With the introduction of a dedicated refinancing program for dental residents, dentists in training now have more options for repaying their dental-school loans. It’s good to have options, but the landscape can be a little complicated to navigate. If you’re a dental resident, or are about to become one, there are some things you should know when deciding between private refinancing and a federal repayment plan.
Before considering the new options available to dental residents, it’s important to understand the federal repayment plan that is still the best option for most dentists in training — REPAYE, the Revised Pay As You Earn plan.
The Department of Education introduced REPAYE at the end of 2015. It is an income-driven repayment plan that expands on its predecessors, Income-Based Repayment (IBR) and Pay As You Earn (PAYE). Similar to PAYE, REPAYE caps an individual’s monthly payments at 10 percent of discretionary income and offers loan forgiveness after several years of repayment.
Under IBR and PAYE, interest accrues at a relatively high rate — and for many dental residents, the forgiveness benefits go unrealized because of high post-residency incomes. This is why, pre-REPAYE, low-rate private refinancing seemed like the best option for dental residents who were not planning to pursue Public Service Loan Forgiveness (PSLF). Private refinancing allowed borrowers to obtain a lower rate on their loans and required low payments during training.
Under REPAYE, the government will forgive 50 percent of unpaid interest that accrues while in REPAYE. That means your effective interest rate is lowered — potentially to a point that could be lower than the rates offered by a private lender — while in residency.
REPAYE Benefits Borrowers With High Debt
One attractive benefit of REPAYE is that for borrowers whose payment is not covering all of their monthly accrued interest, the government will forgive 50 percent of the difference. For example, say a dental resident is accruing $1,000/month in interest and paying $200 based on 10 percent of their discretionary income. Under REPAYE, she would have $400 in interest forgiven every month ($800 in interest difference, multiplied by 50 percent).
The more you owe in federal loans, the more you stand to benefit from this new feature. For many residents, this interest subsidy will lower your effective interest rate from 7% to 4-5 percent during training. Let’s assume that a first-year resident earns $55,000, and owes $200,000 at a weighted average 7 percent interest rate. Using REPAYE during training yields an effective interest rate of 4.43 percent.
Go Federal For Loan Forgiveness
If you plan on pursuing loan forgiveness of any kind, then utilizing one of the income-based repayment options (IBR, PAYE, or REPAYE) is the clear-cut option. While PSLF comes with its own set of question marks — for example, potential legislative limitations — you need to enroll in one of these federal programs if your goal is to get your loans forgiven through non-profit employment.
You must also remain with the federal government if you plan on pursuing long-term loan forgiveness — no private lender would be willing to forgive your debt for any reason other than death or permanent disability. IBR allows for loan forgiveness to take place after 25 years of payments. PAYE forgives your remaining balance after 20 years of payments. REPAYE allows undergraduate borrowers to have loans forgiven after 20 years, while borrowers with post-graduate loans (like dentists) won’t see relief until they have made 25 years of payments.
Just remember that many dental residents are unlikely to receive loan forgiveness because high post-residency incomes mean their student debt is gone before they’re eligible for forgiveness. And keep in mind that forgiveness benefits are considered taxable events, which could lead to a large tax bill that’s due immediately in the year the loan is forgiven.
When Private Refinancing May Be Better
The majority of dental residents will want to use REPAYE during training to capture the interest subsidy and obtain a low effective rate, and then refinance through a private lender once they begin practicing. However, this strategy is not risk-free.
The most important thing to be aware of is that interest rates are not set in stone—they may go up while you’re in training. Rates on private refinancing are currently at very attractive levels. You may not be offered the same low rate from a private lender in the future that you could have locked in during residency. Secondly, while REPAYE’s interest forgiveness may offer the lowest effective rate during training, once training is complete, your rate will effectively return to the 6 percent – 7 percent that is written on your promissory notes.
Despite these risks, REPAYE is still the best option for many dental residents. However, certain groups are better off with private refinancing:
Borrowers with a working spouse
If your spouse earns a decent sized income, your monthly payment could very well be high enough that it is covering all of your accrued interest. In this case, you would see no subsidy, so you don’t stand to benefit from REPAYE.
Borrowers with lower debt
If you have relatively low debt ($60,000 or less), you likely aren’t accruing enough interest to benefit from the REPAYE subsidy.
Borrowers with private loans
Private loans are ineligible for federal repayment plans, so refinancing is most likely the way to go.
Borrowers who can’t afford to pay 10% of their household income
REPAYE will likely dictate monthly payments of $250 and up, based on your residency income — and potentially much higher if you have a working spouse. With private refinancing charging minimal monthly fees during training, it may be a good option if you need more money in your pocket while in residency.
Custom Refinancing Program
Laurel Road is the only lender in the country with a dental-resident refinancing program. Regardless of how much you refinance, you’ll only pay $100/month during training. And if you’re an American Dental Association member, even better—the ADA negotiated a 0.25 percent reduction on refinance rates for its members, so whichever rate you qualify for, your rate will be 0.25 percent lower for the life of the loan as long as you are an ADA member.
Furthermore, interest does not capitalize while you’re in training, so you won’t accrue interest on interest. This help keeps the loan from significantly growing in balance while you make low payment during residency. Many residents also find it helpful to be able to combine their federal and private loans into one payment.
Factoring all the considerations into a repayment decision can get complicated, so we recommend working with an experienced professional before making a final decision. To learn more about our dental-resident refinancing program and discuss your repayment options, get in touch.
About Laurel Road
Laurel Road is the national online lending division of Darien Rowayton Bank. FDIC-insured and established in 2006, Darien Rowayton Bank has helped thousands of professionals with graduate and undergraduate degrees across the country to refinance and consolidate over $2.5 billion in federal and private school loans, saving these borrowers thousands of dollars each. Darien Rowayton Bank is a Connecticut-chartered bank, Member FDIC, and an Equal Housing/Opportunity Lender. For more information about Laurel Road, click here.