Be cautious, however. “The federal government could discontinue this program at any time with little or no notice,” said Paul Larson, CFP, CLU, founder, president, and CEO of Larson Financial Group in St. Louis, Mo. “But this is unlikely to happen anytime soon.”
Explore This IssueDecember 2014
Some qualifying employers include federal, state, and local government agencies or organizations, AmeriCorps or Peace Corps, nonprofit organizations that have been designated as tax exempt by the Internal Revenue Service, and private nonprofits that provide specified public services, such as military, law enforcement, public health, and public education.
If you want to take advantage of multiple options, Thompson advised that you start to repay student loans under IBR/PAYE right out of medical school, especially if you plan to do a fellowship and then work in a public service setting. “Potentially having $50,000 to $200,000 in loans forgiven (tax free) over a 10-year period is a great investment,” he said.
Loan Consolidation vs. Loan Refinancing
Loan consolidation and loan refinancing are often used in tandem. Consolidation is the process of bundling multiple loans and payments from different vendors into a single loan and payment to one servicer. The borrower benefits from having less hassle, a lower risk of missing a payment due to neglect, and less complexity. Having a single loan makes debt more manageable and progress more measurable. “The downside is that the borrower will lose out on any special benefits on the individual loans such as interest rate discounts, principle rebates, or forgiveness periods,” Long said. Also, the new interest rate is a weighted average of the consolidated loans, so the rate will be rounded up by the nearest one-eighth of a percent.
Loan refinancing involves the restructuring of the loan’s term, monthly payment amount, or interest rate. “A refinance happens when a third-party lender is willing to give you the money to pay off your current loan but will charge you a lower interest rate (or extend the term or drop the payment),” Long said. In order to qualify for a refinance on your student loans, most banks require at least a 640 credit score, a maximum monthly debt-to-income ratio of 45%, and a minimum monthly gross income of $2,000. Most borrowers refinance their loans when they are consolidated.
Student Loan Repayment vs. Investing
If you do not have an emergency fund, Larson said your dollars are probably best allocated to building one rather than paying down loans that are in deferment or forbearance. However, there are some benefits if you elect to repay your student loans instead. “Reducing your principal balance can minimize any capitalized interest and allows you to have some peace of mind, knowing your debt is getting reduced,” he added.