Before you settle on a loan repayment program, you’ll need to understand if you operate at a cash surplus or deficit, This requires understanding all of your monthly expenses. Once you know that, you’ll be able to plug in the potential loan payments and see what will work best for your specific situation.
Income Based Repayment (IBR) may lessen your load in the early years.
Your first year IBR loan payment will be based on your adjusted gross income and your family size for the previous year. Say you graduate in June, and get licensed by August. By the time the year is over you’ve worked five months at the most. This is not a lot of income, and will result in a sweet deal for you in Year One!
The low monthly payment gives you the ability to stop living like a college student and build up an emergency cash reserve – which you absolutely MUST begin to do. It allows you to do other financially responsible things like obtain disability income and malpractice insurance.
As your income increases, IBR may no longer be the best solution.
While IBR makes sense as a ‘starter program,’ it’s not optimal for the long run as your income increases. We typically recommend IBR as a short-term solution for a person who’s in the process of building a cash reserve. Once your emergency fund is full you’ll want to get on a 10 or 25-year repayment plan (as your cash flow allows.)
Speaking of refinancing
Refinancing is the privatization of your government loans. For example, you might go to a bank and say: “I’ve got $300,000 in student loans to the government at 7.9%; I’ve been practicing for over a year, and have some real income to show. What can you do for me?”
As an aside, most folks will have loans with several different rates ranging between 6.4% and 7.9%. Provided you have good credit, a bank may make you an offer that’s way more favorable than your current arrangement. Refinancing often requires 1 to 2 years of tax returns with full work unless you have a high guaranteed contract coming out of your program. There are banks that specialize exclusively in refinancing loans for dentists.
Are there other options?
The sweet spot is the 10-year repayment, if cash flow allows. If you need a little cushion look at using the 25-year, it will provide you with a little lower monthly payment, but comes at the cost of more interest expense.
Ultimately, you want to make sure that your loans don’t run your life. You need to come up with a solution that’s going to allow you to build a future.
~ Christian Pearson, SE Financial Services Professional/National Director of Dental Partnerships
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