Student Loans Archives - The Broke Professional

My Favorite Student Loan Calculator

This is going to be a short post, but it should help a lot of people.

Since I’m a finance nerd and think about debt payoff and investing a lot, financial calculators take up a lot of my time.  While there are a lot of good investing calculators out there, I could never find a nice debt payoff calculator.  Here’s what I look for in a good debt calculator:

-The ability to enter multiple loans with different interest rates.  This is really helpful for people with student loans.  Sadly, most calculators don’t even have this seemingly basic feature.

-A graphic representation of my current loans and when they will be paid off.

-The ability to see the effect of increasing or decreasing your extra loan payment on your loan payoff date.

Ready For Zero had a program that did exactly this, and it was great!  I used it for a few years until they suddenly stopped offering it this year.  Huge bummer.

I searched futilely for a similar calculator with no luck.  Recently, I tried to search for a calculator again and an old friend resurfaced…

Unbury.me

I wrote about unbury.me a few years back because the calculator had everything I wanted.  It even showed how much more time and money you’d save by using a debt avalanche instead of a snowball!  It was a very no frills and basic looking calculator but it got the job done.

Like Ready For Zero, it mysteriously disappeared.  But now it’s back with a nice updated look.  Here is a look at the home page:

Everything I want is right there on the home page looking all simple and clean.  From here you can add as many loans as you want and enter the balance, interest rate and monthly payment.  And you can select if you want to pay them off using the avalanche (highest interest loan first) or snowball (lowest balance loan first) method.

Once you enter your information, you’ll be redirected to a cool dashboard with a lot of nice colorful looking graphs.  It’s a nice little control center that gives you a ton of good information.

But the best part is the top of the dashboard which looks like this:

All the information I need in a nice little toolbar.  I love being able to see the exact month my loans will be gone (less than 2 years!)

There are a lot of other cool graphs and numbers to play with.  Number junkies like myself will spend a lot of time on this site.

Having a good student loan calculator like this can be a very motivating factor in paying off your loans quickly.  It’s great seeing the exact month you will be debt free and the powerful effect of paying more on your highest interest loan.

I recommend setting aside a nice half hour to enter all of your student loans and looking at all the nice graphs they have on here.  Another feature is that you can create a profile and save all of your info.  Saves having to re-enter all of your loans again.  Unbury.me is simply an awesome student loan calculator.  Enjoy!

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Big Tax Changes You Need to Know About

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law.  This was one of his pet projects and something he has promising since his campaign.  He also promised that this law would give middle class families a huge tax break.  That remains to be seen.

The TCJA went into effect on January 1, 2018 and it comes with many big changes.  For some people, the effect will be large and there will be lots of planning that needs to get done.  For others, there might be a small change here and there but nothing that would require any real behavior change.

The TCJA provides the first sweeping tax change since the Reagan era.  So it’s important to know how it will effect you.  In this post, I’m going to go over some of the biggest changes in the tax law and what changes you need to make, if any.

If you want to read the bill in its entirety, be my guest.  Otherwise, here are the biggest changes you need to know about.

Much Bigger Standard Deduction

When you file your taxes at the beginning of the year, you have the option of taking the standard deduction or itemizing your deductions.  I’ve written about this before here, but the most common itemized deductions are mortgage interest, property taxes and charitable contributions.  If you have a high amount of these types of payments during the year, chances are you will save more on taxes by itemizing.

This will change for a lot of people this year.  For 2017, the standard deduction amount for single filers was $6,500 ($13,000 married).  The new standard deduction for 2018 will be $12,000 ($24,000 married).  Meaning there will be many more people choosing to take the standard deduction.  This simplifies the tax code in general, but it comes at the expense of other favorable tax treatment as I will explain below.

Behavior change: Most homeowners choose to itemize based on their mortgage interest deduction.  If you won’t be able to do that for 2018 because of the new standard deduction amounts, then the popular mortgage interest deduction doesn’t really provide any benefit.  Depending on your financial plan, it might be time to consider paying your mortgage off early.

State Income and Property Tax Limits Imposed

In 2017, you could itemize your deductions by writing off your state income tax and property tax.  This was an unlimited deduction for the most part.  Helpful for everyone, but especially for those with high state and property taxes.  But change is afoot.

For 2018, you can only deduct a maximum of $10,000 combined state income and property tax.  This is a huge change and will hit those who live in big coastal cities the hardest.  Homeowners in high tax states can easily pay $20K in state income tax and property tax combined.  This rule puts them in a real bind.

Behavior change:  Move or start renting.  For those who live in states like California or New York and have been contemplating a move to a cheaper part of the country, this will give you a little more motivation.

Elimination of Personal Exemptions

This is a key change that will hurt many working professionals with kids.  In 2017, for every member of your family (including yourself), you could take a tax deduction just for being alive.  The value was $4,050 for each family member.

So a family of 4 could take a deduction of $16,200.  This deduction is completely eliminated for 2018.  This is one reason the standard deduction for 2018 will be higher.  It will make the tax code simpler, but will hit couples with children the hardest.  It is slightly offset by the next change I will discuss.

Behavior change:  Not really much you can do here.

New and Improved Child Tax Credit

Tax credits are much better than deductions.  They provide a dollar for dollar reduction in the tax you owe, while a deduction simply adjusts your income a little lower.  The Child Tax Credit has been a nice one that has been around for about 20 years.  It provided families a $1,000 credit for each eligible child.

The problem was, the income phaseout limits were pretty restrictive for many professionals.  For married couples, once their income hit $110,000 the credit was reduced.  For high income professionals, the Child Tax Credit was a pipe dream.

But it is getting a big face lift for 2018.  The Child Tax Credit will now be worth $2,000 per eligible child.  Also, the income limit increases from $110,000 for married couples to $400,000.  

This will make the Child Tax Credit a reality for many couples.  It will also lessen the sting of the personal exemption elimination.  This change is a nice win for all.

Behavior change:  Have more kids!

Tax Bracket Adjustments

The tax bracket changes are another big one.  Essentially all the tax brackets (except the 10%) will be reduced.  And the 35% bracket is widened considerably, which will help high income couples.  Here is the old 2017 bracket:

Here is the new 2018 bracket:

So most people will see a slight decrease in their taxable income.  Not too bad.  This will be the way most people will see some tax savings.

Behavior change:  Employers should be adjusting paychecks to reflect the new tax changes by February.  Just take any extra money you find and add it to your savings and investment plan.  There is no use to have savings if you don’t use the money right?

Student Loan Interest Deduction

Just kidding!  No changes here thankfully.  The deduction maximum of $2,500 remains the same.  Though it would be nice if it was a little higher since tuition rates, and thus student loan balances, are constantly increasing.

Conclusion

The big winners of this tax reform seem to be large corporations, who saw their maximum tax rate changed from 35% to 21%.  Whether this will translate into more cash for employees and a healthier economy, only time will tell.  Families who can take advantage of the Child Tax Credit will also win.

The big losers are high income single filers who own homes in a high cost of living area.  They get hit on so many levels, but especially the state and property tax limit.  Another thing to consider is that these changes are not permanent for the most part.  Many of the big changes will “sunset” in 2027, which will then revert back to the old tax laws.  Nothing in politics is permanent after all.

These changes will affect our returns we do in 2019, so we still have some time to see what the effect on the country as a whole will be.  But it’s important to know the big changes and how you will have to change the way you approach money.  Stay tuned!

(Micheal Kitces CFP provides a great and detailed overview of the tax changes here.  If you want to dig in a little more, this is a great resource.)

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In-Credible Student Loan Refinancing

Everybody with student loans should consider refinancing.  It might not be the right choice for everybody, but you’ll never know unless you take a look.

At worst, you get some quotes and realize it’s not worth the effort or you don’t want to give up Federal loan perks.  But at best, you can potentially save tens of thousands of dollars worth of interest payments and pay your loans off years earlier.

When you look at it that way, it doesn’t hurt to try now does it?

I’ve written before that my two favorite refinance companies are SoFi and Earnest.  That still stands.  I’ve personally refinanced loans with these companies and had a great experience.  People I’ve referred for refinancing have had great experiences as well.

But as with any industry, new players continue to pop up.  It would be a disservice not to mention quality companies in the student loan refinance arena.

One such company is Credible.  We used them to refinance my wife’s student loans and had a great customer service experience along with a great interest rate.  Plus they gave us a nice little sign up bonus.

If you’re already convinced, sign up here to get some quotes.  If you end up applying for a loan before December 31, you get a sweet $200 bonus sent your way.

Need a little more convincing?  Read on about how Credible provides a fantastic student loan refinance experience.

Choices.  So Many Choices

The thing I like about Credible is that they give you so many more loan choices than other companies.  You can essentially find any combination of interest rate, loan payoff time in a fixed or variable loan product.

This flexibility is amazing because not everyone wants or is able to go with the lowest possible interest rate with the shortest payoff term.  Many people have other goals such as investing for retirement, buying a house or funding a business.

These goals take money, so it’s a good idea to find the most manageable payment you can without sacrificing your other goals.

The dashboard neatly lays out all the different offers available to you.  After checking your credit and asking for some pieces of information, you will quickly be able to see what offers are available and find the best one for you.

Since Credible is more of a clearinghouse than a bank, you will see multiple offers from different institutions.  Most refinance companies will just give you their own rates.  So it’s nice to be able to compare rates from a number of companies.

Once you find the offer that works for you, Credible will do a little more background work and in a week or two the process should be complete.

Potentially huge interest savings and a nice $200 bonus to boot.

The Offer

If you sign up with this link and are approved for a loan by December 31, you will get a $200 bonus.  The normal bonus is $100, so it’s a great opportunity to look into refinancing if you’ve been on the fence.

Like I said before, there is no downside in looking into refinancing your student loans.  You can even get your quotes before your actual credit report is pulled.  So no need to worry about your credit score being dinged.

So check out your rates before the year is up.  There could be huge savings and a $200 bonus waiting for you.

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Where to Refinance Your Student Loans

Get some quotes people

Get some quotes people

This post contains affiliate links

People tend to need some hand holding when trying something new.  I’ve found this to be the case when recommending student loan refinance to colleagues.

I recently wrote why everyone with student loans should consider refinancing.  The best that could happen is that your interest rate goes down substantially and you save tens of thousands of dollars over the life of the loan.  The worst that could happen is that refinancing is not beneficial and you stay right where you are.

Nothing to lose at all.

And while people generally like doing things that will benefit them, sometimes a little prodding is still necessary.

For example, I know it’s a good idea to try and fix things around the house myself before I call someone.  But I need to watch a couple of good step by step videos on Youtube before anything actually gets done.  That’s just the way I am.

Many people are like this when it comes to saving money.  They know it’s a good idea to open up a savings account and contribute to it automatically, find a less onerous checking account or sign up for a rewards credit card. But sometimes a little kick in the pants is needed to get going.

This post will serve as that kick in the pants.  I will show you how easy the student loan refinance process is and what companies you should consider.  Let’s get started.

(I will use screenshots from SoFi since they do not require a hard credit check before getting quotes.  More on that later.)

Step 1:  Go to the lender’s website

SoFi page 1

Just type in SoFi.com (or better yet use this link and get $100 if your loan gets approved.)

Most online student loan refinancing companies have easy to use interfaces.  Once you’re on the home page, simply click “Find My Rate” on the top right.

Step 2:  Enter Your Personal Information

info screen

In order to give you an accurate quote, lenders need some information from you.  The type of information required will vary between lenders, and some lenders will do a credit check before you get your quotes.  So the experience with each company will vary.

(By the way I did not hack into Bill Nye’s SoFi account I just made up an account with his name.  I’m fairly sure he doesn’t have a need for student loan refinancing.)

Typically, the information most lenders require is:

-Basic demographic information

-School information

-Employment information

-Current student loan balances and rates

-A little later in the process, you will probably have to send proof of income and a picture of your license or passport.

Some people are wary of giving companies too much information.  This is not really anything to worry about.  In reality, Facebook has a whole lot more information on us than these companies ever will, so I’m okay with letting them know how much money I make.

Step 3:  Analyze your quotes and make a decision

quotes screen

This is where the fun begins.  After you enter all of your information, companies will run a soft or hard credit check.  A soft check won’t affect your credit score but will still allow you to see some quotes which are going to be pretty close to your actual quote.  A hard credit check will show up on your credit report but will give you very precise quotes.

With the example I used, I assumed a student loan balance of $100,000 with a 7% interest rate and a 25 year term.  The minimum payment would be $706.78.  Making just the minimum payment over those 25 years would amount to a total payment amount of $212,000.  More than double the original loan amount!

I advise to go with the shortest payoff period you’re comfortable with and can afford.  But as you can see, even if you go with a 20 year term it would still result in a lifetime savings of more than $43,000 with a slightly lower than original monthly payment!  That’s why I say refinancing is a no-brainer.

A shorter payoff term will also result in a lower interest rate.  So the shorter you can go, the better it will be.

Fixed or Variable?

The other consideration is if you should go with a fixed interest rate or a variable interest rate.  This discussion deserves a post of its own (that’s a good idea!), but if you opt to go with a longer payoff period, about 10 years or longer, I would suggest sticking with a fixed interest rate.

Interest rates are sort of predictable as far as if they will be going up or down, but the uncertainty lies in when that will happen.  Right now in 2016, for instance, interest rates are pretty low so they are bound to go up at some point.

But that could be 6 months from now or 6 years from now.  There is too much uncertainty over a long period of time.  So for shorter term loans, less than 10 years, variable rates are a good bet and for longer term loans, it’s better to stay with fixed.  Everyone has different risk tolerances so use that as a general guideline.

The last thing to consider is that your rates will probably vary from my results, and will probably vary from someone in your same class.  Companies take into account your credit score, credit history, loan balance, interest rate, where you live, where you work and who knows what else.  The screenshot above is just for illustrative purposes, so make sure to get quotes after putting in your own personal information.

So Which Refinance Company Should I Use?

The student loan refinance arena is growing rapidly.  I keep get letters in the mail from new companies claiming they can refinance my loans at the lowest rate possible.

But let me give you the short answer.  There are only two companies worth your trouble:

#1: Earnest (get a $200 bonus by using this link)

#2: SoFi (get a $100 bonus by using this link)

I ended up going with Earnest for my refinance, just because their quoted rate was .05% lower than SoFi’s.  Everything else was pretty much the same with both companies.

Both companies make the onboarding process easy and both companies have great customer service.  You may get different quotes because both companies have different underwriting standards, so get quotes from them both and compare.

If you really truly want more quotes, a good place to look would be Magnify Money.  They will give you a list of all the best student loan refinance companies.  They are also a great resource to find the best checking and savings accounts.

Looking at the potential savings from refinancing I don’t know why anyone would not get a few quotes and see how much they could save.  Refinancing is not a good choice for everyone, but getting quotes online is so easy it really is in your best interest to just take a look.

So to conclude: Earnest. SoFi.  See how much you can save.

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4 Interest-ing Ways to Spend Your Tax Refund

My first and only job before joining the optical field was as a Starbucks barista.  It was hard work but I enjoyed it and learned a lot.  We had to manually and carefully load espresso into the machines back then.  No push button lattes!

My first year of income led to a nice refund at tax time.  I didn’t know anything about withholding rates.  Someone told me just put 1 on the W9 and you’re good to go.

And I got a bigger and bigger tax refund each year.  It was great!  I thought the government was so nice.

But after learning about the tax code, I realized I was just giving up my present income so the government could have some more money during the year.  I was giving them an interest free loan of a few thousand dollars every single year!

Now, I try to get my refund as close to zero as possible.  At the same time, I accordingly increase my savings and debt payoff contributions.  I’d rather have that money work for me throughout the year.

That being said, if you do receive a refund, you have to do something with the money.

Interesting Ways to Spend Your Refund

Here are 4 very interesting (and slightly questionable) ways to spend your tax refund:

1.  Buy an Apple Watch Space Black Stainless Steel Case with Space Black Link Bracelet.  Why spend hundreds of dollars on a run of the mill Apple Watch that tells the time and answers your phone?  Spend a thousand and now you can do the same with a space black link bracelet. ($1,099)

2.  Reserve the Tesla Model 3.  There is no car more coveted than the Tesla.  The Model 3 is a relatively affordable $35,000.  Put down the $1,000 reservation fee and figure out how to pay for it later when it arrives in 2018.

3.  Stay a few nights at a Trump Hotel.  Stay 3 nights at the Trump Hotel in Central Park.  Your friends will be so jealous.  It is the greatest, I mean absolutely the greatest most incredible hotel out there. ($1,500)

4.  Buy 50 shares of SNAP.  SNAP is the ticker symbol for Snap Inc. (very creative).  Snap is the parent company of Snapchat, which specializes in providing fun filters for our pictures.  It recently became a publicly traded company and is trading at $19.54 a share as of March 17, 2017.  Buy 50 shares and snap a picture of the confirmation email.  ($977)

While those are four pretty interesting ways to spend your tax refund, let me propose an alternative.  How about spend your tax refund on things that let interest work for you?  This will make your money go the extra mile.

Interest-ing Ways to Spend Your Refund

1.  Pay off your credit card debt.  The best thing to do when it comes to credit card debt is to avoid it.  The next best thing to do is to pay it off ASAP.  Credit cards charge extremely high interest rates.  The national average hovers around 15%, which is absurdly high.

This means that unless your investments are rocking and rolling and you’re getting a consistent 20%+ return year after year (which is nigh impossible), you need to get rid of that consumer debt FAST.  This will free up cash flow faster and save you a lot of money on interest payments.

2.  Increase your 401k contribution.  I like this suggestion.  I’m glad I thought of it.  The reason I like it is because it’s the most hands off and effective way to spend your refund.  If you already contribute to your 401k, just sign in to your account and increase your contribution percentage by a point or 2.  You will not miss the money trust me.

Once the tax refund hits your checking account, do nothing!  It’s as easy as that.  Your increased contribution rate will take that extra money throughout the year and get it invested.  You will save money on taxes and increase your retirement savings in one fell swoop.

3.  Fund a Roth IRA.  If you have maxed out your 401k, the next thing to focus on is your Roth IRA.  Combined with a pre tax 401k, the Roth IRA will allow you to withdraw money tax free, providing tax diversification for the future.  Because Donald Trump is the president so who knows what the future will bring?

The max contribution to a Roth IRA is $5,500 per year.  A tax refund of a thousand or so will get you almost 20% of the way there.  If you wish to max it out, you can set up automatic contributions for the rest of the year to get you there.

Another reason I like (love?) Roth IRA’s is that you can withdraw any contributions you’ve made to the account without penalty, as long as you’ve had the account for 5 years.  So it can serve as a quasi emergency fund if needed.

4.  Make an extra student loan or mortgage payment.  Depending on which of these debts has a higher interest rate, you can add rocket fuel to the payoff time with a nice lump sum payment.  Both of these debts can potentially give you some tax savings, so they’re not the WORST type of debt to have (see #1).

But debt is debt, and it should be paid off as soon as possible.  Just make sure to let your lender know that you want the payment to be applied to your principal amount ONLY.  Many lenders will pull a dirty trick of having it applied to interest first, which does nothing for you but everything for them.  Which is why it’s better to be debt free than continuing to do business with greedy banks!

Spend Your Refund Wisely

You can certainly spend your refund on the things on the first list.  It would make for a nice story and talking point.  But with all material things, the glamour fades very quickly.  And you’re right back to where you started financially.

Spend your refund on the second list, however, and you will provide a nice boost towards financial freedom.  In the end, that is truly what we’re all looking for.  Once you reach there, you can spend all the nights you wish at Trump Tower.

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Refinance Sooner Rather Than Later

This post contains affiliate links

Paying off student loans is a battle.  It’s a battle fought against multiple enemies while running a marathon.  Sounds difficult, but it takes consistent work and sacrifice for new professionals to become debt free.

In any battle, you need a good strategy and weapons.  Ideally, Matrix amount of weapons:

One weapon I should have used sooner is student loan refinancing.  In my case, it saved me a lot of money.  And if you have a nice chunk of student debt, it can save you a lot of money too.

How much?  Let’s take a look.

Simple case study

Let’s look at the case of a medical school graduate with a run of the mill $100,000 of student loan debt.  To keep things simple let’s assume this is one giant loan with an interest rate of 7% and a 25 year payoff.

And let’s also assume this particular graduate is a big spender and has no extra money to put towards student loan payments.  (I’m going to have a talk with him later about priorities)

With help from this handy student loan calculator, here’s how much this graduate will owe with these initial terms:

Original loan: $100,000

Interest rate: 7%

Minimum monthly payment: $706.78

Total interest paid: $112,033.35

This doc would have to pay a total of $212,033.35 on a $100,000 loan!  That’s one expensive education.  He would have to shell out over $700 every month for 25 years.  That does not sound like a good time.

Now let’s see how he would have fared if the student loan was refinanced at a lower rate of 4.5%, which is pretty average nowadays for a fixed rate according to SoFi:

Original loan: $100,000

Interest rate: 4.5%

Minimum monthly payment: $555.83

Total interest paid: $66,750.38

Through a simple student loan refinance, our doctor lowered his monthly payment by over $150 and reduced his total interest payments by more than $45,000!

Why in the world would anybody not want to take this deal????!!!!

Even if you’re eligible for a government program like income based repayment, these types of programs will almost always have you paying more in total interest payments.  I would much rather get my student loans refinanced to the lowest interest rate possible and then pay them off quick.

Very Easy Process

I graduated optometry school in 2009.  Doesn’t seem like a long time ago, but when it comes to student loan refinancing, it’s an eternity!  There were very few companies around and the process usually required physical paperwork.  Smartphones were not even a big deal back then so that should tell you something.

Today, there are so many companies that will refinance your student loans.  I continue to get emails and letters from these companies.  And many of these companies are very good.

There are two companies in particular who I feel are the best.  They are SoFi and Earnest.

I have personally refinanced student loans with both of these companies and they are listed #1 and #2 on the popular comparison website Magnify Money.

Refinancing with these companies is done completely online and is very streamlined and simple.  I walk you through the experience in a previous post here.  It’s easy enough to open an account and poke around just to see how easy the process really is.

Honestly, unless you’re getting total student loan forgiveness, there is no reason anyone with student debt should forgo the refinancing option.  It costs nothing to get some quotes and more likely than not, you will find an option to lower your interest rate.

Conclusion

Paying off student loans isn’t complicated.  Consolidate your loans if that makes sense from an interest rate point of view.  If not, pay off your highest interest rate loan with reckless abandon while paying the minimum payments on the rest.  Then move on to the next highest rate loan.  Rinse and repeat.

To make this easy process even more effective, refinance your high rate loans.  This will accelerate your loan payoff process and get you debt free even quicker.

Getting your student loans refinanced early in your career will provide the most bang for your buck.  This is the time your balance will be highest which means higher potential interest payments.

Being debt free requires resilience and consistency.  And a little help from others never hurt:

Check out your rate with SoFi.  You will receive a $100 bonus if approved for a refinance.

Also, check out Earnest.  You will receive a $200 bonus if you are approved for a student loan refinance.

My advice is to get a quote from both companies and see what the best deal would be.  Both companies use different underwriting methods so you don’t know what you can get unless you try!

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What I Would Tell My College Self

If only we could go back in time…

At some point in our lives, we wish we could go back in time and give ourselves some advice.  If we performed better in some key points in life, who knows how different everything could be?

Life’s all about the journey as the saying goes, but it would be nice if I was able to tell my 20 year old self the winning lotto numbers.  Might be a more luxurious journey at least.

But I’ve watched enough movies to know that telling ourselves winning lotto numbers or sporting event results would disrupt the space time continuum.  (Back To the Future 2 anyone??!!)

So I would be content with teaching my college self a few solid life lessons.  College is a critical crossroads for many.  Make the right choices and getting your degree will most likely get you a nice job.  Drop out and start a company and you will become the next Mark Zuckerberg.

If only it were that easy.  There are a few lessons I would like to impart to my college self (geez has it been 15 years???):

Figure Out What You Want Before You Start

I didn’t really know what I wanted to do as a college freshman.  I started with a general “business” major, then Philosophy and finally settled on Biology after I decided to become an optometrist.  This was a 2 year process that should have been completed before I got into school.

I tell you, my college bound self,  decide what you want to do with your life before you start college.  That way you can have laser like focus on what classes you need to take.  Taking classes you don’t need for your degree is a waste of time and money.

It will also allow you to work on your career outside of the classroom.  You could find a mentor, look at potential graduate schools or find out how you want to live your life in your chosen career.  This is a much better use of your time than eating mediocre nachos on campus while thinking about what the heck you want to do with your life!

So figure out what you want to do early on, and make that the focus of your time at college.

Student Loans are Easy to Acquire, but Hard to be Rid of

Think about how you want to pay for college before you get in.  If student loans will be your primary tool, so be it.  Just remember that you will be able to get a LOT more money than you really need.  And that can get you in a lot of trouble once real life starts.

When you get that sweet looking award letter, don’t be fooled by all the money the school will want to give you.  You don’t need all of it no matter what the projections say.  All you have to do is sign on the dotted line and your school will benevolently give you as much money as you want.

Only it’s not your school that’s giving it.  It’s most likely the government.  And the government always gets its money back.

So make that sacrifice by eating cheap meals at home rather than eating out every day.  Try to walk or bike whenever you can instead of saddling yourself with a car payment in school.  And ask family for help.  There is no shame in using your brother’s old sofa for your living room.

Consider Refinancing As Early As Possible

College self didn’t know too much about personal finance.  During my second year of graduate school, we were informed that the interest rate on student loans will be going up from around 2% to 6%.  I thought nothing of it at the time, but those 6% loans are the ones that seem to keep hanging around after all these years.

Education is key, so learn about how loans and debt repayment work as early as possible.  Preferably before you get into school.  Along the way you will find out about refinancing, and it is a wonderful thing.

Plan to pay off your debt by paying off the highest interest loan and then moving down the list.  This will allow you to pay off your loans in the most efficient manner possible.

Consider refinancing your loans to get that interest rate down lower so you can pay the loans off even faster.  I didn’t even think about refinancing until about 5 years after school.  Dreaming of the money I could have saved makes me hate student loans even more.

Where to refinance?  Earnest is a great company to work with.  I have had a couple of loans refinanced with them and the process has been great.  They were able to cut my interest rate by a couple of points and I saved hundreds of dollars in interest payments by refinancing with them.  If your goal is to pay off your loans as quickly as possible, what’s not to like?

College is a time for discovery and growth.  It’s when students explore new horizons and find themselves.  But it would be nice if future me just found me pulled me aside and gave me the lowdown on how to prepare for life the right way.  I’m sure he would mention the wonders of student loan refinancing.

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Are Physician Loans a Good Idea?

doc-house

Recent graduates of professional school are in a unique position.  They usually have high amounts of debt and low savings. Not a good recipe to buy a home.  Almost everybody with high debt and low savings will get denied for a traditional mortgage.

But one thing almost all professional school grads have is high potential income. So a number of banks offer Physician Loans (also called Doctor Loans) geared towards new professionals.  Most of these loans are geared towards MD’s.  But other health professionals, such as optometrists, can take advantage of them also.

Nuts and Bolts

I wrote about Doctor Loans in a previous post, but since I’m now a few years into having one, I wanted to revisit the subject.  Here are the key aspects of a Doctor Loan:

Pros

  • Requires little to no down payment
  • Doesn’t require Private Mortgage Insurance (PMI)
  • Doesn’t factor in student loan debt, which is usually high for professionals
  • Will accept a job offer or contract as proof of earnings

Cons

  • Available only to new grads, usually a maximum of 5-10 years out of residency or school
  • Can have higher fees and interest rates than conventional loans
  • Certain types of homes may be restricted
  • Some banks might require the customer open a checking or savings account with the bank

It’s also important to know why banks would offer a Doctor Loan.  Lenders are looking for customers who will make their payments on time and have a good relationship with the bank for years to come.  Professionals usually have high income potential, so banks want them as customers for life.  They will offer premium checking accounts and preferred rates for customers with mortgages.

My Take on Physician Loans

Now that we have the pros and cons out of the way, let me give you my opinion of the Doctor Loan.  I decided to use the Doctor Loan because we wanted a house after renting for a couple of years but didn’t have the 20% down payment needed for a conventional loan.  By not having at least 20% for a down payment I would have to pay Private Mortgage Insurance (PMI).  This is just an extra monthly payment to the bank that would not even be tax deductible in our case.

After finally finding a bank that offered Doctor Loans for optometrists, I went thorough the usual ton of paperwork required for a mortgage.  I’ve heard some horror stories from others who went through the mortgage application process, but luckily it went pretty smoothly for us.

I ended up selecting a no down payment Adjustable Rate Mortgage (ARM).  While this sounds scary on paper, I believe it was the best decision for us.  Doctor Loan interest rates are usually a little higher than conventional loans. Going with an ARM allowed me to get a rate in line with the average 30-year fixed at that time.

The interest rate on my ARM doesn’t increase until after 10 years, which is a few years longer than we plan to live in the house before selling.  Even if we end up living there a little longer than 10 years, we can still handle the maximum possible payments so it shouldn’t be an issue.

Our plan is to build up enough equity in the house to eventually get a conventional loan on our next home.  The Doctor Loan allowed us to take advantage of low current rates and have an affordable payment.  I don’t regret going with the Doctor Loan, but if we had waited a few more years to build up enough of a down payment for a conventional loan, we might have scored a lower interest rate.

No Free Lunch

Not paying PMI and not having to fork over a large down payment sounds like a good deal, but the advantages of that can be erased if you decide to sell too early or you have to settle for a high interest rate.

So are Physician Loans for everyone?  Absolutely not.  Homes are expensive (taxes, maintenance, homeowners association fees etc).  If you rush into a purchase too fast and aren’t ready for the upfront costs, then a Doctor Loan is probably not a good option.  You would be better off learning the basics of home ownership while building up enough of a down payment for a conventional loan.

Mortgage lenders essentially work like see saws.  They can offer low down payment and no PMI, but will have to increase the interest rate.  If you want a lower interest rate, you should be able to offer a good down payment and maybe even pre-pay some of the interest.

There really is no one right answer.  Deciding if a Doctor Loan is right for you depends on your income potential and how long you decide to live in the house, among other things.  Run the numbers and ask those who have been through the mortgage process to see if it would be a good option for you.

If you need some more information, here is a great overview about student loans from Ricardo at Doctor Loan USA.

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I Would Love to do Peer to Peer Lending but…

check-cashing

Our state is too good for P2P lending, but not too good for establishments like this.

Update:  As of February 2016, Lending Club is now open to Maryland residents!  Click here for the details.    I will be doing some heavy research into this before I take the plunge, so look for an update on my journey into P2P lending.  Edit:  Still no Prosper though 🙁  

I’ve been hearing a lot about Peer to Peer Lending (also known as P2P lending).  It’s one of those topics I just kind of glossed over since I had more “pressing” things to learn about like student loans, investing and trying to freelance.  Before last week I had a rough idea of how it worked.  Many people were reportedly getting great returns, but it seemed like a lot more work than I would have liked.  It seemed complex and then some bloggers reported that they were still getting good returns, but not as high as before.  I didn’t think it was worth my time.

But last week I heard an interview on the Stacking Benjamins podcast (which is a great podcast by the way).  The interview was with Simon Cunningham, who runs a website called Lendingmemo.  His interview pretty put P2P lending in a much clearer light for me and I was itching to learn more.  I went over to LendingMemo and got some great information.  Here are what I believe to be the pros of P2P lending:

  • You’re loaning capital to actual people, and not a big corporation.  The vast majority of borrowers on P2P sites are looking for help paying off credit card debt.  I could definitely get behind that.
  • It’s relatively low risk.  The two big P2P sites are Lending Club and Prosper, and they each have their own algorithms they use to determine the risk that a borrower will default on their loan.  According to LendingMemo, the default rate for Lending Club is around 5%, which was a lot lower than I expected.  Higher risk borrowers give investors the potential for higher returns, while low risk borrowers give less a return but a good chance that you will get a return at all.  It’s like a balancing act between risk and reward, which is what investing generally is.
  • Returns are solid.  According to Lending Club, historical returns of their lowest risk loans range from 4.91%-8.38%.  That’s a very good return for what seems like a low risk investment.  And it certainly beats the pants off of an online savings account or CD.  While past returns don’t reflect future performance, it’s good to keep them in mind.
  • It seems like fun.  My preferred method of long term investing, making regular contributions to index funds, is pretty boring.  The only thing I may have to do is rebalance, which takes just a few minutes.  Otherwise, it’s set it and forget it.  With P2P lending there are a few more decisions you have to make, and while they do have an automatic contribution system to make things super easy, you still have to check on your loans from time to time.  This seems like it would be be a fun mental exercise.

I say it SEEMS like fun, because I will not be able to see if it is really fun.  Here’s the notice I received when I tried to sign up for an account at Lending Club:

lending club deniedYes, because I live in the state of Maryland, I can’t participate in direct P2P lending as a borrower or as an investor.  As a medical professional, I’m used to the zany differences from one state to another, but this was just a little annoying.  Some states allow you to use Lending Club only.  Some states allow Prosper only.  There are only 3 states that don’t allow any type of P2P activity (Kansas, Ohio and Maryland), and I happen to live in one of them.  This would firmly fall into the category of a first world problem, but it’s still a problem.  (Here is an interactive map that diagrams all the craziness between states).

So what is an aspiring P2P’er from Maryland to do?  My plan is to do some more research on P2P lending until I know it front to back.  In the meantime I’m still working on getting rid of a 6% student loan, so paying that off would be a pretty good use of my money.  And then I’ll just wait until the curmudgeons in charge of Maryland join the P2P bandwagon.

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4 Books New Grads Should Have Read BEFORE Finishing School

Students in undergraduate and professional school usually have one thing on their minds: sleep!  The next thing is usually studying to do your best (or to just stay afloat) in your respective program.  Many times this requires a laser like focus where nothing else matters except the next test or practical.

But on the other side of that diploma or degree, real life is going to be waiting.  Which means you are going to have to make a lot of financial decisions which could potentially affect the rest of your life.  I would advise students to take a few minutes a week (that’s really all it takes) to read some good books and form some type of financial plan.

I’ve recommended four books for students to read while they’re in school.  Like I said, it just takes a few minutes a week and I know every student can find a few minutes between ping pong tournaments (and studying of course!)

These are light reads that are packed with great information to get you started on the right financial footing.

Good grades are important, but you’re only in school for a small part of your life.  Taking some time to plan the rest of your life is essential.

Here are the recommended books:

I Will Teach You to Be Rich by Ramit Sethi

This is the first book i read after graduating optometry school.  And I’m glad I did.  It touches on some theory when it comes to investing, but it is ultimately a very practical book and this is what I appreciated about it.  Ramit talks about what specific bank accounts he recommends, how to invest and even how to negotiate when buying a car.  The overarching theme from this book is to DO SOMETHING rather than not acting.  Getting 80% of the way there is a whole lot better than getting 0%.

The Millionaire Next Door by Thomas Stanley and William Danko

If there ever was a book out there that tells you what REAL wealth looks like, this is it.  MND is a light read that talks about the characteristics of real life millionaires.  Despite what society and the media tells us, millionaires don’t usually drive around in luxury cars and have gigantic houses.  More often than not they are hard working people who spend their money very wisely for a long time.  This book is especially important for those new grads looking to get a new car and/or house right away.  If you want to be a millionaire, this book will show you that’s just not the way to go.

Richest Man in Babylon by George Clason

I was fortunate to read this book while I was in optometry school, and I’m really glad I did.  It is a light and short read that can help establish a solid financial foundation.  The book consists of Biblical sounding parables that contain financial wisdom.  The main theme I got from this book is the biggest financial lesson of all: you will never get ahead unless you spend less than you earn.  Constantly spending 100% of your earnings is no life at all.

The White Coat Investor by James Dahle MD

This is a great book geared mainly to MD’s and other health professionals, but has some great advice for everyone.  The White Coat Investor is a fantastic blog that teaches professionals about student loans, investing and keeping more of your money.  Honestly, it is one of the blogs that inspired me to start blogging and trying to help my fellow broke professionals.  Great book for investors and a must have for anyone graduating from professional school.

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