11 Questions You Must Ask Before You Refinance Your Medical School Loans
There are so many options when it comes to student loans that it would be enough to fill up its own college course. And when it comes to down to the helm, what do you do when it’s not as simple to refinance your student loans as much as you thought it would be?
You have options for repayment terms, consolidating your loans, different types of federal or private loans, and the list goes on and on. All of these are different ways that you can finance, and stretch out, the payment for your education.
Now that you have to make regular payments (or perhaps you are about to begin making payments), you may be thinking about ways you can affect the monthly amount you have to pay.
If you have started researching this topic at all then you may have seen the offers to refinance your student loans. Sure, it sounds like a no-brainer at first. You combine all your loans, lock in a lower interest rate, pay less each month, and pay off your total amount in less time.
But is it really that simple? Isn’t there an old saying that if something is too good to be true then it probably is? As a physician, your time is limited – so it’s safe to say you need to get right to the bottom line and find out whether or not the refinancing option is too good to be true for your school loans.
While there are certainly situations where a refinance could make sense, there are times when it might not. We have put together the list of 11 questions you need to ask so you will know if the time is right or not.
1. Do I Have Federal or Private Loans or Both?
The first question you are going to have to ask before you can even consider refinancing is what type of loans you have and how much you owe for each of them. While this may seem like a daunting task at first, you will be better off facing reality and knowing exactly what you are dealing with when it comes to your loans.
You have either federal student loans, private student loans, or a combination of both. And don’t be surprised if you can’t remember which ones you have in your name. If you have had to finance your medical school education and undergraduate degree then you most likely have multiple. It can be hard to keep track of them all, especially if you have several!
Federal loans are the loans where the Department of Education is the lender. Many of these loans are classified as subsidized, unsubsidized, Direct PLUS, Stafford, FFEL, or Perkins.
Private student loans are ones that have been taken out via a bank or credit union.
If you are unsure which loans you have in your name, then the first step is to log in to the federal student loan portal. You will clearly see how many different federal loans you have as well as the amounts you are obligated for payment each month. For private loan information, the quickest way to know which loans you have is to pull your credit report.
2. How Much Do I Owe for Each Individual Loan?
This goes hand in hand with identifying what types of loans you have, and the process is similar. Before you can make an informed decision about refinancing your student loans, you need to have a complete understanding of the amount you owe for each one.
While it may be easy to try to estimate or take a swag, you will be better off identifying the exact amounts for each type of loan you have.
You also need to confirm the interest rate you have on each one and the number of years of the repayment terms. All of this information is necessary so you can accurately estimate your new monthly payment or your new payoff date, should you choose to refinance. You can use different calculators online to help you determine if refinancing is going to be a financially savvy option for you.
3. What Is My Credit Score?
If you have already pulled your credit report in order to verify the private loans you have, then this question may already be answered for you. If not, go ahead and pull your credit report so you can understand what the bank or credit union will be seeing when they pull your information.
As a reminder, as a consumer, you are entitled to three free credit reports each year.
Your creditworthiness to a private lender is going to be largely based on your credit score. In turn, this will determine the interest rate your new loan could have. To get the lowest rate possible your credit score needs to be as high as possible. Yes, there are other determining factors besides the score, but this is a very important consideration.
4. What Are the Income Requirements to Refinance My Loans?
Because many physicians have such high-income potential, it typically makes them a good candidate for a refinance option. If you choose to refinance with a bank or credit union (which is a private loan) then you will be subject to their each individual requirements. You will need to make sure you understand what each lender is looking for in terms of both a credit score and an income requirement.
5. Will I Need a Co-Signer?
If your income and credit score do not meet the requirements for the lender in order for you to refinance, then it’s possible you could need a co-signer. A co-signor, or co-borrower, on a loan is someone else who is willing to be obligated to pay on the loan. It could be your parents, grandparents, a cousin, a mentor – anyone who is willing to be obligated for a payment in case you default on the loan.
A co-signer should only be considered after a great deal of thought has been given. There are as many risks to this path as there are advantages. Having a credit-worthy co-signer could mean you get a lower interest rate on your refinanced loan but it may not be worth the risk.
No matter how well-intentioned a family member or friend is, if you default on your loan then they are also going to be penalized.
6. Do I Want to Forego an Income-Driven Repayment Plan?
Now we are getting into the area that could be most critical to you as a physician with several loans and mounting debt. You may have heard us reference here at financialresidency.com the various federal loan repayment plans.
If you choose to consolidate (notice the word is different then refinance) your federal loans, then you become eligible to participate in an income based repayment program. There are basically four programs available, PAYE, REPAYE, IBR, and ICR.
If you choose to refinance your federal loans, you will automatically forego your repayment options. You will no longer be eligible for an income-driven payment plan.
These repayment plans have several advantages to them – you will need to ask yourself if a lower monthly payment through refinancing outweighs the advantages of the repayment programs. You may be able to get a lower monthly payment by participating in an IBR anyways, so you could possibly improve your payment without having to go through the refinance process.
7. Am I a Participant in the PSLF program?
You have probably heard us reference the Public Service Loan Forgiveness program, or PSLF as it’s typically referred to, in many different posts and podcasts. The PSLF is applicable to many physicians and we are just now starting to understand the many benefits and implications.
To summarize, this is a program administered by the federal government that allows for federal student loan forgiveness if you have worked in some sort of government or non-profit entity for at least 10 years. There are several requirements for the program in addition to the minimum 10-year condition. One of the stipulations is that you have made 120 monthly payments towards your federal loans.
If you’ve had a time where you were unemployed or defaulted on your federal loans, then that time period does not count towards the required 10 years and 120 monthly payment requirement.
One of the conditions for PSLF is that the program only offers forgiveness for your federal DIRECT loans only. If you happen to have a Perkins or an FFEL loan, then you will need to consolidate those specific loans into a Direct Consolidation Loan in order to work towards the loan forgiveness.
Your private loans will not count towards the program.
If you refinance any or all of your federal loans into one private loan, then you will automatically lose your eligibility for the PSLF benefit.
Most likely, if you plan on working for a non-profit or a public hospital, then the benefit of the PSLF would far outweigh a lower interest rate you may or may not get with by refinancing your federal loans.
8. What Will My New Interest Rate Be?
Knowing the new interest rate of the newly refinanced loan is non-negotiable. You have to know this information in order to see if it is advantageous for you to go through the student loan refinance process. A lower interest rate should mean a lower monthly payment unless you decide to shorten the length of the loan.
One of the few times that refinancing your loans makes sense is if it is for a lower interest rate. If it is higher than what you are currently paying, then rarely would it be beneficial for you. You may also find offers for either a fixed interest rate or a variable rate loan.
If you decide to refinance your loans through a private lender, you will be able to shop around for different interest rates. Ultimately, these companies will be competing for your business, which in turn could lead to a very competitive rate for your new loan.
9. What Will My New Payment Terms Be if I Refinance?
If you refinance, it could change the number of months and/or years you have to repay the borrowed amount. Like so many other aspects of your finances, there are multiple payment options when it comes to payment terms.
The longer you have to pay your loans back, then the lower your monthly payment will be. However, you will likely end up paying thousands more in interest over the life of the loan.
The shorter the payment terms, then the higher your monthly payment will be. A shorter amount of time means you should be paying less interest over the life of the loan. Make sure you have a clear understanding what your new payment terms will be and how long you will be obligated for the payments.
10. What is My Financial Goal- Lower Monthly Payment, Earlier Payoff or Something Else?
Before you make a decision to refinance your student loans, one of the questions you need to ask is the exact motivation for wanting to make a financial change. Sure, we all want to get rid our student loan debt as quickly as possible and be done with it. But what is it specifically about the loans that is causing you the most anxiety right now?
Is it that your monthly payment is too high and you are having trouble paying for your other necessary expenses? Perhaps your goal is to only have a lower monthly payment, even if it means it takes you longer to pay it off in the end.
Or, is your goal to pay these loans off as soon as possible because having debt hanging over your head causes too much stress in your life? Perhaps you feel you can’t fully enjoy the benefits of your career choice because you are saddled with this debt. Maybe you have goals to purchase big-ticket items later on down the road and you know this debt could obstruct your plans.
You may be in the camp of people who want to refinance because you need to simplify your life and therefore your payments, too. Having one singular payment is your ultimate goal.
Depending on how you answer this question could determine if the refinance route is right for your situation. Ask yourself if you have explored all of your options in order to achieve your specific financial goal.
11. Would Consolidation Be a Better Option?
Conceivably, you have read this far and realized that you are not willing to forfeit your future benefits from the PSLF or that refinancing might not be the best option for whatever reason. But now what do you do? You still have monthly payments you are obligated to make and that you could use a little help with. Have you considered consolidating your loans?
Consolidation is another word you hear mentioned quite a bit. While it sounds similar and is often used in the same sentence, it’s actually different than refinancing your loan.
Consolidation is an option from the Department of Education for your federal loans. Basically, all of your federal loans are combined into one monthly loan payment, with the government being the lender. This is called a Direct Consolidation Loan. The interest rate is determined by taking a weighted average of the current interest rate that is applied to your federal loans. This may or may not be a lower interest rate than what you are paying, but it does offer several benefits.
The first benefit of consolidation of your federal loans is that you will have the convenience of the single monthly payment.
The second major benefit is that you will then become eligible for the income-driven repayment programs that were mentioned previously.
Again, these are for federal student loans only. If you would like to consolidate private student loans, then you will have to follow a specific process based on each individual lender. Each private lender will have their own requirements for consolidation that you will have to work through, just as you would if you were refinancing your loans.
Making a Decision to Refinance Your Student Loans
When dealing with a subject matter that is as complicated as tackling student loan debt, you have to remember that everyone’s situation is different. In the end, it’s up to you to decide what is best for your finances. You have to try to think about not only what is best for you now, but also what makes the most sense for you and your family long-term.
For some of you, that could mean refinancing all of your private loans while consolidating your federal loans. Others of you may need to choose a different path that doesn’t involve any type of refinancing at all. Whatever you choose, you owe it to yourself to ask yourself the questions that we have listed, this way you know you fully understand the pros and cons of refinancing.