Wealth Matters for Physicians

ArticlePrivate Student Loan Refinancing May Come at a Price

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Ben Lake

By Ben Lake, CFA, CFP®

The onerous burden of student loan debt weighs especially heavily on new physicians. After years of medical school and residency, the amount owed can seem insurmountable. Making a plan to manage payments and take advantage of the options available to borrowers can go a long way toward lightening the load.

Is it worth it to pursue private refinancing to get lower interest rates on your student loans? This avenue may seem enticing to a doctor once their income starts to climb.

 

Pros and cons

The selling point of this option is that you can reduce the amount of interest owed and save more money in the long run. The private lender repays the borrower’s student loans, then issues a new loan, based on creditworthiness. This choice also allows for consolidation of multiple student loans to create a single monthly payment and can allow you to change lenders for improved customer service.

However, it is important to recognize that if you refinance federal student loans with private lenders, you may lose valuable protections offered by federal programs. The consumer protections associated with federal loans are unique: eligibility for an Income-Driven Repayment Plan, Public Service Loan Forgiveness, statutory discharge provisions (such as death and disability discharge), and federal forbearances and deferments.

Specific federal loans have additional benefits. For example, subsidized loans do not accrue interest during specific periods, such as when a borrower is a full-time student. Federal Perkins loans have special cancellation provisions for borrowers in specific professions.

 

Make sure to read the fine print

Although some private lenders are incorporating provisions designed to mimic some of the federal consumer protections, be careful to read the fine print and understand that refinancing federal student loans into private loans comes with risk. Comparing key details of multiple refinancing offers to the terms of your existing loans is crucial to be able to effectively weigh the trade-offs of refinancing.

Beyond that potential sacrifice, private-company refinancing also can add complications to your already-complex financial life. For example, if you have a standard 10-year repayment plan for a $200,000 student loan with an average interest rate of six percent interest, your monthly payments are roughly $2,220 for 120 months, which will add up to $200,000 in principal payments and over $66,000 in interest payments.

 

The importance of taking all of your financial goals into consideration

Now let’s say you saw an ad from a refinancing company advertising interest rates of only 4.5 percent for five-year loans. This could result in higher payments, but might save tens of thousands of dollars in interest costs compared to the 10-year plan above. The appeal of paying off this worrisome debt sooner and at a lower interest rate that promises to save you thousands in interest costs is hard to resist.

However, as an Altfest Personal Wealth Management advisor could show you, your monthly payments in this refinancing scenario could double! If you can afford to accelerate your loan payback, this could be a viable choice, but what if going that route means you can no longer afford to save for retirement or invest in your new practice or buy a home?

Deciding to opt for private refinance of your student loans definitely could have a significant opportunity cost that makes it much less sensible or attractive in the long run.

Refinancing student loans can offer a great cost savings that propels you out of debt faster, but don’t make a decision about taking this path before you understand all the consequences on the other parts of your financial life.

 

Click here to schedule a complimentary consultation with an Altfest advisor to take a comprehensive look together at the pros and cons of refinancing student loan debt.

 

 

Altfest Personal Wealth Management does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.

 

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