Private Student Loan Refinancing
Special Covid-19 Consideration
Since March 13, 2020 payments and interest on most Federal student loans have been suspended. President Biden announced that his administration would continue to extend the suspension through September 30th, 2021. This is great news for those who qualify, which are most borrowers with Federal student loan balances. Check with your loan servicer if you have any questions on whether or not this applies to you. While everyone’s situation is unique, it is hard to imagine a scenario where it makes sense to refinance with a private lender if interest accrual and payments are suspended on your federal student loans. During the suspension borrowers are still able to make payments on their federal loans if they choose. To discuss your personal situation, please consider scheduling a free, no-obligation consult with one of our experienced advisors.
Private student loan refinancing has become a very large industry. With nearly $1.7 trillion in student loan debt in the US, the financial industry has jumped in with both feet. Depending on a number of factors such as: career, income potential, credit score, and outstanding loan balance, private lenders may provide you with an offer to refinance your student loan debt at a lower interest rate than what you might receive through one of the Federal repayment options.
While a lower interest rate is generally a good thing, you need to understand the pros and cons of refinancing through a private lender and do your research on which private lender might be appropriate for you. A number of private lenders have worked out discounts with various healthcare associations. For example, the American Dental Association-ADA has negotiated a .25% discount with a couple private lenders. If you are a member of a professional association, check and see if your association has negotiated any discounts you can take advantage of. With the expected future income of many graduate level healthcare professionals, private lenders are generally very eager to work with you. Private lenders generally offer both fixed and variable rates, unlike Federal repayment programs that offer only fixed rates. Private lenders also generally offer repayment terms or plans ranging from 1-20 years. Refinancing through a private lender has become popular, especially among those healthcare professionals with a nice six-figure income immediately after graduation and who may also have a two-income household.
The primary downside of refinancing through a private lender is that you lose the benefits of the Federal programs forever!
For example, income-driven repayment provides a nice feature which allows you to defer making payments for up to about 1000 days during the entire repayment period, that’s three years. Let’s say you wanted to spend a year with the Peace Corps stationed overseas. A private lender is most likely going to require you to make your student loan payments during that period of time. If you are in one income-driven repayment programs, you could simply make a phone call to your loan servicer and apply for a deferment. Your student loan payments would stop, but interest would still be accumulating during your deferment period.
Refinancing through a private lender can be an excellent choice for a number of borrows but it is really important to understand the trade-off between the possibility of a lower interest rate with a private lender versus the benefits associated with the Federal programs like: PSFL, income-based repayment and the liberal deferment options that might be available.
We work with our clients and help them determine the appropriate repayment strategy that might include using more than one repayment method over the repayment period.
For example, it might be appropriate to select an income-based plan during residency while you are earning a little income or for the first year or so after graduation as you start your career. Then once you have settled into your career on a full-time basis, perhaps a year or so after graduation, you might consider a private refinance that would likely require a more robust payment. If you are transitioning from school or residency right into a nice six figure income, then a private refinance right out of the gate might be appropriate, assuming you are not eligible for any interest benefit or subsidy provided through an income-driven repayment. What’s important is to consider all the options, pros and cons, in light of your budget (income-expenses), interest rates, repayment periods, and career path (nonprofit vs. for profit employer) you are seeking to travel.
Selecting the appropriate student loan repayment strategy is likely going to be one of the most important financial decisions you will make in your life and should NOT be viewed in isolation from the other important financial issues you will face as you transition from school into your career. Working with a team of experienced, objective professionals can save you time, money and provide you with peace of mind as a plan is created to meet your specific and evolving needs.
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