Sherpa Mailbag: Time to Abandon PSLF?

Michael Lux Blog, Consolidation, Mailbag, Student Loans 0 Comments

In this edition of the Sherpa Mailbag we take a look at Dr. Carl’s medical school debt.  He is thinking about going with a private consolidation company and giving up on Public Service Student Loan Forgiveness.  If you have a question for the Sherpa, feel free to ask us!

Carl writes:

Hello,

I graduated from medical school in 2013 with about $160,000 in debt from federal loans (apr between 7-8%).  I just completed three years of residency and started fellowship making a fairly low salary.  I did not put my loan into deferment and started paying back right away through the PAYE plan through the federal loan service initially in hopes of maybe completing the 10 year student loan forgiveness program by working at nonprofit organizations.

I will be done with fellowship in 2018 and I’m leaning towards probably not being able to complete 10 years in non-profit and not going that route of loan forgiveness and instead may go a different career route.  I can currently only make the minimum payments in the PAYE plan and was wondering if it is worth it for me to consider refinancing with SoFi or Earnest?   Additionally if I do refinance with them is it possible to defer payments for sometime?

Thank You

First Impression

My fist thought when I see a phrase like “leaning towards probably” or words like “may” is that Carl hasn’t made up his mind.  A bit of indecision is to be expected when we are talking about $160,000 in student debt.

In times of uncertainty, choosing the route that leaves available the most options is often preferable.  A critical factor to remember in the private consolidation process is that it cannot be reversed.  That means that if Carl opts to change course, or ends up in a government or not-for-profit job, he will not be able to take advantage of the public service student loan forgiveness.  Private lender consolidation is definitely appealing for its lower interest rates, and the $100 or more that many lenders offer just for signing up, but careful planning is essential.

Timing the Jump

The basic rule is that private refinancing is appropriate when you know you know you won’t be taking advantage of loan forgiveness, such as the Public Service Student Loan Forgives, and that you won’t ever need the income driven student loan repayment plans, such as PAYE.

Carl seems like he isn’t ready to say pass on either program, but the only way to really know is to run the numbers.  The Department of Education has a great tool called the Repayment Estimator.  As Carl’s income changes, so to will his monthly student loan payments.

The significance of one’s income in making this decision cannot be overstated.  At lower incomes, the student loan balance can actually grow while on PAYE.  At higher incomes, the income driven payments pay so much towards the debt that after 10 years little debt may remain.  The strategy is driven my income and by the debt balance.

What to do right now

Carl should take a look at his income, and projected income, and see what would be left of his student loan balance if it is forgiven after 10 years.  If there is a huge balance to be forgiven, then staying put becomes far more attractive.  If there is little debt to be forgiven, then refinancing right away might be the ideal route.

It also depends upon the interest rates that Carl qualifies for with the student loan refinancing lenders.  If a reduction in his interest rate would make a huge difference in his finances and his planning, taking the time to apply to a few lenders makes sense.

Deferments in refinancing

As young doctor on a fellowship, Carl is in a very unique position.  His debt compared to his income probably does not look very favorable, but he also has a high degree of confidence that his income will be dramatically increasing in the short-term.  This may be one of the rare circumstances where a deferment might actually make sense.  While we are unaware of SoFi or Earnest offering an initial deferment like the one Carl describes, one of their main competitors, Laurel Road, does offer a plan especially for young doctors.  Payments start at $100 per month, and then start at their regular amounts once the income increases.

Bottom Line

There are definitely a lot of reasons to be temped to jump into private student loan consolidation/refinancing.  At the end of the day, the decision should come down to the math.  The only way to know for sure is to run the numbers for a few different possible financial paths and to pick the option that makes the most sense.  It isn’t terribly complicated, but it does take some research and some careful thought.