In Part I of this post, we talked about the huge burden that student debt has become for new professionals coming out of college and ways to address paying down student loan debt quickly. The student loan debt problem is especially prevalent for medical and dental professionals, as their average debt is well over six figures by the time they finish dental school.

In that post, we focused on strategies to pay of your debt. In this post, we will focus on methods to decrease the interest rates on your loans.

An Overview of Interest Rates for Dental Student Loans Today

Interest rates for undergraduate loans vary widely, with the average hovering around 5.8%, according to a 2017 report from New America, a nonprofit, nonpartisan think tank. This average includes both federal and private student loans.

Those seeking professional degrees will often encounter higher student loan interest rates, however. For example, Federal Direct Plus (Grad Plus) Loans have a current interest rate of 6.28%. The maximum is 10.5%, which means that the interest rates vary by individual based on your financial situation and credit rating. Private lender loans vary significantly by lender, but they can be well over 10% as well.

Interest rates are extremely important when considering your options to pay off debt. The average student loan debt for a dental student in 2020 is $304,824, which is up from the 2019 average of $292,159. Assuming a 7% interest rate, dental graduates will see upwards of $21,000 in interest charges every year.

Higher interest rates also dramatically increase your monthly payment when dealing with high amounts of debt.

How to Reduce Interest Rates

Reducing your interest rates can be the key to paying off debt faster and at the lowest possible cost.

Consider Refinancing Your Student Loans

Refinancing your student loans to get a lower interest rate can be a good option in some situations. However, you should be wary of waiving certain benefits if you refinance.

For example, you may lose certain benefits when you move from a federal loan to a private one. The most significant in the age of COVID-19 has been that private student loans do not have the same interest forbearance that many federal borrowers have been able to take advantage of. You also do not have the option of switching to an income-based repayment plan or student loan forgiveness in most cases as well. Be sure to explore these options and weigh out the pros and cons before you refinance.

You should also consider the fees and costs associated with refinancing. If you can refinance for even one percentage point, that can make a big difference for those with high debt levels. However, that advantage may be offset by refinancing costs, so be sure to read the fine print about costs and fees carefully.

Make Biweekly Payments

Most student loan repayment plans only require you to make one monthly payment. However, interest on your outstanding debt is calculated every day in most cases. This is unlike the average mortgage payment, which is only calculated once per month.

You can reduce the amount of interest you pay by making a payment every two weeks rather than just once per month. To do this, just break the monthly payment in half and pay the half once every two weeks.

You not only pay interest faster, but you also end up making an extra payment every year without even noticing. This method can shave off months or years from your repayment plan and save thousands of dollars in interest.

Make Extra Payments Whenever You Can

It goes without saying that the more money you put into repaying the loan, the faster you will pay it off. Making extra payments can have a huge impact on how much you end up paying in interest.

For example, imagine you have $250,000 in student loans that you have to repay over ten years at 7%. Your monthly payment will be about $2,903, and the total cost of the loan will be $348,325. However, if you pay even an additional $250 per month, the cost of your loan decreases by $10,659 and is reduced to nine years.

Extra payments are even more important for longer-term loans. For example, imagine you have the same amount of debt at the same interest rate, but your repayment period is 25 years. Your monthly payment with that loan is $1,767, and the $250,000 loan will end up costing you more than double--$530,084. However, if you pay an extra $250 per month, the cost of the loan decreases by $84,123 and 6 years. In fact, even paying an extra $100 month in this example will save you $41,791 in interest and three years of payments.

Many borrowers choose to extend their repayment periods out as far as they can simply to deal with the high monthly payments. However, you should keep in mind that the longer you take to pay the loan, the more interest you will have to pay. Making extra payments on these longer-term loans is a must to save a significant amount of money over time.

Avoid Capitalized Interest

Capitalized interest is interest that is added to the principal of your loan. Essentially, the interest charge is reclassified as principal rather than interest. Federal student loans go through this process when interest is not paid as it accrues, such as when the loan is in deferment, or you do not have to make payments on your loan for any other reason.

Capitalized interest is an important topic for dental students and other professionals because their student loans are often in deferment while they attend dental school or other graduate-level schooling.

There are generally two reasons that this reclassification process is not beneficial to you.

1. Interest Charges. Interest is only charged on principal. That means that when your interest is capitalized, the lender can now charge additional interest simply because they are now calling a portion of the interest principal instead of interest.
   
   
2. Decreased Tax Deduction. You can take a tax deduction for student loan interest payments (as long as your income is below certain limitations). When your interest is reclassified, paying that amount no longer counts toward your tax deduction.

To avoid having your interest capitalize, you should continue making payments on your student loan, even when it is in deferment or forbearance. Simply paying the interest as it is charged can go a long way to avoid huge interest charges down the road. Even small payments toward interest (even if you cannot pay the full charge) can save you a significant amount of money in the future.

Limiting borrowing to only the amount of money you need to attend school can also help you cut down on the potential for incurring capitalized interest.

Refinancing or changing your repayment terms can also trigger an interest capitalization. Be sure to review the terms and conditions before you commit to changing repayment terms.

Explore Your Options with a Student Loan Calculator

It is sometimes hard to see the immediate benefits of making extra payments or refinancing. Using a student loan calculator can be a good way to put your efforts into perspective.

A student loan calculator will help you see the impact of changing your interest rate, making extra payments, or changing the timing of your payments.

We like the loan payment calculator from SmartAsset because it provides some helpful visuals of your loan payoff journey.

Need More Help?

As you work toward paying off your loans, it can be helpful to consult with a professional who can help you down the right path.

Paying off or paying down your loans is vital if your goal is to become a medical, optometry, veterinary, or dental practice owner. At Dental and Medical Counsel, we can help you address the overlap between student loans and practice ownership. Learn more by scheduling a complimentary consultation with medical and dental attorney Ali Oromchian.