By Andrew Paulson, CSLP, Lead Student Loan Consultant and Co-Founder of our partner site StudentLoanAdvice.com
Deciding how and when to pay off student loans is not an easy decision for most. Many of you are feeling weighed down by your mortgage-sized student loans and asking yourself, “How did I get into this mess?”
Student loans cause stress and burnout for physicians, dentists, and other high-earning professionals. Many, even with the best of intentions, make poor financial decisions on their student loans.
Here’s a guide to help you avoid making mistakes in paying off your student loans.
How Long Does It Take to Pay Off Student Loans?
How long it takes to pay off your student loans depends on your loan type and repayment plan selection. Federal and private loans have different payment options.
Paying Back Federal Student Loans
Some student borrowers will pick amortized loan options like the standard 10-year or extended 25-year. Amortized options have a fixed monthly payment and a set payoff date. Graduated 10-year and extended graduated 25-year are similar, but monthly payments start out lower and grow every two years until their respective payoff dates.
Income-driven repayment (IDR) plans are also common among student borrowers. However, your payments are based on income rather than debt size, and most are on track to reach loan forgiveness through taxable forgiveness after 20 or 25 years or, via Public Service Loan Forgiveness (PSLF), after 10 years. Some borrowers will end up paying off their loans prior to receiving forgiveness through either track, and that's because they make payments that are too large. You eliminate the benefit of loan forgiveness if you end up paying your loans off before your forgiveness date. You don't want to end up paying them off in an IDR plan because the interest rates are likely 6-8%. Private refinancing your loans would allow you to drop the rates down to 2-4% and could save you thousands on interest.
Paying Back Private Student Loans
Borrowers will select a repayment plan which fits their budget anywhere from five, seven, 10, 15, or 20 years. Some private lenders offer longer repayment terms than 20 years, but it’s not common.
How Long Do You Have to Pay Off Student Loans?
Each student loan payoff or completion date varies depending on loan type and repayment plan.
According to Educationdata.org, the average student borrower takes 20 years to pay off student loan debt. Top-earning doctors average out at seven years to pay off student loans. The WCI community typically follows the latter approach by living like a resident or pursuing PSLF.
When to Start Making Student Loan Payments?
You should start making student loan payments when you graduate from school, drop below half-time enrollment, leave school, finish the grace period, or when your student loan goes into repayment.
Begin making payments as early as possible to minimize interest accrual and/or begin payment credit toward loan forgiveness programs.
While in school, you can make student loan payments or, if you can afford to, at least pay the interest.
Deferring student loan payments until after residency is a bad idea because
- Student loans continue to grow
- You won’t receive credit for loan forgiveness
- You won’t receive interest subsidies from any IDR plan
- Interest will capitalize when you begin repayment as an attending
What Happens If You Don’t Pay Your Student Loans?
The day you miss a payment, your student loans become delinquent. If you continue to miss payments for 270 days (nine months), your loans will move into default.
Default can cause your entire loan balance to become due, inhibit your ability for new student loans or grants, and hurt your credit. The federal government has the ability to garnish wages, seize tax refunds, file lawsuits, suspend professional licenses, etc.
Don’t ever let your loans become delinquent or, even worse, reach default. If you can’t afford payments, take forbearance temporarily (this won't hurt your credit, but you also can't stay in forbearance forever). Remember, income-driven repayment (IDR) plan monthly payments are quite affordable for most and a better alternative to forbearance, delinquency, and default.
If you’ve lost your job and you're on an IDR plan, file a certification form, and it will drop your payments to zero dollars in the interim until you find another job.
Can You Pay Off Your Student Loan Early?
Yes, you can pay off your student loans early. There is no prepayment penalty to pay off student loans early. With federal loans, though, there is paid-ahead status you need to be aware of if you’re pursuing a PSLF.
Those of you who can afford to pay off loans earlier than your term can save lots of money.
Example:
Imagine you have $400,000 in student loans with a 10-year term at 2.5%. Monthly payments of $3,771 over 10 years would amount to $452,496.
If you can afford larger monthly payments, such as $5,196 per month, you would end up paying ~$26,000 less in student loans.
Should You Pay Off Student Loan Early?
Most of the time, it's advisable to pay off your student loans as quickly as possible, as referenced above in the reduction in overall payout.
The only time you shouldn’t pay your student loans off early is if you are going for PSLF or taxable loan forgiveness. In which case, you can’t reach the loan forgiveness milestone earlier than 10 years or 20-25 years.
Is There a Better Use of My Money?
Many advocate the minimum payment toward your student loans or even entering forbearance and using all that money that you would be putting toward your student loans into a retirement account, real estate, mutual funds, or even something more exotic like cryptocurrency.
We recommend you pay down debt and invest. See this post to learn more.
Which Student Loan to Pay Off First?
Step 1: If interest rates are equal between your federal and private, pay down those private student loans first. They have less protection than your federal ones.
Step 2: Start with your highest interest rate loan.
Suppose you have two $25,000 loans on a 10-year repayment. The interest rate on loan 1 is 8%, and the interest rate on loan 2 is 3%.
By paying down loan 1 in five years, the total payout is only $59,383, as compared to paying down loan 2 in five years at $63,351.
This saves $4,168.
Does Paying Off Student Loans Help Your Credit Score?
Yes, paying off your student loan can help your credit score. Student loans are listed as installment loans and can go a long way to building or breaking your credit score.
Payments are reported to the big three credit bureaus: Equifax, Experian, and TransUnion. On-time payments will contribute positively to your credit score. Late payments, delinquent loans, and ultimately loans in default are detrimental to your credit score.
Can I Pay a Student Loan with a Credit Card?
There are definitely people out there who have paid off their student loans with a credit card. But it’s generally a risky idea due to:
- Credit card interest rates can far surpass student loan interest rates
- Loss of protections on federal student loans
- Transaction fees
Federal loan servicers won’t allow credit card payments directly unless you use a card service like Plastiq. Private loan servicers may allow you to do so but can charge additional fees.
If you need help deciding the optimal payoff plan for your student loans, meet with StudentLoanAdvice.com!
As we all know, student loans can be stressful, and they can have a significant effect on your financial health and on your mental well-being for decades after you’ve finished your medical school training. But I’m here to help you take control of your student loans.
Schedule a consultation with me at StudentLoanAdvice.com, and you’ll receive a customized student loan plan that will save you hours of research and stress and potentially hundreds of thousands of dollars. Start down the path toward financial independence by letting me guide you through your best student loan options.
Have you started paying off your student loans? What's the process been like? What do you know now that you wish you knew then when it comes to student loans? Comment below!
I would have been interested to see The White Coat Investor’s take student loans in the era of the indefinite student loan forbearance and rumors of student loan forgiveness. Feels like this article was written in 2016.
It’s not particularly different from what I’ve been saying at least once a month for the last two years. We literally JUST sent out a newsletter this morning all about the current student loan situation. Are you subscribed?
https://www.whitecoatinvestor.com/free-monthly-newsletter/
But the basics aren’t that hard:
1) Refinance your private student loans early and often
2) Be very sure you’re not going to get forgiveness before refinancing federal loans
3) Enroll in REPAYE during training if you’re single or married to a non or low earner. If you’re married to another significant earner, get advice from studentloanadvice.com
4) Make a plan to have your student loans paid off within 5 years of completing training unless they’ll be forgiven within that time period or shortly afterward.
5) Might as well wait to refinance when loans are at 0%. While you might not be able to get as low of a rate in 6 months or 12 months or whenever this nonsense ends, the 0% over that time period should be able to make up for it.
6) Don’t hold out expecting $200K to be forgiven (except via PSLF) for a high earner just because. If President Biden does anything, it’ll probably be $10K and you might not even get it. Certainly NOBODY is talking about giving more than $50K, and even that is just from a few left wingers in the Senate. $10-50K is nice, but it really shouldn’t change the plan much for a doc who owes $300K
Hope that helps.