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Monthly Archives: October 2015

Refinancing Medical School Student Loans Can Save Money in the Long Run

The following article is written and provided by Brandon Barfield, Co-Founder and Regional Director of Doctors Without Quarters, LLC. Student loan related services are provided by Doctors Without Quarters, LLC, an affiliate of Larson Financial Group, LLC.

 

You’re probably aware that Student Loan Refinancing is a hot topic for medical graduates right now. It has been in the news, lenders are broadly marketing and many physicians have done it over the past few years. Indeed, available rates can be much lower than the federal loan rates physicians borrowed at over the past decade. Even for a doctor who has taken little if any college level mathematics courses, the prospect of refinancing to lower the interest costs on student loans sounds like a no-brainer. However, only certain borrowers will qualify and there are several angles you should carefully consider. Below are some important considerations every borrower should understand before moving forward.

How Does Refinancing Work

Student loan refinancing is when a private lender buys out your existing federal and/or private student loans and issues you a new loan with a different interest rate determined by the market conditions at the time. The payment schedule for this new loan can range from 5 to 20 years depending on the lender. For borrowers with high balances and high interest rates, refinancing can result in saving tens of thousands of dollars in total payments.1

Medical School Loan Repayment

Suitability

Let’s start by talking about what you give up when you refinance, namely your federal benefits. By paying off your federal loans with a private loan, you lose your status as a federal borrower and forfeit all federal loan benefits. The Federal Income Driven Repayment plans (IBR, PAYE, REPAYE) offer significant savings to many early career physicians. They offer low payments, interest subsidies and reductions and no interest capitalization while debt-to-income (DTI) is high.

PSLF is available to those who are directly employed by government affiliated institutions (including state teaching hospitals) as well as 501(c)3 non-profits. If you are working in this capacity, or considering it, you’ll want to learn more about this opportunity before you refinance. This includes most residents and fellows, and we will tell you how to assess those options at the end of the article. If you are already practicing in a for-profit environment, then PSLF is likely off the table at this point and refinancing is a good alternative to lock in some savings.2

Interest Rates

To benefit from refinancing, you’ll need to receive a lower interest rate on your new loans than you have on your existing loan. You may also benefit by refinancing a variable rate loan over to a fixed, even if the current interest rates are similar. The rates offered by the lenders will be driven by your credit profile which is ultimately summed up by your FICO score and DTI ratio. At the bare minimum, you’ll need a FICO credit score of at least 620 to even be considered. For the “top tier” rates, 720 is often the magic number you need to surpass. You will also need a stable job, a steady income and a degree from an accepted college or university.3

Each lender has different criteria, so it’s best to shop around for a provider that will offer you the best rate and support for your needs. That gets tricky, however, as most lenders advertise the same range of rates for student loan refinance, and you can’t see an actual rate offer until you submit an application and they pull a “hard” inquiry on your credit report. Too many inquires will actually begin to lower your FICO score. Getting a co-signer can sometimes improve your profile, but not always. Many professionals outside of the medical sector (such as parents) may not have the necessary income to make payments on large medical school loan portfolios, even if they have a high FICO. So adding them to the profile may not help. Late payment history on your credit report can also impact your approval and offer.4

Choosing a Lender

Though refinancing private student loans has been possible for years, institutions only began refinancing federal student loans for physicians in the last few years. When researching potential refinancing opportunities, you’ll want to look for lenders who understand the medical profession and have designed their products with key benefits. One such benefit is the ability to discharge your loan in the event of death or permanent disability. This is a federal loan benefit that most physicians highly value, and some private lenders offer it as well.5

The ability to not make payments during times of economic hardship is also a useful feature. Fees are probably the greatest concern. Various fees, particularly origination fees, can really diminish your savings. But you will be happy to know that some lenders, those who are serious about working with physicians, offer to refinance with no fees whatsoever.

Fixed Vs. Variable

Most lenders offer both fixed and variable rate loans. Fixed rate loans allow you to lock in a rate for the life of the loan. On variable rate loans, the effective interest rate will rise and fall with market conditions. Should rates rise dramatically, you risk potentially ending up with a higher rate than you had on the federal loans.3

Given the historically low rates that we are currently experiencing, locking in a low fixed rate is probably the best opportunity for most borrowers at this time. That said, variable rates can benefit borrowers with shorter time horizons to pay down debt, where the risk of rising rates is lower. Borrowers looking to pay off their loans in less than three years may want to explore variable rate options in order to maximize their savings potential.

The Bottom Line

Medical school debt lends itself particularly well to restructuring for a better deal. However, there are several caveats to consider which is why it is highly recommended that you speak to an advisor with knowledge of your individual circumstances before refinancing.

The ultimate objective is to reduce the overall cost of repaying your loans, while maintaining a payment that you can afford without sacrificing your other financial priorities. Exploring refinance opportunities on a proactive basis can afford you the opportunity to get a head start on paying down your medical school debt and planning for your financial future.

How We Can Help

Doctors Without Quarters (DWOQ) specializes in helping physicians and other healthcare professionals manage their debt. They have helped hundreds of Larson Financial Group clients reduce their cost of debt over the last few years. As an advocate to borrowers, and beholden to no one lender or servicer, DWOQ intimately understands the refinancing marketplace for doctors. They offer a free refinancing suitability analysis to physicians who are interested in pursuing this opportunity. Their expert team of loan advisors will consider your career path, financial goals, loan portfolio and credit profile to help you determine if refinancing is a good fit. If so, they will serve as your advocate to help you shop the marketplace, streamline the application process, broker the best deal and lock in a refinance that meets your needs and maximizes your savings potential. There is no charge for this service. If you are interested in the federal repayment and forgiveness programs, they can also assist in this area by offering thorough loan consultations during which a loan advisor will explain the programs in-depth and conduct a detailed analysis to show exactly what payments and savings would look like. To learn more, contact your LFG Advisor, or visit DWOQ’s website at www.DWOQ.com .

Have Questions?

References:

  1. Ashley Eneriz, “Student Loan Refinancing: The Pros and Cons” (May 2017). http://www.investopedia.com/articles/personal-finance/011916/student-loan-refinancing-pros-and-cons.asp
  2. Bill Nelson, “Here’s What You Need to Know About PSLF” (December 2016) http://www.investopedia.com/advisor-network/articles/122816/heres-what-you-need-know-about-pslf/
  3. LendKey Technologies, Inc, “Student Loan Refinancing: Variable vs Fixed Rate” http://www.lendkey.com/resources/student-loan-refinancing-variable-vs-fixed-rate/
  4. Divya Raghavan, “How Student Loans Affect Your Credit Score” (July 2014). http://money.usnews.com/money/blogs/my-money/2014/07/07/how-student-loans-affectyour-credit-score
  5. National Consumer Law Center, Inc, “Disability and Death Discharges” http://www.studentloanborrowerassistance.org/loan-cancellation/disability-and-death/

Loan repayment advice and services provided through Doctors Without Quarters, LLC, an affiliate of Larson Financial Group, LLC. Additional advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. The information set forth in this writing is not intended to be investment or tax advice. Please consult the appropriate professional regarding your tax planning needs.

7 Questions to Ask Your CPA Before Year-End

By Debra Taylor, CPA/PFS, Esq., CDFA

Given the complex tax situation many high-income earners face, start tax planning in the fall while there is still time to make adjustments. These seven questions can help you spot problem areas and better understand the services you may need.

Although tax season is still months away, tax management should begin in the fall – especially for high-income earners facing the 3.8% net investment income tax, AMT, and other taxes.

Physician Tax Deductions

Below are seven questions that can help you open a discussion with your CPA and your financial advisor about next year’s tax bill. Have the discussion early in the fall so you still have time to make adjustments if necessary.

1. Can I limit my exposure to the 3.8% Medicare surcharge tax?

The 3.8% Medicare surcharge applies to net investment income of singles with modified adjusted gross income (MAGI) over $200,000 and couples over $250,000. The threshold for separate filers is $125,000. MAGI is adjusted gross income (AGI) plus tax-free foreign earned income. The tax is due on the smaller of net investment income (interest, dividends, annuities, gains, passive income, and royalties) or the excess of MAGI over the thresholds.

If you think there may be some exposure, review with your advisors the tax efficiency of the portfolio holdings, perhaps moving less efficient investments into tax-deferred accounts, and capitalizing on tax loss harvesting.

Other ideas include using municipal bonds to help avoid the surtax, since interest is tax-free, and/or taking capital losses to offset any other gains you may have. You may also want to consider an installment sale to spread out a large gain if that keeps your AGI below the thresholds. If real estate is involved, a like-kind exchange will also defer the gain.

2. Can I maximize the tax break using a Flex Plan for child care costs?

You can still claim the dependent care credit to the extent that your expenses are greater than the amount you pay through your flexible spending account (FSA).

The maximum dependent care costs funded through an FSA are $5,000, but the credit applies to as much as $6,000 of eligible expenses for filers with two or more children under age 13. In that case, you should run the first $5,000 of dependent care cost through the FSA, and the next $1,000 would be eligible for the credit on Form 2441.

For most filers, taking the dependent care credit will save an extra $200 in taxes. Of course, no credit is allowed for any child care costs that are paid via the flex plan.

3. What if my school-age child went to summer camp?

Costs related to a child’s summer camp qualify for the dependent care credit. So if a you sent your child to any special day camps this summer (i.e., sports, computers, math, or theatre), don’t forget this break. Ditto for camps that help with reading and study skills.

However, the costs of summer school and tutoring programs aren’t eligible for the credit. They are treated as education, not care. The other rules for the credit aren’t affected: the child must be under 13 and expenses must be incurred so that the parents can work.

4. How should I handle an inherited IRA?

If you inherited an IRA last year, a tax planning deadline is looming. The IRA’s beneficiaries are set for September 30th of the year following the death of the IRA owner. Typically, the heirs are able to take distributions from inherited IRAs over their lifetimes, unless one or more of the beneficiaries of the account are not individuals.

With non-individual beneficiaries, the IRA has to be cleaned out within five years for all beneficiaries, which is generally a negative because it denies tax-deferred growth to the beneficiaries over their lives, which is a longer period of time. The issue occurs when the owner names a charity or college as one of the beneficiaries.

Redeeming a non-individual IRA interest by September 30th can pay dividends. If the charity, school, etc., is paid off by that time, the remaining individual beneficiaries can take distributions over their lives, enjoying more tax-free buildup inside the IRA.

5. How can I optimize the earnings of my children?

Optimize a child’s summer job by contributing to a Roth IRA. The child can contribute up to $5,500 as long as he has earned income of $5,500 or more. The parents can make the contribution for the child, although the parent’s pay-in counts towards the $14,000 annual gift tax exclusion.

What difference does this make? A parent’s generosity can provide a nice nest egg. A $5,500 contribution to a 16-year-old’s Roth that earns 7% each year will grow to $151,000 at age 65 and $212,000 at age 70. If the child works for a couple of summers and contributions are made annually, the future balance of the account will be much more significant. And remember, all qualified withdrawals are tax-free!

6. How can I use the 0% rate on long-term gains?

If your taxable income without long-term gains is in the 10% or 15% tax bracket, profits on the sales of assets owned over a year are tax-free until the gains push you into the 25% tax bracket which starts at $74,900 of taxable income for married couples and $37,450 for singles.

If part of the gain is taxed at 0% and the rest at 15%, claiming more itemizations or making a deductible IRA contribution gives you two tax breaks: 1) claiming the deduction saves on income tax and 2) it allows more capital gains to be taxed at the 0% rate.

However, taking more tax-free gains raises the adjusted gross income, which can cause more of your Social Security benefits to be taxable. In addition, your state income tax bill may jump, since many states tax gains as ordinary income.

7. How can I donate most efficiently?

One way to turbo-charge donations to charity is by giving away appreciated assets, such as stocks. The appreciation escapes the capital gains tax and you will get a deduction for the full value in most cases, as long as you’ve owned the asset for longer than a year.

However, deductions for donations are reduced when adjusted gross income is over $258,250 for singles, $284,050 for the household head, and $309,900 for married couples.

The right assets to donate

Do not donate any assets that have declined in value. If you do, the capital loss is wasted. From a tax point of view, you’re better off selling the asset and donating the proceeds. This also applies if you plan to make a gift to a person. If you give an asset that has diminished in value, you are then unable to sell the asset and deduct the loss.

Consider a charitable lead annuity trust

A charitable lead annuity trust is a trust that pays an annuity to a charity for a set term. Then, what’s left goes to the donor or other beneficiaries. Although interest rates may increase, the donor still gets a nice up-front write-off. That deduction can be used to offset income generated from a Roth IRA conversion, such as letting the donor experience a full lifetime of tax-free withdrawals from the Roth.

Substantiate non-cash donations

If you fail to substantiate property donations, you can lose the write-off. For example, a veterinarian donated over $100,000 of fossils to a charity, and although he did attach Form 8283 to his tax return and received letters from the charity acknowledging the gifts, the fossils were not appraised properly as they were not seen by a qualified expert, which is mandatory when claiming a deduction over $5,000 for non-cash donations.

The taxpayer also failed to obtain a contemporaneous written acknowledgement from the organization stating that he received nothing of value in return for his gift. As a result, the tax court upheld the IRS determination to disallow the deduction.

Understanding tax laws isn’t easy, especially since the laws change constantly and are often tricky. Attempting to take advantage of the benefits can be a confusing process. Though there are some great tips and explanations above, seek the assistance of a tax professional whenever you have any questions about your tax situation.

Have Questions?

Debra Taylor, CPA/PFS, Esq., CDFA, writes on tax and retirement planning for Horsesmouth, an independent organization providing unbiased insight into the critical issues facing financial advisors and their clients.

Debra Taylor is not affiliated with Larson Financial Group.

IMPORTANT NOTICE: This reprint is provided exclusively for use by the licensee, including for client education, and is subject to applicable copyright laws. Unauthorized use, reproduction or distribution of this material is a violation of federal law and punishable by civil and criminal penalty. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties expressed or implied are hereby excluded.

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.

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