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  • 20 Year Student Loan Refinancing Product

    My email box is always full of interesting stuff. I thought participants might be interested in an exchange I had recently with one of my sponsors/advertisers, a student loan refinancing company. This isn't the first time I've had this experience with one of these companies. They come to me with a new product they're very excited about and then are surprised that I'm not really very interested in helping market it, even for a generous commission. I've removed the name of my contact and the company, so don't bother asking. It's the discussion that I think is interesting and would love to hear your feedback on.
    Lender:



    [We are looking at launching] a very compelling 20yr refi product.  If/when that happens, is it possible to try an email announcement to folks?  We expect the option to be very popular amongst the medical community to keep monthly obligations low on large debts, but still lower rates and still include a no-penalty early payoff.  I'll share more as we get closer to the launch, but just wanted to see if that was something you'd consider ahead of time!


    WCI:




    We have to be very careful with "email updates" as I have promised my readership list that I will not spam them and that helps keep my email open rate very high, enabling us to sell sponsorships of the emailed monthly newsletter for a high price.



    I'm glad to hear you are constantly developing/finding new products, but there's no way you're going to find me being an advocate of a 20 year student loan refinancing product. Being in debt for 20 years after completing training sounds like a terrible idea to me and would run against everything I've ever recommended about student loans on the site. Any chance of a new 3 year product being developed? Surely that could be offered with much lower rates than a 20 year product and would be a welcome addition to the marketplace that I could wholeheartedly get behind. I think there will be more and more interest in products like that as rates climb.



    Lender:




    I wholeheartedly agree with you on the 20yr loan term from a conceptual perspective.



    What we see and what the data shows, however, is that the demand is there for a longer term product to keep monthly payments reasonable, while still achieving a lower rate than what borrowers currently have.  They typically plan on paying off the loan earlier than the 20yr term for all the reasons you'd expect, but they appreciate the low monthly obligation, particularly early in their careers when earnings are not at their peak but student loan payments are still very high.



    Their alternative is to move to an IBR plan that will achieve more affordable monthly payments, but still push their term out substantially and without reducing the interest rate.  For those that will not achieve PSLF, which is many, extending the term is already happening by moving to IBR, but they're not capturing the savings of that lower rate.



    A 3yr term would definitely come with much lower rates, but a pretty small percentage overall of applicants are even choosing the 5yr term, so bringing an even shorter term to market doesn't make as much sense as the longer term.  Someone who can handle the 3yr term monthly payment schedule can still get a great rate on a 5yr term and pay more than the monthly obligation to achieve a similar result, which I'm sure some do.



    Would love to hear your thoughts on the longer term concept, though, as someone who has a readership across the full spectrum of career arcs in medicine.  Does that make sense for the younger crowd?



    WCI:



    Thanks for sharing your thoughts. I'm not sure you understand how strongly I feel about this point, so I'll elaborate a bit more.



    I don't doubt that lots of people like lower payments and choose 20 year terms based on that lower payment. My contention is that they shouldn't. It's handicapping their financial progress to spend that long paying off an education. So I can't push that sort of a product.



    I'm 11 years out of residency. By making smart financial decisions early in our careers we're multi-millionaires and can quit working at any time. Now I practice medicine as a well-paid hobby because I enjoy it. That's what I'm trying to teach other docs how to do. It's pretty hypocritical to turn around and email readers recommending they take out a 20 year student loan.



    The docs using IBR are primarily in training, where the lower payment is needed because, well, they literally cannot make a full 10 year payment even if they had their paycheck deposited in the lender's bank account. They HAVE to have a lower payment in residency. But as soon as they're out, they can and should pay off their student loans in 2-5 years.



    The alternative isn't to move to IBR, it's to accept that you don't want the lowest possible payments. You want the highest possible payments so you have them paid off sooner. The way you make those is by spending less on houses and cars and vacations and the like. Physicians coming out of residency looking for lower student loan payments don't have an earning problem. They're all making at least $150K a year (3 times what they made as a resident), and most of them much more. They have a spending problem. Rich people ask "How much?" Poor people ask "How much per month?" I don't think doctors ought to be poor, so I teach them not to do that. That's the message of the blog. So you can see why it would distort my message to push a 20 year loan for a house, much less a student loan.



    Frankly, I'd like to see you eliminate the 20 year product so nobody is tempted to buy it. There's a demand for heroin too. That doesn't mean you have to supply it. There are 50 year mortgages in Europe and 100 year mortgages in Japan. Not sure that's doing anybody any favors to supply that demand. Credit has its uses, but when you get carried away with it you become its prisoner.



    Very interesting conversation though. I'll discuss it (no mention of you or your company) on the forum. It'll be interesting to see what forum participants say about a 20 year student loan product.


    So, what say you? Should I be pushing a 20 year refinancing product? Would I be doing doctors a favor or a disservice?
    Helping those who wear the white coat get a fair shake on Wall Street since 2011

  • #2
    Idk, I dont think there is anything inherently wrong with it and it could even be useful. The issue usually comes down to the financing costs start to become much more obvious and limit interest. Nothing wrong with a little more choice.

    20 years puts a lot more inflation at your back for sure.

    Comment


    • #3
      I think using the right tool for the job is key. Knowing which tool to use, or more importantly, which tool not to use is critical. And, often simply because a tool exists, it is perceived to be an acceptable option.

      I've made use of extended graduated plans (25 years) to (temporarily) lower our D:I, to allow us to get the mortgage we wanted/needed. Should we have waited to get less debt? Perhaps. But the financial analysis to let us turn one property into an income generating business to improve cashflow, and let us get a better place to live seemed to indicate we should go for it. Was there more risk, yes. Has it worked so far, yes. We are still dramatically buried with debt - but less than last month! Call me in 20 years, we'll see how this N=1 turned out.

      In the meantime, we've since refinanced the loans to 5 and 10 year notes, and are paying extra each month. We went with a 5 and 10 year, instead of 3 or all 5's to keep the monthly payment (read: commitment level) lower. This allowed for more peace of mind, higher cashflow, and need for a smaller emergency fund. We expect the loans to be paid off in 3-5 years, not 10. Perhaps it's silly, but the peace of mind and interest rate trade off seemed worth it. Perhaps that how to qualitatively measure our risk tolerance.

      Just because a tool is made, doesn't mean it provides overall value to the industry. If I managed to use it well, great. Will everyone? I think there are risks (albeit) different to a 3 year, and to a 20 year note.


      So, what say you? Should I be pushing a 20 year refinancing product? Would I be doing doctors a favor or a disservice?
      Click to expand...


      To clearly answer the questions asked: See above. No. Yes.

      Comment


      • #4




        Idk, I dont think there is anything inherently wrong with it and it could even be useful. The issue usually comes down to the financing costs start to become much more obvious and limit interest. Nothing wrong with a little more choice.

        20 years puts a lot more inflation at your back for sure.
        Click to expand...


        My second though is with this - If the rates really were low enough (read: below inflation), then maybe, I'd consider a 20 year note. I doubt we'll see this though. And it doesn't resonate with what I'd decide to tell the lender if I were in your shoes. Hmmm.

        Comment


        • #5







          Idk, I dont think there is anything inherently wrong with it and it could even be useful. The issue usually comes down to the financing costs start to become much more obvious and limit interest. Nothing wrong with a little more choice.

          20 years puts a lot more inflation at your back for sure.
          Click to expand…


          My second though is with this – If the rates really were low enough (read: below inflation), then maybe, I’d consider a 20 year note. I doubt we’ll see this though. And it doesn’t resonate with what I’d decide to tell the lender if I were in your shoes. Hmmm.
          Click to expand...


          You're not going to get a below inflation rate on anything except a bond. It would just need to be low enough to make the inflation part of it make sense with whatever you could get with the money you werent putting towards that debt. That is, the rate minus inflation should be a low enough hurdle to make investing that money elsewhere very worthwhile. It wouldnt have to be too low, just enough. After 20 years even low inflation is a heavy burden cumulatively.

          That has to be balanced with the annoyance of having that debt for so long.

          Comment


          • #6
            Well, I know it's not SoFi, because they already have a 20-year option...

            Comment


            • #7
              The concept of having a 20 year term for the flexibility and then paying it off as fast as you can is a great concept, however, I imagine very few people actually do that.

              I'd be interested in seeing what a "compelling option" means to them but I would venture a guess that it wouldn't be much different than what is already available.

              Comment


              • #8
                Nothing inherently wrong with 20 year term-- I think you're overreacting a bit.  I believe standard federal repayment plans go up to 25 and 30 year terms, so that's still better.  But as far as it being helpful to your readers in a newsletter... not really.  Products like that already exist.

                If I recall clearly, I personally refinanced to a 15 year note since at the time our debt-to-income actually meant we'd pay a higher interest rate with a 10-year note. So we took the 15 year note, the lower payment, and just made extra payments here and there.

                I've now refi'd to a 5 year note and would be interested in a 3-year note or even a 2-year note if it was available.

                Comment


                • #9
                  To add on the 5yr vs 3yr product: if one of the many lenders offered a 3-year (or 2-year) loan with a significantly lower rate than the competition's 5-year loans (this should be easy), I would snatch that up in a heartbeat, and I think anyone else with a 5 year loan would too.  I don't get the impression that anybody with a 5-year note is struggling to make those minimum payments.

                  Comment


                  • #10
                    Depends on the interest rate.  if its the same rate as a 5 year, the flexibility would be nice.  If its less then inflation its hard to argue against it.

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                    • #11
                      Somehow my remaining Navient loans are 30 year terms.  I've been making minimum payments on them for the last 5-6 years.  The final payment date is 2042. 30 years at 2.6%.  That's free money.  I'd be stupid to pay that off early.  Meanwhile I'm pouring all the cash I can into investment accounts.

                      Comment


                      • #12




                        Somehow my remaining Navient loans are 30 year terms.  I’ve been making minimum payments on them for the last 5-6 years.  The final payment date is 2042. 30 years at 2.6%.  That’s free money.  I’d be stupid to pay that off early.  Meanwhile I’m pouring all the cash I can into investment accounts.
                        Click to expand...


                        I don't think that's "stupid." I don't know of any other 2.6% guaranteed investments out there right now. Not to mention the improvement in cash flow. Doesn't mean paying off low interest debt is right for you, but it's not stupid. Heck, 2.6% even beats inflation right now.
                        Helping those who wear the white coat get a fair shake on Wall Street since 2011

                        Comment


                        • #13
                          Being totally debt free is a great place to be psychologically.  That being said I did what Zaphod and Hightower are talking about.  I focused on investing early in my career rather than repaying loans.  The huge difference is the loan amounts.  I finished med school in 1983 with a total loan burden of $29k.  I also went to a state school with an academic scholarship which helped.  Starting salaries have tremendously inflated over time as well.  I think the tremendous loan burdens have one great positive.  The generation of docs facing this level of debt is laser focused on finances at a younger age than my generation. I am very impressed that even residents are funding retirement plans and trying to pay down debt.  I know the posters here are a skewed sample as Rogue Dad has pointed out with his research. Perhaps someone needs to study who does better the loan payers or the investors. I predict both groups will do fine because both groups are focused on financial independence rather than acquiring a Ferrari.

                          Comment


                          • #14







                            Somehow my remaining Navient loans are 30 year terms.  I’ve been making minimum payments on them for the last 5-6 years.  The final payment date is 2042. 30 years at 2.6%.  That’s free money.  I’d be stupid to pay that off early.  Meanwhile I’m pouring all the cash I can into investment accounts.
                            Click to expand…


                            I don’t think that’s “stupid.” I don’t know of any other 2.6% guaranteed investments out there right now. Not to mention the improvement in cash flow. Doesn’t mean paying off low interest debt is right for you, but it’s not stupid. Heck, 2.6% even beats inflation right now.
                            Click to expand...


                            It's not stupid. But the APR of a simple amortizing loan is not the same as the CAGR of a compounding investment. It's not a "2.6% guaranteed investment."

                            Were he to pay it all at once, he'd save on finance charges over the remaining loan term about half, or about 1.3% CAGR, and that's not even indexed for inflation because his debt principal won't grow (rather it's near-linearly shrinking on its amortization schedule).

                            So again, I don't think it's wrong and def don't think it's stupid to pay one's debts, but mathematically one's money would most likely create more positive net worth elsewhere over time.

                            Comment


                            • #15







                              Somehow my remaining Navient loans are 30 year terms.  I’ve been making minimum payments on them for the last 5-6 years.  The final payment date is 2042. 30 years at 2.6%.  That’s free money.  I’d be stupid to pay that off early.  Meanwhile I’m pouring all the cash I can into investment accounts.
                              Click to expand…


                              I don’t think that’s “stupid.” I don’t know of any other 2.6% guaranteed investments out there right now. Not to mention the improvement in cash flow. Doesn’t mean paying off low interest debt is right for you, but it’s not stupid. Heck, 2.6% even beats inflation right now.
                              Click to expand...


                              Fair enough, I was just making the point that given all of my other financial priorities it would be foolish to pay that loan off early.  I don't really notice the $488/month payment, especially since my old minimum payments on my student loans was over $2100.  Once I have a much larger portfolio and we've downsized our life style a little, I'll probably look into paying it off faster.  But for now, I really need to build up my savings since I didn't do a good job of that during my first 5 years of practice.

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