A couple days ago we received an interesting question in our student loan forums. The question came from a young optometrist who wrote:
I recently graduated from optometry school and had a few questions before I decide to go the consolidation route. I have good job security(100K a year that will increase 5-10% every year over the next ten years) and great credit. I am confident that I can pay my loans off in 10 years and I have no plans to go into any public services that would provide loan forgiveness. Would it be possible to do a graduated 10 year repayment plan or are they all standard fixed? Below is my information about my loans/interest rates. Any advice would be greatly appreciated.
This reader went on to say that all the loans were federal loans with Great Lakes, for a total balance of over 170k. The interest rates ranged between 5.4% and 6.8%, with most loans being in the 6.8% range.
One suggestion was to sign up for the 25 year graduated repayment plan, but to treat it as the desired 10-year graduated repayment plan. The advantage of going this route is that it offers flexibility that the current 10 year fixed plan does not. The downside is that the interest rates stay relatively high. In an ideal world, we can find reasonable monthly payments and low interest rates.
Based upon the readers question, there are two paths that could offer great savings in the coming years.
Option One: A Fixed Rate Loan Consolidation with a Private Lender
By deciding that public service and other forgiveness programs are not going to be used, our reader has effectively decided not to take advantage of the major benefit associated with federal student loans. The advantage of this decision is that there is now no reason to stick with the federal student loans and their high interest rates.
Our reader falls into a demographic that has been targeted by a number of companies over the past couple of years. Essentially, they are looking for high income individuals with larger student debts. As an example, our young optometrist, is a very low risk loan. Private lenders will likely be willing to consolidate 170k for someone making over 100k a year with a great credit score and job security.
At present, three lenders fit the description of companies looking to offer low interest loans to a high income earner. These companies would be SoFi, CommonBond, and Laurel Road. Because they are all competing for the same borrowers, the interest rates offered are fairly similar. Applying to all three can make sure you get the best rate available.
A fixed rate loan is a strong option because of the predictability it offers. There is no danger in your rate going up. These fixed rate loans start at about 3.5%, but the number goes up quickly depending upon the length of your loan.
Option Two: Getting aggressive and hoping for the best
Another option is to visit the same companies, but to gamble a little bit. The gamble part is to select a variable interest loan.
The dangerous part about selecting a variable interest loan is that the interest rate can go up each year. Some of this damage is mitigated by the fact that many lenders have an interest rate cap on these loans. If you are thinking about going this route, be sure to research the various caps offered.
Generally speaking a variable interest rate is only a good idea if you will be paying off your loan very quickly. It allows you to take advantage of the rock bottom interest rates, but it is done under the assumption that the loan will be paid off before the interest rates get a chance to climb back up.
In terms of interest rates, 10 years is a very long time. However, because our reader has expressed an interest in paying a little less now, even if it means paying a little more in the future, this route could make sense.
By not ever having a need for the federal perks available, there is little reason to keep your loans with the federal government. Going the private loan consolidation route provides the opportunity to lock in interest rates that are not otherwise available. Remember, the less money you spend on interest, the more money goes towards your principal, and the sooner your loans will be paid off. To survey all of your consolidation options, be sure to check out our student loan reviews.