While medical school is expensive and getting more so every year, federal student loans are still earning the government a tidy sum (at least those actually being repaid). Combine the two and a new doctor will borrow more and then pay more for the privilege than at any other time in history.
Over the past few years, historically low-interest rates and a rebounding economy have led private banks to re-enter the student loan business, particularly on the refinancing side. Student loan refinancing/consolidation is exactly what it sounds like: the refinancing company or bank pays off all of your current loans and creates a single loan in its place that they hold at a new interest rate. Their profits come from all the interest you’ll be paying to them instead of the feds or other banks. Because banks borrow money at super low rates (recently as low as 0%), they can still make money refinancing borrowers at comparatively low rates. Refinancing is not altruism, even though it’s recently worked out well for student loan borrowers. It’s just a rare market opportunity that can actually benefit consumers.
| Interest rate impact on a $200,000 loan with 10-year Repayment | ||
| Interest Rate | Monthly Payment | Total Interest Paid |
| 6.8% | $2,302 | $76,193 |
| 6.5% | $2,271 | $72,515 |
| 6.0% | $2,220 | $66,449 |
| 5.5% | $2,171 | $60,463 |
| 5.0% | $2,121 | $52,447 |
| 4.5% | $2,073 | $48,732 |
| 4.0% | $2,025 | $42,988 |
| 3.5% | $1,978 | $37,326 |
| 3.0% | $1,931 | $31,746 |
| 2.5% | $1,885 | $26,248 |
In 2015 when the student loan refinancing game heated up and companies first started offering plans specifically tailored towards residents, refinancing should have been a no-brainer for a significant fraction of residents and every attending not considering PSLF. Unfortunately, at the time, very few people knew these options even existed. As you can see in the table, a lower rate makes a big difference.
Now, the landscape has shifted again. First, newer borrowers have lower federal interest rates than the usual 6.8%+ older borrowers had. Then the government’s new REPAYE program reduced the effective interest rate for many residents. While refinancing is still an excellent option for many attendings, it is no longer the best plan even for most non-PSLF-bound residents, especially those who qualify for a nice REPAYE subsidy and are willing to make income-based payments. For those who are confidently non-PSLF-bound but currently forbearing or planning to forbear, looking into refinancing with a resident-friendly company is worth considering; in most cases, you’ll save money.
Overall, I remain surprised at how little most of these companies have done to court doctors. I don’t care how well Peter is doing as a junior associate at BankCorp, I refuse to believe he’s as much of a sure bet as even a resident physician, full stop. Doctors at every stage of training are reliable people with large loans and a near guarantee of paying them off.
General considerations when refinancing
Interest rates are always advertised as a range. The shorter the term, the lower your debt-to-income ratio, and the better your credit score, the better the rates you’ll actually receive when you apply to private companies. These companies are looking for borrowers with good credit histories, proof of a stable income, and enough cash flow to support their monthly loan payments.
If you don’t qualify or don’t get a good rate by yourself, you can consider applying with a cosigner. This means that the second party is now also responsible for your loans if you drop the ball for any reason. Additionally, the cosigned loan will show up on their credit report and can affect their ability to get loans or mortgages of their own. Some companies do offer co-signer release opportunities after a set period of on-time payments, as fast as after one year, but this may or may not be something you’re willing to consider.
Choosing a variable instead of a fixed rate will also get you a better rate, but that’s your upfront reward for taking on the risk of rates going up in the future. Some people do get the lowest possible advertised rate (often derisively called the “teaser rate”), but most do not.
Examples of the effect of term rate and term length on total repayment:
| 5 YEAR | 10 YEAR | 15 YEAR | 20 YEAR | 25 YEAR | |
| Loan balance | $200,000 | $200,000 | $200,000 | $200,000 | $200,000 |
| Interest rate | 3% | 4% | 5% | 5.50% | 6% |
| Monthly payment | $3,594/mo | $2,025/mo | $1,582/mo | $1,376/mo | $1,289/mo |
| Total interest | $15,624 | $42,988 | $84,686 | $130,186 | $186,581 |
| Total payment | $215,624 | $242,988 | $284,686 | $330,186 | $386,581 |
Divide the amounts in the chart by whatever number it takes to get to your actual loan amount for a more personal illustration (so if you borrowed $50k, divide the monthly repayment and total interest by 4).
Effect of the just term length on total repayment:
| 5 YEAR | 10 YEAR | 15 YEAR | 20 YEAR | 25 YEAR | |
| Loan balance | $200,000 | $200,000 | $200,000 | $200,000 | $200,000 |
| Interest rate | 5% | 5% | 5% | 5% | 5% |
| Monthly payment | $3,774/mo | $2,121/mo | $1,582/mo | $1,320/mo | $1,169/mo |
| Total interest | $26,455 | $54,557 | $84,686 | $116,779 | $150,754 |
| Total payment | $226,455 | $254,557 | $284,686 | $316,779 | $350,754 |
When comparing interest rates to your current federal loans, you must consider capitalization, which can be substantial after a few years of negative amortization. Your current federal loan accrues interest on the current principal, but the new refinanced loan’s principal will be the combination of the current principal and all of the accrued interest.
A $200,000 loan at 6% accrues the same interest per year as a $240,000 loan at 5%: $12,000. That $40,000 difference could easily accrue during training, and thus refinancing to 5% in this scenario wouldn’t actually save you money.
Since cash flow is important, trading a federal loan (with its possibility of forbearance or IDR) for a private loan may not be a good idea right before buying a house, depending on the size of your mortgage and student loans, as the underwriters may not be as confident that you can make mortgage payments on top of a large fixed student loan payment. This is most commonly an issue for people trying to buy a house during residency, especially at the beginning. Of course, if you’re buying a reasonably priced house for your income, this should be less of an issue. This also wouldn’t be an issue if your monthly payment size isn’t changing significantly.
Variable vs Fixed
While variable rates are always cheaper at the beginning than fixed rates, they don’t always stay that way. They can get even better (sometimes), but in a world of recent historically low interest rates, they can also go up. These rates are usually tied to some external measure of bank borrowing such as the LIBOR, and each company will have their own maximum rate and sometimes a maximum rate of change. These are always available to you before you sign anything but are important when considering your options.
In general, if you’re an attending who could afford to pay off your loans in a few years and who has the financial flexibility to increase the money flowing toward your loans if needed, in many cases, you’ll be better off with the variable rate. You’ll enjoy the savings off the bat, and if rates go up, then you push harder and pay them off as fast as possible. If you can afford a 5-year variable term, then go for it. Even if rates go up, it takes some time to undo the savings.
If you’re looking at years and years of payments no matter what you do, then the risk probably isn’t worth it.
Ideally, a new attending would pick a 5-year (or shorter) term variable loan and be prepared to knock it down faster if needed. Otherwise, a 10-year fixed loan is a reasonable option. No company has prepayment penalties, so you can always pay it down faster. And, because these are also no-cost refinances, there’s nothing to stop you from rate shopping when rates go down and refinancing again, even with the same company.
Lost Protections & Benefits
All those websites and advisors promoting refinance will allude to vague protections of federal loans that you’ll lose if you refinance privately. These are what matters:
- Obviously no PSLF. Refinancing is for people who actually need to pay down their debt.
- No income-driven repayment. Except for companies that offer a reduced monthly payment during residency, payments are based on a length of time, not your income. This matters if you anticipate big swings in your income such that you might not be able to make big payments consistently. This is less of an issue for most docs.
- No forbearance. Sort of. Many companies offer brief periods of forbearance on the order of a few months.
- Did I mention no loan forgiveness? You can refinance over and over again, but you can never ever go back to the feds once you leave.
Myths
Private lenders come after your family if you die.
Private lenders demand their money back even if you’re permanently disabled.
Frankly, those would be deal-breakers for most people. And, contrary to a lot of people’s assumptions, they generally aren’t true.
These are both important protections of federal loans. In the competitive market for student loan refinance, the majority of companies have followed suit and guaranteed the same protections. Definitely read the fine print before you sign anything; most but not all companies publicize terms and stipulations that mirror the feds. But in particular, if you need to use a cosigner, find out if they’ll be on the hook if you die or become disabled—this would be the sneaky pitfall.
Interest Capitalization
Capitalization is a big pitfall for borrowers when considering refinancing.
One thing that happens with any private refi is that your accrued interest will capitalize. This means that if you had loans of $180k with $40k of accrued interest, your new loan amount (that will now be gaining interest) is $220k after refinancing. That sounds bad, but it all depends on the numbers:
$180k at 6.8% accrues $12,240 every year in interest.
$220k at 5.6% accrues $12,320 the first year in interest.
What this illustrates is that you can’t just compare the two rates apples to apples if you have unpaid interest. You need to compare the combination of the interest rate with the loan amount and see how much interest accrues every year.
Also note that interest capitalizes anyway at end of your six-month grace period after finishing school, when you file for a Direct Consolidation loan, or after a period of forbearance, so this is irrelevant if one of these events has happened recently.
What would always be relevant is any private loan’s capitalization interval, if any. All loans’ interest rates are marketed as APR (annual percentage rate), which is basically just the interest rate (plus any fees wrapped in).
Every legitimate student loan company I know of uses simple interest without any capitalization during repayment, so the APR is an accurate reflection. Some other private loans may capitalize at some interval (as often as daily) and their rates would be more accurate if expressed as an APY (annual percent yield). In practice, this results in a small rate bump. You can use this calculator to convert the APR you receive to an APY that reflects compounding: https://mindyourdecisions.com/blog/apr-to-apy-converter/. (Note: in resident-specific refinance programs, your loans do capitalize at the end of your training period when you begin repayment but not again during repayment.)
For example, that 5.6% APR loan has an APY of 5.76% if compounding daily. The actual interest it will accrue would thus be $12,672.
Ultimately, the APY nuance isn’t likely to be important in this particular rodeo, but it illustrates that you should get in the habit of reading the fine print whenever you sign anything, especially if it involves piles of money.
Refinancing > Forbearance
So, there are many benefits of federal student loans (income-driven repayment, the REPAYE interest subsidy, the possibility of PSLF), but none of them meaningfully apply if you don’t enter into an income-driven repayment plan during residency. Forbeared loans are just loans that accrue a lot of interest at high rates. If you can switch to a private company and save a point or two on your rate during residency, you’d likely save thousands in interest during training.
The main exceptions are individuals with massive debt and plans for semi-permanent “relatively low” income. A person with $400,000 in loans with plans to enter academic pediatrics making $150k a year will still benefit from IDR programs and PSLF after forbearance, as he or she will essentially function as a resident forever from a debt-to-income perspective. Even the companies that have resident-friendly plans ask for your specialty, which they basically use as a proxy for future income before refinancing.
The Fear Scenario
The whole point of refinancing is to get a better rate than what you already have. The REPAYE interest subsidy makes this a bit more complicated because the most likely scenario is that a resident-friendly private company will offer you a rate that is better than your actual federal rate but worse than your current effective rate.
But, on the flip side, it’s also possible that by the time you make enough money to lose a good effective REPAYE rate and want to refinance that the golden window has closed and private rates have gone up (that’s what the lenders want you to think at least). I would argue that such prognostication is generally unsatisfying and as foolish as trying to time the market, especially for those just beginning training.
Refinancing private loans
If you already hold private loans, there’s an excellent chance that their rates are higher than what companies are currently offering. Even if you’re able to do IDR during residency, you should always look into refinancing any private loans. Again, refinancing is a no-cost proposition.
Once you hold any private loans, you should be checking the rates periodically to see if they’ve improved. If they have, refinance again.
Refinancing as a resident
If you’re a resident with a boatload of student loans from the feds, your choice has historically been IDR or forbearance. The mountain of debt compared with your relatively paltry resident salary has put conventional student loan refinancing out of reach.
However, there are currently several companies that offer specific plans to residents which involve a reduced (e.g. $100/month) monthly payments during residency. The details are of course subject to change. See benwhite.com/refinancing for a rundown.
While residents in their final year of training with a signed job contract can usually secure an “attending” rate, residents earlier in training won’t be so lucky. In general, residents earning a REPAYE subsidy or without PLUS loans will not be particularly impressed. Again, most residents would do better to stick with IDR for their federal loans (although these programs would of course still be a good idea for those with private loans).
Ultimately, the reduced monthly payments will make a private refi “cheaper” on a monthly basis than an IDR plan after the first year or two of training. The downside, of course, is that if you only make the minimum required monthly payments then you just accrue more interest. And interest capitalizes at the end of the training period when entering repayment (just like after a federal forbearance period). There are no prepayment penalties though, so if you can make bigger more-IDR-sized payments, then by all means do it. You can refinance as a resident and continue to make as big a payment as you can afford. And, of course, the more you pay now the more you save in the long run.
Most residents won’t qualify for refinancing outside of a special resident program, because most trainees’ debt to income ratio is far away from the underwriting requirements most companies use (i.e. they want you to make more per year than you owe, not owe four times what you make per year). It’s a bummer that the rates offered to residents are not as good as those offered to attendings, so if you do apply as a resident but aren’t impressed (or don’t bother applying), that doesn’t mean you should give up on the idea once you’re out of training if you’re not PSLF-bound. Attendings who aren’t going for PSLF and are stable in their new jobs should basically all refinance and save thousands.
Lucky borrowers who have escaped with five-figure or low six-figure debt may be able to squeeze into a traditional private refinance which may land them better rates. As a general rule, if you can afford the standard 10-year repayment (i.e. you don’t or barely have a partial financial hardship), then you might as well refinance once the private rate is better than your effective REPAYE rate. Since there are no costs or penalties, you can and should refinance again as an attending.
Ultimately, most residents should refinance any private loans but probably leave their Direct loans where they are.
What about PSLF?
Keep in mind, PSLF can only take place after 10 years of monthly payments. The smaller your loan burden and the shorter your residency, the less you can theoretically have forgiven. PSLF is the best deal for those with long residencies/fellowships (low monthly payments for longer under IDR) and with a lot of loans (private school = more forgiven).
As an average attending, the desire to do PSLF is the main real reason to continue holding federal loans if you otherwise qualify for private refinancing. As a resident, REPAYE is likely better than refinancing and it keeps your options open. If you can afford the IDR payments, you should probably stick with the program.
Refinancing just PLUS loans
If you have PLUS loans and are confident about PSLF not being for you, you may think it would be helpful to compare your effective REPAYE rate of both your regular Direct Unsubsidized loans as well as your PLUS loans to what you can get from a private company. You may then think that it’s only worth refinancing your PLUS ones, but it’s probably not. Your REPAYE payment is based on your current income and not on your debt amount. Thus, your IDR payments won’t go down. That same amount will go to just your remaining federal loans, reducing the amount of unpaid interest and thus raising your effective interest rate. On top of that, you’ll now have to make payments on that new private loan as well.
It may be worth refinancing a fraction of your loans if the effective interest rates are still above what private refinancing can offer, but it’s unlikely to work well if you’re benefiting from an interest subsidy.
Final thoughts: REPAYE vs Private Refinancing
If you consolidate at the end of school, you should hopefully be able to net zero-dollar payments for REPAYE and enjoy the fullest possible subsidy: the forgiven interest reduces your effective interest rate by half! No matter how much you borrowed and how much you’ll make, anyone with $0 payments will get that subsidy. As a result, it’s going to be hard to get a better rate your intern year. Once your payments really kick in, you may calculate that private refinancing is better. This is particularly common for those who managed to escape with five-figure or low six-figure debt. For the rest, REPAYE will likely still ultimately be the stronger choice during training, followed by private refinance once an attending (again, if not considering PSLF or for the unfortunate souls considering the 20/25-year IDR loan forgiveness). This assumes that you can afford and will pay that 10% monthly payment. Refinancing is generally better than forbearing for any significant amount of time (the exception is someone with very large loans but permanently low income, as we discussed in the chapter on Long-term Loan Forgiveness.
Should a resident refinance?
- If you have private loans at high rates, this is a no-brainer.
- If you have federal loans and have been forbearing, then this is also probably worth checking out. $100 a month to slow down the relentless climb of accruing interest could save thousands (but only if the rate is substantially lower, which it probably won’t be)
- If you’re doing IDR temporarily but planning to start forbearing (barely making ends meet now and having kids soon, etc.), then it only makes sense to refinance if you can afford the token payment.
- If you have federal loans and are doing IDR to be financially responsible but have no interest/faith in PSLF, then refinancing is also worth considering only if you’re not getting much of a REPAYE subsidy. The “resident” rate is unlikely to beat your effective REPAYE rate but may beat the actual rate, particularly if you have PLUS loans. If you’re married and are paying the fed’s sticker rate, then a private company will probably save you some money there as well. As there is no prepayment penalty, you are free to still make your old IDR-sized payments (only now those payments will go a lot further at a lower interest rate). If you know you want to do private practice, then there’s really no big reason to stick with IDR just for IDR’s sake if it’s costing you more.
- If you’re in REPAYE but not considering PSLF, then feel free to apply for private refinance, but only pull the trigger if the rate you’re offered is lowered than your effective interest rate with the REPAYE unpaid interest subsidy. This is unlikely.
- Keep in mind you’ll get a better rate as a trainee if you are in your final year and have a signed employment contract.
- Residents with substantial loans probably shouldn’t refinance regardless of your future plans, because those are just plans. You don’t know what kind of job you’ll find after residency, and it would be really sad to miss out on PSLF just because you were cynical or overconfident.
Applying to companies
The initial applications are short (really short, usually 5 minutes or less). Rate ranges are typically pretty similar across lenders (and all will typically advertise a rate with a 0.25% auto-debit discount factored in already) but idiosyncratic enough that you can’t predict consistently which company will actually give you the best deal. The brief initial application will give you a preliminary rate and will not affect your credit score. The hard-pull on your credit comes when you actually move forward with official paperwork stuff. The credit bureaus also treat multiple pulls for the same reason to be comparison shopping, so you won’t be penalized for applying to multiple companies at the same time—it’ll just be the single hit on your credit.
The prudent thing for an attending or lucky resident to do is to apply for refinancing from each company that can theoretically meet your needs and see which one is willing to refinance you at the best rate.
When it comes time to apply for refinancing, you should assume pretty much any link you click online will be a referral link from which someone will make some money. The big websites like Student Loan Hero promote refinancing heavily because their income model is primarily based on refinancing referrals, which are worth hundreds of dollars apiece (and I’d venture pay-to-play featured placement for an additional fee). Smaller sites run by individuals (like mine) sometimes split those referrals with you. My referral links are available at benwhite.com/refinancing. That said, I’m not trying to be a shill for private refinance and referral commissions, so if this discussion makes you uncomfortable, by all means use someone else’s links. Some of the lenders even offer open programs where you and your friends can refer each other. But since you can often get a few hundred bucks back through a referral, you might as well use someone’s.
Overall, the interest rate ranges offered by these companies are generally comparable. Typically, when one lowers their rates, the others have followed quickly followed suit. The increasing competition in this space has generally been excellent for consumers, though the rate nadir seems to have already come and gone. Before REPAYE, private refinancing would have been a great choice for many residents and most attendings. Now, private refinancing is a great choice for a much smaller number of residents (but still a lot of attendings).
Again, if you have several potential options based on your loan burden and your income, you might as well apply to all and see who gives you the best deal. You can’t predict ahead of time. Applications are relatively short and painless, so there isn’t a big-time investment in doing your due diligence. If you’ve refinanced, make sure to check rates periodically (especially if the marketed ranges change, your credit score or income improves, etc.). Once you’ve pulled the trigger, don’t shy away from refinancing over and over again if you can get a better rate. It never costs you anything, and you can keep racking up referral bonuses.
As an attending, unless you are making qualifying payments toward achieving some sort of loan forgiveness, there is little reason to stay with federal loans if you qualify for a better rate elsewhere. Being an attending making good money and actually paying off your loans means that you’re unlikely to benefit from any of those great provisions of income-driven repayment. If you’re not benefiting from those, then all you have is a loan with a high interest rate.
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