Once you’ve graduated from medical school and completed your residency, it feels like you’ve finally made it. After years of intense work and effort, you’re ready to put your education, training, and expertise into practice. But if you’re like most young physicians, finally finishing school means just getting started with paying for it. Student loan refinancing can be a good idea in some situations, but it’s not a silver-bullet solution. You need to understand the ins and outs of this process to make the best decision possible for you. Before you start looking for a lower interest rate or monthly payment, keep these five things in mind.
1. Make Sure You Don’t Need Protections or Benefits That Only Come with Federal Student Loans
If you’ve been taking out student loans since undergrad, you likely have a mix of federal and private student loans. The main difference between these two is that federal student loans offer some extra benefits and protections for borrowers. When you refinance, you automatically convert all your federal loans to private ones, losing those federal loan benefits in the process. Some of the benefits of federal student loans include:
- Income-driven repayment plans, which limit your payments to between 10% and 20% of your discretionary income. Just keep in mind that some income-driven repayment plans require that you qualify based on your income and family size.
- Student loan forgiveness, such as the Public Service Loan Forgiveness program. By working for a government agency or eligible nonprofit, federal lenders will forgive your student loans. Be aware that this program is not automatic, and your application under it may be denied.
- Protections for your family. Depending on your loan type, your debt could be forgiven if you were to pass away. But with private loans, these kinds of provisions are often missing from the loan terms.
If you can manage your payments and you plan to work in the private sector, refinancing could work for you. But if you want to access these programs or protections, refinancing might not be your best choice.
2. Consider Joining the Military
Some branches of the military offer student loan assistance to physicians who commit to a certain number of years. This isn’t necessarily a good primary reason to join the service – but if you’ve considered a military career, student loan refinancing for physicians is an added perk. Here are just a few examples of military student loan refinancing and repayment programs:
- Health Professions Loan Repayment Program: Offers up to $120,000 in student loan forgiveness over three years to physicians on active duty or in the Army Reserve.
- National Guard Student Loan Repayment Program: Get up to $50,000 in loan forgiveness when you enlist for at least six years.
- Navy Student Loan Repayment Program: Receive up to $65,000 in student loan forgiveness in your first three years of service.
- Air Force Judge Advocate General’s Corps Loan Repayment Program: Awards up to $65,000 in student loan assistance over three years.
3. Shop Around Before You Apply
Several student loan refinancing companies specialize in offering loans to new physicians. Each lender has its own criteria and terms, so it’s important to compare several lenders before choosing one. Many of these lenders allow you to get pre-qualified with just a soft credit check. This means that you can view potential interest rate offers without any negative impact on your credit score.
As you’re shopping around, don’t just look at the interest rates. Take a look at each lender’s fees, repayment periods, credit score and income requirements, and other terms. Some lenders, for instance, offer interest rate discounts if you set up automatic payments. Others provide protection if you lose your job or experience financial hardship. In other words, get the whole picture of each lender rather than focusing solely on their interest rates.
4. Decide Whether You Want a Variable or Fixed Interest Rate
The best interest rates student loan refinancing companies offer are variable interest rates, which can rise or fall as market interest rates fluctuate. Because the lender can charge you higher rates in the future, interest rates start off lower as a tradeoff. If you think you can pay your loans off early, a variable rate could save you a lot of money. Just be aware that you run the risk of that rate rising in the future, making any debt you still owe more expensive once that happens.
Student loan refinancing companies also offer fixed interest rates, which don’t change during your repayment term. In exchange for the stability and the known, flat rate throughout the life of your loan, you may have to pay a slightly higher rate than what the initial interest rate would be on a variable rate refinance.
There’s no right or wrong answer for which type of rate you should choose. Generally, variable rates are better if you have a short repayment term and you don’t anticipate much change in market interest rates. Fixed rates are typically better for long-term repayment and situations where you anticipate changes in market rates. If you aren’t familiar with how market interest rates work, a fixed rate may be a better choice for you.
5. Consider Getting a Cosigner
According to ValueMD, the average first-year salary for a physician can range from $80,000 to $398,000, depending on your specialty. With a high income and a solid credit score, you shouldn’t have a problem getting a low-interest rate when refinancing your student loans. But to get the best interest rates these companies offer, you might need a cosigner, preferably another person with a solid income and excellent credit.
The primary drawback of getting a cosigner is that you’re both equally liable to repay the student loans. So if you default, it could damage your cosigner’s credit history, and your relationship with them. Having your student loans on their credit report can also make it difficult for them to get approved for credit in the future. If you consider this route to help you pay off your loans faster and at lower rates, make sure you refinance with a lender that offers a cosigner release provision. This allows you to remove your cosigner from the loan after you’ve met certain repayment criteria. Most lenders require between 24 and 48 consecutive on-time payments to remove your cosigner.
The Bottom Line
Refinancing student loans can make your debt burden a little easier to bear, but there are still a lot of things to consider before deciding whether to proceed through the process. In the meantime, keep working to pay down your student loans as quickly as possible. Create a strategy for how you’re going to get rid of your debt, and, if you can afford it, add extra payments each month.
And if the whole process still seems completely overwhelming? Don’t feel bad – it is a complicated, confusing situation to find yourself in, especially if you’re looking for the best path possible. In that case, it might be worth partnering with a financial planner who can strategize with you and map out an action plan to follow. This eliminates the guesswork and gives you a clear process to use to better manage your debt as you begin your medical career.