Speaker 0 00:00:02 <inaudible>
Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode. Interest rates are crazy low right now. So to make sure you're getting the full benefit of the situation today, we're going to be talking about student loans specifically and how to navigate those in this ultra low rate environment we're in. So if you didn't, uh, check out the episode last week on federal student loans and how to capitalize on them, definitely go and check that out first. I think that's going to be a good kind of precursor to this conversation because we hit on a lot of the kind of unique benefits around federal loans specifically.
Speaker 1 00:00:58 And so those are, those are important to understand before you really start to kind of hone in on, uh, potentially refinancing your student loans, which we'll talk more about today, but the gist of the conversation today is what can you do given how low interest rates are in relation to your student loans? So we're going to zero in on student loans. Now in a future episode, we'll, we'll, we'll get into more of, uh, some of the other debts and how to handle those in this, uh, low interest rate environment like mortgages or other debts. But yet today we're going to kind of focus in on those student loans and make sure we have a, a good kind of idea of what your options are there. So I think a good starting point is looking at what drives student loan interest rates. So there's really two broad categories of types of student loans.
Speaker 1 00:01:44 And so it depends on which type we're talking about. So let's start with federal student loans. First federal student loan rates are set each year by the federal government and they're tied to the ten-year treasury note. So if you're looking at a current rates, for example, the rate range for federal student loans is 2.75 to 5.3%. So undergraduate borrowers are 2.7, 5% graduate is between 4.3 and 5.3, depending on which type basically that is a slight premium above that 10 year treasury rate. And so what they do is every year they look at the treasury rate and they add a certain percentage to the existing 10 year treasury. And that's how they set those federal loans. So if we look at the historical ten-year treasury yield, it's been, you know, a little bit up and down. It's definitely very, very low right now, but it hasn't had massive volatility, especially in the past 10 years or so.
Speaker 1 00:02:48 It's probably been an on average in that maybe 2% range right now. It's, it's really low, you know, lowest it's been in, in that 10 year period, but it's, it's been kind roughly in that 2% range. So what that has translated to for probably most of you with federal student loans is for graduate or medical school loans. You're probably sitting on interest rates in that maybe six to 8% range. If you're lucky, you're below 6%, there's probably very few of those. And they would have to be later in that time period. But most of you that have federal student loans are probably in that six to 8% interest rate range, just given that that's what these 10 year treasury has been over that period of time. And so what's unique about federal student loans is when they issue those loans, do you, they have really absolutely nothing to do with your specific financial situation.
Speaker 1 00:03:48 They're going to give them to anyone that qualifies based on their very minimal standards, none of which are financial qualifications for the most part. Now there's some financial aid requirements, but aside from that, they're not going to like underwrite your financial situation and look at your credit score and that sort of thing, like with a lot of other debts. And so it's, it's also a flat rate that everybody gets. So they just, you know, it's kind of a one size fits all. You get your rate and you're off to the races. The other thing that is important, I think to note on federal student loans is you can't refinance those into new federal student loans. So you might've gotten your student loans say like five to eight years ago or something along those years, and maybe your rate is 8% or 7% or something like that.
Speaker 1 00:04:40 And you just heard me say, you know, rates now are probably in the 5%, 4% range. So you're thinking, well, maybe I could refinance into a new federal loan. Well, that's not an option with federal loans. You can't go federal to federal on a refinance, unfortunately. So that's, that's kind of the high level of federal student loans and how those rates are set now with private student loans, it's, it's a little bit different. So private loan rates are, are much more based on your financial situation. So the lenders are going to really kind of hone in on your circumstances and your credit worthiness. They're gonna look at credit, score your income. Basically they want to know, uh, get a good idea of the likelihood you're going to be able to pay it back without any concerns on their end. And so there's, there's these financial requirements.
Speaker 1 00:05:32 And so they're going to set the rate, uh, based on the, uh, on your underlying financial circumstances. So lenders typically tie those interest rates that they're setting to something like prime or LIBOR. So those are kind of like, uh, you know, interest rate indexes. And so if you look at, uh, for example, historical prime rates, they've kind of been, you know, like the 10 year treasury, that they're a little different in that they're set by the government. But, um, the gist of it is they've been kind of trending down over the past 10 years, just like all other interest rates, given the low interest rate environment we're in, they're very low, low relative to that 10 year period of time. So private student loans, I think the biggest thing to understand is that they are going to be issued based on your circumstances. So if we look at a few examples, let's say that you got your private student loans, let's say you went to a medical school in, uh, you know, maybe out of the country or something.
Speaker 1 00:06:39 And so you were not eligible for federal student loans, or let's say you were a non us citizen and you're not eligible for federal student loans. So you're, you're kind of forced to get those products and student loans for two to finance medical school. So in that situation, like I was saying, they're going to issue those loans based on your financial circumstances. So a student signing off on loans themselves doesn't really have a lot of, uh, history typically and is, is often be kind of considered a higher risk from the lenders stamp. So what that typically translates to is a very high interest rates. So that's why when you compare, or if you compare federal student loans in school to private student loans, while you're in school, typically private student loans are way higher and you would, you, you would almost always favor federal student loans.
Speaker 1 00:07:36 That's because those private lenders are like, well, you know, we need to price this up. Cause we, we think there's some risk here given the financial circumstances. So that's how it works in school. Now it's kind of, flip-flopped when you kind of get out in practice into, uh, you're earning a living and you have say, you've done well with your finances and you have good credit score and that sort of thing. So the flip flop there is, they're going to say, you know, it's a much better situation financially. So they're going to give you a much lower interest rate. So same comparison if you're comparing your federal student loans and you're comparing them to private student loans when you're in practice and say your credit score is good. Typically private student loans are much more competitive. So to give an idea, give you an idea of what those private student loan interest rates are.
Speaker 1 00:08:27 So if I look, I like to use common bond come and bond is a private student lender, and they ha they do a good job stating their interest rates on their website. And so if you look we'll link to them, their rates in the show notes, but if you look at their interest rates, as of this recording, I'm looking at them right now. So variable full five-year term 2.556% is the low 6.87% is the high. So that kind gives you that, that idea of this, this big range there, and th and that's going to depend on your credit worthiness and your ability to repay. So if you have a very good profile, you have a really good credit score. You have a solid income. You typically will be on that low end of the spectrum. So 2.5, 6% as is very good rate. Now you can actually find right now lenders that are doing variable five-year rates even lower than this.
Speaker 1 00:09:18 Uh, so it CA when you start looking at the specifics of this, you can kind of pick and choose lenders to find that most competitive for the given, but just sticking with a common bond example. You know, you even look up to like 10 year variable rate, 2.9, 6%. If I look at five-year fixed it's 2.5, 9% is the low end. And then a 10 year fixed is 2.99%. So going back to the federal student loan rates right now, the federal student loan rates for a graduate graduate student are going to be, or professionals school borrow is, is going to be 4.3% to 5.3%. So if you are getting federal loans, now, you know, they're going to be somewhere in that 5% range and compare them to common bond. Obviously getting a, a 3%, two to 4% range is much better than 5%. So the other big difference about private student loans is you can refinance private student loans as many times as you like into the new rate environment.
Speaker 1 00:10:23 So unlike federal student loans, you can just, if you see the rates of reduced, you can just refinance. The other big thing is they don't typically have closing costs on prices, student loan, refinances. And so there can be some opportunity to really impact improve on your rate over time with private student loans. So if you're looking at your federal student loans, maybe you got them, maybe you took them out, say in that five-year range five years ago, five to 10 years ago, you're probably looking <inaudible> if it was for medical school, you're probably looking at rates in that, you know, at least 6%, probably six to 8% interest rate range. And if you're comparing that now say you're in practice and you have a good income and you have solid credit score. If you're looking at common bond and bond, or one of these private lenders, and you're saying, Oh, heck if I can get two to 3% and in, in pay that instead of 8%, that's, that's a home run.
Speaker 1 00:11:21 I mean, just from a strictly interest rate standpoint, there's some huge opportunity there to refinance your federal student loans into private student loans. But before you go doing the refinance, there's, there's some quirks and unique aspects with federal student loans that you really have to be, be aware of. And we'll, we'll hit on those, um, in a, in a bit. So for honing in on, what are those big things to think about before you refinance federal student loans, I'm going to run through some of those biggies that you really want to really want to hone in on and make sure you're or, uh, looking into before you refinance federal student loans. So the big thing about federal student loans is once you refinance out of federal student loans, you can't go back. And so it's a one-time thing once you're out, you're out. And so there's these, there's several key kind of federal perks that exists that I'll run through.
Speaker 1 00:12:17 So the first big one is PSLF or public service loan forgiveness. We talked a lot more about that in the last episode. So definitely check that out. If you want to understand a little bit more about that, how that works, but basically you want to make sure that PSLF is off the table, like a hundred percent sure before you refinance. Is there sometimes that's a little tricky, especially in training. You're not sure where you're gonna end up, but I would just say that in my experience, working with physicians in my planning practice, there's a lot of people that we see that don't think they're going to be going for PS and end up surprised and in APS, LF, qualified job. And then the flip flop also happens as well. But I would try to keep an open mind about that. A lot of jobs that people think might not be qualified are qualified, and then the reverse is true as well.
Speaker 1 00:13:12 So you just want to make sure, like very sure that PSLF is not in play before you refinance, because if you say, pull the trigger on a federal to private refinance and then end up in this PSLF qualified job, there's a lot of lost opportunity there that exists. So that's the first one, that's a biggie. The second one is, is the repay ye and unpaid interest subsidies. So basically federal student loans, don't charge interest on your existing interest balance. So if you've had federal student loans during training, you typically aren't even your, your payment is not going to be high enough under like income-driven repayment. Your payment is not going to be high enough even to cover the interest that is building. And so what happens is this interest balance starts to build up on the sidelines. What's unique about federal student loans is that they don't charge you interest on that accrued interest balance.
Speaker 1 00:14:18 Whereas if you refinance it that immediately in most, the cases immediately will begin accruing interest. The other subsidy I mentioned is the repay subsidy. So with repay IE, at least half of your monthly accrued interest, that's unpaid gets forgiven by the guy. So if you're in training and you have a large balance relative to your income, large student loan balance revenue, relative to your income, your typical not going to be making your income-based is typically going to be not even enough to pay that interest accrual, that, that interest amount that builds every month. So when that ex that situation happens, basically that unpaid amount of interest age month, at least half of it gets forgiven. So that's the repay, the subsidy. The just is that when you're in repay IE in a lot of cases, you're a true straight, or your net interest rate is actually lower than you might think it is definitely lower than your stated interest rate.
Speaker 1 00:15:23 So you really want to make sure you understand your true interest rate, because I've seen in a lot of cases that the true interest rate is much lower than what people think it is, especially in training. And, and it's oftentimes lower. Then the private refinance would, would have been the third, big thing is the 20 or 25 year forgiveness. So this is the program that exists with federal student loans. If you're in an income-based repayment plan or income-driven repayment plan for either 20 or 25 years, depending on the repayment plan at the end of that period, the remaining balance is forgiven. This program is available for anyone with federal student loans. And so with that program, there's a big forgiveness event at the end. It is a taxable event, so it's not near as good as PSLF. And it takes a very, very long time.
Speaker 1 00:16:20 And so in most physicians will have an income high enough that it makes this a kind of a non-player in the situation. But in certain cases, if you have, uh, a high federal loan balance, let's say your federal student loans are double the size of your income. That's a good kind of situation, classic scenario where that 20 or 25 year forgiveness might be in play. And that might be a huge benefit to look out for. And you would definitely not want to, or be very cautious refinancing to private student loans because you're giving that up. The next big thing, I guess this is kind of a situational thing is COVID for parents. And so COVID forbearance for what's going on right now as of this recording. Um, I guess it's, it's been an extended recently until September of 2021. It's basically 0% interest and zero required payments on all federal student loans are all loans owned by the federal government.
Speaker 1 00:17:17 So that's, you know, situational very unique circumstance, but in, in you have a federal loan now you're really at a 0% interest rates. So, um, you know, it's changes the game completely on wanting to refinance, but if you're in the situation where a private refinance potentially might make sense, you just, you would just want to kind of revisit that at the end of the COVID for parents period typically, but the main thing is being aware of that COVID forbearance 0% interest. That's a game changer, uh, for federal student loans. And then the last one I would just throw out there is just kind of any other federal perks or forgiveness programs. The thing about federal student loans is they're government controlled, and there's just, there's a lot of different, special perks. For example, you know, the, uh, federal student loans have the forgiveness at death and, and some had disability.
Speaker 1 00:18:11 Now, some private loans offer that as well, but, uh, federal student loans for sure offer that there's also lots of proposals for changing federal student loans, at least right now for the better or the ones that, uh, that are out there. There's some that are for the worst. In a lot of cases, there are perks potentially that exists that are kind of special and unique for federal student loans. So once you've taken those, all those into consideration, and you know, that the private student loan rates are going to be better net of everything and, you know, those forgiveness programs are out of play then definitely, you know, private refinance by all means makes all the sense in the world. So once we, so once you're in the private student loan situation, it gets a little more straightforward when we're just comparing private student loans to private student loans.
Speaker 1 00:19:01 So I think I already mentioned this, but private student loans don't have closing costs. So there's really no incentive or there's very little, um, you know, costs of refinancing multiple times aside from the time that it's going to take. And so there can be that opportunity to, to kind of regularly look at this again. So let's say you took private student loans out during school. And so the rates are going to be typically very high, just as a result of your financial situation then, and let's say, now you have very good financials. That's typically a home run for a new, just kind of a refinance, your private student loans into a new private refinance and can be a massive interest rate savings. So I would, I would definitely, if you don't know exactly what your private student loan interest rates are, I would look at those now just to check those out, or if your credit is good and your income profile is good, and your rate is higher than what you see in the private market with like a common bond or something.
Speaker 1 00:20:03 Then you definitely want to look at that, or let's say, you're already in practice and you've already refinanced to a private student loan. Maybe you did it, uh, you know, three or so years ago, but over that period of time rates have fallen. And so you just kind of want to regularly be checking up on that. And in a lot of cases, you're going to get a better interest rate just by the fact that the, uh, interest rates overall have fallen. So for private student loans, if they were tied to live or live overs, generally trended downward. And so that's going to allow those private student loans on new loans to go down. So you can just, you know, refinance just cause rates overall have gone down. The other big scenario we see playing out. I think this is kind of a, uh, one of the common ones people miss is I would call it like the refinance waterfall, but basically as you pay the loan off, let's say you start with a 10 year term on your private student loan.
Speaker 1 00:21:03 So you've been paying it for three years. So you got seven years left at that point in time. If you're considering a new refinance, you're already, uh, set up to be at worst, looking at a seven-year term. And so typically the shorter, the term, the better the interest rates. And so you always want to be kind of keeping that in the back of your mind as you hit the, those kind of key rate break periods. So that would be like 10 years period from seven year period five-year period. You can oftentimes get a little bit of an interest rate break, even if rates haven't changed. Now, if rates have gone down on top of that, this kind of starts to compound to be even better. The last little scenario with throughout on private student loans, this would be, I think something I would only look at if I was ultra aggressive on payoff.
Speaker 1 00:21:52 So let's say, um, you know, totally on track to pay my, uh, federal, uh, my private student loan off and, you know, a couple years at most. And my financial situation outside of the student loans is solid. I have kind of my ducks in a row. Then in that situation, I might actually consider going for like a five-year okay, variable rate, because you're going to get a lot lower well and amount, lower interest rate when you go the variable route. And when you're paying it off of that aggressively, that reduces the risk, a ton of the interest rates change over time. And so that's really the situation where you might consider switching to a variable, or maybe you've just been paying your existing loan off. And you're just in the home stretch and you have two years left, you know, maybe you consider kind of finishing it out with that variable rate loan, just to kind of get that rate down even lower.
Speaker 1 00:22:43 Now there is risk of the variable late yeah. Uh, rate loan, uh, of interest rates going up. But that's why I say like, that's really the best, really the one you want to consider when you're getting very aggressive cause that the shorter, the period, the less risk there is the other thing to keep in mind about private student loans and refinancing is there's typically welcome bonuses that lenders will offer when you're starting out with them. So in some cases you can swap lenders, you can go from one to the other and oftentimes get a new welcome bonus. They're typically in the $500 range. And so we'll link it. Why could investor, uh, has a really good resource on all the different, uh, welcome bonuses that are out there with student loans? So we'll link to that. So as we wrap up, I just want to kind of iron out, maybe some action items you can think about as you're looking at your student loans, maybe you're in the federal loan system and you're thinking about a private refinance.
Speaker 1 00:23:40 So right now we're still in COVID forbearance. It's probably going to most likely be something you wait on until COVID forbearance in. So I would put a reminder in your phone or on your calendar too, at the latest around September revisit what the landscape looks like. And, you know, really kind of look at those private refinance options and, and, uh, and once the interest rates and the federal loans go back up that that can potentially be a big savings. Or if you have private student loans, if you haven't looked at your rate and compared it to other alternatives in a while, you definitely want to do that. That's, that's typically, uh, there's typically going to be some value, especially if you haven't done it in a lounge, just because the rates have gone down. And so we'll, we'll link to some of the resources we have in regards to looking at interest rates.
Speaker 1 00:24:32 But if you're going to do that and make sure you also get that welcome bonus, and you maximize that, that's just kind of a little extra gravy on top. All right. Well, I appreciate you all hanging out today. We'll definitely dig into student loans more in the future. So let us know if you have specific areas of student loans, you want us to cover questions are always welcome, and we'll look forward to seeing you next time as always, thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
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