Let’s say you’re one of the 60% of docs who plan to actually pay off your loans yourself. There are no “5 crazy tricks to blasting your student loans,” but there are a few considerations to speed things up.
Pay more
Just pay more per month. It’s that simple. Earmark more of your income toward paying down your debt and have it auto-debited from your account so you don’t have a choice. If you’re being clever, you could even have the necessary fraction of each paycheck routed via direct deposit to a different checking account and use that one for student loans—then you’ll never even see the money. The key here, as advocated by Dr. James Dahle in The White Coat Investor, is to “live like a resident.” That new attending income is there so you can pay yourself first. That means student loans and retirement before fancier cars and bigger houses.
Where to Put it
Federal loan servicers are required to use any extra payments to pay down any accrued interest first. Then, they’re supposed to put any principal payments toward the highest-interest debt. However, they occasionally don’t and spread it evenly. If there’s any leeway for a human being to make a bad decision on your account, just take the extra time to be clear. You can always specify where you want extra payments to go, and you want them to go toward your highest-interest debt. If you have a consolidation loan or all of your loans have the same rate, then you’re set already. (Did I mention you really don’t want to have credit card debt? Take care of that first.)
Once you’ve paid accrued interest, it’s time to be extra clear:
- Make a separate payment from your monthly payment
- Tell them which loan(s) you want it to go to
- Tell them not to “advance your due date” or whatever other way they specify to make this an extra voluntary payment to be applied now and not earmarked for future required payments
- Follow up to make sure they did what you asked
Whenever making an extra payment, you’ll have the choice to “advance your due date” or keep your next automatic payment as scheduled. Advancing the due date means your payment will be used to cover next month’s payment. If your goal is to pay your loan faster, you do not want to advance the due date—you want extra payments, not just early ones.
Leveraging other debt
In the Borrowing Less chapter, we already discussed leveraging debt a bit, but the basic idea is simple: use debt at a lower interest rate to pay off debt with a higher interest rate and thus save money in the process. Whenever you consider any “debt reshuffling,” make sure to consider any associated fees. It’s easy for loan origination or transaction fees to wipe away benefits.
Also note that no matter the difference in interest rates that there is a potentially important unanticipated risk: student loans are discharged on death or permanent disability. Personal loans, credit cards, mortgages, etc. are not. On the other hand, you can discharge pretty much every other kind of debt during bankruptcy…except for student loans.
The Mortgage
In addition to hopefully having a lower rate, interest paid on a mortgage is generally 100% tax-deductible (if you itemize), which can make a big difference (student loan interest is basically not, especially for attendings; we’ll discuss that in the next chapter on Taxes). There are two main ways to use a home as a vehicle to help pay off your student loans:
Refinance a home you already own or take a home equity loan
A cash-out refinance will almost always have a better rate, though you generally have low to no closing costs on a home equity loan (sometimes called a second mortgage). If rates are lower now than when you got your mortgage, refinancing is going to be an even better idea. If you’re moving soon, a home equity line may be better due to lower up-front costs.
Price out both options. Both are easier to do if your house is worth substantially more than you owe on it, and both may be more complicated depending on underwriting requirements. It’s not uncommon to need to use a “physician loan” product to get a mortgage as a young doc with a lot of loans.
Get a bigger loan than you need on a new home
If you buy a fixer-upper, for example, you might take out a bigger loan ostensibly for the purposes of renovation and use the extra to pay off your loans.
Worth it?
Any mortgage fun will depend on the price of the loan versus the appraised value of your home. And before jumping the gun, remember that closing costs on a mortgage (new or refinanced) are non-zero. A new loan may also often have an origination fee on top of any closing costs.
Some lenders love this idea—SoFi even advertises a student loan payoff/mortgage financing combo package (though unsurprisingly the student loan portion of the package isn’t the most generous).
Credit Cards
You can’t use a credit card to directly pay your servicer, but you can use an intermediary service like Plastiq, which we discussed in detail in the Borrow Less Chapter. You can occasionally even use those balance transfer checks that your card company won’t stop sending you in the mail. Neither of these comes free, and in most cases, you don’t even earn points/miles/bonuses on balance transfers (please, read the fine print, those checks are generally a terrible idea). Depending on the amounts at play and the rate of interest accumulating on your loans, it’s quite possible that the fees involved will be a wash with the interest savings—but then you’ll get the points to make it “worthwhile.” Also note that you’ll only save money on interest accumulation if the extra cash is enough to go to the principal. Paying a fee to pay off interest itself isn’t going to do you any good.
Any scheme leveraging credit cards basically amounts to point-hacking. There are blogs and blogs dedicated to this practice: which cards to use, how to manufacture spending to get rewards, which loopholes are still open for which companies. It can be time-consuming. It definitely isn’t for everyone. It isn’t even for most people. If these ideas excite you, it’s crucial you do your due diligence: miscalculating a perk can easily end up costing more than you were ever going to save. Never carry a balance past the introductory term.
Personal Loans
Personal loans are almost always at a higher rate than both your student loans or any secured debt (e.g. mortgage) you have. You probably don’t want personal loans.
Ditto “Practice Loans,” which while often better than your average personal loan, still aren’t going to be that great.
Terms
Reshuffling your debt to a lower interest rate but a longer term isn’t going to save you much money; it’ll probably just lower your monthly payment. Don’t forget that how much a loan ultimately costs you is always a function of both the interest rate and the loan term. It’s not unusual to get excited by a change in your monthly cash flow only to realize that you’ll end up paying more over the life of the loan.
If the goal is to be aggressive in getting out of debt, you want to use debt reshuffling to make your payments go further, not to reduce them.
Refinancing Ladder
If you’ve refinanced your loans, keep checking every so often to see if rates have moved. Don’t be scared to be a serial refinancer. Each time you can snag a few hundred bucks as a referral bonus in addition to getting a lower rate.
As you make more progress, you can refinance to shorter terms each time, and eventually, you’ll probably be confident in your ability to take on a variable rate loan. Don’t just get a 10-year loan and pay it for 10 years. Unless interest rates rise, you could end up saving a lot of money by following that with 7- and 5-year loans when the time is right.
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Next: Taxes