The following article is written and provided by Brandon Barfield, Co-Founder and Regional Director of Doctors Without Quarters, LLC. Student loan related services are provided by Doctors Without Quarters, LLC, an affiliate of Larson Financial Group, LLC.
You’re probably aware that Student Loan Refinancing is a hot topic for medical graduates right now. It has been in the news, lenders are broadly marketing and many physicians have done it over the past few years. Indeed, available rates can be much lower than the federal loan rates physicians borrowed at over the past decade. Even for a doctor who has taken little if any college level mathematics courses, the prospect of refinancing to lower the interest costs on student loans sounds like a no-brainer. However, only certain borrowers will qualify and there are several angles you should carefully consider. Below are some important considerations every borrower should understand before moving forward.
How Does Refinancing Work
Student loan refinancing is when a private lender buys out your existing federal and/or private student loans and issues you a new loan with a different interest rate determined by the market conditions at the time. The payment schedule for this new loan can range from 5 to 20 years depending on the lender. For borrowers with high balances and high interest rates, refinancing can result in saving tens of thousands of dollars in total payments.1
Let’s start by talking about what you give up when you refinance, namely your federal benefits. By paying off your federal loans with a private loan, you lose your status as a federal borrower and forfeit all federal loan benefits. The Federal Income Driven Repayment plans (IBR, PAYE, REPAYE) offer significant savings to many early career physicians. They offer low payments, interest subsidies and reductions and no interest capitalization while debt-to-income (DTI) is high.
PSLF is available to those who are directly employed by government affiliated institutions (including state teaching hospitals) as well as 501(c)3 non-profits. If you are working in this capacity, or considering it, you’ll want to learn more about this opportunity before you refinance. This includes most residents and fellows, and we will tell you how to assess those options at the end of the article. If you are already practicing in a for-profit environment, then PSLF is likely off the table at this point and refinancing is a good alternative to lock in some savings.2
To benefit from refinancing, you’ll need to receive a lower interest rate on your new loans than you have on your existing loan. You may also benefit by refinancing a variable rate loan over to a fixed, even if the current interest rates are similar. The rates offered by the lenders will be driven by your credit profile which is ultimately summed up by your FICO score and DTI ratio. At the bare minimum, you’ll need a FICO credit score of at least 620 to even be considered. For the “top tier” rates, 720 is often the magic number you need to surpass. You will also need a stable job, a steady income and a degree from an accepted college or university.3
Each lender has different criteria, so it’s best to shop around for a provider that will offer you the best rate and support for your needs. That gets tricky, however, as most lenders advertise the same range of rates for student loan refinance, and you can’t see an actual rate offer until you submit an application and they pull a “hard” inquiry on your credit report. Too many inquires will actually begin to lower your FICO score. Getting a co-signer can sometimes improve your profile, but not always. Many professionals outside of the medical sector (such as parents) may not have the necessary income to make payments on large medical school loan portfolios, even if they have a high FICO. So adding them to the profile may not help. Late payment history on your credit report can also impact your approval and offer.4
Choosing a Lender
Though refinancing private student loans has been possible for years, institutions only began refinancing federal student loans for physicians in the last few years. When researching potential refinancing opportunities, you’ll want to look for lenders who understand the medical profession and have designed their products with key benefits. One such benefit is the ability to discharge your loan in the event of death or permanent disability. This is a federal loan benefit that most physicians highly value, and some private lenders offer it as well.5
The ability to not make payments during times of economic hardship is also a useful feature. Fees are probably the greatest concern. Various fees, particularly origination fees, can really diminish your savings. But you will be happy to know that some lenders, those who are serious about working with physicians, offer to refinance with no fees whatsoever.
Fixed Vs. Variable
Most lenders offer both fixed and variable rate loans. Fixed rate loans allow you to lock in a rate for the life of the loan. On variable rate loans, the effective interest rate will rise and fall with market conditions. Should rates rise dramatically, you risk potentially ending up with a higher rate than you had on the federal loans.3
Given the historically low rates that we are currently experiencing, locking in a low fixed rate is probably the best opportunity for most borrowers at this time. That said, variable rates can benefit borrowers with shorter time horizons to pay down debt, where the risk of rising rates is lower. Borrowers looking to pay off their loans in less than three years may want to explore variable rate options in order to maximize their savings potential.
The Bottom Line
Medical school debt lends itself particularly well to restructuring for a better deal. However, there are several caveats to consider which is why it is highly recommended that you speak to an advisor with knowledge of your individual circumstances before refinancing.
The ultimate objective is to reduce the overall cost of repaying your loans, while maintaining a payment that you can afford without sacrificing your other financial priorities. Exploring refinance opportunities on a proactive basis can afford you the opportunity to get a head start on paying down your medical school debt and planning for your financial future.
How We Can Help
LFG recently partnered with Doctors Without Quarters (DWOQ), which specializes in helping physicians and other healthcare professionals manage their debt. As an advocate to borrowers, and beholden to no one lender or servicer, DWOQ intimately understands the refinancing marketplace for doctors. They offer a free refinancing suitability analysis to physicians who are interested in pursuing this opportunity. Their expert team of loan advisors will consider your career path, financial goals, loan portfolio and credit profile to help you determine if refinancing is a good fit. If so, they will serve as your advocate to help you shop the marketplace, streamline the application process, broker the best deal and lock in a refinance that meets your needs and maximizes your savings potential. There is no charge for this service. If you are interested in the federal repayment and forgiveness programs, they can also assist in this area by offering thorough loan consultations during which a loan advisor will explain the programs in-depth and conduct a detailed analysis to show exactly what payments and savings would look like. To learn more, contact your LFG Advisor, or visit DWOQ’s website at www.DWOQ.com .
- Ashley Eneriz, “Student Loan Refinancing: The Pros and Cons” (May 2017). http://www.investopedia.com/articles/personal-finance/011916/student-loan-refinancing-pros-and-cons.asp
- Bill Nelson, “Here’s What You Need to Know About PSLF” (December 2016) http://www.investopedia.com/advisor-network/articles/122816/heres-what-you-need-know-about-pslf/
- LendKey Technologies, Inc, “Student Loan Refinancing: Variable vs Fixed Rate” http://www.lendkey.com/resources/student-loan-refinancing-variable-vs-fixed-rate/
- Divya Raghavan, “How Student Loans Affect Your Credit Score” (July 2014). http://money.usnews.com/money/blogs/my-money/2014/07/07/how-student-loans-affectyour-credit-score
- National Consumer Law Center, Inc, “Disability and Death Discharges” http://www.studentloanborrowerassistance.org/loan-cancellation/disability-and-death/
Loan repayment advice and services provided through Doctors Without Quarters, LLC, an affiliate of Larson Financial Group, LLC. Additional advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. The information set forth in this writing is not intended to be investment or tax advice. Please consult the appropriate professional regarding your tax planning needs.