Should I Refinance My Medical School Loans? A Physician's Decision Guide

The actual cost is $150, 000; I am not trying to hide anything. Doctors who later regret refinancing did not realize they had made a mistake: they just did not carefully do numbers for PSLF; they gave up debt forgiveness for a very small reduction in interest and reversal is not possible. Please read carefully before taking action.

What refinancing actually does

A private lender buys federal loans and replaces them with a new loan at a lower rate; this is obvious but other things also change. Eligibility for PSLF ends permanently when you switch from federal to private loans and you no longer qualify for any income driven repayment plans either. Forgiveness after 20 or 25 years disappears as well. Ease of residency is no longer available. What do you get? A lower rate right now. Recent graduates can now refinance at rates ranging from 7 to 8 percent. Offers for good borrowers are now available at around 4. 5 to 6 percent. Reducing a loan rate from 7. 5 to 5. 5 percent means you save $5000 every year roughly $30, 000 to $35, 000 over six years if you pay aggressively. You must decide whether this trade off is worthwhile based on what you give up.

The one question that decides everything

Before speaking to lenders think honestly: Do you plan to work at employers eligible for PSLF (Public Service Loan Forgiveness)? Employers eligible are those that are tax code 501(c)(3) not for profit along with government agencies and VA hospitals; most children hospitals and medical centers are but private practice is not and neither are for profit hospitals. Short placement is not included. If you are sure you will work in private practice, read on. If not, do not refinance because average loan forgiveness is $100, 000 to $300, 000 which is far more than a mere 2% reduction.

When refinancing makes sense

My honest view is that refinancing works for a specific group. If you are working in private practice or for profit business, you do not qualify for Public Service Loan Forgiveness (PSLF). Your salary is high so that regular large monthly payments are feasible. At 5. 5 percent interest over seven years $250, 000 comes to $3500 per month and very comfortable at $450, 000 but very hard at $240, 000. Credit scores are usually high enough to get good rates. You want to pay off all debt in five or seven years instead of slow repayment over ten years. Generally speaking math works out well for specialties such as orthopedic surgery, neurosurgery, dermatology and plastic surgery and anesthesiology.

When refinancing doesn't make sense

Are you currently pursuing PSLF? Stop thinking about refinancing and start looking at the numbers - they are clear. Most doctors and academics at residencies at non profits get more forgiveness through tax savings compared to lower interest rates and this is obvious. If you are not sure about future career path as a resident do not pursue this route: you lose eligibility for income driven repayment during hard times and you forfeit already paid PSLF. Payments matter now; refinancing erases them. This choice seems small but really matters in the long run. With fluctuating income federal loans allow pausing when things go bad; income driven reduction cuts payments when income falls. Hard deferment for private loans is limited to 12 months. Refinancing does not make sense if interest rate is less than 1. 5 percentage points higher. Savings usually do not justify giving up federal protection if there is even a remote chance that PSLF might be available later.

How to compare lenders

Many lenders are unsuitable for residents. First look for programs that fit residents better. Programs like Juno, SoFi, Earnest and Laurel Road offer monthly payments of $100 during residency versus full amounts. ELFI requires full amounts and an income of $65, 000 annually. Honestly I have no clue who targets this product. Underwriting for doctors is important and some lenders consider future income or matching letters rather than present income of $65, 000. Programs like Juno, SoFi, Earnest and Laurel Road handle this. Difference between good offers and rates that are only marginally better than government rates is important. Fixed rates are preferable; variable loans can go up to 70 percent over 7 to 10 years and rates also move in the wrong direction for years. Avoid risk with variable loans unless you are absolutely sure you can pay off full balance in three years. Comparison page at [Medschooldebtcalculator.com] side by side compares current range of interest rates and availability along with underwriting status.

The resident decision: should you refinance during training?

Payments of $450 a month are possible and the government will also clear remaining unpaid interest. You can also use Paycheck Protection Program loans and receive federal protection. Monthly payments would have been lower anyway without refinancing. Refinancing during residency wipes out previous payments and locks you into high interest private loans at the lowest salary level; refinancing is usually beneficial for residents whose supervisors score above 730 and are certain about their future prospects. Otherwise waiting is preferable.

The bottom-line decision framework

Thinking naturally if you are eligible for PSLF through your employer then you should stop refinancing. If you do not have stable income to make actual monthly payments now then wait. If you cannot find refinancing rate at least 1. 5 percentage points lower than your current federal rate then refinancing doesn't seem worthwhile. And if you have been continuously employed at least a year and plan to continue for at least five more years then refinancing makes sense.

Know what you're giving up before you sign

Start with Public Service Loan Forgiveness (PSLF): everything else is secondary. Completing four years of residency at a nonprofit hospital currently means there are 48 qualifying payments in your account. Refinancing will remove these forever permanently. Appealing or reversing these payments won't work: once you sign they are gone forever. There is no way to reclaim these payments either. Use MedDebt calculator at [https://www.medschooldebtcalculator.com/calculator] to compare PSLF, IDR and refinancing directly side by side using actual balances and salary along with employer type and see total cost for each route before making this important choice: data is from Department of Education on federal student loans, the report from MGMA on doctor compensation and production and Bureau of Consumer Protection on loans.