My dd went to her first meeting about loans for medical school last week and it is scary. First of all she said they take 4% right off the top. And then the interest rate is 6.5% Anyways are there any alternative loans I should be checking out for her. It just seems so steep.
Are you willing to co-sign private loans with your daughter?
Are you willing to take out a mortgage line of credit on your house?
If the answer to both is no, then there really aren’t any other loan sources than federal unsub student loans and Grad Plus loans. A few private med schools may offer their own in-house loans to students, but those are never for the full amount of the COA and are intended to supplement rather than replace federal student loans.
If you belong to credit union, you might check with them to see if they offer student loans to grad/professional students without a parent co-signer. I know our local CU does, but only up to $30K/year and $100K total. (IOW, not even close to what med school costs.) The interest rates are lower than on fed loans, but interest-only repayment starts immediately upon loan disbursement.
Your daughter has no collateral to offer banks and nothing that guarantees she’ll repay her loans. So she’s a poor risk for private lenders.
P.S. Her interest rate is bargain compared to what D1’s rates were 3 years ago–they were 7.5+%!!!
P.P.S. Your daughter will have the opportunity to consolidate and refinance her federal loans ONCE with her loan servicer. This is typically done after med school graduation when she’s done taking out new loans.
I just checked because that 4% sounded high to me, and found that–
Federal grad/professional student loans have an origination fee of 1.068%.
Grad Plus loans have an origination fee of 4.272%
So that 4% is only for any loans she’s taking out in excess of the federal professional student loan maximum of $40,500.
I don’t know if that makes you feel any better, but every little bit helps.
Thanks for the reply. I think the answers to the first two questions are no. I don’t want my credit tied up by her.
My daughter actually banks at our credit union so I will have her check it out. I figure she is going to have to borrow $200K+.
My DD said they mentioned if she makes 120 payments (10 years) while working for a non profit hospital what is left of her loan will be forgiven. She also said she was told that this is a new program and don’t count on it because things are always changing. (well if she got a loan at the credit union I don’t think it would be able to be forgiven) Anyways there is a lot to it and I wasn’t at the meeting. All kinds of different payment plans, etc.
P.S. Oh dear 7.5%, I thought 6.5% was bad. Does the interest rate change along the way? Can it go back up before she is done? Let’s hope it continues to drop.
Ah, PSLF!
Yeah, don’t count on it. The next Congress will likely kill the program because it costs too much and is being used by individuals that program was never intended for. (Like many Congressional staffers/consultants/lobbists as well as high income professionals like doctors, dentists, lawyers etc. IIRC, the program was originally intended to serve people who worked in education, social work and other low-paying public interest careers.)
The other issue with PSLF is that many/most doctors are not directly employed by non-profit entities (like public hospitals), but rather are employed by physician groups who then contract the services of the doctors to public hospitals. It’s a fine distinction, but enough to DQ it as employment in the non-profit sector.
And yes, any loan obtained through the credit union would not be eligible for any STATE or FEDERAL loan forgiveness programs.
And one more caveat about PSLF–the amount of any loan balance that is forgiven is considered to be income to the individual for that year. So if your daughter has $85K forgiven, she will have to pay state, local & federal income tax on that amount in addition to any income earned that year.
The interest rate is set every July 1 for all loans disbursed between July 1 and the June 30 of the following year. The exact rate is determined by a calculation based on certain economic indicators as specified in the Bipartisan Student Loan Certainty Act of 2013.
So yes, the loan interest rate certainly can go up as well down.
Thanks for clarifying about the loan origination fee. That does make me feel better. Actually 3% less right off the top is a big deal. She must of gotten confused between the 1.068% and the 4.272%. She probably will have to pay a bit of that higher 4.272% though because I don’t think the $40,500 is going to be enough.
And also thank you about clarifying about the PSLF. That explains quite a bit. So don’t take the approach of borrow all you can because in 10 years it will be forgiven. And just by chance if she were to marry a doctor, wow their interest rate would be high. I’m guessing it will be high even if she is single in 14 years. Anyways your information helps. It reinforces keep the debt down and pay it off as quickly as you can.
No kidding! I remember talking with my financial planner about the time D1 started med school. I remember him shaking his head over the child of one of his clients who had come to him for financial planning. The child and spouse were a pair of newly practicing physicians (both freshly out of residency) with over $750K in combined student debt, plus a mortgage, consumer debt and no retirement or other savings whatsoever. Ouch!
I’m fortunate that D1 is marrying someone who not only has no student debt, but also had $$ in the bank. (Smart guy–he got an all expenses paid STEM PhD.)
D2 has already said she has no interest in marrying another doctor. Her last 3 dating partners have been a computer programmer at a National Laboratory, a clinical pediatric oncological pharmacist and a forest ranger. (She’s still seeing the programmer–and I think the forest ranger-- but the pharmacist got the heave ho. She said he was too much of a “bro”–and if she wanted to date a bro, she’d date the orthopedics resident that keeps hitting on her.)
What makes financial sense is different from family to family. For us, taking equity loans made perfect sense.
Bumping this thread, my D just received her loan package for her first year of med school. This is all new, and confusing, to us! She will be taking loans to cover pretty much all of her total COA. Can anyone tell me if the has to borrow the full amount of the DirectMed unsubsidized loan, or does it function more like a home equity line of credit? She would like to have the full amount there if she needs it, but doesn’t want to borrow more than she needs.
She will be taking the full GradPlus amount to cover the tuition.
IMO, your d should apply her federal student loan toward her tuition first, not her living expenses. Her tuition & fees are fixed expenses but her living expenses are not. She should try to minimize the amount she takes out in Grad Plus loans since the terms of those loans are less favorable. (higher origination fee and higher interest rate)
Ok, this is how it works. Her federal student loan (I assume this is what you’re calling DirectMed) will be disbursed twice a year. One-half of the total amount of the DirectMed loan will be paid directly to school at the beginning of each semester. If there are funds left over after her tuition & fees are paid, your D can either accept the leftover money and use it to pay her living expenses or she can return the unused funds to the lender within 15 days of the date the school receiving the loan. Returned funds will be credited to her loan’s principle. However, if she does return part of the loan, she cannot get the money back at some later date during the semester. She has to wait until the next disbursement date when she will receive the other 50% of the amount originally offered to her.
For example:
Total DirecMed loan offered – $40K
Semester #1 disbursement --$20K
Let’s say $17K goes to cover tuition & fees. Your D has the option of keeping the $3K leftover or returning it to the lender. Let’s say she returns it.
Total loan disbursement for semester #1 =$17K
Semester #2 disbursement – $20K
Tuition & fees = $17K. Your D decides to keep the remaining $3k to pay her summer living expenses
Total loan disbursement for semester #2 =$20K
Total loan disbursement for Year #1 =$37K
So, no it doesn’t work like a home equity line of credit. She can’t take additional amounts out whenever she wants.
For the Grad Plus loan, she can specify exactly how much she wants to borrow each year.
Thanks, WOWM. Very useful. The amount of DirectMed is not enough to cover tuition & fees, so she will have to use some Grad Plus loans. But good to know we should use the full amount there first before accessing the Grad Plus $$$$. Pretty sobering stuff…
Don’t ask me about the ins and outs of Grad Plus. Neither D had one so I’m not terribly familiar with exactly how they work. (Whether they disburse one or twice a year, whether a student can ask for additional funds later in the year if they have a shortfall, if they can refund within 15 days without a penalty, etc.)
One suggestion–and this is looking way far ahead. Residency interviewing during the last year of med school is expensive. (Your D will be doing LOTS of traveling for interviews–so plane tickets, hotels, meals, car rentals.) So is relocating after graduation to a residency site. Your D may want to consider asking for an extra amount of Grad Plus at the beginning of her 4th year to cover this. If she’s already borrowing close the full COA for her med school (and the most any med student can borrow is the school’s published COA), she may want to bank some her loan monies from years 1-2-3 so she has funds to pay for residency interviews and to pay her moving & relocations costs. New residents don’t get paid until at least 2-4 weeks after they begin residency. She’ll need money for a damage deposit & first month’s rent up front when she signs a rental agreement.
She will also need extra funds during MS3 to pay for USMLE exams. The STEP 2 CS is only offered at 5 cities in the US. (LA, Houston, Philadelphia, Chicago and Atlanta) Your D is required to travel to one of those sites to take the exam. The exam takes a full 8-10 hours and starts at, IIRC, 8 or 9am so she’ll need to spend a night in a hotel before and after.
Also the exams themselves aren’t cheap. I think D2 told me it cost her $1000 just to register for the Step 2CS.