Medical school is expensive, and there are plenty of loan forgiveness opportunities for physicians. But refinancing medical school loans may also be a great option for doctors. Here’s how to know when to refinance — and how to do it.
Doctors are one of the most highly-trained and highly-educated professionals compared to other careers. Four years of pre-med in undergrad, four years in medical school and then at least three years in residency is a long haul.
By the end, most physicians are looking at a solid six-figure income but are also well into six-figure student loan debt. With the high income and high student loan debt, it’s important to figure out the best way to pay back medical school loans. Refinancing can often be a good way to attack medical school student loans.
We’re going to take a look at the important factors to consider when refinancing, including how long it should take to pay back refinanced loans, cosigning, fixed vs. variable rates and more.
Physician student loan repayment options
Let’s look at this from a higher level first and examine the best ways we’ve found to attack student loans. This comes from our one-on-one work with nearly 350 physicians totaling more than $100,000,000 in student debt.
There are essentially two ways to attack student loans:
1. Taxable loan forgiveness using an income-driven repayment (IDR) plan for federal loans
For households that owe more than two times their income in student loans (e.g., doctors who owe $400,000 and earn $200,000 or less), selecting an income-driven repayment (IDR) plan like Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE) for 20 to 25 years could be the best option. In the end, the remaining loan balance is forgiven, though taxes will be owed on the forgiven amount.
The idea is to keep student loan payments as low as possible, save up for the tax bomb and work toward other financial goals along the way.
2. Aggressive repayment with refinancing to get a lower interest rate
This usually applies to doctors working in a private practice. If a doctor owes 1.5 times their income in student loans or less (e.g., owe $330,000 or less and make $220,000 or more), their best bet could be to pay off the debt as quickly as possible.
The goal is to pay keep the interest low and eliminate the debt in 10 years or less. This may also include refinancing to get a lower interest rate.
Many doctors might want to go with aggressive repayment. But this depends on their loan balance and whether their employer is a nonprofit or government employer that could make them eligible for Public Service Loan Forgiveness (PSLF).
Medical school loans and PSLF
Career choice and type of employer greatly impacts student loan repayment for doctors. Many doctors in private practice could choose refinancing as a solid option to pay back their loans. But doctors who work in a PSLF-qualifying job (a 501(c)(3) hospital or academic institution) may want to choose the powerful PSLF program to save six figures in loan repayment.
Physicians who are working for a PSLF-qualifying employer or who might end up doing so at some point should take serious caution before refinancing their loans. This is because refinancing permanently pulls the loans out of the federal program and ultimately forfeits any future loan forgiveness. Give refinancing very careful thought if PSLF is in the picture.
Why refinance medical school loans?
The goal is always to spend as little as possible repaying student loans.
If a doctor’s student debt-to-income ratio is low enough, chances are they’ll end up paying off their loans in full if they choose an IDR plan since the payments are based on income, not the loan amount.
High income compared to loans could mean there won’t be any loans left to forgive as the loans would be paid off before the 20 to 25 year repayment term on an IDR.
Let’s say Sara has $300,000 in student loans at 7% interest. She’s been on REPAYE for three years and is now an attending physician making $250,000 in a private practice with projected raises of 3% each year.
As you can see here, if she stays on REPAYE, she’ll end up making $586,731 in total payments and will pay off the loan in full within 20 years, two years before she’d be eligible for taxable loan forgiveness. That’s because her calculated payment on REPAYE is high enough to pay down the loan. Paying off a 7% loan over 20 years is a very expensive way to pay back student loans and should be eliminated as a permanent option.
Even if she switches to PAYE and gets $73,506 of loan forgiveness, her total out-of-pocket cost is going to be $534,663 when you add the estimated payments and taxes due. Not even PAYE provides enough taxable loan forgiveness to make it worth it.
If a physician is going to end up paying their loans off in full anyway, the key is to keep the interest paid to a minimum. In other words, Sara wouldn’t want to stick with a 7% loan if she could do better.
The two main ways to do that would be to refinance to get a lower interest rate or to pay them off quickly.
Let’s say Sara starts looking at the Standard 10-year Plan since staying on one of the income-driven plans is going to be pretty expensive. She’s also considering refinancing down to 5% on these loans.
The Standard Plan is less costly than any of the income-driven plans, but refinancing is even better because it’s going to save her a bunch of money on interest. As you can see, refinancing from 7% to 5% would save about $40,000 in paying back the loans.
By Sara switching from REPAYE to refinancing, her out of pocket cost will go from $586,731 to $390,325. That’s $196,406 in savings — a monstrous number!
Plus, she’d be debt-free in half the time. We would rather Sara keep that extra money in her pocket and be debt-free much sooner. Kind of a no-brainer to refinance here.
Refinancing private medical school loans
Doctors with private medical student loans have very little to no flexibility with repayment.
Since they’re not in the federal program, there’s no opportunity for income-driven repayment or loan forgiveness. Forbearance is usually unavailable as well, except in some cases. The only thing that can be done is to pay back the loan at the terms laid out — or faster.
The good news is these loans can be refinanced if it would be helpful. Any physician with private student loans in the 5% range or higher should take a look at refinancing to see if they can lower their rate.
How fast should a doctor pay back their student loans?
The short answer is as quickly as possible — but for no longer than 10 years.
Most doctors have the income to pay them back much faster than that. But after grueling and intensive training while making next to nothing compared to the amount of hours they work, many feel it’s time to live it up once their salary quadruples.
I’m not here to tell you that doctors shouldn’t increase their lifestyle, but things can go overboard pretty quickly.
Let’s say Sara’s monthly take-home pay goes from $4,000 as a resident to $14,000 as an attending. That’s an extra $10,000 per month that she will have access to.
If she refinance and pays off her $300,000 of student loans in 10 years, then her payment will be $3,182 and she’ll have more than $10,000 per month to live on. But she can pay off her loans in half the time if she puts $5,661 per month toward them and lives off the remaining $8,000 of take-home pay.
Paying off these loans in five years or less is the way to go for Sara. She’d be able to double her monthly income from $4,000 to $8,000 and use the other $6,000 to be student debt-free in half the time.
That’s the best of both worlds: drastically increase her lifestyle and be debt-free in five years! How awesome would that be?
What loan term should a doctor choose?
We’ve established that a refinanced loan should be paid back in 10 years or less, but when should you go shorter than a 10-year term?
The most important factor to consider is what minimum payment you can afford. Pick a monthly payment that’s manageable but not a stretch.
Remember: the shorter the loan term, the higher the payments. Just like in Sara’s example above, a 10-year term at 5% would require a $3,162 monthly payment and a five-year term would be $5,661, about $2,500 more a month.
Why would someone want a higher required payment? Typically, the shorter the loan term, the lower the interest rate. The borrower would be exchanging higher payments for a lower interest rate.
I usually say that if the difference in interest rate is negligible (around 0.25% between a seven-year and a 10-year term, for example), going with the longer term will mean a lower required payment.
A doctor can usually make higher than the minimum payment without penalty, which they should do. But the longer term gives the doctor who’s refinancing greater flexibility, just in case they ever need to go back down to the minimum payments.
Take an aggressive stance to paying back the refinanced loans and as short a term as possible to get the lowest interest rate. But make sure the required payment is affordable.
Fixed vs. variable interest rate?
Banks’ costs go up with rising interest rates, so they’ll offer lower initial interest rates to borrowers who are willing to take on some interest rate risk. That’s what a variable interest rate loan allows the bank to do. If interest rates rise, they can pass on that cost to the borrower.
The end result is that if someone is looking at a 10-year term, the variable rate will almost always be lower than the fixed rate.
The risk for the borrower is that their monthly payments will go up if interest rates do. That’s different than a borrower with a fixed-interest-rate loan because the interest rate and payments won’t change even as interest rates go up.
Generally, a fixed rate is the way to go. If rates go up, you’re locked in at the lower rate for good. If they go down, you can always refi again, depending on the fees.
The less time it takes for someone to pay off their loans, the less impact the interest rate has. Taking a lower variable rate might make sense if someone plans on paying it off in about three years or less. The longer it’s going to take someone to pay off their refinanced loan, the more it’s in their best interest to go with a fixed rate.
I need a cosigner to refinance my student loans — should I do it?
This issue mainly comes up when doctors are in residency or fellowship and want to refinance. Once a doctor becomes an attending physician with a multiple six-figure income, most banks will be willing to let them refinance.
As for doctors in residency and in general, my answer is almost always to never cosign on someone else’s loan or to ask someone to do it for you.
Yes, it could mean a lower interest rate and cost less money to repay the loan. But the additional liability and possible relationship strain just might not be worth it, especially between parents and adult children.
For married couples, it could make more sense, but now both spouses are on the hook for the loan. If an adverse circumstance like death, disability or divorce occur, the cosigner would still be on the hook.
Another option instead of cosigning would be to go on an income-driven plan, possibly REPAYE for the interest subsidy while in residency depending on spousal income. Save up aggressively and wait to refinance until becoming an attending physician.
There’s a bunch of downsides for cosigning (and only some upsides), so avoid it if possible.
A word on medical school loan consolidation
During my consults, there’s a lot of talk and confusion around what consolidation means. That’s because “experts” mix up the terms all the time.
Are refinancing and consolidation the same thing? No!
Consolidation means keeping the loan in the federal program. This keeps the loan eligible for income-driven repayment, possible loan forgiveness, forbearance, etc.
Refinancing is different. It pulls the loans out of the federal program and makes them private loans. Basically, the bank pays off the federal loans, and then you have to pay back the bank. All of the federal loan program perks are gone for good. This is worth it if there’s no loan forgiveness on the table and if there’s a significant savings paying back the loan.
Next time you hear someone is consolidating at a private lender, they mean they’re refinancing. You’ll be the life of the party now that you know the difference.
How to refinance medical school loans
A doctor has determined that refinancing their student loans is the way to go. Here’s how to go about it.
Step 1: Shop around
There are plenty of lenders out there and rates can vary quite a bit, so try out at least two and maybe up to four options to see which one gives you the best terms. We usually see some variance from one lender to another.
I’d suggest applying through our cashback refinancing links to see if you can cut your interest rate. The private lenders offer financial incentives to websites and give the site owner a referral fee.
We’re one of the only companies that gives up some of that referral fee so that the people refinancing can get a really nice cashback bonus. Most other companies don’t offer a bonus and keep the entire fee for themselves.
Step 2: Select the terms you can afford and that will save you money
The most important thing is that you can afford the monthly payment. If you can’t afford the 10-year payment, then maybe refinancing isn’t the way to go right now. Perhaps there’s a better way to pay back your loans.
Select the lowest rate with the lender you feel comfortable with and go for a 10-year term (or shorter) with a fixed interest rate.
Step 3: Go through the formal application process
When you shop around, you’ll be given preliminary offers. The lender will need the entire picture to guarantee your rate. Complete the application, select the loan you want to refinance and make sure the offer is what you were offered initially. If not, try another company. If so, go for it.
Step 4: Start making payments
Once everything has been approved and is processed, your payments will go to the new bank. Make a goal to throw extra money, including bonuses and tax refunds, at these private loans until they’re eliminated for good.
Step 5: Enjoy being student debt-free
It will be such an amazing feeling to have zero student loan debt. Refinancing can be a great way to lower the cost of paying back your loans, and lower cost means keeping more money in your pocket.
Not sure if refinancing is right for you?
Refinancing is permanent. If you’re not sure, you might want an expert to review your loan situation and help you figure out the best way to pay back your loans.
Here at Student Loan Planner, we have advised on over $500,000,000 in loans with over 2,000 one-on-one consults. We’d be happy to help.
If you’re ready to refinance, be sure to use our links to get your cashback bonus.
I handle student loans between $200,000 to $400,000, so that makes me the point person for most people with medical school student loans. Feel free to reach out to me with any questions about this article or refinancing at firstname.lastname@example.org.