This Q&A section is from a webinar done in partnership between Pattern and CommonBond. It has been edited for clarity.
Dave Carter, Director of Business Development, CommonBond
Matt Wiggins, Partner and Founder, Pattern Financial Consultancy
Q1: Are there any other loan options that get you less than 6.8% interest that still have some of the benefits of Federal Loans?
Dave: That's actually a great question. This is Dave, and just by way of introduction, my name is Dave Carter, I'm the director of business development here at Common Bond. It's a great question and a lot of you are looking at ways to lower your interest rate.
One great way to do so is to refinance your loans. For example, the average interest rate that Common Bond gives physicians is around 4.5 %, and we can change the terms on that anywhere from 5 to 20 years; so it can be quite flexible. So refinancing could be a good solution for you there, Charles.
Q2: I recently got married. I'm now not sure if we should file our taxes jointly or separately. I don't want my husband's income to affect my loan payments. What are your thoughts?
Matt: I think I can answer that one. You know, it is a little bit of a dilemma, you're sitting there thinking through a few things. Here are some things that you can consider. Some of the benefits of being married and filing jointly are that your combined tax bracket is often lower. Not always, but it is sometimes.
You are also allowed certain tax deductions like student loan interest and things like that that you may not be able to when you're filing separately. You have easier access to certain tax credits. So there are some real advantages to being married filing jointly.
But for income driven repayment plans your payments are largely based on your income. And so if you're filing jointly and your spouse is also earning a decent income, it could obviously make the payments higher.
But if you can sit down with someone who knows your income, you can calculate your student loan payments if you're doing IVR or something like that and you can actually figure out what your taxes will look like. You can answer questions like “Will we owe more taxes if we file separately? What will the lower payment look like on the student loans? And which one helps more than the other?”
So you really have to weigh both of those and you may need some help doing it; that's not a big deal, you can get a CPA or someone to help you do that. If you need a recommendation we can make one; we work with doctors all the time. But the two things you're looking at are, “How much more will I pay in taxes? And does it offset what I would save in the student loan repayment?” So hopefully that helps you out a little bit. Unfortunately, it kind of is a not one-size-fits all, but those are some things to think through as you're trying to try to decide which one's best for you.
Dave: I can add something to that, if you don't mind.
Matt: Sure, go ahead.
Dave: Just related to student loans in particular, if you are on an income-driven plan, it does make a difference if you're on the Pay As You Earn income-based repayment or the Revised Pay As You Earn plan. For income-based repayment or Pay As You Earn, you are able to file separately and they would just take your income individually; for REPAYE, they actually do not. It does not matter if you file separately or together, they will always take your income together. So that's just one thing that these repayments programs don’t have in common.
Q3: What is the difference between Revised Pay As You Earn (REPAYE) and Pay As You Earn (PAYE)?
Dave: Yeah, absolutely. So there's a number of differences between PAYE and REPAYE. And if you kind of look at the names, you can kind of tell that they're related. PAYE is Pay As You Earn, which came out first, and is a little bit more restrictive as to who can actually take advantage of it. And the reason for that is, it's a little bit more generous. The reason why it's more generous is based on who is eligible for it who are those who borrowed after 2014.
And also, it has to do with the repayment. So if you if you're looking at it from a tax perspective, REPAYE takes both of you into consideration if you're filing jointly or separately. If you're filing individually, PAYE just takes into account your individual income, but then also the amount you actually pay.
So for PAYE, that's going to be maxed out at your 10 year repayment. So your 10 year standard repayment plan is going to be the max you will ever pay on a PAYE program.
On the REPAYE program, if your income goes above a certain threshold and that 10% of your income that you pay on your loans is actually above that 10 year standard payment, you will owe more on your loans.
So if you're looking to get Public Service Loan Forgiveness, the goal is absolutely to pay as little as possible over the course of that 10 year plan. You could actually end up paying more than the standard 10 year if you are in that REPAYE program. So that's a one good thing to think about as well.
Q4: Are there risks of the Public Service Loan Forgiveness program going away in the next 10 years? Is it retroactive? Do you have to be in the program to start the 120 payments? Does working for the VA count as PSLF? Would it be reasonable to enter this repayment option as an attending?
Dave: I'll take a step back and say one thing. So Public Service Loan Forgiveness is actually a forgiveness program, it's not technically a repayment program. In order to be eligible for Public Service Loan Forgiveness, you have to be in one of the eligible repayment programs. Those programs are REPAYE, PAYE, IBR, ICR, and the standard 10-year repayment. So the question, “What is the portion of the monthly payment based on Public Service Loan Forgiveness?” is highly dependent on which program you're actually in and which program you qualify for.
So for income-based repayment, it could be 10% of discretionary income or 15 %, depending on when you took the loans out. And for REPAYE and PAYE, that's likely around 10 %. Now, it gets a pretty tricky in there because a lot of times it depends on when you took out the loans and if you had loans before.
I think the best course of action, given your individual situation, to what you'd be paying under each of the programs is to use a really great calculator that the government provides. This one will take all of your personal information and your loan information that actually the government already has and show you what your payments would look like on each and every one of the programs.
And it'll show you which ones you're eligible for. And if you're looking to get Public Service Loan Forgiveness, the whole goal there is to get the most forgiving as possible; which means you pay the least amount possible. So a lot of times that's the PAYE or REPAYE.
There's another question of, “Does working for the VA count as Public Service Loan Forgiveness?” Yes, it would. The VA is a government program or government employer so they would be eligible.
Also, a lot of the hospitals out there are actually non-profit hospitals. There's one little caveat on that there that you have to be careful of though; and that's if you're working for a non-profit hospital, you have to make sure that your paycheck is actually coming from that hospital.
A lot of times you see private practices actually work out of these nonprofit hospitals, but the private practices are the ones who hire the physicians. And so even though the physicians work at the hospital, they don't technically work for the hospital, so they're not actually eligible for this. So that's something that is very important.
If anyone here is interested in pursuing Public Service Loan Forgiveness, please go talk to your HR department at your organization, whether that's the hospital, a practice or what-have-you, and make sure that your organization is eligible for it.
Another question that was in there is, “Is the PSLF retroactive? So do you have to be in the program to start the 120 payments?” So as we mentioned, it's all about having 120 qualifying payments in an eligible program, working for an eligible employer.
So if you were in residency at an eligible program, which most of you likely were as most residences are out of non-profit institutions, and you were in an income-based repayment program, likely you were eligible and those do count.
The only time something like that wouldn't count is if you're in deferment or forbearance, those payments do not count; or if you did a consolidation. And here’s something else: a federal consolidation is a little bit different than refinancing. A federal consolidation keeps your loans with the government and does a weighted average of your interest rate and just makes it one easy simple payment.
The important thing to know about this is, if you did a consolidation, that resets your clock for Public Service Loan Forgiveness. So if you made 100 payments and then decided to consolidate your loans, you start back at 0. So if you’re Public Service Loan Forgiveness eligible and you're looking into consolidating with the federal government, be very careful with that.
Matt: The important point that he just made is is why you really do want to have someone who knows what they're talking about it and can advise you on this type of stuff. So before you take any steps with your debt, you want to make sure that you're not just doing what sounds good or what a colleague told you to do; that unfortunately is too often the case.
You want to make sure you talk to an expert. And we know that most of you are on this webinar because you have debt, especially student loan debt. And you should be developing a plan around it, you should be attacking it, you should be getting rid of it. You should have someone in your corner that actually knows what they're talking about to really guide you through doing this so you don’t make the same kind of missteps that other doctors have made.
And so if we can encourage you in any way, we wanted to bring Common Bond on here to be able to show you the expertise that they have. We believe they're doing a good service for doctors and helping them with their student loan debt and kind of taking some of that burden off of them by helping them with that overwhelmed feeling they have about debt.
Q5: Does a mortgage loan affect my application with refinancing?
Dave: Ooh, that's a good question! Do you want me to take that one?
Dave: Absolutely. So anytime you are looking to take out a loan, whether that's refinancing or take out a mortgage or anything, one of the things they're going to look at is your DTI; so your debt to income ratio.
This is the amount of debt you had versus the amount of money you're bringing in on an annual basis. And so if you're a renter, and you look to refinance your loans, that rental doesn't count against your DTI so your DTI is going to be lower. Now if you have a mortgage and you have a large mortgage, that'll actually make your DTI higher.
Let's say you have a $500,000 mortgage, that's going to increase that DTI which is going to impact your rates.
Another question I get a lot is, “Which one should I do first; refinance my loans or get a mortgage?” For that case, refinancing your loans first makes less sense. And for a second reason as well: when you get a mortgage, a lot of times they look at how much your DTI is on a monthly basis, so your monthly free cash flow.
And if you refinance your loan, especially if you push it out to a longer-term, call it 15 or 20 years, that will actually reduce the amount you're paying on a monthly basis, which makes you more attractive to get a mortgage, which means you can get better mortgage rates.
So if you have the option, I would say refinance your loans and then get a mortgage; that's just my advice. I'm not a financial adviser but I know that's the way that that your credit score or your credit affects the interest rates you get.
Matt: And I think I'm supposed to jump in right now and say, “All advice given doesn't pertain to every single person in every situation.” So…
Matt: But I do think that's a good general rule of thumb and something you guys should consider, obviously checking with the appropriate people to make sure it fits your specific situation, but that's good information.
Q6: I have applied for refinancing I was denied even with a cosigner. What are some ways that I can ensure that I can refinance my loans?
Dave: Generally with time, people increase their credit score, their DTI decreases and their income goes up. And so it's something where I would highly suggest they reach out to us and discuss as to why exactly they or their co-signers were not approved before and work through that. And if it's a FICO issue, then we can tell them some ways to help boost their FICO score.
If it's an issue about their debt to income ratio with a free cash flow, we can talk about ways to remedy that so that in a few months or maybe next year, they can apply again and be more successful this time.
Q7: Is your rate fixed or does it change over time when refinancing?
Dave: Yeah. No, that's it's a great question and I can tell a little bit about fixed, fixed variable, and hybrid. Fixed, generally means that the interest rate is not going to change, you'll have the same monthly payments throughout the duration of the loan.
As a 10-year fixed loan, for those 10 years, your payments aren't going to change. If you have a variable-rate loan that means your loan or interest rate is tied to the market interest rates. And so as the market interest rates go up, your monthly payment would go up; as they go down, your monthly payment would go down.
And then on a hybrid loan, which is something that it's pretty unique that we offer, it's 5 years fixed up front with the back end 5 years variable. And the reason this is a unique and pretty interesting product is, if you're looking to possibly pay down a large portion of that loan and you want to do it in 5 years but you want a little bit more flexibility, the rate that's given on the 5-year fixed piece of that is lower than our 10-year fixed rate.
But then it gives you the flexibility to say, “Okay, well, maybe I want to pay it over six, seven, eight years.” And by the time you get to that variable piece, your loan principal has reduced drastically. So the differences in interest rates aren't going to have as big of an effect as if you had a higher interest rate upfront.
Q8: Can you explain real quickly the difference between consolidation and refinancing?
Dave: Now, it's another very good question. when it comes to consolidation, this is a federal government program that takes all of your federal loans and basically combines them into one payment, and does a weighted average of the entire interest rate balance.
So if you have a bunch of interest rates at 5% and a bunch of 6%, they'll take them all together and you'll likely come out with an interest rate of about 5.5%, right?
On refinancing, it's combining all those loans together, but it's also giving you a different interest rate based on your individual needs in your individual situation. And it can change the term; so it can go from say 10 years to five years to seven to 15 to 20.
Q9: Who do you recommend talk to? Who should we talk to about Public Service Loan Forgiveness versus refinancing?
Dave: That's a very good question. Number one, you should talk to your HR representative at your organization to make sure that you are Public Service Loan Forgiveness eligible in your organization.
And you also should talk to yourself and determine if you want to work for a public service eligible employer for the next, however many years until you get to 10. And when it comes to this, if you are PSLF eligible and you are okay staying at an organization that is a 501(c)(3) nonprofit, Public Service Loan Forgiveness is a phenomenal program, and you should likely stick with it.
Because even though nothing has been paid back yet and there is the threat that it's… you know, people are talking about capping it what not, it's in the promissory note and so I'd be very surprised if they didn't grandfather everyone into it. But back to the original question, “Is there someone to talk to?” there are a number of consultants out there that will take a fee to tell you what is the right program for you.
Q10: If I have a large amount of debt over $200,000 but would potentially be able to pay it off soon, less than 5 years, is there an advantage to refinancing?
Dave: Great question. And, Sarah, great job; that's the absolute goal, is pay it off as soon as possible. Yes, there is an advantage because no matter how quickly you pay it off, as long as long as it's not paid off by tomorrow, you're going to be accruing interest on that balance until you pay it off. And so by refinancing and refinancing to say a 5 year loan, 5 your variable loan, which will be our absolute lowest rate, you'll bring that interest rate down.
Which means over the course of that 5 years you're looking to pay it off, you're going to accrue less interest. So across the board, if you're looking to pay off early especially, within 5 years, refinancing is a great option; especially if you have a high loan balance of $200,000, that can save you a significant amount of money.
Matt: All right. Well, with that, I think that'll be the last question that we answer tonight. Dave, we sure do appreciate you being on this webinar tonight.
Dave: We appreciate you having us.
Matt: Absolutely! For everyone who's still on board, I just want to say this really quickly. You know, we work with doctors all over the country, all medical specialties.
Thanks for joining us tonight, you guys were great. You hung around, hopefully got a lot of questions answered. Just know we're here for you as a resource anytime you need us; as the same way Common Bond is to help you with your debt. And hope you have a good rest of your night, thanks so much.