I have had a number of questions recently about student loan management. None are long enough for their own blog post, but all are worth discussing here.
How Much Is Too Much Debt?
A bunch of pre-dental and pre-medical students over at the Student Doctor Network wrangled me into a discussion on when medical or dental school no longer makes sense as an investment. I've talked about this before, but that was long ago and at a time when student loan refinancing wasn't available. Basically, the question is does it make sense to go half a million bucks into debt in order to get a job that pays $120K or even $200K?
Surely there is a ratio where it no longer makes sense. It is one thing if you have a bunch of scholarships or your parents are paying a bunch of money for your education. I guess I don't have a problem with a dentist expecting an average income of $120K a year paying $400K for an education, as long as he doesn't have $400K in debt upon graduation. I think a good general rule is that your student loans should never be more than 2X your expected average career salary, and preferably much closer to 1X. However, this isn't a cut and dry question that can be dealt with via a simple rule of thumb. Just because some dentists settle for a $120K income doesn't mean you have to. On the medical side, while it may not make sense to take out $450K in loans to be a pediatrician, that doesn't mean you couldn't handle that as an orthopedist.
Basic Approach to Student Loans
I am referring more and more people every week to get student loan specific financial advice. I am also often asked for a good book or reference on the subject, but don't really have one that is up to date enough to recommend. However, a lot of people just need a basic overview of the key principles. Here they are:
The basic approach is this:
- Minimize how much debt you take out. Use other resources, get scholarships, work, and choose the least expensive schools that can help you reach your goals.
- Try to take out the most favorable debt possible. That might mean taking out a little more as an undergrad so you can take out less as a grad student, spreading parental assets out over all 4 years to avoid private loans, or having more mortgage debt and less student loan debt. It also means not taking out the loans until you absolutely need them, and maybe even then delaying them a year with a 0% credit card.
- If someone has to borrow for school, it should usually be the student even if the parent can borrow on better terms. Otherwise, disability/life insurance on the student should be taken out to at least partially protect the parent.
- Upon entering residency, decide between REPAYE and student loan refinancing. This is complicated given recent changes and the most likely time you will benefit from professional advice. As a general rule, lean toward REPAYE.
- Upon completing training, decide either to go for PSLF or refinance the loans (if you have not already.)
- Live like a resident until the debt is gone.
I brought on a new refinancing company recently as a blog sponsor. They're called Credible. The coolest part about Credible is that they allow you to apply with multiple companies with a single application. There are downsides, however, in that most of the best/most active refinancing companies aren't on their list of companies. Plus, of the ones that are (such as CommonBond,) you get a better deal by going directly to their site via my links, where you get a $300 cash bonus that Credible isn't currently offering (yes, I'm working on it.) At any rate, more options are a good thing so take a look if you're in the market for a refinance. Credible is also partnering with WCI to provide private medical/dental/graduate school loans. Same principle- one application, multiple lenders. Obviously you probably want to max out your federal loans first. [Update: You can know get a $350 cash bonus by refinancing with Credible. They do have some bigger lenders now (Citizens Bank, Purefy, CollegeAve). -ed]
Lend Key is also a newer refinancing company to the site. They are somewhat similar to Credible in that they work with multiple credit unions to find one that will refinance your loans. I'm a big fan of credit unions as their structure often makes for attractive rates and fees on loans and other financial products. I'd love to hear about your experience with Lend Key in the comments. As a WCI reader, if you use the links on this page, you get an extra $300 in your pocket when you refinance with them. I suggest you put it toward the principle on the loan.
How Much More Do I Pay To Refinance As A Resident
Four years ago, you couldn't refinance student loans at all. Even as recently as a year ago, you couldn't refinance student loans as a resident without a contract in hand. This year, Laurel Road and Link Capital started refinancing loans right as you walk out of medical school. However, a few readers called “foul” as they felt they were getting a bait and switch with the rates. They saw that these companies offer rates as low as 1.9% variable (awesome ATTENDING financials, 5 year term), but weren't getting anywhere near that. So I asked the companies what the deal was. Here's what they said.
Laurel Road doesn't disclose their exact pricing matrix to the public because it is proprietary and fluid but their pricing is based on the applicant's credit and risk profile, and that applies to residents as well. A signed contract gets you attending rates and you can even still get the $100 payments until you start working. But if you just started residency, your rates would be at the higher end of the published range. They can be lowered if there is a high-income co-signer. So if the 5 year rates are 1.9%-4.08% variable or 3.50-5.25% fixed, then you should expect your offered rate to be close to 4% variable or 5% fixed if refinancing as a resident. If you're looking at a 10 or 15 year term, rates would be higher.
Link Capital does not offer residents a variable interest rate. The fixed interest rates start at 4.75%.
Both companies allow you to refinance again upon residency completion. Refinancing with them in residency allows you to have lower in-residency payments ($100 with DRB and $75 with Link Capital) than you may have with IBR, PAYE, or REPAYE. Plus assuming the rates are lower than the loans you're refinancing, you're likely to save a lot of interest in the long run. Two caveats to be aware of prior to refinancing loans as a resident-
# 1 DON'T REFINANCE IF SOMEONE ELSE IS GOING TO PAY OFF OR FORGIVE YOUR LOANS. You don't want to refinance if you're going for PSLF.
# 2 Be aware that your effective interest rate during residency under REPAYE may be lower than the rates offered by a refinancing company due to the fact that REPAYE subsidizes half of the interest due. More details here. Resident refinancing isn't quite the no-brainer it is for an attending not working for a 501(c)3.
The Laurel Road Snafu
I had a few readers call “Foul!” last month on Laurel Road. Apparently, there was a computer snafu that was allowing residents who had refinanced to pay money directly to the principal on their loans, without even paying the accumulating interest. Obviously, that doesn't make any sense. Laurel Road eventually fixed the software issue that was allowing that. So if you got a few payments in during that time period, count your blessings, you weren't supposed to be able to do that under the terms of your loan. The way they were reporting the anticipated future (not actual) interest also confused a few people, so they'll likely make some website changes there to make it more clear.
Switching From REPAYE to IBR
Some astute readers have wondered if it is going to be possible in the future to switch back from REPAYE to IBR at residency graduation. That would allow the resident planning on PSLF to take advantage of lower payments in residency, but still be able to get maximal PSLF forgiveness. I'm still looking for clarification on this issue; if you have a good source, I'd love to hear about it. [Update: 1/13/16 – Jan Miller assures me that under current law you can switch between repayment programs once per year, but he worries, as you should, that law could change in the future-i.e. that once you're in REPAYE you're stuck in REPAYE.)
Just Do It!
Now, the more significant issue is there are still tens of thousands of attendings out there paying 6.8% or more on their student loans. You are not working at 501(c)3s. You'll have the loans paid off before you get any IBR forgiveness at 25 years, which is taxable anyway. REFINANCE YOUR DARN LOANS ALREADY! If you have $200K at 7% fixed, and change to 2% variable, that's $10K a year in after-tax money that goes into your pocket. I know from experience that pays for a very nice 14 days in France for two. Every year. Of course, YOU shouldn't spend it on that. You should be living like a resident and put that $10K toward your loans. Residents don't vacation in France.
Here are the links you need. All of them are affiliate links, which pay me if you use them. But for most of them, you get $200-550 cash back (put that toward your loans too) you wouldn't get if you went directly to their site.
New Bonus Disclosure
Earnest Welcome Bonus Offer Disclosure: Terms and conditions apply. To qualify for this Earnest Welcome Bonus offer: 1) you must not currently be an Earnest client, or have received the bonus in the past, 2) you must submit a completed student loan refinancing application through WCI link; 3) you must provide a valid email address and a valid checking account number during the application process; and 4) your loan must be fully disbursed. The bonus will be automatically transmitted to your checking account after the final disbursement. There is a limit of one bonus per borrower. This offer is not valid for current Earnest clients who refinance their existing Earnest loans, clients who have previously received a bonus, or with any other bonus offers received from Earnest. Bonus cannot be issued to residents in KY, MA, or MI.
“*Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. If you choose to complete an application, we will conduct a hard credit pull, which may affect your credit score. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Oct 10, 2020 and may increase after consummation.”
What do you think? How much is too much debt? What do you think is the best way to manage student loans? Have you refinanced your loans? Why or why not? Who did you use? Did you use Credible? How was the experience? Which lender did they end up pairing you with? Comment below!