By Dr. Jim Dahle, WCI Founder

The student loan refinancing industry has been decimated in the last few years. While that's not great for The White Coat Investor as a business (we get paid for referring people to refinancers), it hasn't necessarily been bad for white coat investors.

First was the student loan holiday, which reduced payments on federal student loans to $0 and eliminated the interest on those payments. Many people who would have otherwise refinanced took one look at that and decided they'd wait until the holiday ended to refinance. It was a more difficult decision at the time than it appears to be retrospectively. Interest rates in 2020 were very low, and the cash incentives to refinance were very high. Some people figured it was worth it to give up a few months of 0% payments to lock in 1%-3% long-term. Of course, a few months turned into a few years as the holiday was extended nine times.

Second, Public Service Loan Forgiveness (PSLF) became more generous (despite what you may have read here last week on April Fools Day). Payments that wouldn't have counted before started counting. Employers that didn't count before started counting. Hassles that existed before went away. The more generous forgiveness became, the less likely people were to leave the federal student loan programs by refinancing, lest they miss out on it. There were other forgiveness programs/events that generally didn't apply to white coat investors, but the hope that some sort of mass forgiveness would come along (or IDR forgiveness would become tax-free in the long term) has kept plenty more in the federal programs.

Third, Income Driven Repayment (IDR) became more generous when SAVE replaced REPAYE. The payments stayed low but the subsidy got bigger, and the flexibility (for example being able to file Married Filing Separately) got better. Income recertification dates kept getting pushed further and further back. Even after the student loan holiday ended, lots of people still had $0 or otherwise very low payments for many months afterward.

Fourth, fewer students are using private loans than used to. These days one can borrow the entire Cost of Attendance of a US medical school using only federal loans. Yes, you'll end up with the higher rate Grad Plus loans for some of that burden, but they're still direct loans eligible for SAVE and PSLF.

Last, interest rates went up 4% over the course of a little more than a year. People with 5.5%-7% student loans were looking at refinancing to 5%-6% instead of 1%-3%, and refinancing no longer seemed as appealing. It just wasn't enough of an interest savings to be worth giving up on some of the protections (and possible future forgiveness) inherent in the federal programs.

So, where do we stand today with this “technique” of student loan management? Who should still be considering refinancing and when?

 

#1 Private Student Loans

med school scholarship sponsor

When it comes to private student loan management, nothing has changed. Those loans still aren't eligible for PSLF or IDR programs. If you can get a lower rate on your private student loans, refinance them. In fact, given the cash you can get back, refinance them early and often. Worried about big payments during residency? Don't be. At least two student loan refinancing companies will limit your payments to just $100 during your training. The time to refinance these loans is as soon as you get out of school. Then, check on rates every year and refinance them again and again until they're paid off. As your credit score and debt-to-income ratio improve and interest rates fall, you'll get lower rates and new cash bonuses to do so.

Some private loans out there are ridiculous. We run into people with 10%-18% student loans all the time. Refinancing to 5%-6% is still a fantastic deal for those folks.

More information here:

Want to Shorten Your Student Loan Repayment? The PSLF Buyback Can Help

 

#2 2nd- or 3rd-Year Attendings Still Paying Off Their Loans

There is still a role for the refinancing of federal student loans. Once you know you're going to be paying off your student loans, it's an easy decision: if you can get a lower rate, you should get a lower rate. The only exception is if you truly believe in your heart of hearts that the government is going to come in and make IDR and forgiveness programs even more generous for doctors than they already have. I don't really believe this, but I've been surprised by student loan policy before.

However, the time to refinance these loans is not necessarily just as you leave training (or even before like many people used to do). Due to the lengthy delay in recertification of your income and the very generous SAVE subsidy, you'll want to wait until you HAVE to recertify your new, higher attending income. You may still be getting a significant SAVE subsidy for up to two years after leaving training. You might even have your loans paid off by then if you really go hard after them while living like a resident.

If your effective interest rate with the subsidy is less than what you can refinance it to, stick with SAVE. Just be careful not to play too many games to get that subsidy. There is usually a tax cost (either immediately or eventually) to filing Married Filing Separately instead of Married Filing Jointly, and contributing to tax-deferred accounts when contributing to Roth accounts would be wiser if it wasn't for the IDR-associated mal-incentives. While you can go back and refile your taxes for three years (if you feel it is ethical to do so), that retirement contribution decision isn't really changeable without going through a Roth conversion with the associated tax consequences.

 

#3 The Future of Student Loans

student loan refinancing

The new higher interest rates don't just affect the private student loans into which you can refinance. They also affect the federal student loans that professional students are taking out. Those loan rates are currently 7.05%-8.05%. Lots of today's residents are running around with 5%-6% federal student loans. That won't be the case in a few years as today's students move on to residency. Those federal loan rates are locked in from the time you get them. That means future residents and attendings will have more incentive to refinance than today's. Plus, if interest rates drop as many expect, the differential between higher federal loan rates and lower private loan rates will be even more dramatic. Just because refinancing doesn't make sense for you today, that doesn't mean you shouldn't “check in” every year or so to see if something has changed.

More information here:

Are Student Loans the New Mortgage for My Generation?

 

If it does make sense for you to refinance your student loans, please use the WCI links to do so. Not only does it help support our mission, but it provides a better deal for you (cash back and a free WCI online course) than going directly to the refinancing companies.

 

** White Coat Investor accepts advertising compensation from these companies. Page order does not guarantee best possible rate and terms.
† 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 5, 2024. Free course must be claimed within 90 days of loan disbursement. To claim free course enrollment, visit https://www.whitecoatinvestor.com/RefiBonus.
Student Loan Refinancing Disclosures

 

What do you think? Have you refinanced lately? Why or why not? Comment below!