Hardly a day goes by in the financial world when someone doesn’t mention something related to student loan debt. And if you’re one of the 43 million Americans who are currently under the burden of student loans, then you understand why it’s an important topic.
As physicians, you’re in a very unique position when it comes to medical school debt. Most likely you have a very high amount of loans (at least $100,000+), which have amassed from years of schooling and training. And the hope is with your future salary, you know eventually you could be in a position to pay back the large amount.
But then one day you start thinking. You start wondering if you need to change your strategy when it comes to your debt. You hear a commercial on the radio touting the benefits of refinancing. You see an advertisement as your scrolling through your social media feed. All of these messages keep telling you how easy it is to lower your monthly payment just by refinancing your student loans.
The decision to refinance student loan debt is not as simple as the ads make it seem. As with other types of financial decisions, there are multiple considerations to be made before you jump in.
Things to Know Before You Refinance Student Loan Debt
So, you have an offer in hand for a new loan and the interest rate is lower than what you’re currently paying. Sounds like a win-win situation right? Perhaps, but before you sign on the dotted line, there are several items you need to make sure you have reviewed. This will help you make the most informed decision possible.
1. What is My Financial Goal?
Before you refinance, you need to ask yourself what the purpose of refinancing your loans really is. You need to understand this before you can accurately weigh the pros and cons for your decision.
Your goal could be a lower monthly payment. Your goal might be a lower interest rate, which means you could pay off your loans sooner. Your goal could be to make your life easier and only have one payment, as opposed to several. Hopefully, your overall goal is to pay your debt off as quickly as possible. And the good news is, it is possible refinancing your student loan debt could help you achieve this goal.
Some of you may be thinking you would like to achieve all 3 of these somehow. You would like relief on your monthly payment but you don’t want to waste your hard-earned money and pay over too many years either. The only way to determine if this is possible is to do your homework before refinancing.
2. Have I Pulled My Credit Report?
Before you go down this path to refinance student loan debt, you need to take a few moments to get prepared. The first step you should do is pull your most recent credit report. You need to understand what is on your report because it will affect the results of your offers.
If the thought of pulling a credit report sends you into a panic, try not to worry. There are ways you can improve your score over time, but for now, you need to know what your number is. We all know we are more than a number, but the banks have to use this information to determine our creditworthiness with them.
Don’t forget, you are entitled to three free credit reports each year. Take advantage of this and check your report annually! Not only does it help you know what the banks see, but it will also help you identify any strange activity which may have occurred without you knowing.
Trust me, you want to know what is on your credit report. You do not want any surprises when you go to fill out the loan application. Usually, surprises on your credit report do not work out in your favor, so it’s helpful to understand what is on there.
3. What is My Credit Score?
Now that you have your credit report, it’s time to carefully review the information. Some of you try not to think about your credit score unless you are absolutely forced to do so. Others of you look at your credit score as a challenge – and one you try to improve on as often as possible.
Whichever camp you belong to, you need to know your credit score from the beginning. This will help you understand how a bank or credit union will be reviewing your application.
4. Do I Have Federal Loans or Private, or a Combination of Both?
When you go to pull your credit report, your credit score isn’t the only piece of information I want you to analyze. You should also notate which of these installment loans you have in your name.
Depending on where you are in your repayment plan, you may see your loans which are both private and federal. Private loans are lent to you by a bank or credit union. Those loans will be on your credit report.
The other type of student loan you could have is a federal loan. This is a loan where you borrow from the U.S. Department of Education. Again, depending on where you are in the repayment process, you may not have all the information on your report.
The best way to determine the number of federal loans you have is to pull your information from the FAFSA website. Login to see the exact loan information, your payments and balance, and the interest rate associated with each loan.
5. How Much Do I Really Owe?
Now that you have your list of private and federal loans, you can determine how much you really owe. You may think you know the full amount, but this isn’t an area you want to ballpark. Get the exact numbers. It’s best to tackle the debt when you know exactly what the balance is on each loan.
Try not to feel overwhelmed by the amount. You’re taking the right steps for your financial future by gathering all of this information. You are also working on your debt step by step, and refinancing your loans could be a tool for you.
6. What are My Current Terms and Payments?
At the same time, you are confirming the amounts you owe for each loan, you need to verify the interest rate and length of payment for each loan. Having this critical information at your fingertips will help you with a true, side-by-side comparison of loans.
Again, it might seem like basic information to review. But if you aren’t sure of your current interest rate and payment terms then you won’t be able to calculate your true savings (or lack thereof) from refinancing.
7. Am I a Resident or an Attending?
Obviously this is an easy question for you to ask yourself, but believe it or not, this matters. Where you are in your medical career can impact how you approach your student loan repayment.
Most people would assume that if you’re a resident or fellow, that it would be a perfect time to refinance and get a lower monthly payment. After all, you are barely making any money and have to scrape up enough just to pay the water bill. In reality, though, residency can be a terrible time to refinance federal loans.
By refinancing your federal loans, you will automatically take yourself out of eligibility for the PSLF program, as well as income-driven repayment plans.
However, if you have private student loans and you are a resident, then refinancing could be an option. Since private loans are not eligible for any government forgiveness or repayment programs, then refinancing could be the way to go -but for your private loans only.
8. Do I Understand the Difference Between Refinance and Consolidation?
When it comes to student loans, you will often see the words Consolidation and Refinance used. While they both sound like you’re doing something positive to your loan, they are actually different financial terms.
Refinancing of your loans means you take out an entirely new loan – with new repayment terms – to cover the amounts of the loan or loans you need. The new loan (along with the interest rate and payment terms) will be based off your credit score and your income. Your only option to refinance your loan will come through a private lender such as a bank or credit union.
Unlike the lending of student loans, the federal government is not in the business of refinancing loans.
Consolidation of the loans is when you have two or more loans and you combine the remaining balances on each loan into one loan. It does not necessarily result in a lower interest rate or extended payment terms. The advantage of loan consolidation is the convenience of one, singular monthly payment.
In the world of federal loans however, consolidation is important for another reason. Consolidating into a Direct Consolidation Loan allows you to remain eligible for PSLF qualification as well as an Income-Driven Repayment Plan.
9. Would Consolidation be a Better Option
While there are options for consolidation of private student loans, consolidation for private loans is not very common. Most often consolidation is used when discussing federal student loans.
A Direct Consolidation Loan option for your federal student loans is an option for almost all types of federal loans. With this loan, the interest rate will be determined by taking the weighted average of interest rates for each of the loans you’re consolidating.
Remember, you can refinance your private student loans only, without including your federal loans. You can also consolidate specific federal loans – you do not have to consolidate all federal loans. You can choose which ones to consolidate, just like you can choose which private loans to refinance.
10. Am I Eligible for PSLF?
Before you choose to refinance student loans, you need to decide if you are going to work towards loan forgiveness through the PSLF program. The Public Service Loan Forgiveness, or PSLF, offers forgiveness by the government on federal student loans after several requirements have been met.
The main requirements for physicians are working for a 501(c)(3) entity for 10 years (such as a public hospital), making 120 months of payments, and filling out the proper paperwork.
Again, the PSLF can be immensely beneficial to physicians with a large student loan burden. However, the PSLF can only be used for federal loans.
It is possible for you to refinance your private student loans and still work towards PSLF with your federal loans. This is where the knowledge of each of your individual loans becomes very important.
11. Should I Use an Income-Driven Repayment Plan?
In addition to the PSLF program eligibility, your federal loans are eligible for an income-driven repayment plan. If you only have private student loans, you will not be eligible for these repayment options.
The most popular income-driven repayment plans among physicians are the REPAYE and the PAYE programs. The reason for their popularity is the fact you can enroll in one of these plans and still work towards eligibility with forgiveness through PSLF.
Why does this matter if you’re only interested in refinancing student loans? As you determine your path to payoff your debt, you will want to make sure you consider all the options of forgiveness, refinancing, and how to save the most money over the years.
12. What Will the New Terms Be?
Once you have determined which private loans you may want to refinance, then you will need to understand the new loan terms being offered by the bank.
You will need to confirm the new interest rate, the length of repayment, any prepayment penalties – all of the items you are on the hook for. One website which I highly recommend to help you compare the refinancing info is Splash. You can get all of the facts right up front and then easily compare your options from multiple lenders.
13. How Much Will I Pay Over the Life of the Loan?
Once you have some initial quotes, you should see how much you are saving over the life of the loan by using a refinance calculator. Only you can decide if the amount of savings is worth the effort of refinancing. The savings potential of refinancing can be enormous, but you need to check the numbers yourself.
14. Will I Qualify Without a Co-Signer
Since your new loan will be based off both your credit score and income qualifications, it’s possible the lender could require an additional guarantee with the loan. A co-signer could be needed if you do not qualify based on your own credentials.
Knowing whether a co-signer is needed is an important factor in the decision-making process. It’s not recommended you take on a loan which would need an additional signer. The person who is a co-signer is just as responsible for the loan, should you default.
If you would like to pursue refinancing of your loans, you should proceed very carefully before asking someone else to sign the loan with you.
15. What is My Next Step?
You’ve gathered all of your information. You’ve selected which of your loans you would like to target for refinancing. You’ve compared rates and learned the facts through a website like Splash Financial. Now it’s time to make a decision whether or not to refinance.
If you can refinance your private student loans into a plan with a lower interest rate and pay off your balance sooner, then this will be the point where refinancing becomes a sound financial decision. You will only be able to determine this by doing your homework up front and taking the steps which have been discussed.
The other option is discussing the possibility of refinancing, the PSLF, and income-driven repayment plans with a Fee-Only Financial Advisor. These types of advisors are equipped to answer questions about your best strategy for paying off student loan debt.
Since physicians tend to have an above-average amount of student loan debt, it can be helpful to work with professionals who understand the unique challenges for doctors and their student loans. A Fee-Only Advisor can be a tremendous asset in your journey of eliminating debt and building wealth.
The Right Way to Refinance Student Loan Debt
It may seem like a lot of information to review before going through the refinancing process with student loans. But in the end, doing your homework up front can literally save you thousands over the years. By educating yourself now on what to expect, you can be confident you are making this decision based on what is best for you.
With this information, do you feel prepared to make a decision about refinancing? Learn more about this topic and more by subscribing to the podcast!