Why Resident Student Loan Refinancing is Usually a Bad Idea

Over the past few years, the resident student loan refinancing space has seen big changes. It's way easier to qualify for refinancing during residency than it’s ever been.

At one time, Laurel Road was one of the few lending companies that offered student loan refinancing to med school grads during residency or fellowship training. But a few years ago, Splash Financial joined the fray and then SoFi did as well.

Each of these lenders accepts low payments during residency while also claiming to offer refinancing rates that are close to what you’d get as an attending physician.

Many people may get excited and jump at the chance to cut their student loan interest rates. Here’s the problem, though. In the vast majority of cases, refinancing during residency is a terrible decision. If you would want to see the minority of cases where it’s okay, keep reading.

Why would personal finance websites get pumped about residency refinancing?

Let me show you a peek under the hood for a moment. Student loan refinance companies pay partners like me to tell you when and how to get a lower fixed or variable interest rate on your student loans.

A lot of content out there is designed with one goal in mind: To get paid. The only way that happens is if you click on a link and eventually decide to move your loans to a private lender that you discovered while reading their website.

Obviously, you’d only take that action as a reader if you were saving money by refinancing to a lower interest rate. However, a lot of residents will refinance their medical student loans without having a clue about what the heck they’re doing.

When you refinance to a new loan, you permanently lose eligibility to join an Income-Driven Repayment (IDR) plan or pursue a federal forgiveness program like Public Service Loan Forgiveness (PSLF).

Refinancing as a resident or fellow has a use, but it’s very narrow. I don’t think the blogs out there talking about resident refinancing are doing justice to how few residents with medical school loans should be doing this.

What are the risks of resident student loan refinancing?

Each of the federal IDR plans except for the Income-Contingent Repayment Plan (ICR) offer some interest subsidies. But the plan that offers the most generous repayment terms is the REPAYE program.

With REPAYE, the government pays 50% of all the interest that your monthly payment amount doesn’t cover each month. If you owe $250,000 and make $60,000 a year, then you could see that subsidy approach 50% of the stated interest rate.

Plus, unpaid interest does not capitalize on an IDR plan as long as you remain on it. Instead, interest simply continues to be charged on your outstanding principal.

So, when you combine these two benefits, you'll discover that your effective interest rate on an IDR plan can actually go down over time. Learn more about how this works. This is a unique phenomenon that simply can't happen with a private refinance loan.

Refinancing student loans during residency means kissing tax-free loan forgiveness goodbye

I hear from very smart people all the time, “I just want to give up on the PSLF program because FedLoan sucks and I want to get out of student loan debt.” That's a common mistake made in residency. The problem is if you look at projected savings with PSLF vs refinancing as I have ad nauseam, PSLF typically wins 10 to one.

Related: Most FedLoan Accounts are Going to MOHELA

What if you’re confident as an intern that you want to do private practice, so you listen to people who tell you to refinance? It's important to remember that consolidation in the healthcare world gets more intense every year. No, private practices won’t go away, but consider this.

My wife Christine is a urogynecologist. When she was looking for jobs, one of the offers came from a nonprofit hospital that paid like a private practice. If she had over $200,000 of medical school debt, she could’ve been on track for huge amounts of student loan forgiveness while also getting paid a lot more than the typical academic salaries out there.

Are you sure enough about the tax status of your future employer that you’d give up a projected $200,000 benefit under PSLF for $20,000 in interest savings over the life of the loan with refinancing? That’s the risk you’re making when you refinance student loans as a resident.

When does residency refinancing make sense?

There are only three scenarios where refinancing med school loans as a resident could be a smart decision. The first is if you have private student loans.

The second is if you’re married to a very high-income earner during residency whose student loan balance is a fraction of their salary.

The third is if you have a really high-risk tolerance and want to gamble that interest rates are going to be drastically higher by the time you finish training.

These three situations are the only ones in which I can mathematically defend resident student loan refinancing.

The private student loan borrower

If you took out private student loans to help pay for med school, then none of the downsides of refinancing federal loans apply to you. You already don't qualify for federal benefits which makes the decision much easier.

Let me put it simply: If you have private student loans and you can qualify for an interest rate reduction by refinancing, then you should do it.

Since fixed and variable rates are so low right now, you most likely can get a lower annual percentage rate (APR) than what you were offered during med school as long as you have a solid credit score. Compare lender rates, loan terms, and bonus offers here.

The high-income-earning spouse

If your husband or wife makes a lot more than you do as a resident, then you will receive little to no interest subsidies on the REPAYE program and your monthly payment will be high.

With the PAYE plan, you could file taxes separately to qualify for lower student loan payments. But with a large spousal income differential, the tax penalties are likely to be substantial.

Hence, it’s a perfectly rational move to refinance in this situation as long as you’ve run the numbers (or hired someone like me to do it for you) and are confident that PSLF can’t help you out given your future career plans and combined income.

The interest rate gambler

People have been saying that interest rates are soon going to skyrocket for a decade now. We certainly said it sometimes when I was a professional bond trader. And guess what? We were wrong.

Timing interest rates is notoriously difficult. But things are a little easier to predict right now because the Fed went on record saying that there are no immediate plans to raise the emergency rates that it set in response to the COVID-19 crisis.

Yes, rates are at all-time lows right now which is great for refinancing. But variable and fixed interest rates are likely to stay depressed until at least 2022. Once rates begin to rise, it will likely be a gradual change.

Remember, giving up the potential of PSLF is a bigger risk than paying higher interest costs. This is true for everyone except those who know for certain that they're going to private practice after training.

Where to find resident student loan refinancing

Do you fit into one of the categories of student loan borrowers described above? If so, below are three lenders that offer strong residency refinancing products.

Each of these lenders charges no origination fees, application fees or prepayment penalties. You'll also have the opportunity with each to check rates with only a soft credit pull of your credit profile.

Refi option #1: Laurel Road

Laurel Road invented the concept of refinancing during residency. The payments are only $100 a month during residency, and then jump up when you become an attending.

Note that they will not keep payments low during fellowship unless you apply with them for an extension of the reduced payments and get approval.

Laurel Road offers a 0.25% discount for borrowers who sign up for automatic payments. Also, Student Loan Planner® readers can get a cash bonus of up to $1,050 by using our link.

Refi option #2: SoFi

If you have student loans, you almost certainly know about SoFi. Most of my clients tell me that they receive something in the mail from them at least once a month trying to get them to refinance student loans.

The best-known company in the student loan refinancing market wants to get your business early while you’re still in training. Payments during training are $100 a month with the SoFi Medical Resident Refinance loan.

You get up to seven years of these payments, so any fellowship plans would have to be incorporated in that low payment period. The fewer years of $100 a month payments you need, the better the interest rate could be.

Like Laurel Road, SoFi offers a 0.25% autopay discount. And if you apply for residency refinancing using our link, you can get a cash bonus of up to $500.

Refi option #3: Splash Financial

Splash matches Laurel Road and SoFi by also accepting payments as low as $100 during your residency or fellowship training. Plus, you'll get an additional six months after your training is completed before regular payments begin. The maximum residency deferment period is 84 months.

The Splash team assures me that they're trying to beat out the industry leaders in every case. So, I would definitely give them a shot if you're shopping around. They also only require you to be matched to a residency program with a med school diploma in hand to refinance.

You can get $1,000 cashback by using this Splash Financial link if you refinance more than $100,000. By refinancing loan amounts of $50,000 to $99,000, you can get a $300 cash bonus.

We can help you figure out your med school loans

If you’re a resident with federal student loans, you should probably use REPAYE even if your plan is to later pay back your loans through refinancing.

But if you fit the three narrow scenarios I outlined in this article, then go ahead and refinance with whichever lender offers you the lowest rate and pay it down as fast as you can.

Feel nervous as to what to do in your specific situation? Our Student Loan advisors have helped many doctors pick the right repayment strategy. We'd love to hear more about your loan details. Book a consultation here.