How to Take Your Student Loan Debt from 6 Figures to Paid Down
According to the Association of American Medical Colleges (AAMC), the median level of debt for the class of 2017 was $192,000. In my full-time gig at Physician Wealth Services, I regularly speak with doctors who have student loan debt of over $220k.
With student loan debt increasing for physicians every year, refinancing your loans is an option to get your loans paid off more quickly.
With various repayment options available, it’s hard to know which one is the right option for your situation.
Let’s take a look at refinancing student loan debt and see what might work the best in your case.
Refinancing your student loan debt means that you find a private lender to help pay it down. You then set up different repayment terms and conditions through that private lender.
It is not consolidating your loans.
The main reason someone would want to refinance their student loan debt is to save money in interest fees over the life of their loan and also to pay off their debt quicker.
Because refinancing is only done through private lenders, there are pros and cons to refinancing student loan debt. It will depend largely on your situation and the amount of debt you’re dealing with.
Pros To Refinancing Student Loans
There are many positives to refinancing student loan debt. Depending on your financial goals and career path, refinancing could be just the thing you need to properly tackle debt from medical school.
What are the best reasons to choose to refinance?
- You could secure a much lower interest rate and better repayment terms for your loans.
- You can potentially knock tens of thousands of dollars of interest off your total student loan debt.
- You could pay off your student loan debt much faster than your current repayment plan.
Cons To Refinancing Student Loans
Refinancing student loan debt may seem like the best thing to do, but there are potential negatives associated with refinancing because how you deal with your student loan debt is such an important decision.
Make sure you take time to explore all your options and do your research upfront before pursuing any one path.
What potential negatives are there with refinancing your medical school loans?
- If you have federal student loans, they now become private loans and you lose access to many allowances the federal government has created for borrowers.
- You will lose access to income-driven repayment plans, which match monthly payments to your income keeping payments affordable. This is a great program if you are going through your residency and still have a lower income.
- You also lose access to Public Student Loan Forgiveness (PSLF), which could wipe out student loan debt if you work at eligible hospitals or institutions and make payments for 10 straight years.
- You encounter extended forbearance and deferment in periods of hardship. As a general rule, you want to avoid these options or make them a last resort. Private loans offer little help, if any, during times of hardship. If you have poor or no credit, you might not qualify for the low-interest rate you were hoping for, which is one of the main reasons for refinancing.
Should You Refinance Your Student Loan Debt?
For physicians, refinancing your student loans is dependent largely on the amount of student loan debt you have and the type.
For those with extremely large amounts of student loan debt, you might be better served by taking advantage of income-driven repayment and working to qualify for Public Student Loan Forgiveness. If you already have private student loans, it makes sense to refinance. If you don’t work for an employer who qualifies as a 501(c)3 nonprofit organization or aren’t looking at PSLF, refinancing is a great option.
Everyone has a different situation so whatever choice you make, research all available options before you make a decision. Seek help from someone more familiar with your options to make sure you aren’t making a bad financial decision.
3 Ways To Pay Off Your Loans Faster
Want to know how to pay off your student loans faster? Follow these foolproof tips.
Forbearance is an option that allows you to delay student loan payments for a specified period of time. Many medical professionals choose forbearance during residency as a way to save money when financial times are tight. However, while the loan payments stop during forbearance, the interest still accrues and in the end, you will end up with a much larger balance than you borrowed. Even if you can only make small payments, try and avoid forbearance at all costs.
Avoid Lifestyle Inflation
Going to school to become a physician is a long process. When most people are finally finished with residency and start making real money, their first urge is to celebrate with large purchases.
After all, you put in the work while other people were getting paid, buying houses and cars, and living the life they always wanted.
However, if you have a large amount of student loan debt, upgrading your lifestyle is one of the worst things you can do right after you get your first real paycheck. Not only are you in a large financial hole with your student loan debt, but you are also behind most other people in terms of saving for retirement. Making smart financial choices during this time will help set up a brighter future for you and your family.
Use Your Signing Bonus To Pay Off Student Loans
If you happen to be lucky enough to negotiate a signing bonus with a new employer, use it to pay off student loans. According to the Medicus Firm, the average signing bonus for physicians jumped to nearly $30,000 in 2017. Even after taxes, that’s a huge amount to put towards student loan debt. This will knock off much of the interest you could end up paying on your loans.
What Do Lenders Look At When Refinancing Student Loans?
If you’ve made the decision to pursue refinancing your medical school loan debt, there are a few things you need to know before applying with lenders.
One is that lenders look at is your credit history.
This includes your credit score as well as your debt to income ratio (DTI). Your debt to income ratio is factored by taking the amount of debt you owe divided by your current income. Lenders use this to see if you are a lending risk. The lower your DTI the better you look to lenders and the better interest rates you will be offered.
Lenders normally look for a credit score in the high 600s and above. Credit scores of 670 to 739 are considered good and 740 to 799 is very good. If your credit score is around 670, you might not qualify for the best interest rate, but it could still be better than your current rate.
If you haven’t established good credit or any credit yet, you will need to find someone with good credit to cosign on your refinanced loan.
Anyone who cosigns on your loan becomes financially responsible to pay off your debt should you be unable to make payments.
Cosigner options could be a spouse, a parent or other family member or even a mentor. Asking someone to cosign on your student loan is a big deal so make sure that you are doing your part to make smart financial decisions.
Some lenders offer cosigner release after certain criteria are met, such as a certain number of on-time payments in a row.
How To Improve Your Credit So You Can Get Lower Interest Rates
If you weren’t able to secure the lower interest rate you desired, what can you do to improve your credit so you can try again?
- Improve your credit score by making bill payments on time every month. Never carry credit card debt over from month-to-month.
- Try and limit how much of your available credit lines you use. Ideally, you want to stay below 30 percent utilization.
- If you have older credit cards, don’t get rid of them. Your credit age factors into your credit score. If you don’t want to use them any longer, pay them off and set them aside, unless they have an annual fee you want to avoid.
- If you don’t have any credit cards, get one, use it, and pay off your bill completely every month to help establish good credit payment history in the eyes of lenders. Use it like a debit card and only spend on it what you can afford to pay at month end.
- Don’t apply for new credit cards if you are applying for refinancing in the near future. Your credit score takes a small hit every time there is a hard inquiry made on your credit.
- Check your credit report at AnnualCreditReport.com to see if there are any mistakes. In 2013, the Federal Trade Commission estimated that 1 in 5 Americans had mistakes on their credit report. These mistakes could be affecting your credit and, in turn, keeping you from the best possible interest rates from lenders.
How To Refinance Your Student Loans
If you’ve examined all your options and are ready to refinance your student loan debt, take steps to ensure you get the best possible interest rates and repayment plan possible. Shop around to find lenders with the best deals.
Apply with several lenders at the same time and choose one that you are comfortable with and fits your financial situation. If you don’t get as low of an interest rate as you were hoping for, you can wait until after you’ve improved your credit or your income has increased.
Another option many people choose is to still move forward and refinance now and then refinance again later when your credit is better established. For example, your credit and income are likely to change for the better between age 21 and age 28. If your situation has improved, it would be worth looking into refinancing again to knock your interest rate down even further.
Most lenders offer fixed and variable interest rates so you will need to determine which one is right for you and your financial situation. A fixed rate stays the same for the life of the loan. A variable interest rate generally starts out low and increases over time. If you are choosing shorter loan terms, such as 5 years, it might be beneficial to choose a variable rate and enjoy saving on interest. There is a risk associated with variable interest rates because they can change at any time. If you would rather skip the risk, just choose a fixed interest rate.
Lenders usually have several options available for repayment terms, such as 5, 7, and 10-year loan terms. Generally, the shorter the length of loan terms, the higher your payments will be monthly. You want to make sure you agree to terms that you are comfortable with so you don’t struggle with your monthly payments. It would be better to negotiate for longer payment terms if you are worried about monthly payments being too high.
Student Loan Scams
In searching for the right lender, you should beware of student loan refinancing scams that exist. Although the government has taken great strides to clean this up, there are still scams that exist.
What do you need to avoid?
- Stay away from any lenders offering immediate loan forgiveness.
- Beware of lenders who claim to have connections to the Department of Education. No third party lenders have a relationship with the Department of Education.
- Avoid any high-pressure refinancing sales pitches.
- Avoid any lenders who send you direct mailings.
- Stay away from lenders who promise to get you the best rates on the market for a small fee upfront.
Many private student loan lenders have fees associated with their refinancing services. These are generally referred to as an origination fee. An origination fee is a fee charged by lenders to offset the cost or processing a new student loan.
Generally, these fees are built into the total cost of the loan. While federal student loans have a set origination fee, private lenders can set their own fees. Often your credit determines where your origination fee is set so the better your credit the lower your origination fee will be if you are charged one. Some of the more reputable lenders don’t charge an origination fee. You will need to factor that into your decision when deciding on which lender to refinance through.
Know Your Money Goals
In the end, you (and your spouse if you are married) need to decide what your financial goals are, especially when talking about your student loan debt.
Figuring this out will help you determine if refinancing is the right option at this time or ever.
It might not be. It might be better to pursue an income-driven repayment plan and try for Public Student Loan Forgiveness.
It might be better to wait until you are further along in your career and you’ve nailed down more details on what you really want out of life.
Is your goal to have flexibility financial by keeping monthly payments lower?
Do you want to pay down your student loan debt as quickly as possible?
Answering these questions and making a plan for your future will help you decide if refinancing your student loan debt is ultimately the best choice for you.