Provided By Jake Whipp, MBA, Partner/Regional Director at Larson Financial Group
Have high monthly student loan payments become a burden for you? Even with a comfortable salary, high medical school debt can prohibit you from purchasing a home, starting a family or saving for retirement. With 43 million Americans carrying student debt and the class of 2015 the most indebted ever according to government data, it’s now more important than ever to explore opportunities that will lower your interest rate and save you money over the life of the loan.
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. Defaulting on student loans can be extremely damaging to a borrower’s credit history, so it’s best to evaluate your refinancing options on a proactive basis.
When Does Refinancing Medical School Debt Make Sense?
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 30 years depending on the lender. For borrowers with high balances and high interest rates, refinancing can result in saving thousands of dollars in total payment.
To benefit from refinancing, you’ll need to receive a lower interest rate on your new loans than you have on your existing loan. If your objective is simply to lower your monthly payments by extending the repayment schedule, you can do this with a free federal consolidation loan and preserve the federal protections on your debt. Consolidation is similar to refinancing, but works a little differently. When you consolidate, the federal government gives you the weighted average interest rate of your existing loans and packages them together. There’s a chance this will actually increase your interest rate slightly.
As with refinancing any other kind of debt, the two key factors to consider are interest rates and fees. Getting a co-signer can improve the terms you receive on your new student loan. However, the eligibility requirements for refinancing can be fairly stringent. At the bare minimum, you’ll need a FICO credit score of at least 620 to even be considered. You will also need a stable job, a steady income and a degree from an accepted college or University. 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.
Though refinancing private student loans has been possible for years, institutions only began refinancing federal student loans in 2012. Federal student loans offer unique protections, which can make the decision to refinance difficult if it means forfeiting these protections. For one, federal loans offer a fixed interest rate, meaning that even when interest rates rise your payments wont. Another perk of federal student loans is they have several different income-based repayment (IBR) plans that calculate your monthly payment based on income. These IBR repayment plans are not an option if you refinance a government loan with a private loan.
If you’re a public servant or employed by a 501(C)3, a portion of your federal loan can be forgiven after 10 years of consecutive payments. Private student loans do not qualify for the Public Service Loan Forgiveness Program. Federal student loans also offer up to 3 years of deferment if you are unemployed or have other financial hardships. In contrast, some private lenders offer no forbearance or deferral options. CommonBond is one that will allow a borrower to temporarily postpone making monthly payments in the event of financial hardship. SoFi has a job-hunting team that arranges interviews on behalf of job-seekers and, as with federal loans, a borrower’s debt is forgiven in case of death.
When researching potential refinancing opportunities, you’ll want to inquire upfront about the perks and customer service that the potential lender will offer. If you have private loans, you may want to speak with your current lender to see if they can work with you on a new medical school loan repayment plan. There could be fees associated with switching to another lender to refinance. Some lenders charge an origination fee of 1-2 percent of the total loan amount for processing the new loan. It’s also extremely important to ask if there is any kind of prepayment fee and whether your new interest rate will be fixed or variable. If the interest rate is variable, you should check to make sure it is capped at a certain percent so you aren’t stuck with an unreasonable rate down the road.
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 ensure that the amount you pay every month is one that you can afford now and in the future. One late payment can be all it takes to turn a good credit score into a negative one. 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.
Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.