Hello,
It’s Mark Johnson from StudentLoansRx.
We want to be a key resource for you as you approach graduation. Invite us to speak to your graduating class on “Smart Strategies for Student Loan Repayment.
In this communication:
- Tip #5-Don’t Rush To Refinance Your Federal Student Loans.
- Podcast Interview-Art of Dental Finance and Management.
- Commonly asked student loan repayment questions from those close to graduation.
To schedule your FREE consult with one of our licensed and experienced advisors, please click FREE CONSULT.
You have a lot going on between now and graduation with boards, finding a job, getting licensed, and probably relocating to a new city, and starting your new job or residency.
And, on top of that, you really need to have a plan to address your student loan debt and a few other important financial planning items.
StudentLoansRx-2021 Graduation
“What You Need to Know” Series,
Tip #5-Don’t Rush To Refinance Your Federal Student Loans.
I think for well over 80% of graduates, refinancing Federal student loan debt immediately upon graduation is a bad idea!
Identifying the right repayment strategy as you exit school or residency is a very important financial decision. After several years of helping graduates build plans to tackle their student loan debt, I am convinced that thousands of graduates, short on time and frankly short on financial expertise in this area, rush into the wrong “initial repayment strategy”. I have highlighted, “initial repayment strategy” for a reason, I will share more on this point later in this article.
In addition to being short on time, often times lacking sufficient financial expertise on repayment strategies, graduates are bombarded with thousands of marketing ads from private refinance companies, many articles on the internet (including e-newsletters like this) and may receive “advice” from folks providing repayment advice to graduates, some licensed, financial professionals, others not. So, with all this information and “advice” out there, what is a graduate to do?
Refinancing your Federal student loans with a private lender may be a good idea at some point in your repayment strategy. But, given our experience, I think for well over 80% of dental graduates or other healthcare graduates with six figure student loan balances, refinancing Federal student loan debt immediately upon graduation is a bad idea!
As students and residents approach graduation, there are a number of repayment options to consider with respect to their Federal student loan debt. One option is to refinance federal student loan debt with a private lender. The hypothesis is that refinancing with a private lender will reduce the interest liability on one’s student loan debt and that alone should be your primary concern when considering repayment options. This may be true, and it may be true in the future, but is rarely true, in my experience, within the first year or so for many graduates.
Points to Consider
- If you are eligible (many graduates are) for an interest subsidy or interest benefit under the Revised Pay As You Earn-REPAYE, income-driven repayment plan, your effective interest rate (interest you will actually be required to pay) may be considerably lower, perhaps as much as 50% lower, than the average nominal interest rate on your Federal student loans. Many graduates who claimed little or no income on their Federal tax return in the year prior to graduation, (see Tip #2 in this series), will be eligible for up to a 50% reduction in their interest accrual on the REPAYE plan. Since most students/residents graduate in May or June, they will typically have only income for six-months of income in the calendar year they graduate. If they recertify their income, after the first twelves months of being on the REPAYE plan, having only six-months of income to report, they are likely to receive a significant interest subsidy or interest benefit in the second twelve months on the REPAYE plan. Understanding the interest subsidy or benefit provided under the REPAYE plan is extremely important for those approaching graduation with large Federal student loan balances.
- If you are working towards practice ownership within a couple of years of graduation, refinancing your Federal student loan debt with a private lender may not be the best idea. Refinancing with a private lender, versus enrolling in an income-driven repayment plan will often times provide a much higher payment.
Example: Consider a 2021 graduate who filed their 2020 Federal tax return with ZERO income and has $350,000 in Federal student loan debt.
A. $350,000 refinanced at 4.50% over 15 years translates into a monthly payment of almost $2,700.
B. Enrolled in REPAYE, first 12 months had no payment to make and Uncle Sam, most likely subsidized 50% of their interest accrual. 12 months after being on REPAYE, they recertified their income, (six months of 2021 income), let’s say $75,000, their payment for the second 12 months on REPAYE would be about $500/month.
Is the banker more likely, all other financial items considered, to provide a practice loan to someone making a $500 monthly student loan payment or someone making a $2,700 loan payment?
Point #3–Many graduate with zero emergency savings, some have accumulated credit card debt, need to upgrade transportation, relocate to a new city with related expenses, etc. Being in a position to have extra cash flow in the first year or so out of school or residency, to meet these other important financial needs, may be more important to your current and long-term financial situation, versus shopping for the lowest possible interest rate immediately upon graduation, especially if you qualify, like many, for any interest subsidy under the REPAYE plan.
And finally, some “advisors” who provide student loan repayment consulting services receive payments or income for referring or recommending graduates refinance their Federal loans with a private lending company. There might be a good reason to refinance and eventually, perhaps a year or so after graduation, a private refinance might be a really good idea. But, I would want to know if anyone recommending a private refinance is receiving income as a result of that recommendation. Are they providing objective advice or are they looking to earn a few hundred dollars for their consulting business? Something I suggest you explore.
At StudentLoansRx and RBF Wealth Advisors, we receive NO payments or income of any kind from lenders, private or otherwise, based on our recommendations to clients with respect to their student loan repayment.
We have helped many graduates navigate the complexity of student loan repayment planning.
To schedule your FREE consult with one of our licensed and experienced advisors, please click FREE CONSULT.
Mark Johnson, founder of StudentLoansRx interviewed on The Art of Dental Finance and Management.
I really enjoyed my recent appearance and discussion with Art Wiederman on The Art of Dental Finance and Management.
If you are an emerging dental professional on your way one day to practice ownership, I highly encourage you to sign-up for Art’s podcast. Art is a dental specific CPA with many years of experience.
To schedule your FREE consult with one of our licensed and experienced advisors, please click FREE CONSULT.
For 2021 graduates, you will have a few months after graduation to consider your options. But, on Oct. 1, 2021, interest resumes. On loan balance of $400,000 @ 6% that is $2,000/month of interest accrual!
If you are still trying to figure out the best repayment option, or want to make sure your current strategy is optimal, why not schedule a free, no-obligation, 30-minute Zoom consult with us?
Maybe we can help you avoid a massive and costly error in your student loan repayment planning.
Most frequently asked questions during our FREE 30-minute consults:
- Which repayment method is best if I wish to start or purchase a practice?
- Should I enroll in an income-driven plan?
- If so, should I choose Pay As You Earn-PAYE or Revised Pay As You Earn-REPAYE?
- When do I enroll in repayment if I will be on PSLF?
- What is my work/life situation changes? Can I change repayment plans? What are the consequences of changing plans?
- Should I refinance with a private lender? If so, which lender and when?
- How aggressive should I be in repaying student loan debt when I have other financial priorities as well?
To schedule your FREE consult with one of our licensed and experienced advisors, please click FREE CONSULT.
If you have any questions related to student loan repayment planning or any of the other financial or investment planning services we offer, please feel free to email us at StudentLoansRx@RBFAdvisors.net.
