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As tuition fees continue to rise across the dental education system, so does the debt that students graduate with. Student debt in excess of $ 400,000 for a dental school is no longer uncommon. Add a specialty certificate and a few more years and you can easily be over $ 500,000 in debt before ever treating your first patient as a doctor.
These numbers are harrowing and sobering, but unfortunately they only tell part of the story. Hidden in it is the silent killer: interest. Interest rates can vary significantly depending on the type of loan you are getting and which lenders are offering each year. But its effect is monumental.
Interest is loan expense collected for the use of borrowed money paid by a borrower to a lender.1 The expense is calculated as a percentage of the unpaid principal of the loan. A lender is the organization that created the loan (borrower’s school, bank, credit union, etc.).1 The lender sets the interest rate on the particular loan being offered, and students can do little to nothing about it. Given the choice between accepting the loan and the interest rate offered by the lender rather than paying the tuition yourself (likely through your family), this is not a difficult decision to make.
All of this doesn’t seem to really matter at this point. The real effects will be noticed as soon as you start practicing – that is, when you are paying attention.
When reviewing your student loan repayment statement, the average borrower will notice a few numbers. The big one is the total balance of your loan and the second is the “minimum payment”. For most of them, as long as this minimum payment is met, everything is on the right track and your loan will be repaid. Or is it? Here the interest rate becomes a silent killer.
Take a simple hypothetical example. You have a $ 100,000 loan with a 5% interest rate that is due to be repaid over 30 years. Your “minimum payment” for your monthly repayment schedule for this loan could be around $ 2,500 per month.
However, if you take a closer look at the actual breakdown of the payment, you may find that $ 1,700 is used for the interest and only $ 800 for the principal. What does that mean? That means that even though you paid $ 2,500 of your hard earned money, the total amount of your loan has only dropped to $ 800! Project this over many months and many years and a new reality will become clear. If you follow the minimum payment recommendation, not only will you pay the lender a substantial additional amount, but this loan will take much longer to repay than you expect.
So what are your options to solve this problem? There are a few. For one, you can always try to consolidate your student loan through companies like SoFi and others. The goal of consolidating your loans is to lower the interest rate on your loans together, resulting in less interest per month. However, most companies won’t offer this option if your bankroll is very high, where most of the dentistry graduates reside.
A second option is to pay off your higher-interest loans faster. Remember, the lender will suggest a “minimum payment” that is good for them, but if you pay more you can turn the tables and do it well for you. It doesn’t take much more – even $ 100 to $ 200 per month can cut your total loan repayment time by several years.
An easy way to find out your options is to call your lender directly. Ask the lender to provide the amount that will cut your repayment deadline in half. Again, the number may not be as high as you think. Do not feel pressured to do this with all of your loans; Focus solely on those who are most interested. By depositing more each month and paying off your loans faster, you will save a lot of money in the long run.
But what if you can’t afford that option, let alone pay the minimum amount on your loans? In this situation, you have two options: deferment and income-based repayment. Deferral is a temporary deferred payment for a loan that can be made in six month increments for a maximum of three years.1 However, it is important to note that your interest may continue to accrue during this time, which goes against the additional fees we are trying to avoid.
With Income-Oriented Repayment (IDR), you have more flexibility. There are four different types of IDR options, but all of them only apply to federal loans. Generally, they each offer a monthly repayment plan based on your income, family size, and loan debt, as well as loan waiver for the remaining balance after 20-25 years.2.3 This repayment plan is reviewed annually so that it can be adjusted based on your annual income. While it is likely that you will pay more interest over the life of the loan, the waiver option and reduced monthly pressures provide a potential lifeline for those in need. Each of the four IDR options has slightly different characteristics, so it is important to carefully consider which is best for your individual situation.
Student loan repayment is a major financial obstacle that we begin our careers with and that we carry around with us for many years. Lenders are like casinos – in their world, the house always wins. High interest rates and more attractive minimum repayment contributions put them in a position, if they ignore them, to get far more from us than we had ever planned. But by paying more on your loans each month, you can take the reins back in hand and be in charge on your terms. . . or at least use the IDR options to keep your loan repayment on par. Don’t wait another month. Make your move today and take control of your money back!
- Glossary. Federal student funding. US Department of Education office. https://studentaid.gov/help-center/answers/topic/glossary/articles
- Student loan repayment. Federal student funding. US Department of Education office. https://studentaid.gov/manage-loans/repayment
- Loan repayment plans. Finaid. https://www.finaid.org/loans/repayment.phtml
Sam S. Shamardi, DMD, is a diplomat on the American Board of Periodontology and Implant Surgery and has practiced full-time while teaching as a clinical instructor at the Harvard Dental Division of Periodontics. He is the founder of Dental Innovations LLC and has been recognized as a dental entrepreneur for his revolutionary EarAid product. He is the author of The Dentist’s Guide to Financial Survival: Everything You Had to Learn in Dentist School but Never Taught, available at fsg4dentists.com. Contact Dr. Shamardi at [email protected].