Written by: Corey Janoff
A few weeks ago I wrote about medical school loan forgiveness and ways to get other people to pay your student loans off for you. With many doctors carrying student loan balances well into the six-figures, they need all the help they can get in tackling that debt.However, loan forgiveness isn’t available for everyone. If you don’t have a certain type of student loan, or you aren’t working for a certain type of employer, you may be on your own to pay back your loans. Today we will look at refinancing medical school student loans for those of you who are paying off your loans in their entirety.
When Should Someone Refinance Medical School Loans?
One should consider refinancing their student loans if:
- Student loan forgiveness isn’t a viable option, and
- If the interest rate on the new loan after refinancing is lower than the current interest rate.
When Loan Forgiveness Isn’t a Viable Option
If you can use Other People’s Money (OPM) to pay off your student loans, that option should be strongly considered. Yes, it might mean you aren’t working in your dream job initially. It may result in you working in a rural setting for several years. You may not be earning the same level of income as you would if you pursued the ideal job scenario. However, you must weigh the pros and cons.
If you have $400,000 of student loans at 6.8% interest, your monthly payment will be about $4,600 if you want to pay them off in ten years. That is with after-tax dollars. Depending on how much income you earn, that could be a significant portion of your monthly earnings!
If you can expect to earn around $200,000 per year in your specialty, your monthly take-home pay after taxes will likely be somewhere around $10,000/month. Maybe more, maybe less, depending on family size, what state you live in, and if you are putting money into a retirement plan or paying for other benefits at work. Basically, half of your paycheck is going to student loans for that first decade as an attending.
Now, the average American household earning $60,000/year isn’t going to feel sorry for you, since you still have around $5,000 remaining to cover all your monthly living expenses. But for a doctor who spent a third of their life in school and training, you better not have gotten into medicine for the money. If this describes your situation, then you should strongly consider all options for loan forgiveness before looking into refinancing.
On the other hand, if you owe $90,000 in student loans and have a starting salary of $350,000 from a private group, loan forgiveness isn’t all that attractive. Why take a pay cut to go work for a non-profit in the middle of nowhere, when you could pay the loans off in full in your first year in practice if you want to? You could potentially refinance your loans and cut the interest rate in half, saving you thousands of dollars per year in interest, which will enable you to pay them off even faster.
If the New Interest Rate is Lower
I feel like this is common sense, but it is worth noting. It only makes sense to refinance your federal student loans if your new interest rate will be lower than your existing interest rate. The only exception I can think of would be if you have a parent or relative who co-signed on your original student loans and they want you to refinance to remove them from the note. Case-by-case basis in that scenario.
Assuming you can lower your interest rate by refinancing and loan forgiveness opportunities absolutely do not make sense for you, then you can consider refinancing.
Some Thoughts About Refinancing Student Loans
There are plenty of companies out there who will refinance medical school loans for doctors, and it seems like more and more are popping up each day. They all pretty much do the same thing. In a nutshell, they pay off your federal loans and create a new loan with new loan terms for you.
Some lenders have restrictions and limitations. For example, some lenders will cap the amount they will refinance ($300,000 is a common limit). Other companies will not cap the amount.
Some lenders require a higher credit score than others. Certain banks are regional and you must live within a defined proximity to one of their branches in order for them to refinance your loans.
There are a handful of lenders who have special refinancing programs for residents and fellows where your minimum required payment is extremely low while in training ($100 or less per month!).
At the end of the day, there is no single student loan refinancing company that is the best in all scenarios. Depending on your financial circumstances, different lenders might be more attractive for you than they would for someone else.
Student loan refinancing is also a highly competitive industry, so odds are there are several companies that could offer competitive loan terms for you. If you need help getting pointed in the right direction, feel free to reach out to us.
What if I Die or Get Disabled?
One concern some people have with refinancing loans is what will happen to the loans if you die or become permanently disabled. Federal loans are forgiven if you die or become permanently disabled.
Most refinancing companies will also forgive remaining balances, but it is always wise to confirm and read the fine print. If there is a co-signer on the loans (maybe both spouses needed to do a joint loan in order to get it approved), you will want to make sure you understand the provisions. The surviving spouse may be on the hook if he or she was a co-signer.
Federal Loans Have Flexibility
One big advantage that federal loans have over privately refinanced student loans is flexibility. Once you refinance your loans, there is no turning back. You are now locked into a rigid loan with mandatory fixed monthly payments. If you chose a variable interest rate, your mandatory monthly payments may increase if interest rates rise.
The new bank doesn’t care if you have a change in income, decide to go back to fellowship, are in between jobs, or have a significant increase in household expenses because you just had triplets. You better make your full required monthly payment on time.
With federal loans, you have a lot of flexibility with your payments plans. You can go from a fixed standard 10-year repayment schedule to an income-based payment plan and back again. You can put your payments on hold during an economic hardship. The federal government (who can print their own money) isn’t as concerned about getting their money back in a timely manner as a for-profit bank. They’ll continue to accrue interest, so you owe even more money! Granted, it is unwise to let your loans accrue interest if you can afford to pay them, but that is a topic for another post.
The point is, your federal student loans are the most flexible loans you will ever have in your life. Refinancing can lower your interest rate, which enables you to pay off the loans faster. Or pay them off in the same amount of time but with lower monthly payments. So, before you give up that flexibility, make sure you are 110% certain that refinancing is the most prudent option for you.