In March, the federal government provided the first layer of student loan assistance through the CARES Act. The CARES Act provides 0% interest on all Federally owned student loans from March 13th through September 30th, 2020.
This is a huge financial assistance for graduating dentists who average about $300k of student debt with a 6% interest that is accruing approximately $1,500 of interest every month. Six months of accrued interest is $9,000 of government assistance for you. That is great, but how do you take this opportunity and think about your loans over the long term?
Strategies for Loan Management
For 90+% of dentists you are going to repay your student loans off completely over time. Therefore, it is in your best interest to manage your loans properly and protect yourself from unnecessary interest growth as your career and income grow to the affordability stage. The affordability stage is where you can start making full principal and interest payments and have a path to completely pay off your student loans.
There are 2 ways to protect yourself from the growing interest on your student loans:
1. If you can comfortably afford monthly principal and interest payments and you aren’t intentionally keeping your monthly payment low to fund the purchase of a practice, you can refinance to lower the interest rate on your student loans.
2. If you cannot comfortably afford full principal and interest monthly payments, you have to properly navigate the Department of Education’s Income Driven Repayment (IDR) programs until you can afford to refinance your student loans.
Refinancing can be a confusing experience. You need to understand that different lenders have different underwiting rules and pricing metrics so you can get different responses and interest rates depending on the lender you go to. You need to find the right lender for your unique financial situation.
Income Driven Repayment Programs
Navigating the Income Driven Repayment (IDR) programs can be tremendously confusing. There are 4 different named IDR programs and each program has its own rules. Again, you need to find the right program for you. That being said, the program that is generally the best fit for a graduating D-4 dentist is the Revised Pay As You Earn (REPAYE).
In this program the Federal government offers an interest rate subsidy on the unpaid interest each month. This interest subsidy can reduce the amount of interest that accumulates on your loans each month as you build your career and reach the affordability stage. Once you reach the affordability stage it is highly recommended that you consider looking at your refinancing options to lower the interest rate on your loans.
Typically, for graduating dentists using REPAYE, you should consolidate your Federal Student Loans once you graduate, and forego the grace period, in order to start receiving the subsidy immediately after graduation.
In this year, because of the 0% interest through September, you can wait to execute the consolidation and sign up for REPAYE in the August/September time frame. This will allow you to maximize the CARES Act benefit and have the REPAYE subsidy kick in as soon as the CARES Act expires.