How (and Where) to Refinance Medical Student Loans
For medical students who graduate with more than $200,000 in student loan debt on average, refinancing is one strategy for managing their student loan payments while in a residency or fellowship program. Some of today's lenders specialize in refinancing medical student loans, allowing residents to make minimum payments during training.
As the massive and growing student debt issue continues to garner media attention, there is little mention of the crisis facing medical students who must contend with an average medical school debt of more than $200,000 before they even begin to earn a decent paycheck.
Maybe it’s because, as physicians, they are expected to earn sizable salaries that should be more than sufficient to pay the higher medical school loan payments. However, considering most med school graduates have to carry that debt through a residency program before said higher pay kicks in, they can end up living paycheck to paycheck well into the early part of their careers.
On this page:
- Debt Piles Up for Residents and Fellows
- Few Good Options for Medical School Loan Borrowers
- Why Privately Refinancing Medical School Loans Makes Sense
- Where to Refinance
Debt Piles Up for Residents and Fellows
While in residency, medical school grads are allowed to defer payments until they successfully complete the program. With average residency salaries hovering around $57,000 in 2017, that might seem like the logical thing to do until you start earning a larger paycheck. The problem is medical student loans are still accruing interest on the outstanding balance while in deferment.
If your total medical school debt is $240,000 and you are being charged an interest rate of 6.8%, that means $17,000 of interest is being added to your debt per year. And because your accrued interest is also being charged interest, your debt can balloon to nearly $300,000 over three years.
If you’re specializing and working through a five-year residency and fellowship program, your loan balance could grow by as much as $100,000.
Few Good Options for Medical School Loan Borrowers
Many student debt experts recommend medical residents start paying down their debt as soon as they can. However, paying a $1,500 monthly payment on less than $60,000 of income is a lot easier said than done.
At the very least, residents should try making interest payments to keep their loan balances from growing. But considering the loan payments consist primarily of interest in the early years, it would still be a large monthly payment. Medical school graduates can look to income-driven repayment plans to lower their payments, but only the lowest-paid residents may qualify for one.
Income-Based Repayment (IBR)
Even with IBR payments, you may only cover about half of the monthly interest accrual, which means your loan balance will still grow. If you qualify for IBR while in residency, you would no longer qualify once you started earning a bigger salary.
Revised Pay As You Earn (REPAYE)
Another government option is the Revised Pay As You Earn (REPAYE) program, which forgives up to 50 percent of interest accrued on student loans during your residency. It also reduces the interest rate on any accrued interest. REPAYE, like other IBR programs, also offers loan forgiveness after 20 years of on-time payments. Once you leave residency and start earning a higher income, you lose the interest subsidy and will continue to make payments capped at 10 percent of your discretionary income.
One strategy would be to opt for REPAYE while in residency and then refinance when your income increases. However, by waiting to refinance medical school loans, you risk facing higher interest rates.
Privately Refinancing Medical School Loans Makes Sense for Most Grads
It always depends on individual circumstances, but for many medical school grads who don’t plan on pursuing Public Service Loan Forgiveness (PSLF), Refinancing student loans while in residency can help them reduce both their interest costs and monthly student loan payments. It also allows borrowers to consolidate multiple private and federal student loans into one, which makes managing medical school loan repayment much easier.
When you refinance medical school loans, you are essentially taking out a new loan to pay off the old ones. This would only make sense if you can obtain better terms — either a lower interest rate or a lower monthly payment — with the new loan. For example, if you can reduce your medical school loan interest rate by 2% on $180,000, it can result in an annual savings of nearly $4,000.
Refinancing medical school loans must be done with a private lender. Until recently, the challenge for medical school grads has been to qualify for a private loan. Many traditional lenders typically require a very good credit score to qualify for a decent interest rate; however, in just the last few years, a new group of student loan refinance lenders has emerged to address the specific challenges faced by medical school grads.
Refinancing Designed for Medical Professionals
These alternative lenders base their loan qualifications on the borrower’s earning potential as determined by their future field of practice, as well as other factors like credit score and current income. They also have flexible repayment terms that include minimum payments during residency if desired. Among the leaders offering refinancing options in this specialized arena are SoFi (Social Finance, Inc.), Splash Financial, and Laurel Road.
Over the last eight years, SoFi has exploded on the fintech scene as one of the premier lenders for student loan refinancing. As the first alternative lender to offer consolidation of both federal and private student loans, SoFi has refinanced about $18 billion in student loan debt as of February 2019.
In October 2017, SoFi announced the launch of a new refinancing program geared strictly for medical student loans with the following rates, terms, fees, and limits:
- Rates: 4.140% to 8.709% (fixed APR with autopay); 2.790% to 7.750% (variable APR with autopay)
- Terms: 5, 7, 10, 15, and 20 years
- Fees: None
- Limits: Minimum $10,001 in most states, no maximum
Refinancing medical school loans is open to residents and fellows once they have been matched to a program and are within four years of becoming an attending physician or practicing dentist.
SoFi allows residents to make minimum payments as low as $100 on their loans through the end of their residency or fellowship program, up to 54 months. Once you leave residency, SoFi will re-amortize your loan and your payment amount will increase based on the new amortization schedule.
Although interest does accrue when you make minimum payments, you are not charged compounded interest during your residency period. Instead, SoFi simply capitalizes the accrued interest at the end of your residency period.
Launched in 2013, Splash Financial is one of the first student loan consolidation companies to focus primarily on medical student borrowers in residencies or fellowships. Medical student loan refinancing is available with the following rates, terms, fees, and limits:
- Rates: Fixed APR starting at 3.75%, variable APR starting at 3.10%
- Terms: 5, 7, 10, 15, and 20 years
- Fees: None
- Limits: Minimum $25,001, maximum $346,000
Borrowers may pay as little as $1 a month towards their loans during their residency period, with all unpaid principal and interest amounts capitalized at the end of training.
Laurel Road started offering student loan refinancing as Darien Rowayton Bank (DRB) in 2006. It took on its current name in 2017 to reflect the “journey it takes our customers to achieve their life goals.” DRB/Laurel Road has originated more than $2 billion in refinanced student loans, which makes it one of the largest lenders in the student loan space.
Medical student loan refinancing is available with the following rates, terms, fees, and limits:
- Rates: 3.87% to 7.44% (fixed APR); 3.60% to 7.10% (variable APR)
- Terms: 5, 7, 10, 15, and 20 years
- Fees: None
- Limits: Minimum $5,000, up to your total outstanding loan balance (if you refinance more than $300,000, Laurel Road will break it into two loans)
Like SoFi and Splash Financial, Laurel Road offers a minimum repayment option, allowing borrowers to pay as little as $100 per month throughout their residency or fellowship and for up to six months after training concludes.
All three of these leading lenders offer forbearance options and loan forgiveness in the event of death or disability. Applications are submitted online and are usually notified of a decision the same business day. The timing of funding varies between the three, but borrowers can always expect to receive loan proceeds within about 10 days, if not sooner.
Americans owe more student loan debt than ever, with medical students carrying an average of more than $200,000 in debt upon graduation. Although physicians are expected to earn sizable salaries, the truth is most earn around $57,000 while in a residency or fellowship program, putting student loan repayment out of reach for many.
Luckily, lenders SoFi, Splash Financial, and Laurel Road specialize in medical student loan refinancing that can ease the burden of monthly loan payments for residents and fellows. As with most loans, eligibility restrictions apply and approval for the lowest rates is based on a variety of factors, including earning potential, credit score, and current income.
Author: Jeff Gitlen
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