Why Refinancing During Residency is Usually a Bad Idea

There are big changes happening that will make refinancing as a resident way easier than it’s been in the past. Sofi has declared their intention to start offering residency refinancing close to the rates you’d get as an attending physician.

This brings competition into a market that has long been dominated by Laurel Road, the original player in refinancing student loans during training.

I bet a lot of people will get excited and jump at the chance to cut their federal student loan interest rates. Here’s the problem though, in 90% of cases, refinancing during residency is a terrible decision. If you would want to see the 10% of cases where it’s ok, skip down a bit.

Why Would Personal Finance Websites Get Pumped About Residency Refinancing?

Let me let you under the hood for a moment. Student loan refinancing companies pay partners like me to tell you when and how to get a lower interest rate on your student loans.

A lot of content out there is designed with one goal in mind: 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 getting a lower interest rate. However, a lot of residents will refinance without having a clue what the heck they’re doing.

When you refinance, you permanently lose the option of using the Revised Pay As You Earn Program (REPAYE) and the Public Service Loan Forgiveness program (PSLF).

Refinancing as a resident has a use, but it’s really narrow and I don’t think the blogs out there talking about this are doing justice to how few residents should be doing this.

Why am I So Against Refinancing As a Resident?

There’s growing awareness that the federal REPAYE program comes with significant interest subsidies. The government pays 50% of all the interest that your monthly payment 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 rate. I’ll use those stats in the following example.

An OBGYN resident will be in training for four years. Let’s say she could use the REPAYE program for her 7% student loans or refinance them to a 5%. Here’s what the annual interest charges look like.

residency refinancingThis chart doesn’t even do the REPAYE program justice. Because I’m assuming a refinancing where your loan balance actually goes DOWN. When you refinance as a resident, the interest charges just accrue as if you were on a zero-subsidy plan like PAYE or IBR. The benefit is that they accrue at a lower interest rate.

However, your stated interest rate does not take into account the EFFECTIVE interest rate, which is what you actually pay on student loans in a given year. Here’s what that looks like:

refinance as a resident

Refinancing 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 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 nauseum, PSLF typically wins 10 to 1.

What if you’re confident as an intern that you want to do private practice? There’s no way you work for a not for profit hospital system because you’re going to be a partner making the big bucks. Hence, you listen to people that tell you to refinance.

student loan calculator

What if you work at a hospital that happens to be 501c3 but acts like a private practice in terms of lifestyle and compensation? Consolidation in the healthcare world gets more intense every year. Private practices won’t go away, but consider this.

My fiancée Christine is a urogynecologist attending. When she was looking for jobs, one of the offers came from a 501c3 hospital that paid like a private practice.

If she had over $200,000 of med school loans, she could’ve been on track for huge amounts of loan forgiveness while also getting paid like 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 with refinancing? That’s the bet you’re making when you refinance student loans as a resident.

When Does Residency Refinancing Make Sense Then?

There’s only 2 scenarios where refinancing med school loans as a resident could be a smart decision.

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

The second 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.

There could be others that I haven’t thought of, but these two situations are the only ones I can mathematically defend a refinancing decision while in training.

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 because your monthly payment will be high. If you wanted to file taxes separately because you want to benefit from PSLF, then because the income differential is so large the tax penalties will 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 give your future career plans and combined income.

The Interest Rate Gambler

People have been saying that interest rates are going sky high for a decade now. We certainly said it sometimes when I was a professional bond trader. And guess what? We’ve been wrong.

Timing the market is extremely difficult. I can tell you that experts don’t expect a massive rise in interest rates in the next four or five years. Most folks think it will be a gradual increase.

That could be totally wrong of course. If you wanted to insure against refinancing at much higher rates in the future, then refinancing as a resident could make sense.

Even so, 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 a private practice after training.

Refinancing Residency Loans with Laurel Road

In the past, residency refinancing interest rates haven’t been nearly as low as what you get as an attending physician. If Laurel Road can make you an offer, then it’ll probably be in the 5% to 5.5% range. You’ll get $300 if you refinance by clicking on that link too as a Student Loan Planner reader.

Laurel Road invented the concept of refinancing during residency. As more companies enter the residency refinancing space, I would bet that Laurel Road will adapt to make their offers competitive.

The payments are only $100 a month during residency, and then they 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.

That’s not a guarantee, so if you want to do fellowship then that’s a big gamble that could put significant strain on your budget. I’d have a frank discussion with them about your career plans before deciding to go with them.

Otherwise if you know that you’re just going to do residency and that’s it, then I would at least make sure you check with them.

Sofi Aims to Disrupt Residency Refinancing

If you have student loans, then 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. If you click on that link and go through with their refinancing process, you get $300 cashback.

The best-known company in the student loan refinancing market now wants to get your business early while you’re still in training. They want to do this so badly that they’re promising to lend at rates as low as 0.25% above what they give out to attending physicians.

To be honest, I’ll believe these low interest rates when I see them. If they actually do this starting in October of 2017 as they say, then it would be a big disruption of the refinancing space as folks could get offers starting with a 4 instead of 5.

Payments during training would be $100 a month as well. You get up to 4 years of these payments, so any fellowship plans would have to incorporated in that low payment period. The fewer years of $100 a month payments you need, the better the interest rate could be.

I think Sofi is doing this because they desire to capture high income customers to offer them other products like mortgages, wealth management, and insurance. That said, you don’t have to bite when they position you this stuff, so take the low interest rate if they offer it (and it makes sense overall obviously).

Default Resident Loan Repayment: REPAYE Until Proven Otherwise

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

If you fit the two narrow scenarios I outlined in this article, then go ahead and refinance to a lower rate and pay it down as fast as you can.

I Can Help Figure Out Med School Loans

If you’re nervous as to what to do in your specific situation, I’ve advised many doctors on how to pick a repayment strategy. I’d love to hear more about your loan details. I’ll let you know if I think I can help.

Just shoot me a note at travis@studentloanplanner.com or use the contact button below.

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