How to Decide If It’s Right for You and Lenders to Consider
Rate information updated 11-18-2019.
It’s no secret that medical school is expensive. Because of this, many students have to take on large amounts of debt to help pay for it. In fact, the cost has become so astronomical that the Association of American Medical Colleges reported in 2018 that around 75% of medical school graduates had student loan debt.
The amount of debt has also climbed dramatically. For the Class of 2018, the average medical student loan debt balance at graduation was $196,520. For students attending private institutions the average was nearly $210,000.
The problem becomes even more complex when considering that these loans are often deferred during residency. This means they’re still accruing interest for another several years. Once residents finish their program, that accrued interest is often capitalized, becoming part of the principal and now earning interest on itself. By the time a new doctor is finished with residency, they could owe nearly $350,000 from compounded interest.
There is hope, however, if all of this sounds like an unending nightmare that you’ll never wake up from.
Refinancing your medical student loans can significantly help your finances both in the short- and long-term. It can get you on your way to financial independence by building a solid foundation of proper financial management early. When refinancing, you take out one new loan large enough to pay off all of your existing loans. Depending on how you structure it, you may pay lower interest rates or a lower monthly payment.
Pros of Refinancing Student Loans During Residency
Your residency period isn’t exactly known for being a time when you have money to burn. So it can often be a great time to refinance your medical school loans to help you save on your student loans and possibly lower your required monthly payments.
Here are some of the pros of refinancing during your residency:
- Saves Money on Interest Costs
You can often get a lower interest rate on your loans by refinancing depending on the type of loan and your credit score. Lowering your rate means less money paid in interest and a less expensive loan overall (unless you extend your repayment term, in which case your loan may be more or less expensive depending on the rate and term).
- Smaller Monthly Payments Available
Sometimes the short-term ability to pay your monthly obligations is more important than being able to pay less interest over the next 20 years. While you’re in residency, money can be very tight, and any little bit of relief can help. Some lenders will allow residents to defer payments or only make partial payments while in residency to help reduce the burden.
- No Money May Compound During Residency
Sometimes your refinanced loan can come with a critical perk: no compounding interest while you’re in your residency. This will save you thousands, not just in the short-term but also over the life of the loan.
- Easier Organization of Your Loans
When you have multiple student loans, especially if they’re spread to multiple lenders, it can get confusing to make payments. You may even accidentally miss a payment, which can affect the credit score you’re trying hard to build. With a refinance, you can consolidate federal and private student loans together, leaving you with only one loan to worry about.
Cons of Refinancing Student Loans During Residency
Just like anything else, refinancing has a few downsides too. If you’re not aware of them, you could find yourself in a financially undesirable situation—and the start of your career is an especially bad time to get into money trouble.
- You Will Lose Federal Benefits and Protections If You Refinance Federal Student Loans
Having a federal student loan means also having access to some great perks, such as access to income-driven repayment plans, public service loan forgiveness, and much more. Once you refinance and pay off those existing federal loans, your perks and federal benefits go away, even if you would normally still be eligible for them.
Several of the Democratic presidential candidates have student loan forgiveness as a part of their platforms. While there is a long distance from campaign promises to enacted legislation, this may be something to keep in mind before you refinance.
For graduates who are in the military, you may lose the ability to defer payments due to deployment or military service. Not all refinance lenders offer this benefit for military borrowers but some do, so ask your prospective lender what their policy is.
- Payments May Start Immediately
Many private refinance loans start the repayment process immediately, which means instead of being able to defer your payments until you’re finished with residency, you could find yourself having to make payments right away.
Even though deferment often means compounding interest, some residents may not be financially able to make payments while they’re still in residency, so understanding what is expected of you is critical before agreeing to take out a loan with a specific lender.
Three Lenders Who Offer Medical Residency Refinancing
While there are many lenders who refinance student loans in general, there are several that offer products specifically designed for the medical resident. Each of them has its own terms and conditions, so make sure to research them to find the right one for you.
SoFi is one of the leading student loan refinance companies in the nation. They offer specific refinance loans for both medical and dental residents.
- Payments During Residency: You can reduce your payment to $100 per month for four years to allow you to get through residency while making very small payments.
- Interest Rates: Rates are based on creditworthiness but you can choose either fixed or variable rates based on your expected income as a physician. Rates start at 3.71% for fixed and 2.56% APR for variable loans.
- Term Lengths: 5, 7, 10, 15, or 20 years.
- Benefits: Interest doesn’t compound while you’re a resident. You can also refinance both private and federal loans together.
- Eligibility Requirements: You must be a medical or dental resident with up to four years left in your program. You must also be a US citizen or permanent resident, have more than $10,000 in student loan debt, and be a graduate of an accredited medical school. Lastly, you’ll need to meet SoFi’s underwriting criteria, which may be slightly more strict than other lenders.
Laurel Road is another lender that has a specific medical residency and fellowship refinance product. Here are the key details:
- Payments During Residency: Pay only $100 a month during residency/fellowship and for six months after completion.
- Interest Rates: Variable rates begin at 2.41% APR and fixed rates start at 3.76% APR.
- Term Lengths: 5, 7, 10, 15, or 20 years.
- Benefits: Receive $400 for every referral you send to Laurel Road.
- Eligibility Requirements: To refinance with Laurel Road, you must be a U.S. citizen or permanent resident and be in a medical residency or fellowship. There are also credit requirements and other underwriting criteria that will determine your eligibility and interest rates.
A division of PenFed Credit Union, Splash Financial, was created to help students save money on their educational debt refinancing. Splash offers general student loan refinance that can help medical school graduates get started on the right financial foot.
- Payments During Residency: Yes, you’ll make payments during residency and there’s no deferment or forbearance option if you go back to school or have problems making the payments.
- Interest Rates: Rates start at 3.48% APR for a fixed rate loan and 1.99% APR for a variable loan.
- Term Lengths: 5, 8, 12, and 15 years.
- Benefits: Top-rated, in-house customer service team.
- Eligibility Requirements: Typically, Splash has a minimum annual income requirement of $42,000, but this may not apply to borrowers in residency or a fellowship. There is also a credit score of 670 or above. You also need to be a US citizen; loans are not available to permanent residents. You must have at least a bachelor’s degree from a Title IV accredited school. Finally, you cannot have a bankruptcy on your credit history.
Refinancing your medical school loans can be a great way to help you set up for financial success as you complete your residency. Always shop around for the best rates, but keep in mind that interest rates are only one part of the equation.
Make sure that you understand the benefits you’ll need for your personal situation, such as low or no payments during residency or military/education deferrals, and see which lenders can best meet those needs as a total package.
Do the research, and find the program that is best for you so you can start your medical school repayment on the right foot.
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