By Dr. James M. Dahle, WCI Founder
Proper student loan management for doctors usually includes student loan refinancing at some point. Private student loans can be refinanced right after graduation from school and federal student loans are usually refinanced upon completing training for anyone not pursuing Income-Driven Repayment (IDR) forgiveness or Public Service Loan Forgiveness (PSLF). There are a lot of Pros to refinancing, but there are some Cons too. Make sure you understand both so you can manage your loans like an expert. If you don't want to become an expert, we suggest hiring one such as Andrew Paulson at StudentLoanAdvice.com.
Pros of Student Loan Refinancing
First, let's tackle the Pros—the reasons why you should consider refinancing.
#1 Lower Interest Rate
The main reason most people refinance is to get a lower interest rate. Medical school loans can range from as little as five percent to as much as 10 percent. If you can refinance a $300,000 loan from 8% to 3%, you just saved $15,000 per year in interest. That money can be used to improve your lifestyle, invested for your future, or simply redirected at the principal of the loan to pay it off faster. Since there are no fees to refinance and it requires little hassle, many people will refinance multiple times, basically any time they can get a lower interest rate because rates dropped, their credit score went up, or their debt to income ratio improved. There are no prepayment penalties, so refinancing does not have to lengthen the amount of time you are indebted unless you want to lengthen it.
#2 A Single Loan Payment
Let's be honest, dealing with student loans is a major hassle. Upon graduation, a doctor may have a dozen or more separate loans. The simple act of combining them into a single loan reduces stress and hassle. Refinancing will do that for you. Obviously, you can consolidate your federal loans into a single federal loan without refinancing into a private loan, but with consolidation, you get the weighted average interest rate of all of your loans, rounded UP to the nearest 1/8th of a point. With refinancing, you usually get a significantly lower interest rate.
#3 Different Terms
One of the best parts of refinancing is you often get a number of different terms to choose from. You may be able to choose between the lower interest rate available with a variable rate loan or the guarantees of a fixed-rate loan. You can choose from a 5, 10, 15, or 20-year loan. At least one lender, Earnest, allows you to choose the length of your loan even more precisely.
#4 Lower Payments and Better Cash Flow
While I'm a big fan of paying off your student loans as quickly as you can by making very large payments each month, one benefit of refinancing is that you can combine the effects of a lower interest rate and a longer term in order to get a much lower payment, improving cash flow in order to invest for your future, improve your lifestyle, or pay off other debts.
#5 Interest Rates Can Fall
When deciding between variable and fixed-rate loans, a lot of people forget that there are three things interest rates can do—stay the same, go up, or go down. When rates go down, variable rate loans really perform well. A number of white coat investors that had refinanced into the 2% or 3% range subsequently had their interest rates fall under 1% when rates went down. That's not going to happen if you don't refinance into a variable loan.
#6 Cash Back
If you refinance your student loans through the White Coat Investor refinancing links, you get an even better deal than you can get going directly to the lenders. You get hundreds of dollars of cash back (ranging from $300 to as much as $1,500) just for refinancing. I hope you use that money to pay down your loan even faster, but it's yours to do with as you please. And if you refinance again with a new company, you get another cash bonus. Some white coat investors have received three or four cash bonuses by the time they paid off their student loans. Check out the current deals in the chart below!
Variable 4.99% - 8.99% APR
Fixed 3.74% - 8.99% APR
^Up to 0.75% off rates
Variable 3.99%-11.67% APR
Fixed 3.99%-11.87% APR
^Best Rate Guarantee
† Bonus includes cash rebates and value of free course. Borrowers who refinance more than $60,000 in student loans using the WCI links will be enrolled in The White Coat Investor’s flagship course, Fire Your Financial Advisor for free ($799 value). Borrowers will still receive the amazing cash rebates that WCI has negotiated with each lender. Offer valid for loan applications submitted from May 1, 2021 through June 30, 2023. Free course must be claimed within 90 days of loan disbursement. To claim free course enrollment, visit https://www.whitecoatinvestor.com/RefiBonus.
#7 Special Deals
If you refinance through those links above before October 31, 2021, you get the flagship WCI online course Fire Your Financial Advisor absolutely free, a $799 value. Other deals are also available only to those who refinance. For example, right now one of our lending partners, CommonBond, is offering a 0% interest rate for the first six months, extending well past the September 30th deadline for the federal student loan holiday. SoFi is also offering 0%, but just until October 1st, matching the federal deal. However, SoFI is also offering a rate match guarantee. If you find a lower rate elsewhere, they will match it, so really you can get 0% with any company until the end of the student loan holiday.
#8 Better Service
Federal student loan servicing companies like Fedloan, Great Lakes, Navient, Mohela, and Nelnet are not exactly known for providing excellent customer service. Long waits on the phone, poor communication, and even wrong answers are the norm. When you refinance your loan with a private lender, you move away from government bureaucracy and toward private enterprise that actually has to compete for and earn your business. Borrowers routinely report much better customer service from the private companies.
When Hernan Cortez landed in the New World intent on conquering the Aztecs, he reportedly burned the boats he arrived in. This sent a very real psychological message to his men that they had to succeed in their quest. Likewise, when you refinance your student loans you are committing to paying them off yourself. They will no longer be eligible for PSLF and IDR forgiveness. This may help you to focus on crushing them and getting them out of your life ASAP since waffling around hoping the taxpayer takes care of them for you is no longer an option.
#10 You Can Benefit from a Cosigner
Sometimes you cannot refinance your student loans without a cosigner, but other times the presence of a cosigner actually helps you get a better interest rate or terms. While I don't necessarily advocate cosigning for anyone else's loans, if you have a really good cosigner you will have to refinance to take advantage.
#11 Release a Cosigner
If you already have a student loan with a cosigner, when you refinance it you can often release the cosigner from their obligation because your credit score or debt to income ratio has improved since you took out the original loan. This can be a real benefit to your cosigner if something happens to your income while paying off the new loan.
#12 Taxpayer Gets Paid Back
Student loan refinancing is a win-win-win-win scenario. You get a lower interest rate and cash back. The lender gets your business. If you go through the WCI affiliate links, we make money. But there is another winner—the US taxpayer. When you refinance, the taxpayer is paid back and now that money can be loaned out to another needy student.
#13 No Legislative Risk
Many of those pursuing forgiveness via PSLF or an IDR program worry that Fedloans, the Department of Education, or even Congress will change the program and they'll get hosed. Once you refinance, that worry goes away completely!
#14 No Golden Handcuffs
In order to obtain PSLF, you must work full-time as an employee of a non-profit or government agency. However, life changes and sometimes people want to cut back on work, change employers, or even move to a new town. That's not an option if you HAVE to stick with your current job for a few more years in order to get PSLF. You've got golden handcuffs. Well, those go away if you refinance.
#15 Pay Off Student Loans Faster
Finally, most of those who refinance pay off their student loans faster. This is likely due to a combination of a lower interest rate, cash back, and increased focus on the loan. Living like a resident for 2-5 years while paying off your student loans usually results in being out of debt even faster than those who are going for PSLF. Those folks, even if they manage the process perfectly, usually require 3-7 years after training to be free of their debt. Refinancers are often out of debt within just a couple of years.
Cons of Student Loan Refinancing
There are downsides to refinancing you should be aware of prior to doing it. The main ones involve loss of access to federal student loan associated programs.
#1 No More Public Service Loan Forgiveness
If you refinance your federal direct loans, they are now private loans and are no longer eligible for PSLF. Most people who are not working for a non-profit don't think that is a big deal, but remember that something like 50% of docs change jobs in their first two years out of training. What if you take a new job that is actually now eligible for PSLF?
#2 No IDR Forgiveness
IDR forgiveness is not nearly as attractive as PSLF. PSLF provides tax-free forgiveness after 10 years. The IDR programs provide fully taxable forgiveness after 20-25 years. However, IDR forgiveness is still a reasonable option for anyone not willing to work for a 501(c)(3) with a Debt To Income (DTI) ratio of 1.5-2.5+. That option goes away if you refinance your federal loans.
#3 No Income-Driven Payments
IDR payments are an absolute necessity for residents and fellows with large debt burdens. After training, most docs no longer need them, especially if they're “living like a resident” and trying to pay off their student loans quickly. However, some docs may still find IDR payments to be useful due to:
- Having a better use for their money,
- Leaving medicine,
- Cutting back to part-time,
- Having a particularly bad DTI ratio, or
- Other life circumstances.
If they refinance, they lose the ability to reduce payments when their income goes down.
#4 No More Student Loan Holidays
You know who really regretted refinancing their federal loans? Those who did so in February 2020. When March 2020 rolled around and the government announced the student loan holiday with $0 payments and 0% interest, they were left feeling like schmucks despite doing what was “the right thing” a month earlier. It's possible the holiday could be extended, there could be a new holiday, or that $10,000 or even $50,000 of student loans could be forgiven for everyone. While all of those things seem very unlikely, the likelihood isn't zero, and this is a risk of refinancing.
#5 No REPAYE Subsidy
If you are enrolled in the REPAYE IDR, half of any unpaid interest is waived each month. This lowers the effective interest rate for many residents, fellows, and others with a relatively high DTI ratio. Once you refinance, you are no longer eligible for REPAYE or this subsidy.
#6 Different Consequences for Death
If you die while owing federal student loans, they are forgiven. If you refinance them into private loans, they are also often completely forgiven. However, sometimes they are assessed to your estate, which in reality means your spouse, kids, favorite charities, or other heirs end up getting less money than they otherwise would. Since money is fungible, in reality, they end up paying off your student loans. Make sure you read the fine print on your new loans to know if this is a risk you are taking on when refinancing. If you are, that doesn't necessarily mean you should not refinance. It simply means you need to buy a little larger term life insurance policy to cover that possibility. The truth is that a short-term life insurance policy in the amount of your loans is likely dramatically cheaper than the extra interest you would be saving by keeping your federal loans. A healthy 25-year-old female can buy a 5 year, $300,000 term life insurance policy for just $125 a year. Refinancing that same debt from 8% to 3% will save $15,000 a year. If this is the only reason you're not refinancing, that's likely a mistake.
#7 Different Consequences for Disability
Likewise, federal student loans are discharged in the event of a permanent disability. Many private loans have a similar policy, but not all of them. Again, you need to read the fine print. If your selected lender does not discharge for permanent disability, consider buying a little extra disability insurance to cover that potential outcome. While disability insurance is more expensive than term life insurance, a healthy 25-year-old is still only looking at perhaps $1,500 a year for a disability policy that would take care of a $300,000 student loan. That's only 1/10th the amount of interest you would save by refinancing.
#8 Shorter Forbearance Period
You can go into forbearance for up to three years with a federal student loan. Interest still accrues, but at least you don't have to make the payments. Forbearance offered by private lenders, if any, is usually limited to a year.
#9 You Have to Qualify
The Department of Education will loan you money if you have a medical school acceptance and a pulse. That's not the case for private lenders. You actually have to qualify and appear as though you are likely to pay them back before they will refinance you. That means you need a decent credit score, a solid income, and a reasonable debt to income ratio. There are no hard numbers here, but we're talking about:
- A credit score of 700+,
- A six-figure income, and
- A DTI (measured by total debt payments divided by total income) of 28%.
Without those, a doctor is unlikely to be refinanced at all.
#10 Your Credit, Income, and Ratios Affect Your Options and Interest Rate
Even if you are able to qualify, your credit score, income, and DTI ratio affect what options and interest rates you are offered. Not every doctor is offered the same deal. Your friend might be offered a 5-year variable loan at 2%, but the best you might be able to get is a 10-year fixed loan at 5%. Tough luck.
#11 Might Need a Cosigner
Cosigners show up on both the Pro and the Con list, but they're more of a Con if you have to get a cosigner to get refinanced and you can't find one. Even if you do end up using a cosigner, they're on the hook for your debt too, and that's definitely a Con to them!
#12 Can't Switch Payment Plans
While there is great flexibility in payment plans when you are signing your refinancing paperwork, once you have signed it, you are locked into that payment plan until you have paid off the loan or refinanced it. If you have federal loans, you can switch relatively easily between IBR, PAYE, REPAYE, and other payment plans.
#13 Interest Rates Can Rise with Variable Loans
I'm a big fan of variable rates for student loans so long as borrowers are committed to paying off the loans quickly and can handle the risks of a variable loan. However, they do have a downside. If rates rise rapidly early in the life of the loan, you may end up paying more in interest than you otherwise would or even be stuck with a payment you cannot afford. Federal student loan rates are always fixed.
#14 Lose the Grace Period
When you first come out of school, your student loans enter a six-month grace period. Interest accrues during this period, but no payments are due. A grace period is actually a downside if you are going for PSLF (because you want to make a bunch of very small monthly payments ASAP toward PSLF before your payments are adjusted upward due to your rising income), so many new doctors going for PSLF consolidate their loans to eliminate that six month grace period. But if you really wanted the grace period, remember that it goes away if you refinance right away.
Summing It Up
There you have it—15 Pros to Refinancing Student Loans and 14 Cons. Make sure you understand all of them before refinancing your student loans. If, like for most people, the Pros outweigh the Cons, find the best deals out there on student loan refinancing here at The White Coat Investor. If you're still not sure if you should refinance, we recommend you spend an hour and a few hundred dollars with Andrew Paulson at StudentLoanAdvice.com to help you run the numbers and make a decision.
What do you think? Did you refinance your student loans? Why or why not? Comment below!