Posted by Amy Carbone on Oct 7, 2016 4:00:47 AM
“How should I repay this dental student loan debt?” is the question I probably hear most often as I travel throughout the country to visit schools. I sense the anxiety in the voices of dental students with whom I meet. And I understand.
Unfortunately there is no one size fits all solution. In my work as a financial advisor, I create plans to help my clients understand what their assets will look like, what to pay in what order, and how much. “Can you provide some generic advice?” they ask. As impossible as it is to give “generic advice,” I’ve tried to compile a few rules of thumb that may help you.
Use the deferment period to get yourself organized
You may have six months after you graduate during which your loans go into deferment[1]. Use that time to build a solid financial base, so that when your payments are due you have a better financial balance to work from.
What’s is a ‘solid financial base?’
By solid financial base, I mean several things. First of all, get a good grasp on your cash flow. Your cash flow is what comes in (your income sources) minus what goes out (your expenses). Yes, create a budget! Before you graduate, buy disability income insurance. This is probably the most critical financial step you will take in your entire life. This insurance protects your ability to earn an income, and the most affordable it will ever be is while you are in school. Third, build an emergency fund of three to six months of liquid living expenses. Factor your student debt payments into your emergency funds.
Refinance or not?
Refinancing is the process of a private company buying your government-issued student loan from you, and offering you a more favorable interest rate. There are several companies doing this currently, so shop around. Most of them look at your debt to income ratio (that would be your current income, not your future income). If you have a ton of debt, and you’re also not making a lot of money, don’t be surprised if you don’t get a good offer. Your rate and terms really hinge on the kind of income your first job generates. If you have a guaranteed salary or guaranteed contract, clearly you are in better shape and can get your loan refinanced sooner and more favorably.
Be aware that the majority of private companies don’t offer any forgiveness if you have a severance of employment, whereas government loans do offer some. Both private and government loans do forgive loans upon death (...there’s a happy thought.)
If you don’t have good cash flow, temporarily stretch out your government loan
The minute you graduate you will have a whole bunch of expenses like moving, renting an apartment, and a host of other things. You will need to maximize your cash now so that you can afford all the things you need to do. If you have decent cash flow straight out of school, then you might be OK to start on a 10-year repayment plan. If you don’t, then consider stretching out your government loan to a 25-year term, until your cash flow stabilizes. Then, once your cash flow allows you to, pay it off as though it were a 10-year loan. Also, if you apply for refinancing and don’t get good terms then it’s okay to wait a year or so and try again.
Another way to keep your loan payments low
Many recent grads opt for IBR - income based repayment, which is popular because the payments are based on your income. Chances are, your income today is lower than it will be in the future. With IBR, this helps your loan payment today, but when your income increases, so will your loan payments. If you do decide to do IBR, consider it for maybe the first year of your loan payments, and then switch to the longest repayment term the government offers, or refinance to a lower interest rate. Bottom line is, for the first few years after you graduate you will need to keep a close eye on your student debt. As your circumstances change, so will your need for different payment options.
Student debt should not be your greatest fear
I tell students that their greatest fear should be that they get sick or disabled, and won’t be able to work. If you don’t work, you won’t have an income, and without your income you won’t be able to support your life. Not paying your student loans will be the least of your worries. Protecting your income using disability insurance is an absolute building block of financial security. Affordable coverage is available, and there are plans that cosst less than $100/month.
In conclusion, don’t sacrifice on protection and other basic building blocks of financial stability early on in your career, because you’re fearful that you won’t be able to service your student loans. Put all of the building blocks in place before you start spending your new income. The first thing you need to do is to protect your income and build a cash emergency reserve. A good financial advisor who understands the unique financial trajectory of those in the dental professions should be able to help you.
[1] Federal loans have a 6-month deferment period. Check with your loan provider regarding the deferment payment, if any, of your loan.
About Treloar & Heisel
Treloar & Heisel is a premier financial services provider to dental and medical professionals across the country. We assist thousands of clients from residency to practice and through retirement with a comprehensive suite of financial services, custom-tailored advice, and a strong national network focused on delivering the highest level of service.
