The Optometrist's Guide to Student Loans

Chapter 4: How to Refinance into Private Loans 


This might be one of the most hotly debated topics among optometrists mainly because it is a ONE-time decision. Once you decide to refinance your federal loans with a private lender, you unfortunately cannot go back. You will lose all the perks of federal programs like flexible repayment plan during times of hardship. But for the majority of doctors, it is a no-brainer to refinance to a lower interest rate to save money.

6 Reasons Why You should Refinance Your Student Loans

(1) You save a lot of money due to a lower interest rate 

Range: 1.9% to 4.9% depending which banks


A typical optometrist will have a $200,000 loan at 6.8%, but if he were able to get a refinanced rate of 2.5%, he would save a total of $8600 in interest that first year alone – which could go towards principal payment. Now imagine a 20-year student loan - you would save a total of $112,049 in interest alone ($166,402 at 6.8% interest vs. $54,353.09 at 2.5% interest). That is more than half of the actual principal amount that you are saving in interest!


(2) Cash Bonus


In addition to the huge savings in interest, many banks will offer a cash bonus up to $750 for signing up.


(3) Easy Application process and Better Service from Lenders


If you have all the financial documents, most applications can be done online. Also, compared to the service that you are getting from your federal lender; most private lenders want to keep your business and will strive to provide the best customer services and answer any questions you will have.


(4) You don’t have to Refinance all your loans, and you can do it multiple times


You can select which loans you want to refinance - so if one of your old loans has a really great low rate, then you don’t have to refinance that specific loan. In addition, if you didn’t get the best rate due to your poor credit score as a new doctor or if interest rates have dramatically drop, then you can refinance again in a few years with the same lender or select a new lender to get a better rate.


(5) Five-year Short-Term and Variable Rates are often the Best Deal


For most lenders, if you want their lowest offered rate (less than 2-3%), then you usually have to commit to a 5-year term and select a variable rate. This means if federal interest goes dramatically up, then you might have to pay more in interest each month, compared to a fixed rate.


(6) Good Financial Background


Private lenders have certain requirements when refinancing, but usually, you are required to have a minimum credit score of 650, proof of full time income, and an acceptable debt to income ratio (2:1). This will vary from lender to lender, but will impact your eligibility and thus your quoted rate.

6 Negative Factors to consider when Refinancing your Student Loans

(1) If you are eligible for 10 year PSLF and pursuing student forgiveness, then you should not refinance


For any optometrists working for a VA or non-profit and planning to be there for 10 years, you should be in a 10 year PSLF forgiveness programs,  so make sure you stick with it and don't change your mind half way through.


(2) If your debt to income ratio is too high, usually 3:1 or higher


Consider enrolling 20-25 year income-based Loan forgiveness for now.

This is a tough decision because if if you are making $100K in salary, but have $300,000 in debt, it is extremely hard to aggressively pay off it without sacrificing your retirement investing or saving for any financial milestones.  So consider total loan forgiveness for a year or so. Remember, your financial situation might change in a year or some. Maybe you got a huge raise and your salary increase to $130,000 and after a year of paying student, your debt is down to $270,000.  This would put you in a debt to income ratio of 2:1! Much more manageable and advised to refi to capture a lower rate.


(3) You lose all Federal repayment Benefits such as flexible income-based repayment during times of hardship and loan deferment or forbearance.


If you miss a single payment you will automatically default and your credit score suffers significantly. This is definitely something to consider when you are applying for an upcoming home mortgage or private practice business loan.


But many private bank lenders such as Sofi, Brazos, Earnest, Commonbond will let you defer your payment and offer temporary forbearance during times of financial hardship.


(4) No loan forgiveness due to partial/full disability or death.


This is a significant factor when you have a life-threatening life condition. So make sure you have enough disability/life insurance prior to refinancing.

But again, many private bank lenders such as Sofi, Brazos, Earnest, Commonbond will offer total forgiveness upon death or disability.


5) Your student debt essentially becomes consumer debt


Similar to credit card debt, which means it will be 100% wiped out with a complete Chapter 7 bankruptcy, giving the debtor a fresh start. But the downside is that unlike federal loans, even if you pass away, the lender will be able to recuperate any remaining debt from your post-death “estate value” such as 401K/IRA/rental investment. This will result in little inheritance for your heirs.


6) If your spouse co-signs your student loan during the refinancing process. Your student loan doesn’t die with you, but instead becomes THEIR DEBT.


This is why we don’t recommend co-signing unless both parties are completely aware of the risks involved and/or your financial situation is extremely dire. Otherwise, work to improve your financial qualifications and wait to reapply.

But again, many private bank lenders such as Sofi, Brazos, Earnest, Commonbond will offer Cosigner release upon death.

3 Steps to Refinance your Federal Loans

Unlike a federal loan, there are certain qualifications that you have to meet to be approved.  Here are some steps to get you started:


Step 1) Select the amount of loans that you want to refinance.


  • Most doctors refinance the whole amount to keep it simple and also get the most bonus back ~$1000 (if over $150,000 loan).

Step 2) Get all your financial documents gathered.


There are many factors that will get you approved and each bank has its own criteria.


  • Total student loan amount: Ideally, most banks want a lower debt to income ratio, typically 2:1 or lower. So if your student debt is $200,000, your yearly income should ideally be $100,000.

  • Total annual income salary (including any fill-in 1099 income):
    • Note: You can get a spouse or family member to co-sign your refinanced loan to help your chance of getting approved (assuming they have no major debt). We do not recommend having a co-signer.

  • Total Monthly Expenses + Rent (which is a significant factor). If you live at home with your parents or rent a cheap room, you are more likely to get approved

  • Credit Score (ideally > 650)
  • Total amount of savings in checking (Ideally 10-20% of total student debt)

    • This is where it gets kind of iffy. For example, if you have $200,000 in debt, ideally some lenders want you to have 10-20% of debt in your saving/checking account. So, the minimum amount would be $20,000. This is difficult for most new graduates, so you might need to save up for a year (such as reduce retirement contribution or aggressive loan payment) or borrow money from family prior to applying to get approved.

  • Other Restrictions: Some lenders are very location-specific (such as First Republic) and will only be available if the borrowers are near a branch

Step 3: Select the bank with the best and lowest rate and shop around for multiple quotes


  • Make sure there is no origination fee to refinance with them or prepayment penalty if you want to make extra payments each month.

What Term Duration Amount Should I select?

Obviously, if you select a short-duration loan (5 years vs. 10 years), you will get a much better rate, but your monthly payment will be significantly more. Example: Assuming a 200,000 student loans, comparing a 5 year at 1.95% vs. 10 years at 2.6%, your required monthly payment will be $3,501 vs. $1,894 (HUGE DIFFERENCE).


While the lower interest rate is very attractive, it is extremely important to make sure the required monthly payment is within your budget. We usually recommend starting with a safer term of 10-year duration. You can always refinance to a shorter term like 5 years if circumstances change. Strive to pay extra payments each month.


Usually if you are a dual-income family (with your spouse having no debt) with a low budget, high income, and/or extremely motivated to live like a student for 5 years to pay off debt, then you will be done with your student debt within 2-5 years (Yes, it is possible! Quite a few of members in our ODs on Finance Facebook Group have accomplished this, along with the co-founders of this website)

How to Decide between Variable versus Fixed rate?

A fixed rate means whatever the rate is at the current moment is guaranteed to be the same rate during the next 10 years.


A variable rate will be lower initially but has a risk of either increasing or decreasing, depending on federal rate percentage changes during the next 10 year. Just think of a fixed rate, as “insurance against increasing rates” and your “premium” is the higher interest rate. Fixed is usually better but it doesn’t make much of a significant difference mathematically if you finish up within 5 years.


Once approved, make it your goal to make any extra payments in addition to the required monthly refinanced payment. Make it your financial goal to pay off your refinanced loans within 5-10 years.

"While the lower interest rate is very attractive, it is extremely important to make sure the required monthly payment is within your budget. We usually recommend starting with a safer term of 10-year duration. You can always refinance to a shorter term like 5 years if circumstances change. Strive to pay extra payments each month"

The most important upside in refinancing your student loans from 6.8% to 2.5% is that it allows you to have flexibility in your financial priorities. You can max more retirement accounts now before paying extra on student loans. But don’t get caught in the illusion that you’ve done anything about your student debt.


Many doctors have the illusion that once they are done refinancing, they have “done something” and subsequently treat themselves to a fancy vacation. Yes, you made a smart mathematical move (Bravo to you!) but you still have your debt. Saving 2-3% in interest doesn’t defeat the ugly, huge $200,000 monster that is Sallie Mae.


Also, you are an adult. It irks me so much when doctors play victim - blaming the government or loan provider for their huge debt. Yes, I do agree that it is fiscally irresponsible to have a naive 18-year-old student approved for hundreds of thousands of dollars of student debt without the proper financial education...


...But did someone hold a gun to your head and force you to take out those loans or attend some fancy private school in a high-cost of living state? Most definitely not!


Don’t be a victim.


You can whine and complain all you want, but it is not going to change anything, your student debt is still there. Take control of your finances; make it a goal for you to pay off your student loans within 5-10 years. It is extremely hard work, but it is definitely better than living a life of debt.


That was a long guide, and you finally made it to the end! We focused a lot of research and information on this topic, because it is most likely the biggest financial (maybe even personal) stress in most doctors’ lives. We wanted our readers to be aware of all the financial pitfalls, and avoid all the dumb mistakes of student debt. We wanted to give you strategies on how to attack it in the most efficient way.


I will end this article with a positive take-way (you know that “Hamburger Technique” that you learned back in clinical methods to give patients bad news) but maybe; this section is more bread than meat. The most important thing is to:


Stay motivated!


This is one of the hardest things you will do in your life, and some days it will tear you down emotionally, leave you feeling helpless and crying in the corner of your exam room, while some others days, you may feel like Wonder Woman!  Keep track of your progress each month; it is okay to do small celebrations after your pay off each $5-10,000.


Definitely take a well-deserved and long vacation (but don’t go into more debt) when you are done with your student loans. Gain support by talking to fellow colleagues and friends who are going through the same thing, because they will keep you accountable and on track if you ever drool over that shiny new BMW for too long.


YOU GOT THIS! You made it through Optometry school; this is just one small obstacle to face.

"Paying your massive student Loan is one of the hardest things you will do in your life, and some days it will tear you down emotionally, leave you feeling helpless and crying in the corner of your exam room, while some others days, you may feel like Wonder Woman!  Keep track of your progress each month; it is okay to do small celebrations after your pay off each $5,000-10,000"

DatBuiOD

DatBuiOD

Dr. Bui is an optometrist at the Apple Wellness Center in the heart of Silicon Valley. He has a deep passion for ocular disease and healthcare technology. He started his career with $220,000 of student debt and was able to finish this massive debt in 5 years using budgeting and personal finance strategies, along with aggressive investing. He is a big advocate for passive index funding with a small portfolio toward individual technology stocks.

Lastly, he wants to help all new doctors and high-earning professionals navigate toward wealth and financial independence.

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