Many physicians are eager to refinance their federal student loans as soon as they finish residency or fellowship. Med school loans are difficult to bear throughout training, especially since a resident’s pay typically isn’t enough to keep up with accruing interest. That all changes with an Attending’s income.
Refinancing can be a daunting task, however. There are so many lending institutions that will refinance your loans for you, many of which are now online. It’s difficult to know which ones are reputable, let alone which one will end up giving you the best rate. I’ve helped many of my physician clients walk through the refinancing process over the past few years, and have accrued a lot of experience that can help you as you embark on your own refinancing journey. This step-by-step guide is meant to help you navigate that process, because there’s enough to be stressed about when you’re settling in to your first full-time Attending position.
Step 1: Determine if refinancing makes sense
Are you eligible for PSLF?
If you’re eligible to have your loans forgiven via the Public Service Loan Forgiveness (PSLF) program, then you should probably do it. To satisfy the requirements for PSLF, an Attending physician has to work full-time in a qualifying public service job. The great thing is, your time in residency (and fellowship) typically qualifies towards your 10 years of payments.
But if you aren’t planning to work for the government or a qualifying non-profit organization, you are one step closer to determining that refinancing is right for you.
Remember, though, that federal repayment plans like IBR, PAYE, and REPAYE, all grant forgiveness after 20 or 25 years of payments. However, unlike PSLF, that forgivable amount is taxable as income. In addition, you have to stay locked in to your current interest rates, which are likely to be higher than what’s available on the open market (via refinance). For the average physician, this means you will end up paying a lot more interest by staying in the federal system, versus refinancing at today’s rates.
Can refinancing lower your interest rate?
Today (November 6, 2018), most federal loans for recent training graduates are charging somewhere between 6% and 9%. That compares unfavorably to current interest rates with the best lenders in the private market, which typically range from 3.5% to 5.5%. First Republic Bank, which has limited locations in California, Portland, Palm Beach, and the northeastern U.S., currently has a program offering rates between 1.95% and 4.45%. If a lender offers you a lower interest rate than your federal loan(s), it’s probably worth it to refinance.
Giving up federal loan benefits for refinancing
The federal loan system tends to be pretty gracious if you fall on hard times. Private lenders usually are not. Make sure you are ready to give up those graces before you refinance. Those key benefits are:
Income-based repayment plans (with the ability to change/switch repayment plans)
In summary, if you won’t qualify for PSLF, can lower your interest rate, and are willing to give up the benefits of the federal loan system, then you’re ready to take the next step and prepare for the refinancing process.
Step 2: Get organized
Get ready to refinance
You’ll do well to prepare in advance of the application process. Racing around to find your personal information and financial documents while you’re applying to refinance can make the experience stressful and intimidating. That’s why so many physicians end up only applying at one lender, which can be a big mistake. To make it easy on you, I’ve compiled a list of all the information you’ll need ahead of time to make your application process a breeze with any lender:
Your basic personal info including social security number
Employer’s Name and Address
Med School and Graduation month/year
Undergrad School, Degree, and Graduation month/year
Current savings balance
Monthly mortgage/rent payment
Student loan balance
Signed employment contract
Most recent pay stub (for new employer)
Most recent tax return
Most recent investment statement(s)
Most recent retirement account statement(s)
Loan payoff statement(s) from your loan servicer
Determine where you are getting refinance quotes
Once all of your personal info and documents are organized, you need to decide where you’re going to apply. Since there are no hard and fast rules as to which lenders are better, your best bet to is apply to as many lenders as possible – since you’re already so organized – and compare which ones offer the best rate for the given term.
You can research lenders on your own, but why re-create the wheel when someone has already done the work for you? Renowned author, speaker, blogger (and physician) Jim Dahle over at White Coat Investor has compiled a very well-organized list of all the top lenders. And you’ll get a cash-back bonus for using his direct links.
Step 3: Get Quotes
Apply for refinancing at several places, because it’s easy to get quotes
I just said this but it bears repeating. Since you’ve taken the time to get organized, you should apply to as many lenders as possible. Each quote request is about a five-minute process. If you stay focused, you can get quotes at all the major lenders done in less than an hour. The extra time spent will be totally worth your while, as just a 0.5% improvement in rate on a 10-year $200,000 loan can save you about $5,000 in total.
Review payment amounts associated with each refinance term
Once you have your rate offers, it’s time to compare. Make a list of the best fixed rates for the 5-, 7-, 10-, and 15-year terms (read the fine print too). Chances are, one lender won’t offer the best rates at every term length. Here’s an example of what you might see from some of the major lenders on a $260,000 refinance:
5 Year, $4775.46, 3.89% (Lender 1)
7 Year, $3,598.34, 4.37% (Lender 2)
10 Year, $2,694.60, 4.50% (Lender 2)
15 Year, $2,038.50, 4.87% (Lender 3)
Choose the best refinance offer for the term you want
By narrowing it down to the best offer per term length, you now get an idea of the different monthly payment amounts at stake. It’s at this point that having a good idea of your budget will really come in handy. If you haven’t signed up for a big mortgage yet and don’t owe on any credit cards, it should be fairly easy for you to handle the 5- or 7-year term on your refinance, assuming average student debt levels. My recommendation is to pick the shortest term you can reasonably handle. That will limit your interest paid, but also not spread you too thin for your other monthly bills.
If you’re having trouble committing to a loan term, an alternate strategy could be to split your loans in half. The first half can be refinanced on a short term like 5 years, while the other half can be stretched out to 10 or 15 years. This strategy would appeal to you if you want to find balance. Your payment won’t be as big if you put your entire loan on a 5-year term, but it also limits the amount that gets stretched out for longer periods of time (which leads to more interest paid).
Step 4: Complete refinance application and set up autopay
Finalizing your application can give you cold feet. And understandably so, it is a very big decision and there is no going back. Make sure you are committed to the terms and that your monthly budget can handle the payments. Also, remember that by refinancing into a private loan means you will be giving up all the benefits associated with the federal loan system. Make sure you are comfortable doing that before you sign your loans away.
This leads me to a really important piece of advice.
I would recommend making sure you are committed to your new job, before refinancing. Specifically, you want to be certain that the possibility of moving to PSLF-qualifying employer in the near-term future like the VA is pretty much obsolete. It would be a major mistake to refinance your loans during the first month of your new Attending job, to determine soon after that you’re switching jobs, and a PSLF-qualifying employer is an eventual landing spot. Take special note: after you refinance, there’s no going back to the federal loan system, which means you are kissing your PSLF eligibility goodbye.
I recommend refinancing your student loans after you’ve worked in your new position for at least a couple months, and are all but certain you are staying put, or working for another private employer, for the long haul. The good thing is that you’ll stay on income-based repayment in the meantime, which won’t strap your monthly cash flow and give you the ability to pay off credit card debt and build up your emergency fund.
Also, most lenders offer a 0.25% discount for setting your loans up on autopay. There’s no good reason not to take advantage of this. Make sure you do it.
Other tips for refinancing student loans from med school
Getting organized can take anywhere between 30 minutes to a few hours. It really depends on how organized you are in general with your finances. Once you’re organized, getting quotes from all the different lenders shouldn’t take more than an hour. Those form fills are pretty straightforward and you will have all your information at your fingertips.
Once you have your quotes and you decide which offer to move forward with, it typically takes 2-6 weeks for the lender to fully approve your application and pay off your existing loans. I can’t guarantee these timeframes, but that is what I have seen from experience.
Have spouse co-sign if that helps you qualify for refinance
Sometimes your student debt is significantly larger than your projected income as an Attending. Sometimes your credit score isn’t great. In either of these cases, your application might get rejected. Having a high-income spouse co-sign the loan for you could be the difference in getting approved. Most lenders will allow for this, so make sure to ask if you experience this scenario.
*Spouses Beware! Cosigning a loan means you are fully on the hook for the loan, regardless of your spouse’s current or future situation. Make sure you feel comfortable adding this liability before you sign.
Refinance again if you didn’t get lowest rate
Usually, most physicians don’t qualify for the best rate when they apply right out of training. That’s typically because the lender views you as a riskier borrower, given that you have a short income history, your student loans are large, and you might have credit card debt or a poor credit score.
The good news is that you can re-apply again, for no cost, in the not-too-distant future, to try to lower your rate further. It might be difficult to do this successfully in the current rising interest rate environment, but I’ve seen several physicians do it. And since the end game is to minimize the interest you pay, it’s worthwhile to revisit refinancing opportunities every six months or so, until you’ve achieved the lowest rate available.
The sooner you act – the better
Your loans aren’t going anywhere. Unless you pay them off. Refinancing can be the first big step in that direction. The longer a physician puts the decision to refinance off, the larger the debt burden is likely to grow or cost.
Consider a variable rate
I say this with a lot of caution. We are currently in the midst of a rising interest rate environment, which means interest rates are likely to be higher a year from now.
But there is a big advantage to going with a variable interest rate versus a fixed interest rate. And that is that variable rates are usually 1% lower (or more) than their fixed rate counterparts. That means, even in a rising interest rate environment, your chances are good that you will pay less interest using a variable rate instead of a fixed rate, if you pay your loans off in two to three years. It’s definitely worth considering if that is your plan.
1099 earners could have difficult time refinancing
Lenders view 1099 earners as riskier borrowers, since they have no working agreement of income (i.e. contract). Protocol for these types of physician earners is to base your income off your tax return. As a result, you won’t be able to report an income higher than your resident’s salary until you file taxes the following year, and even then it will only include half of a year of your higher Attending pay level. You’ll have to wait another year to be able to report a full year of Attending level income. Roadblocks definitely abound for student loan refinancing offers for 1099 earners.
My best advice is to still check to see if any lender will refinance your loans at a better rate. If not, make sure you’re keeping up with the interest accruing every month. Most of the time, your income-based repayment amount isn’t making you pay enough to cover it.
Once you’ve filed your taxes the following year, you should try to refinance again. And again the year after that. Remember, the more income you report, the better rate the lender is likely to offer you.
Split the loan into two for flexibility or better terms
I’ve heard testimonies from some physicians whose applications for refinance were rejected, only to be approved when they split their loan amount in two. This can happen if your student loan balance is substantially higher than your annual income. This strategy also might help you secure better rates on two smaller loans, versus one big loan. You’ll never know until you try. If you don’t like the offers you’re receiving, then it’s worth a shot.
You don’t have to refinance all of your federal loans
You can pick and choose which federal loans to refinance. This is important to know in case you have older loans (pre-2006) or undergrad loans that are at low fixed rates. Unfortunately, some physicians are under the wrong impression that you must refinance all of your federal loans, if you choose to refinance. However, it is best to only refinance the loans in which you are reducing your interest rate.
For example, if you have a federal loan at a 3% fixed rate, and your refinancing offer is for a 4% fixed rate, you don’t want to refinance that particular loan. But if you have other loans at a higher rate than 4%, which is typical, you will want to refinance those.
Refinancing your student loans can be intimidating, but hopefully this guide will help. Once you’ve finished refinancing, you can rest easy, knowing the exact date your loans will be paid off in the future – FOREVER!!!!