Student loans have become more complicated over time. Many medical students who have started residency have learned that with this complexity comes widespread misinformation. Not understanding your student loan situation can hurt your finances. Here are some common misconceptions and details to better understand your loans and repayment plans.
1. Student Loans Don’t Accrue Interest While I’m in School
This is true for certain subsidized or Perkins Loans. For unsubsidized loans (which account for a large percentage of loans) interest IS accrued while still in school.
2.You Can’t Begin Repayment While Still Attending School
While not available for all loan types, many loans in deferment status can be paid while in school. Most payments plans are income based. So, if not earning income, the loan payment is $0 a month. With a Revised Pay as You Earn income-based student loan plan, 50-100% of unpaid interest is forgiven. This means that if your loans are accruing interest during school, that percentage interest reduction can greatly help loan financing cost. If able to as a student, it is smart to make payments, even if they are small or interest-only. Cutting down on accrued interest or monthly payments will make repayment easier in the years to come.
3. Refinancing Student Loans is Always a Good Idea
While refinancing student loans can be helpful in negotiating a lower interest rate or changing the payment schedule, the process can convert federal student loans into private student loans. This means that the loans are no longer eligible for federal repayment plans such as income driven repayment or Public Service Loan Forgiveness (PSLF). It is best to find out what is most advantageous for your financial situation.
4. Not Being Able to Verify Income Outside of the Normal One Year Window
You can verify your income anytime if you are changing repayment plans or have a change in income or family size. Typically, this will lock in a new payment for another 12 months.
5. Public Service Loan Forgiveness is Not Impacted by a Spouse’s Loans
The truth is, if both spouses have federal loans with payments based on the household, such as RePAYE, PAYE, or IBR plans, and one spouse refinances to private loans, then the spouse staying in the federal loan system will now pay the entire household payment. Being aware of this is especially important as it can have a dramatic impact on either your spouse or yourself.
6. Retirement Plan Contributions are Unrelated to Student Loans
If you have a pre-tax contribution plan such as a 401(k), 403(b) or 457(b), your adjusted gross income (AGI) will be lowered, thus lowering your future student loan payments. For example married borrowers can see up to a 25% increase in savings and single borrowers can see an increase of up to 15% savings.
7. Pay As You Earn (PAYE) Repayment Plan is the Best Option for PSLF
Not necessarily, instead, consult a financial advisor and explore different routes to find the lowest cost.
8. Income-Driven Repayment Plans will Lower Student Loan Costs
While loans may be made more affordable month to month, your costs of borrowing may increase because your loan terms are increased. The longer term allows for more interest to accrue over a longer period of time.
9. PSLF is Not Worth Pursuing for High Income Earners
Many in the mid to upper six figure income range can benefit massively from PSLF. One of the most important things you can do is check in with a trusted advisor to find out the best way to manage your student loans and repayment plans.