2017 Guide to Refinancing Medical School Student Loans
Refinancing medical school debt can lower interest rates and lower payments saving young physicians thousands of dollars over the life of their loans. According to the Association of American Medical Colleges (AAMC), four out of five doctors will graduate with medical school debt averaging $180,723, so a 1% lower interest rate could save the average new doctor $1,800 a year. While the interest savings and lower payments may sound appealing, physicians should use caution when refinancing federal direct loans, which have some protections that private lenders usually do not offer.
How to Refinance Medical School Loans Successfully
Refinancing a student loan means getting a new loan to pay off an old one. The key is to get better terms—a lower interest rate or a lower payment—on the new loan without sacrificing protections, pledging more collateral or adding a co-signer to the new loan. A sound refinancing decision requires physicians to know the costs and benefits of their current student loans and be able to compare them to the costs and benefits of options for new loans.
1. Understand Current Medical School Debt
Medical school student loans come in two flavors: private and direct. Federal direct loans, also known as “Ford loans”, are issued by the federal government and come with some benefits and protections that private loans may not offer, including:
Deferment allows a physician to stop making loan payments during residency, fellowship, a period of economic hardship, unemployment, active duty military service or disability. While the government may make interest payments on Federal Perkins Loans, Direct Subsidized Loans and Subsidized Federal Stafford Loans, interest payments on other federal student loans is capitalized, or added back to the loan.
Forbearance is similar to deferment but payments may also be reduced as well as suspended. Forbearance periods are usually shorter than deferment, and eligibility includes financial hardship (like job loss), illness, and cases where a physician’s total monthly student loan payment exceed 20% of total monthly gross income.
Income-based repayment plans make it easier for young doctors and physicians in less lucrative specialties to repay their med school loans by requiring payments based on “discretionary income” which is only a portion of gross earnings. Examples include Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Contingent Repayment (ICR) and the original Income Based Repayment plan (IBR) which is a good option for physicians seeking loan forgiveness under PSLF. For details, see the DOE’s page on repayment plans.
Consolidation lets a physician combine several federal education loans into one loan whose interest rate is the weighted average of the original loans. Since the maximum repayment term for a consolidation loan is 30 years, it may result in a lower payment but It will not give a lower interest rate. In fact, the rate may be slightly higher after consolidation since the weighted average rate is rounded up. The main benefit of consolidation is to simplicity: one loan, one payment. Consolidation may also make certain loan balances eligible for PSLF (see Forgiveness).
Discharge relieves a physician’s obligation to repay federal student loans in the event of death (including the death of a parent PLUS borrower) or total and permanent disability.
Forgiveness, also known as Public Service Loan Forgiveness (PSLF), allows doctors who work for certain tax-exempt non-profit organizations and federal, state, local or tribal government healthcare providers to be relieved of most federal direct student loan debt after making 120 qualifying monthly payments. Federal Family Education Loans (FFEL) and Federal Perkins Loans do not qualify for PSLF but it is possible to refinance them into a Federal Direct Consolidation Loan which may qualify for forgiveness.
2. Evaluate Options for Refinancing Med School Debt
Physicians have three options when it comes to refinancing and consolidating student loans.
Refinance one or more private student loans into a private loan with a bank for a lower interest rate or a lower payment. Since private loans offer limited or no protection for doctors, this option poses the least risk since there’s usually nothing to lose.
Consolidate two or more federal direct loans into one new Direct Consolidation Loan through the U.S. Department of Education at StudentLoans.gov. Don’t be fooled by look-alike sites. The D.O.E. is the only agency that can consolidate student loans. This option poses some risk to physician borrowers since certain loan-based protections may be lost in the consolidation process.
Refinance one or more federal student loans into a private loan by asking a bank to issue a new loan to pay off the original loans. While this option offers physician borrowers a lower interest rates or lower payment, it poses the greatest risk since physician borrowers stand to lose most or all of the protections that come with federal student loans.
3. Shop for the Best Banks for Refinancing Medical School Student Loans
WARNING: Physicians should use caution when discussing their refinancing options with lenders since banks have no fiduciary duty to borrowers.
Physician Family Financial Advisors does not endorse any lender listed here and receives no compensation from the sale of any financial product. The following list is provided as a free resource for physician borrowers to use as a starting point in the process of shopping for a refinance loan.
Citizens Bank’s (800-922-9999) makes it easy to pay extra toward refinanced student loan balances by applying overpayments directly to the principal, saving interest for physician borrowers. Their loan department is easy to reach, helpful and plain-spoken.
College Ave (844-422-7502) claims to have an easy web-based application process. They let physicians choose repayment periods ranging from five to fifteen years, allowing for tailor-made payment amounts. Interest-only payments for the first 48 months of the loan helps young doctors manage their cash flow.
CommonBond (800-975-7812) offers unemployment protection to physician borrowers, so loan payments are paused in the event of job loss. Physicians can temporarily postpone monthly payments in the event of financial hardship. Young doctors can get a lower rate for the first 60 months, then variable rates for the next five years with their “Hybrid-Option” refinance loan. No origination or prepayment penalties. Get a $300 Welcome Bonus when you refinance with CommonBond
Credible (866-540-6005) is a website that matches physicians who need to refinance their student loans with lenders, helping borrowers see their options clearly.
Darien Rowayton Bank (or “DR Bank”) (855-245-0989) offers lower-than-standard interest rates for better-than-average physician borrowers, helping even interns, residents and even medical school students in deferment to refinance student loans. Unlike most private lenders, DRB offers forgiveness of debt upon death so that physician’s medical school loans die when they do.
Earnest (800-601-2801) promises flexibility for cash-strapped young doctors since borrowers can switch between fixed and variable rates, change payment dates and skip a payment once a year. Earnest offers unemployment protection so borrowers can pause monthly payments in the event of job loss. No origination fees or prepayment penalties.
LendKey (888-549-9050) helps physicians get a lower rate on their student loan refinance by Shopping the loan out to credit unions who can offer rates below the industry average. Their maximum 15-year term may result in higher monthly payments for some doctors.
Loan Scribe (732-930-5002) takes a “merit-based approach” to underwriting, basing their decisions on a borrower’s grades during medical school. Their “Med Debt Relief™ Program” is designed for medical residents and fellows, allowing 100% refinance of student loans and payments as low as $100 per month until they begin to practice. An interest-only payment option preventing student loans from growing during school.
Rhode Island Student Loan Authority (800-758-7562) offers physicians who reside in Rhode Island thousands of dollars in student loan forgiveness. They require a cosigner for better than average rates.
Social Finance (SoFi) (855-456-7634) offers unemployment protection, so that physicians who find themselves between job can skip a few payments while they make the transition. They refinance student loans ranging from $5,000 all the way up to 100% of the outstanding balance. No origination fees, no prepayment penalty and 24/7 support.
4. Compare the Costs, Benefits, Advantages and Disadvantages of Student Loan Refinancing Options
Refinancing student loans is a personal decision that each physician must approach with caution since the commitment is huge and the consequences will last years and cost tens of thousands of dollars. As you approach this decision, ask yourself:
- What benefits will I gain or lose when I refinance (especially if refinancing federal student loans into private student loans)?
- If interest rates rise, how will that change impact my ability to make payments on my loans?
- What happens if I become disabled or experience a period of joblessness?
- How will this refinance impact my eligibility for Public Service Loan Forgiveness?
- Am I going to be eligible for any discounts due to making automatic payments on my loans?
Medical School Student Loan Management Tips for Interns & Residents
Avoid deferment and forbearance. Physicians and med students who are having trouble making student loan payments because of low income or high costs of living should consider an income-based repayment method rather than going into forbearance or deferment. If you are going to qualify for PSLF, each of those payments will count toward the 120 qualifying payments, so you will receive forgiveness on a greater loan balance.
Pay off high interest rate loans first. This seems obvious but many physicians still overlook it. When deciding which loan to repay first, remember that the interest on home mortgage debt is tax deductible while most physicians will not be able to deduct the interest paid on student loans.
Stay on top of your loans! While many physicians will refinance their student loans right out of medical school, most will overlook opportunities to re-refinance later on when their cash flow improves. Look at your student loans at least once a year and ask yourself, “Are these the best rates and terms I can get right now?”
Resources for Managing Medical School Student Loan Debt
Adam S. Minsky is an attorney whose law practice focuses exclusively on matters pertaining to student loans.
Heather Jarvis learned “the hard way” about managing student loan debts by managing her own debt and now teaches courses on the subject.,
Paul Girard helps medical school graduates manage their student loans and develop repayment strategies as they transition from medical school to practice.
Jan Miller is a student loan consultant who practices in Ashland, Oregon.
National Student Loan Data System for Students (NSLDS) is the place to go to see a complete list of your federal direct student loans.
AnnualCreditReport.com is the only website authorized by the U.S. Federal Trade Commission (FTC) to fill orders for the free annual credit report you are entitled to by law. Beware imposter sites trying to sell you similar-sounding products and services. Pull your credit report to begin building a complete list of everything you owe.
Federal Student Aid Ombudsman Group can help physicians resolve difficult problems with their federal direct student loans. Call (877) 557-2575 or contact them by mail at:
U.S. Department of Education
FSA Ombudsman Group
P.O. Box 1843
Monticello, KY 42633
We hope that our Guide to Refinancing Medical School Student Loans can help you make sense of the personal finance issues that affect doctors while helping you avoid mistakes and seize opportunities as you and your family plan for financial security that can last a lifetime.