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Student Loan Idea!

| August 04, 2019

If you haven't heard, there is over $1.5 TRILLION of outstanding student loan debt in this country, so you are not alone.  In fact, depending on the type of college you went to, somewhere between 75%-88% of people graduate with student loan debt!  That's crazy! 

Well, hopefully this will give you just one of many different ideas on how to pay that off... 

In this example, let's assume you are not doing a residency (don't worry, I'll give an example of that later on). 

There are a few different options you can pursue: 

  1. Standard 10 Year Repayment 
  1. Graduated 10 Year Repayment 
  1. Extended (Fixed or Graduated) 25 Year Repayment 
  1. 20 or 25 Year Loan Forgiveness (There's a BIG catch though) 
  1. Refinancing to a Private Lender (5, 7, 10, 12, 15, 20 Year Options) 

Now, most people want this loan balance paid off ASAP. And, I'm with you! But, I know most people ALSO want to travel, enjoy life, have fun, and not live at home forever too. So we need to have some sort of balance.  

Let's use an example: 

  • $200,000 Total Student Loans 
  • $100,000 First Year Income 

Now most pharmacists or physicians graduate with 5-25 different loans (depending on the school) and each loan has a different interest rate. Assuming a 6.5% cumulative interest rate, under the standard repayment plan, your monthly payment will be about $2,300 per month. That's tough. 

Instead, what if we look at doing this... 

  • Any loans under 5% interest, keep with the federal loan program (let's assume it's $80k of the $200k).  Using 4.5% collective rate, that is $830 per month. 
  • For the rest of the loans, look to refinance where many of our clients are getting around the same interest rate (maybe closer to 5%). When we factor that in, it is still about a $2,050 monthly payment - doesn't really move the needle. 

Here's the key.  These are all based on a 10 year repayment plan.  But what if you extend those repayment plans to 15 or 20 years? Not with the intention to pay them off in that amount of time - remember, we want them gone ASAP. In many cases, the interest rate difference is minimal, AND it gives you greater flexibility with your money. 

  • The Extended Fixed plan lowers your federal loans to about $450 per month (25 years). 
  • The refinanced loan lowers your payment to about $850 per month (20 years). 
  • You've lowered your interest rate across the board too by about 1%. 
  • Your minimum payment also drops from $2,300 to $1,300 - $1,000 per month. 

If you then make the effort to save that $1,000 per month, you can use it every year to pay down your loans more aggressively, AND have control of $12,000 per year (what you would have otherwise paid to loans) if you want. 

Here is the result: 

  • For the standard 10 year repayment plan: You would have had a $2,300 monthly payment, would have paid off your loans in 120 payments, and paid about $72,000 in interest over that time. 
  • For the combo (some standard, some refinanced) strategy: You would have a $1,300 monthly payment, pay an extra $12,000 once per year if you choose (not including the interest that could earn just in a savings account at 2%), pay just over $59,000 of interest, and have your loans paid off in about 116 months. 

Which would you rather do? :) 

There are many different ways to think outside the box around student loans and not have them be the big burden they feel like.  We want them gone too, but we also want you to have the ability to enjoy life along the way - after all, that's why we are here, right?! 

Disclosure: Guardian and its subsidiaries do not issue or advise with regard to student loans.