Wednesday, June 7, 2017

Using Refinancing to Maximize Benefit from the NHSC or State Loan Repayment Programs

I'm going to share how I figured out how to effectively put your student loans into a grace period while you work towards paying them off via the NHSC or state loan repayment programs.

Loan repayment programs, whether through the NHSC or the state, can be a tremendous boon for medical or dental providers with student loans. The NHSC Loan Repayment Program (LRP) provides $50k/$30k (depending on the HPSA score of your community health center) for a two-year commitment, $20k/$10k per year for the next two years (extended one year at a time), then $10k/$5k per year after that.

Unlike with Public Service Loan Forgiveness (PLFS) where there are pretty specific criteria for how payments must be made leading to loan forgiveness, loan repayment programs give you the money which you then pay towards your loans. These programs are also pretty hands-off regarding what you can do with your loans in the meantime. As long as you don't consolidate eligible loans with ineligible loans, you can refinance or consolidate at will, picking any type of repayment plan available.

The financial strategy for someone using a loan repayment program to pay off their remaining student loans differs markedly from the strategy used when you are paying them off by yourself. Instead of the normal goal of securing a low interest rate and paying off the loan as quickly as possible, you instead want to pay as little as possible towards the loan until the loan repayment funds are received. This way, you've maximized your use of the loan repayment funds while minimizing your out-of-pocket cost. Interest rate only matters in that 1) it may dictate your monthly payment if you are on an interest-only repayment plan, 2) your loan repayment plans could fall through leaving you to pay the accumulated interest, and 3) it may cause your loans to exceed the amount covered by the loan repayment program if your loan amounts are about equal the maximum benefit of your program. Basically, the most ideal situation possible would be if you could lower your interest rate and put your loans into another grace period while you wait for loan repayment funds. Note, that this strategy assumes your loans will be covered in full by the loan repayment program. If your program will only cover a portion of your remaining loans, you want to use the normal strategy on the excess, but pay as little as possible on the portion to be covered by the program.

After I finished my two-year commitment for the NHSC Scholarship Program, I transitioned into the LRP. I hadn't done anything with my federal loans beside consolidating them and picking the 30-year graduated repayment plan. However, this still left me accumulating 6.5% interest with a significant monthly payment. I searched for a way to minimize my interest rate while also minimizing my monthly payment, but SoFi, CommonBond, DRB, and Earnest all would result in me paying more as they are geared to give you the maximum benefit with short loan terms and their high monthly payments. Eventually, I was able to refinance my loan with College Ave Student Loans using Credible (a middle man that connects you with offers from several smaller name lenders) to effectively put my loans into a bonus grace period. This unique strategy works by leveraging a few principles in your favor:

1) Interest-only repayment period - College Ave is one of the only student loan refinancers that I could find that offered an interest-only repayment period. Their 5-year loans start with 2 years of interest-only payments. Short of qualifying for a grace period or forbearance, this is the next smallest loan payment you could hope for.

2) Low interest rates - This isn't unique to College Ave, but I was able to get a 3% variable interest rate, which is less than half of my previous 6.5% rate. Since my monthly payments are going to be interest-only, this again helps me pay as little as possible on my balance. I'm not too worried about it being variable because this won't be a long-term loan, and as you will see next, I won't be paying monthly payments for long.

3) "Paid Ahead" status - This is the key to this strategy, without which it would fall apart. Loan servicers do one of two things which you pay a lump sum. They either 1) shorten the term of the loan but go on requiring the same monthly payment or 2) put you in "Paid Ahead" status where your payment covers your next X number of months, and a monthly payment is not required again until those X months have elapsed. I checked with CommonBond, SoFi, etc. and all the big players seemed to do option 1. College Ave uses Navient as their servicer, and they do option 2. Why is this such a huge deal? Remember that loan repayment programs give you a lump sum of money that you then pay towards your loan. So, when you take your $50k and use it to make a lump sum payment on your refinanced loan, Navient is going to give you credit for covering however many monthly payments that would cover, and won't require a monthly payment until that lump sum has "run out." With any of the servicers that do option 1, you'd have to keep making your monthly payment!

So, here is the strategy. First, figure out if you are going to have a loan repayment program cover your remaining student loans, or if you think it is likely enough that it is worth minimizing the amount you pay on your loans now. Before you use your lump sum from the loan repayment program to pay towards your loan, refinance. Use Credible to get your loan refinanced with College Ave Student Loans, picking their 5-year loan with a 2-year interest-only period. Next, if you have your lump sum already, pay it towards your loan. If not, pay your interest-only monthly payment until you can make your lump sum payment. Once you make this payment, you will have to disable autopay (unfortunately losing your .25% interest rate deduction, but it won't really matter because you likely won't be paying another monthly payment again), otherwise Navient will keep auto-debiting your monthly payment. Then sit back and enjoy paying nothing on your loan since you will put in "Paid Ahead" status. Now, where you go from here depends on the balance of your loans and the nature of your specific loan repayment program. But with the NHSC your initial $50k/$30k in "Paid Ahead" status will keep you payment free by the time your $20k/$10k comes two years later, and so forth.

A few notes: I couldn't find any other lender that would work with this strategy other than College Ave Student Loans, mainly because of their "Paid Ahead" status. I confirmed twice with the servicer Navient that their "Paid Ahead" status worked like this, but I suppose it could change at any time, so you may want to confirm yourself. You can always refinance again with another lender if terms change. To refinance, you could go directly with College Ave to refinance, but if you use my Credible link at the end, you get $200 if you refinance over $30,000 or $100 for less, plus I get a referral bonus from Credible. The process refinancing with Credible and College Ave was painless. I didn't have to upload any documents. The process from start to finish took about two weeks rather than the months it took to refinance with CommonBond (did that for my wife's loans last year) or the months just to get a rate from DRB. Also, you'll want to read the fine print with your loan repayment program to make sure it works like the NHSC (that they are fine with privately refinanced student loans as long as they don't include ineligible loans, and that they pay you the lump sum that you apply to your loan). Finally, I am not a financial advisor, so you should check with your financial advisor before making large financial decisions.

Anyway, I was pretty excited to find this method, which will end up saving me a few thousand dollars. Utilizing the unique characteristics of College Ave Student Loans along with a loan repayment program makes for a killer combo that is about as close as you can get to putting your loans into a permanent grace period.

Well, here is my link to get you started with a $200 bonus for refinancing over $30,000 and $100 for less than $30,000: Credible

Let me know in the comments below if you have any questions or suggestions. Thanks!

3/24/19 Update: College Ave now uses University Account Service (UAS) to service their student loans instead of Navient, but College Ave's website states that they still treat excess payments by putting you in a "paid ahead" status and not requiring a payment until the lump sump payment is used up. Also, I'm now almost 2 years into this, and it's worked out perfectly. I wasn't aware of this strategy until after I received my initial lump sum of $50k, so I had to pay interest-only payments until I received my next lump sum of $20k, but haven't paid a monthly payment since!