WCI #1: Refinancing Student Loans

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahli.

Welcome to the White Coat Investor Podcast.

Number one if you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief Financial officer, you have never been given the tools to succeed. Enroll in WCI Financial Bootcamp, a free educational email series, and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the White Coat Investor can help.

Well, this is exciting. This is our first podcast we've ever done. I probably ought to introduce myself as we go into this. My name is Jim Dali. I'm an emergency physician practicing in suburban Utah. I had developed an interest in personal finance and investing and started blogging back in 2011 at a site called the White Coat Investor that can be found@whitecoatinvestor.com that site literally exploded because the information I was passing out there was unable to be found anywhere else by high income professionals such as physicians. This was stuff they weren't being taught in medical school or residency. And so I saw this niche and this need for information among my peers and so decided to start filling that. And it's really been an exciting journey. Watch it take off and being able to affect the lives of hundreds of thousands of physicians. But why the podcast? This is new for us. I've never done a podcast before and as you can tell on this, our first one, it probably won't be all that polished. And that's okay. But I found as I go around speaking across the country that it takes me a couple of days when I include travel time there and back, just to speak to a group of 30 or 40 or 50 docs. And in this aspect, through the podcast, I'm hoping to be able to affect the lives of thousands at a time just because it's much more scalable than going out and talking to people. Plus hopefully it'll allow me to spend less time in airports. Our subject for today's podcast is going to be student loan refinancing. And everything you need to know about it. There are really two options for managing your student loans as an attending physician. The first option is get your loans forgiven. And if you're going to get your loans forgiven, you shouldn't refinance them. The main forgiveness program for physicians is what's called public service loan forgiveness. And in this program, if you make 120 monthly payments under one of the federal government programs for your federal student loans, the remainder of what you owe is then forgiven completely tax free. It's a wonderful program. The way you get those 120 payments is that you make a bunch of tiny payments while you're in training. That includes in your residency and in your fellowship and then in your first few years as an attending. Of course, you're required to be directly employed by a nonprofit, A501, in order for those payments to count toward public service loan forgiveness. But if you can qualify for that, and the typical path for that is for an academic physician, but if you qualify for that, you shouldn't refinance your student loans. That's the first caveat you ought to know about this. It just doesn't make sense for you to refinance them if somebody's going to forgive hundreds of thousands of them. The other thing to keep in mind is there's no going back once you refinance your loans, you cannot go back into the federal programs. There's no more income based repayment pay as you earn, revised pay as you earn, public service loan forgiveness. Those are all out the door. So before you refinance, you better be darn sure you're not going for public service loan forgiveness. Now, the first question a lot of people have about student loan refinancing is how long of a term should they take? Because these companies that do student loan refinancing will refinance you for as little as five years or as much as 20 years. And when people ask me this, I tell them, do you really want to be in debt for 20 years? I wouldn't even want to be in debt for 10 years after residency. So I always tell people to take the five year term if they can possibly qualify for it. Mostly because I just think you ought to be out of your student loan debt within five years of completing your training. I think it's ridiculous that it takes longer to pay off your training than it does to go through the training. And so I always recommend that people live like a resident for two to five years after residency in order to be able to pay off their student loans. And get a jump start on their nest egg and hopefully even save up a down payment on their dream house. So five year terms are what I really recommend. Another question people have is whether they should take a variable rate loan or a fixed rate loan. Now, the common wisdom on this is to take a fixed rate loan, but I'm not sure that's entirely accurate, particularly for a doctor working very hard to pay these off early. The reason why is that it costs quite a bit more to get a fixed rate loan, usually about 1.5% more. And what you're really doing with a fixed rate loan is you are simply paying a bank to insure you against interest rate risk, the risk that your interest rates are going up. Whereas I think most physicians, especially those who are throwing thousands of dollars a month at their student loans, can really afford to insure against this risk themselves. And there's little point in insuring against something that isn't a financial catastrophe for you. Insurance always costs you more than you get on average, and so don't buy insurance that you don't need. In this case, if you're going to have your loans paid off in two or three or four years, you can probably afford to run the variable rate risk. And what is that risk? Well, that risk is that interest rates go up quickly and severely right after you refinance. If they only go up a little bit, you're still going to come out ahead because you have started with a rate that's one and a half percent lower. If they don't go up for a while, you're also going to come out ahead because you'll have paid off a great deal of your loan at those lower interest rates. So for you to come out behind, they really have to go up quite severely and quite soon for this not to work out well for you to take a variable rate loan. So I would really give serious consideration to a variable rate loan for your student loans or any other debt that you think you can get paid off within five years or less. What rates can you expect from these? Well, they're going to be a lot better than what the government will offer you. I find it amazing that you can borrow money for a mortgage at 2 or 3%. But if you want to take out student loans to be a doctor, you're going to be paying 6 to 8%. So you'll almost surely be able to dramatically improve the interest rate you are given by the government. But these rates start as low as 2% for the variable loans and as low as about 3.5% for the fixed loans. Now, at the high end, they can reach into the 6% range, but that's usually for a long term loan. You know, somebody who wants it for 15 or 20 years and someone with not particularly good credit. So most people are going to be able to get down into the two and three and four percents with their student loans if they refinance them. Many doctors worry about refinancing their loans because if they become disabled, they're worried they won't be able to make those payments or they won't be able to go back into the government programs that protect them from those sorts of things. This is really not a very serious issue in my view. First, a lot of these student loan refinance companies, such as SoFi, who's sponsoring this podcast, they waive your loans if you become permanently disabled. Even if the company you've decided to refinance with doesn't do that. And you should be sure to read the fine print to know whether they do or not. You can always buy a little bit of extra disability insurance that will cover these payments. That extra disability insurance costs less than what you're paying in the extra interest on your student loans at the current rates. And so it's a no brainer if you're going to refinance to just have a little bit of extra disability insurance to cover you in case you do get disabled. Other people worry about what happens if they die, and the truth of the matter is that's even cheaper to cover than disability. Again, most of the companies such as SoFi do waive your loans if you die, as long as there's no cosigner. But it's relatively easy to insure against this. The cost of a $500,000 term life insurance policy for a healthy 30 year old is almost free. And so you can cover the cost of your student loans not going away in case of death very easily. That's certainly much cheaper than the amount of insurance that you're paying. You can also refinance again if for whatever reason, your debt to income ratio or your credit score wasn't very good, or you didn't qualify for a five year term. You can give it a year or two and then refinance again. In fact, you could probably refinance every month if you wanted to. I don't know that I'd go through that much pain just to get the sign up bonuses for these refinancing deals. But you can keep refinancing. It's not like you're stuck with it. If you do it once, you the only thing you can't do is go back to the government programs. So how should you go about the process? Well, the best way to do it is probably to pick two or three lenders. And I've got a list of them@whitecoatinvestor.com student loan refinancing, where it lists what I think are the preeminent lenders in this space. And I would apply with two or three of them. Most of these will give you an estimate of your rate within two or three minutes online without you having to upload a whole bunch of paperwork. And then you can simply take the one that offers you the best rate. As a general rule, the preliminary rate they offer you is what you end up getting in the end. And so they're quite accurate at projecting what your rate is going to be as long as you're putting in accurate information. Once they give you the best rate, you can upload your data. And that only takes a few minutes if you've gathered all the data together already for all your loans. And then, you know, over the matter of a couple of weeks, maybe four at the most, the paperwork runs through and you start making payments to these student loan companies instead of the federal servicers. As a general rule, you're going to get a lot better service out of these refinancing companies. So that's one bonus. But the big bonus is that you get your rate much lower. One caveat is you have to qualify for these loans. While the federal government will loan money to anybody with a pulse who can get into medical school, these guys actually are in the business to make money. They are for profit companies. And if they don't think you're a good bet, if they don't think you're going to pay them back, they, they're not going to loan you money or they're not going to loan them to you at very good terms. And so they're actually going to pay attention to your debt to income ratio. For example, if you owe $550,000 and you're a pediatrician making $150,000, they might not refinance you. If you have a credit score of 650, they're probably not going to refinance you. But if you have a reasonable credit score and a reasonable debt to income ratio, they'll refinance you sometimes. If they won't qualify just you, they will qualify you. If you have a cosigner, that might be a good deal for some people, but you better think about it carefully. One problem with having a cosigner is the cosigner is also on the hook. So if you get divorced or if you if the borrower dies or becomes disabled or whatever, the cosigner is still on the hook to make the payments. And so use extreme caution bringing on a cosigner just to get a little bit lower rate. You can also refinance as a resident. There are a couple of companies that will do this. Probably the most well known one is DRB in New York. However, the issue is as a resident you usually don't get a very good rate. About the best rates I'm seeing residents get is about 5.5%. And the truth of the matter is most residents in the government revised pay as you earn program have an effective interest rate that's less than that. And so while it makes sense to refinance your private student loans while you're a resident, it really doesn't make sense usually to refinance your federal student loans as a resident. You can learn more about all these companies that will do student loan refinancing@whitecoatinvestor.com student loan refinancing and you will also learn about some special deals I've negotiated with each of these companies. Basically a bonus payment you get for refinancing and that ranges from 100 to $300. Just as a nice thank you for refinancing your loans with them. Now if you're smart, you'll take that 300 bucks and you'll put it toward your loan so you can pay them off even faster. But I suppose if you want to go buy a bunch of stuff off the dollar menu at Wendy's, you can do that too. The main thing with student loan refinancing is you just need to go do it. The fact of the matter is there are tons of doctors walking around out there not working for a 501 who are still paying 6, 7, 8% on their loans. That's stupid. Quit doing that. Go refinance your loans, save yourself a bunch of interest and make a commitment to get those loans paid off within the next five years. You don't need this stuff hanging over your head for half your career. All right, that's a little bit of a rant. I always like to cover a one topic in depth in these podcasts, but also I want to go to the Mailbag and answer a lot of questions and bring up some interesting stuff that I'm seeing on the Internet as well. So the first thing I'd like to do is talk about an email I got from Taylor Larimore. He's well known to those of you who have spent much time on the Bogleheads forum and he's known for, you know, common sense advice. Taylor is actually a World War II veteran, fought in the battle of Bastogne, spent a Christmas there in 1944. But he gives a lot of wisdom out and he sent me an email after a recent pro con post that we published on the White Coat Investor about whether you should drive an expensive car or not. And he said this is a con that he posted on the forum last year. He says despite the billions of dollars spent on marketing by automobile manufacturers, try to remember that a car is primarily to get from A to B. Nearly all cars do the job very well. Certainly better than the most dangerous, gas consuming and most expensive cars built 20 years ago. The savings from buying a less expensive car are enormous. For example, Edmunds gives the five year true cost to own for various Automobiles. A new BMW 528i sedan costs $55,264 with a five year true cost to own of $74,419. A new Toyota Corolla sedan costs $18,165 with a five year true cost to Own of $35,382. So that means buying the Toyota saves $39,037 in five years or approximately the $3,253 per year. So says Taylor, if instead of buying a fancier car, you invest the $3,253 per year at 8.5% in a Roth IRA. In 40 years, you know, between the ages of 25 and 65 you will have saved approximately $1,000,043. So basically driving a cheaper car can make you a millionaire from that alone. And I think that's certainly good advice for anybody, particularly somebody with a middle class income. That's really the difference between becoming a millionaire and not becoming a millionaire if you're on a middle class income. But even for a high income professional like doctors, lawyers, veterinarians, you name it, you know you're going to be a lot better off driving a cheaper car, at least for the first few years of your career and certainly during your training. Alright, I had another question recently from someone who is looking to open an individual 401k. Now an individual 401k is really great if you have some significant side income because you can basically have another 401k in addition to your employer's 401. And that's useful to be able to shield more of your income and protect your assets from your creditors. But sometimes it's useful just to be able to open an individual 401k or a solo 401k in order to be able to roll a traditional IRA into it. And that's useful if you're trying to set yourself up for a backdoor Roth ira. Of course, with the backdoor Roth IRA you have to make sure the balance of any traditional SEP and simple IRAs is zero by the end of the year. And so the way you do that is by rolling your traditional IRAs into a 401k. The other alternative, just converting the whole thing can be really expensive and so you don't necessarily want to do that. But you can open an individual 401k with very little income. In fact, there really is no lower income limit. The government doesn't care if all the profit your business made was 10 bucks. You can still open an individual 401k. And so that's one method if you have a big traditional IRA you need to roll over is go find a business that makes $10, get an employer identification number for it and open an individual 401k. Then you can roll your traditional IRA in there even though you never really make a lot of money. So what kind of business can make $10? Well, you can just go do some online surveys. As long as you report it as self employed business income, you can open an individual 401k and roll your traditional IRA money in there. All right, I got another question here via email. This one comes from a couple of docs who are moving. They say my wife and I are 40 year old surgeons relocating. We have excellent credit, fully funded retirements and a $500,000 equity in the home we'll be selling. Our relocation specialist has recommended using a mortgage broker for our new home. We'll be coming to the table with 20% down. Even before our current home sale. And due to a lower cost of living, only about 12% of our income will be going toward housing costs. In short, I don't see a problem finding a lender. Have you ever seen a mortgage broker add any value? If you can do it yourself? And does the unstable interest rate environment affect your thinking? Well, there's nothing wrong with using a mortgage broker. If you want to use a mortgage broker, that's perfectly fine. I don't know that they're going to save you a ton of money or Time. I think the real key to shopping for a mortgage is to take two different lenders and play them off each other until you get down to the lowest rate at which they're still going to make enough profit to make it worth their hassle. And that's really the key, especially today's low interest rates. You're going to get a good interest rate no matter what. I mean, we're talking about through the negotiation process. Maybe knocking off another eighth or a quarter of a point is all you're going to be able to do. And you can usually do that just by playing two lenders off one another. So I think if you're getting really great service from a mortgage broker, that's fine to use them, but I would not have them be your only source for a loan. I would at least play them off one other lender to see if you can get a slightly lower rate. And it's really useful, of course, at these times to do what's called a no cost mortgage or a no cost refinance. And the reason why is because these guys are in the business all day long and they know what the rates are for all these other things like, you know, title insurance and an appraisal and all kind of, all that kind of stuff. And they can actually do a better job negotiating those deals than you can. And so it's useful just to say, hey, you know, you cover all those costs, what's the best rate you can give me with you covering all those closing costs? And then you can just shop from one lender to the next, just comparing rates. And I think that's a great way to look for a loan. But there's nothing wrong with using a mortgage broker. I would just make sure you're also using somebody else with them. All right. Another question I had was kind of an interesting email I got from an anesthesiologist. She says, I'm a 39 year old anesthesiologist. I've been in practice for six years. Unfortunately, I'm just now understanding the importance of financial literacy and saving. I'm embarrassed to admit, at my age, after six years of being an attending, grossing on average $320,000 a year, almost $2 million total, my current net worth is only about $350,000. Up until now, I relied on the advice of a financial planner who at the end of the day did not have my best interests at heart. Boy, isn't that common. Who hasn't had that experience? Needless to say, I got rid of him and am now forging my path, albeit embarrassingly delayed, to financial independence. I was referred to your blog by one of my anesthesia colleagues and like many who find themselves in my position, I wish I came across it years ago. I've been reading your blog for the last three weeks and I found it to be an incredible resource. That's very nice for her to say that I have no financial background, so reading your blog in the comments can sometimes be overwhelming because the terminology and concepts are so foreign to me. Despite this, I'm committed to learning and ultimately becoming successful in this area of my life. The truth is any anybody who's smart enough to get into and through medical school and through residency is smart enough to learn this stuff. Is it going to take a little bit of time to learn the new terminology? Sure. But once words like, you know, interest rate and Roth IRA and those sorts of words become second hand to you, it's going to be pretty easy to understand this stuff. So she gives a few details of her financial situation. She's already paid off all her student loans. She kept them down to about $100,000. She has no other debt. She's currently living with family members and working as a strict W2 employee. But her question is really one that I get quite commonly. She wants more tax advantaged space to invest in. So she asks after contributing the max to my 401k, my Roth IRA of course, via the back door and paying for living expenses, I still have about $150,000 of after tax income available each year assuming conscientious saving behavior. Boy, this lady's going to do great, right? She's embarrassed that she doesn't know as much as she thinks she ought to about finances, but this lady's going to be very wealthy very soon. But she says because of my situation, I don't have any more areas of tax protected space and so am forced to invest in a taxable account. And then she asks are there any other options for me to create more tax protected space? And I get this very frequently. And the truth is if you don't have any side income, any self employment income, there aren't a lot of options. You're basically stuck with what your employer offers you. Now you should become an expert in what your employer offers you. That might include a 403B and a 457 and a 401A and all kinds of accounts, especially if you are a academic. But for most of us that aren't academics, you're probably looking at a 401k and that's about it. Hopefully with the profit sharing plan. So you can get up to $53,000 a year put in there. But many docs are stuck with nothing but an $18,000 contribution plus minus a match. Of course, everyone ought to be using a backdoor Roth IRA for themselves as well as for their spouse. It's relatively easy to take care of your traditional IRA to avoid the pro rata rule for that. But you know that gives you another 5,500 if you're under 50 or 6,500 if you're over 50 that you can put in there and the same amount for your spouse. Your health savings account is also a great tax protected account. You can be investing in and in fact serves in many ways as a stealth ira. But once you get beyond that and for somebody who wants to save $150,000 a year toward retirement, you're pretty much stuck with the taxable account. And that's okay. There are lots of advantages of a taxable account as well. It's very flexible. You can invest it in just about anything you want. It's a great place to invest in real estate. There's a lot of unique tax advantages to investing in real estate and it kind of becomes a mess when you invest in it inside an IRA or a 401k. And so that's a great thing to invest in in a taxable account. But there are other advantages as well. Even if you're just investing in mutual funds, it's best to invest in very tax efficient mutual funds in your taxable account. That might be tax exempt bonds, you know, municipal bonds. Or it might be a broadly diversified low cost index fund like the Vanguard Total Stock Market or the Vanguard Total International Stock Market funds. Those are also great holdings for a taxable account. But a taxable account isn't all bad. I mean you get a pretty good break on long term capital gains and dividends. You get to pay at a lower rate than your regular tax rate for those. And you also have the ability to tax loss harvest. So anytime you have a tax loss, you can sell the investment and buy something very similar, but in the words of the irs, not substantially identical and can then take that loss and put up to $3,000 a year against your taxable income. And so you can carry that forward for years and years. You can use it to offset any particular capital gains you may get. It's really can be a great benefit for those investing in a taxable account. Another great thing you can do in a taxable account is to simply use those shares, those appreciated shares for your charitable giving. Most large charities have a brokerage account at all the big places. Vanguard, Fidelity, Schwab, you name it. And you basically are just transferring the shares from your account to those of the charity. Then the charity sells their shares and they get the money. Not only do you get the tax deduction for the charitable contribution, but you also get the tax deduct or you basically get avoid paying the capital gains tax and the charity doesn't have to pay them either. So it's really a great way to flush out the capital gains of appreciated shares from your taxable account. So bottom line is it's not that big of a deal to use a taxable account if you already maxed everything else out. It's a perfectly fine place to invest. I wouldn't invest there before maxing out my 401k and Roth IRA and HSA and if I have self employment income and individual 401. But it certainly is a reasonable place to invest if you need to invest more than that. All right, the last question I wanted to go over is one I saw on the White Coat Investor forums, which is a great place to get a lot of help in a hurry from some very smart people who have similar incomes to you. But it basically comes down to something I hear all the time, such as should I be investing at the top of the market? And this particular forum poster said with stocks at all time highs and bonds moving in the wrong direction, is anybody else having stomach pains when investing in a taxable account? Right now I know that in theory we should all just stick to our investment plans and not follow the current numbers, but boy am I finding it hard right now. I don't consider myself an emotional investor at all. In fact, I was chomping at the bit wishing I had cash to Invest back in 2008 2009. At that point I was just beginning residency and only had a few thousand each year to throw at a Roth. Now that I've got enough to invest a significant amount in a taxable account, the markets are at all time highs. Anybody else out there struggling with this right now? Well, I think there's a few things to point out for people who are worried about investing at all time highs. While it's true that the price you pay does affect your future returns, you got to keep in mind that the market is usually at or near all time highs. That's because it's generally going up. And so when the market's rising, most of the Time you're at market highs. Opportunities to invest at a 50% discount like we had in late 2008 and early 2009, don't come along that often. And if you just sit on your money waiting for those to come, it might be a long time waiting. So you should always consider your time horizon. I mean, most of the time when we're investing money, we're not going to be spending it for 10, 20, 30, maybe 60 years. It might even be our heirs spending it. So if you've got years before you need this money, do you really think that the market's going to be lower in 30 years than it is today? I mean, if that were the case, that would paint a very dire picture of the future of America. And so I think you ought to, you know, invest when you have the money. A lot of people worry about putting a whole bunch of money into the market all at once at all time highs. And mathematically, about two thirds of the time, you're better off if you have a lump sum just investing it all at once, rather than dollar cost averaging it over months or years. Obviously, if the market goes down right after you invest it, you would have been better off dollar cost averaging. But because the market goes up most of the time, you're usually better off just lump suming it in there. When people are really worried about this, the usual problem is they've set their asset allocation to be entirely too aggressive. Because there's no difference in putting a lump sum of money into the market all at once versus just having your money in the market in that asset allocation for years afterward. It's all at risk to a market decline that could happen at any given time. And so what you probably ought to be doing if it doesn't feel right to lump sum in your 75, 25 portfolio or even a 5050 portfolio, is to pick something less aggressive that you do feel comfortable lump summing with and get the money into the investments so you're not suffering with low savings rate returns due to a paralysis by analysis. You should also avoid recency bias and its opposite. For example, just because the market has recently gone up doesn't mean it won't go up more. It also doesn't mean that it will go down anytime soon. And just because it's gone down doesn't mean it won't go down more or that it's going to go up anytime soon. But far too often we focus on what's happened in the last month and assume that that's going to have some effect on this month, and the truth of the matter is, it's far more random than anything else. There are some momentum effects, obviously keeping things going in the same direction. There's also a return to the mean effect which brings things back the other direction. But when you really look at those two together, it's much more random than anything else. And trying to predict the future is not a wise way to invest. And I thought it was interesting as well that this forum poster was worried about investing in taxable because he thought there was a decent chance the market will fall. If you think the market's going to go down, taxable is the best place to invest because then you can harvest your losses and Uncle Sam will share in the pain of your losses. It's far better to lose money in a taxable account than it is in a tax protected account like a Roth IRA or a 401K. I hope you've enjoyed this podcast. We hope to do a whole bunch more of these. Please send us your suggestions for feedback as well as any questions you'd like us to address on the podcast. I think most of you are probably listening to this while you commute and that's great. I hope I've kept you awake and safe on your drive into work today.

If you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief financial Officer, you have never been given the tools to succeed. Enroll in WCI Financial Boot Camp, a free educational email series, and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the white coat investor can help.

Have a great week.