High income earners with large debts, such as doctors and lawyers, are well positioned to save a small fortune on their student loans by refinancing or consolidating. Mistakes in the refinance or consolidation process can likewise cost a small fortune. Navigating these high stakes requires a careful strategy free from errors.
These five mistakes are among the most common:
#1 – Refinancing Only Once
Unlike refinancing a house, there is no cost associated with refinancing student loans. Smart borrowers often refinance their loans multiple times. Dramatic changes in income, such as finishing a residency or becoming a partner, can mean lower interest rates and better loan terms. The key is to take advantage of personal changes that make a borrower a more attractive customer to lenders.
#2 – Refinancing The Wrong Loans
The large income generated by many doctors and lawyers does not necessarily mean that it is a good idea to refinance federal loans. In some cases, not touching government loans is the best idea. This is especially true for professionals working for non-profits or government employers. Ten years of this employment can qualify for Public Service Student Loan Forgiveness. Deciding between chasing PSLF or refinancing for aggressive repayment is a complicated question without an easy answer. Borrowers must carefully evaluate their ability to pay, future earrings, and goals.
# 3 – Opting for a Variable Rate Loan
Interest rates are near historic lows and rates seem to be trending up. Borrowers who are refinancing long-term leave themselves vulnerable to future rate increases if they get a variable-rate loan. With many lenders, the variable-rate caps can be over 10%, making this mistake quite expensive. Borrowers who are refinancing their loans for 10 years or more would be well served to lock in a fixed rate. It means a slightly higher interest rate now, but it ensures no future rate increases.
#4 – Failing to Leverage Low Interest Rates
With refinance rates under 3%, the necessity to aggressively repay loans becomes diminished. Some borrowers with these favorable loan terms elect to invest additional funds rather than aggressively repaying their loans. The gamble is that investments will perform better than the interest rate on the student loan. If the investment earns more than the interest the loan generates, the borrower comes out ahead.
Where this mistake becomes especially egregious is if a borrower declines opportunities to participate in employer 401(k) matching or other favorable retirement options. The desire to eliminate debt is good, but it shouldn’t be done at the expense of building a strong financial future.
#5 – Not shopping Around
Checking rates with multiple student loan companies is especially important for borrowers with high incomes and large student debts. Lenders all have unique formulas for generating rates. For example, Laurel Road seems to favor borrowers with medical degrees. With large debts, a slight difference in interest rate can make a large difference over the life of the loan.
Another factor that borrowers should realize is that lending decisions are at times made based upon availability of funds. Many of the top student loan lenders are relatively new companies. When these companies gain new investors, they often offer better rates or approve a higher portion of borrowers. Borrowers with large balances are especially vulnerable to these market based factors influencing their interest rate. If a college got the best company with SoFi three months ago, it is entirely possible that a subsequent refinancer might get a better rate with another lender, even if their financial circumstances are nearly identical.
Be sure to check out our complete list of national student loan lenders as well as our breakdown of the lenders offering the best rates, sorted by loan type and length. These tools should make shopping around an efficient process that takes less than an hour.