Should You Refinance Your Student Loans?

As a resident physician, wife, and mother, one of the most significant financial decisions you'll face is how to manage your money - including your student loans. 

With the average medical student graduating with around > $200,000 in debt, it's crucial to understand your options and make informed decisions.

Refinancing is one path you might consider.

As a resident, you may have already decided to refinance your medical school loans, but there are pros and cons to be aware of.

• For private loans, this is usually a no-brainer. Not only do you get a lower rate, but you also get to benefit from the $100 per month payments during your training offered by one of four primary lenders.
• For federal loans, the decision is not nearly so easy. The default choice, in fact, is probably not to refinance them until the end of residency so you can get the benefits of the Income-Driven Repayment (IDR) programs, such as the Revised Pay As You Earn (REPAYE) subsidy, IDR Forgiveness, and/or Public Service Loan Forgiveness (PSLF). However, there are many situations when it makes sense to refinance federal loans for residency. Mainly, these are people who are not planning to go for any type of loan forgiveness and are receiving little or no REPAYE subsidy due to their own or their spouse's income. One is not necessarily better than the other; it really just depends on your long-term goals.

If you’ve yet to refinance, these are some things to know and consider.

Decide What Your Financial Goals Are

What are you trying to accomplish concerning your student loans? Are you trying to pay them off as quickly as possible? Are you trying to minimize the amount you pay? Are you trying to improve your cash flow for more important financial goals? Refinancing can assist with all these goals, but you have to start with the end in mind.

Pros of Refinancing During Residency

• ‍Lower Interest Rates
  One of the main advantages of refinancing is the potential to secure a lower interest rate. This can be especially beneficial if you have high-interest federal or private loans. Reducing your interest rate can decrease your monthly payments and save money over time.

• Simplified Payments
  Refinancing can consolidate multiple loans into a single payment, making it easier to manage your debt. This can be particularly helpful for busy residents who don’t have time to keep track of multiple loan payments.

• Potential Savings
  If you secure a lower interest rate, you can save a significant amount of money over the life of your loan. This can free up funds for other financial goals, such as investing or saving for a home.

• Determine How Much You Plan to Pay Each Month
  
  • When refinancing, it’s pretty standard for residents to coast by paying $100/mo. But after residency, once their income drastically shifts, it’s critical to create a plan of attack to tackle this debt as quickly as possible. So it’s encouraged to live like a resident for 2-5 years after residency, primarily to get the student loan monkey off your back.
  • It’s advised to refinance again at the end of residency/fellowship, and as you do,  you want the lowest interest rate you can get for the repayment length you need. Be aggressive here, though. For those really focused on knocking out their debt as quickly as possible, they have had great success with a five-year, variable student loan. Committing to being done in less than five years focuses your mind and financial power on the task at hand. Yeah, it sucks to continue living like a resident…but to be free from $250,000+ gives you and your family a financial freedom you can’t buy elsewhere.

Cons of Refinancing During Residency

• Loss of Federal Protections
  Federal student loans come with certain benefits and protections, such as income-driven repayment plans, deferment, forbearance, and eligibility for Public Service Loan Forgiveness (PSLF) as mentioned above. Refinancing with a private lender means you will lose access to these benefits.

• Eligibility for PSLF
  If you plan to pursue PSLF, refinancing your federal loans is not advisable. PSLF offers loan forgiveness after 120 qualifying payments while working for a qualifying employer, such as a non-profit or government organization. Refinancing would make you ineligible for this program.

Steps to Take If You Decide to Refinance

If you determine that refinancing is the right choice for you, follow these steps to ensure a smooth process:

• Research Lenders
  
  • Look for reputable lenders that offer competitive rates and favorable terms.
  • ie. SoFi, Splash, Laurel Road, Credible
• Check Your Credit Score
  
  • Your credit score plays a significant role in the interest rate you'll receive. Make sure your credit is in good shape before applying for refinancing.
  • You can often find out your credit score for free using deals offered by your credit card company or by signing up for a service like Credit Karma, Credit Sesame, Credit.com, or WalletHub. You may end up paying something to get the score itself. However, the credit reports from the three reporting companies (Equifax, Experian, and Transunion) are free to obtain once a year
  • Usually, a score of 740-760 or higher is good enough, but it is possible to refinance with a lower score. The higher the score, the better your interest rate will be and the more options you will be offered.

• Gather Documentation
  
  • Be prepared to provide proof of income, employment, and existing loan information. Having all the necessary documents ready can expedite the application process.
• Evaluate Offers
  
  • Once you receive offers from lenders, compare them carefully. Consider the interest rate, repayment terms, and any additional fees. Also, consult your financial advisor and/or certified financial planner in this process. They’ll have insights you and your partner may not know in determining what’s best for your long-term wealth plan.
• Make Your Decision
  
  • After evaluating your options, choose the lender and loan terms that best meet your needs and stick with it.

Lastly

Remember, managing your student loans effectively is crucial to financial freedom and success as a physician. Take the time to understand your options and make the choice that best supports your long-term financial health.