Refinancing is a common strategy for paying off medical school debt. Whether you’re a doctor in residency, an attending physician or a fellow, you need to know your medical school loan refinance options and how they affect your finances.
When you refinance, a new loan is created with a private lender. This lender can be a bank, credit union or financial institution. You can use a company, like Credible, to look at several lender options at once. You’d only refinance if you could get a lower interest rate — and even then, many doctors with federal loans might want to avoid refinancing due to some major drawbacks.
Student Loan Planner estimates that refinancing medical school loans is the right choice for only 20% to 30% of physicians. The rest would come out ahead by going for federal loan forgiveness. Be sure refinancing is the right move before taking steps to switch your loans to a private lender.
Before you refinance medical student loans
Before tackling your student loans, you have to figure out what kind of loans you have. The average medical student carries six figures of student loan debt. It’s not uncommon to have a combination of federal loans and private loans.
You can check what federal student loans you have by logging into the National Student Loan Data System (NSLDS). Any loan listed in this database is federal debt that you still owe. And if you ask for a credit report from AnnualCreditReport.com, you can download a free summary of your entire credit history, including any private student loans you owe.
You might have taken out medical-specific loans as well. These could be housed under the Health Resources and Services Administration (HRSA). These loans won’t always show up on your credit report or in the NSLDS. If you have questions about these loans or need to review which ones you have, contact the HRSA, directly.
Once you have all of your student loans mapped out, you should also be aware of your credit score. If you choose to refinance, having a healthy credit history will help you get a lower interest rate.
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 more than 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).
How refinancing medical student loans can cost you
Refinancing might not be the best path for federal student loans. This is especially true if you’re currently in residency. This is because refinancing means your loans will no longer be in the federal system, you’re giving up benefits and flexible options forever. These include:
- Income-driven repayment (IDR) plans
- Extended forbearance or deferment in periods of hardship
- Federal loan forgiveness programs, such as the tax-free Public Service Loan Forgiveness (PSLF) program
PSLF, in a particular, is an amazing student loan forgiveness program that can wipe out all your federal loans in 10 years. You can enter PSLF as soon as you begin your residency training. This way, you can be on your path to forgiveness before you’re an attending physician.
PSLF is also a tax-free forgiveness program. This is especially important for anyone with large amounts of student loan debt. IDR forgiveness, on the other hand, treats all forgiven student loan debt as income, so you have to pay taxes. You’ll owe a hefty amount after you reach forgiveness, whereas PSLF lets you off the hook with Uncle Sam.
While on PSLF, you’re required to sign up for an IDR plan. Whether you’re in residency or already an attending physician, sign up for a plan that offers the lowest monthly payment. Your student loan balance will grow, but since you’re pursuing forgiveness after a few years, it shouldn’t be an issue.
Two payment options to consider are Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). Each of these repayment plans takes 10% of your discretionary income to calculate your monthly payment. After signing up for either PAYE or REPAYE, follow up on all needed paperwork for PSLF, then plan on forgiveness in 10 years.
When does it make sense to refinance medical student loans?
There are a few scenarios where student loan refinancing might make sense for your medical school loans. Let’s take a look.
1. You don’t need PSLF or a federal loan forgiveness program
Not everyone with medical student loans is eligible for loan forgiveness. For example, if you have private student loans, you’re ineligible.
If you complete your residency at a for-profit hospital, you’ll set yourself back about five years on PSLF. You may decide to aggressively pay your medical student loans off instead. Know that if you refinance federal student loans, you’re giving up a lot of options. If you’re unsure and still in residency, don’t refinance. If you are sure, then you can refinance medical student loans.
2. You plan to work in the private sector
If you plan to work in the private sector — or already do — this means your employer doesn’t qualify as a 501(c)(3) not-for-profit organization. In this case, your situation is very straightforward.
If you have a good credit score, you should refinance your medical student loans and get rid of them as fast as you can. Because you won’t qualify for any of the federal forgiveness programs, it’s a no-brainer to refinance and save interest over the lives of your loans.
Related: How to start a medical practice
3. You have high-interest private student 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.
4. You have a high-income-earning spouse
If you’re married to a high-income-earning spouse, your payments on REPAYE could be very steep. You’ll want to run the numbers on this using a student loan repayment calculator. Look at what your monthly payment would be if you filed taxes jointly versus separately. If you’re in residency and make less, filing separately will lower your payment. However, you’ll pay a large amount when you file your federal tax return.
If you’re sure you can’t benefit from a forgiveness program like PSLF because your spouse makes a high income, then it would make sense to refinance medical school loans.
The bottom line? Refinance medical school loans if you’re confident in these scenarios:
- You can meet the financial obligation of making your monthly payments after student loan refinancing.
- Your new employer is not a not-for-profit 501(c)(3).
- You can’t or don’t want to go for loan forgiveness.
- You have private student loans and a healthy credit score.
There are many companies out there that refinance medical school loans, and each will have its own offers. Look at all your refinancing options before making a decision.
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.
Should you consolidate your medical school loans?
During our 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 a consolidation loan at a private lender, they mean they’re refinancing.
Options to refinance your medical school loans
Your loans’ interest rates are one of the first considerations when refinancing your medical school loans. Most lenders offer you fixed- and variable-rate options. Fixed-rate loans never increase (or decrease). Variable-rate loans are tied to short-term interest rates that fluctuate with the market. Usually, variable rates start low and can increase (or decrease) over time.
If you’re planning to pay off your medical school loans as quickly as possible — say, five to seven years — then the variable rate option could be a good choice. Your loans will be paid off before they balloon to a higher interest rate. But if you want the predictability of having a set monthly payment and knowing your rate from here on out, then choose a fixed rate to refinance your medical school loans.
When looking at lenders for student loan refinancing, consider what benefits they can offer you other than a low rate. For example, some lenders offer unemployment benefits. Below are three strong lending options for refinancing medical school loans.
Laurel Road invented resident and fellow refinancing and typically offers competitive rates. The lender offers reduced payments as low as $100 per month for medical and dental residents. Notably, interest accrued during this period does not capitalize. If you’re looking for a relatively low required payment with significant interest rate savings, Laurel Road could be a great fit.
Laurel Road doesn’t charge any application or origination fees. There are no prepayment penalties either. You can get up to a $1,250 bonus or 0.25% interest rate discount with Laurel Road by using our link. Student Loan Planner negotiated an exclusive tiered cash bonus with Laurel Road, so the higher your refinancing amount, the larger your cash-back bonus. Learn more about Laurel Road in our full review.
SoFi is another solid option for medical student loan refinancing, especially during residency. Like Laurel Road, SoFi offers $100 medical resident payments for up to four years. However, it should be noted that the interest that accrues during residency will capitalize when regular monthly payments begin.
Both fixed- and variable-rate loans are available for SoFi’s medical student loan refinance product. There are no fees and borrowers can choose from a variety of repayment terms from five to 20 years. Plus, SoFi offers unemployment protection and provides career support. Get up to a $1,000 bonus through our SoFi link. For more information about this lender, check out our SoFi refinancing review.
Laurel Road and SoFi are two great student loan refinance options for medical residents. But Earnest could a good choice for attending physicians.
Earnest’s underwriting algorithms look at more than just your credit score (such as your employment and financial accounts) when determining eligibility and rates. So if you’re already earning a solid income in the medical field, Earnest may be willing to offer you a lower interest rate than other lenders.
In addition to its comprehensive application process, Earnest offers a lot of payment flexibility. You’ll have 180 repayment terms to choose from (between 5-20 years) and can even skip 1 payment per year without penalty. Plus, borrowers who refinance $100,000+ can get a $1000 bonus when refinancing with Earnest ($500 Earnest bonus + $500 from Student Loan Planner). See our Earnest Student Loan Refinance review.
You can also shop for refinancing lenders even if you refinanced in the past. Compare refinancing options for a better interest rate or loan term to help you wipe out medical school loan debt.
Ask us if refinancing medical school loans is right for you
When you refinance your medical school loans, it’s permanent. If you’re still unsure about your student loan refinancing options or want professional help to crunch the numbers, reach out to our consultants today. We specialize in helping individuals with large sums of student loan debt. We’ll look at your forgiveness options and help you create a student loan payoff plan for wherever you’re at with medical school.