I'm a Resident Physician: Should I Refinance My Student Loans?
If you’re a resident and wondering if you should refinance your student loans, you’re not alone. Although many bloggers for financial planning for physicians highlight the cash back you get when you refinance through their site, you should be very careful before making this decision. There are scenarios when refinancing makes sense, but also times when it doesn’t.
Should I refinance my FEDERAL student loans during residency?
This question used to be easier to answer prior to the introduction of the Revised Pay As You Earn (REPAYE) program. Historically, if you were absolutely certain that you weren’t going for Public Service Loan Forgiveness (PSLF), refinancing your student loans during residency could make a great deal of sense. A lower interest rate meant less money paid over the loan term.
But the government subsidies now available through REPAYE offer low effective interest rates that complicate the situation. Knowing if you should refinance your federal student loans begins with answering a few other questions first.
Am I going for Public Service Loan Forgiveness?
You should avoid refinancing your federal student loans if there is any chance at all that you will be going for PSLF. Refinancing your federal student loans is an act for which there is no going back. You will permanently forfeit the possibility of tax-free loan forgiveness through the PSLF program.
Therefore, even considering private refinancing of your federal student loans should only happen if you are 100% certain that you will not be going for PSLF.
Is REPAYE’s effective interest rate better than that offered by private lenders?
Even if you’re a resident who knows with absolute certainty that you’re not going for PSLF, you should be careful about rushing to refinance. If your loans qualify for Revised Pay As You Earn (REPAYE), the effective rate resulting from unpaid interest forgiveness may be more attractive than the rates being offered by private refinance companies.
For example, if you have a $200,000 unsubsidized federal student loan balance at a 6% interest rate, you will owe $12,000 in interest (!) each year. Let’s say that the loans qualify for REPAYE and your monthly payments are only $100 per month. Each month you pay $100, leaving $900 left over in unpaid interest. Under REPAYE, of the $900 unpaid interest, the government will pay 50%. Therefore $450 is paid off and $450 is left over and added to your accruing interest.
When the year is over, you will pay $1,200 in interest and will accrue $5,400 in unpaid interest. Furthermore, the government will have forgiven $5,400 in interest as well. The percentage of interest you actually paid or will have to pay is only 55% [($1,200+$5,400)/$12,000 = 55%]. By taking this percentage and multiplying it by the original 6% interest rate, we arrive at a 3.3% effective interest rate under REPAYE.
Although it takes a little math to figure out, if your federal student loans qualify under REPAYE, you may already have the lowest effective interest rate available without needing to privately refinance. The other thing you need to consider as well is whether or not it’s worth leaving REPAYE even if a marginally smaller interest rate is available. Perhaps it makes sense to stay in REPAYE simply in order to continue having the ability to qualify for PSLF in case you change your mind in the next few years and decide it might be worth trying to qualify for the program.
Don’t forget that there are other requirements that must be met in order to qualify for PSLF. We’ll address those in a future article.
Should I refinance PRIVATE loans during residency?
If you have private student loans, it’s worth doing some research in order to find out if you can get an offer with a lower interest rate and a manageable repayment plan during residency. Private refinance companies are pretty good at providing you with an estimated rate quickly and painlessly.
I just did a quick Google search and it looks like the most favorable rates are currently right around 2.5%. That’s the advertised rate, of course, so your actual rate may or may not be higher.
Just be sure that you explore multiple lenders to see who will offer you the best rate and repayment plan during the lean years of residency.
Some final thoughts.
Remember, when it comes to refinancing your federal student loans in residency, the first question to answer is whether or not you will be going for PSLF. If you are, refinancing is not for you. If you aren’t sure yet, refinancing is not for you (because once you refinance you can’t go back).
If you are 100% sure that you’re not going for PSLF, refinancing your federal student loans may be an option worth exploring. But you need to make sure that your effective rate under REPAYE (if you qualify for it) isn’t better than what the private refinance companies are offering.
If you’ve checked with multiple lenders and have secured a lower rate than the effective rate under REPAYE, it may be worth proceeding. Just keep in mind that there are other benefits available with federal student loans that you may lose when privately refinancing. Make sure that you consider these factors as well.
Lastly, for those of you with private student loans, it’s always worth checking to see if lower rates and more favorable repayment plans are available.
The content you just read is for informational purposes only. Yes, I’m a financial advisor, but this article really isn’t intended as advice for you specifically. Your unique situation needs to be taken into account, and the ideas presented here may not apply.
So, please make sure you do your due diligence BEFORE implementing anything. Due diligence may include hiring a qualified professional who understands your situation completely and can offer you personalized advice.