The Impact of Private Loans on Choice of Repayment Strategy
A recent health sciences graduate developed a repayment strategy that included making payments on his federal loans to help him qualify for the Public Service Loan Forgiveness program. He qualified for payments under the new Income Based Repayment (IBR) plan and was starting employment in a public service position. He seemed all set.
However, when he looked at the amount he had set aside each month for his student loan payments, , he realized he had forgotten to include payments coming due on private loans he had borrowed not only in college, but also during his post-baccalaureate year prior to professional school.
His repayment strategy was derailed, and he was understandably upset, as choices he had made earlier relying on private loan borrowing were now coming back to haunt him.
Federal Loans and Private Loans: The Choice is Yours
Whether at the recent ADEA Recruitment Fair or perhaps from your health professions advisor, or even from a financial aid professional if you have already contacted your dental school about financial aid, you have likely heard continual references to responsible borrowing: admonitions to budget wisely, spend accordingly, and control what you can within the confines of your student financial aid budget. You plan to do just that, yet you still face the hard reality that you need to borrow for dental school, and you may have to borrow a lot.
You see and hear what seem like horror stories about students borrowing too much, especially with private loan programs. You see constant references to exhausting federal eligibility first before taking out private loans for school. You hear examples like the one above and you commit that this will never ever happen to you … and then reality sets in.
You know that you can borrow up to your entire “Cost of Attendance” (your financial aid budget) each year with a combination of Federal Stafford and Grad PLUS Loans. However, you also know these loans carry interest rates of 6.8% and 7.9% respectively, and you are intrigued when you hear private lenders offering what seem like substantially lower rates on their private student loans.
Responsible Borrowing Means Responsible Choices
As you look at your potential borrowing for dental school, ask yourself these questions before you apply for a private loan:
Have I exhausted not only my federal loan eligibility, but also other options, such as grants, scholarships, fellowships, and other sources of potential aid that I do not have to repay?
When will this loan come due and when it does, what are my repayment options? How do these compare with my repayment options on federal loans?
- Can I postpone payment on this loan if I pursue a postdoctoral program or residency after dental school, and if so, for how long? Are there fees for doing so? Knowing the rules about postponement is extremely important, especially for programs like dentistry which offer additional study for interested graduates.
- Can I lower the cost of this loan if I find a creditworthy cosigner? Do I want to saddle a potential cosigner with this credit obligation? How long will this stay on their credit report?
- Perhaps the most important question to ask involves not only the interest rate, but also the frequency at which the accrued, unpaid interest will be added back to the loan’s principal. This process, called “capitalization,” remains—without question—the number one reason some students face enormous balances on private student loans when they enter repayment.
Don’t let a poorly planned or uninformed choice about private loans now derail your choice of repayment strategy later. Dental school graduates have a terrific track record for responsible repayment. With some careful planning now and responsible borrowing during school, you can do your part to continue that tradition.
Paul S. Garrard, Founder and President
Consultant for ADEA
For additional information on the Public Service Loan Repayment Program and Income Based Repayment, please visit: