If you’re a resident with a big load of student loans from the feds at a 6.8% interest rate (or worse), your choice has generally been IBR or forbearance. The mountain of debt compared with your relatively paltry resident salary has put conventional student loan refinancing—which requires a reasonable debt/income ratio—out of reach. If you have an average loan burden (say, $180k) or higher, your IBR payments also only cover around half of the monthly interest accrued (so your loans are still growing). If you forbear, they’re growing even faster.
So basically, your loans have been growing at a crappy interest rate, and you’ve been unable to bail to greener pastures.1 Until now.
DRB, one of the handful of big players in the growing medical student loan refinancing industry, is now the first to put forth a refinancing program for physicians still in residency. The new loan program is so new that it’s still in the soft rollout phase; there is no special webpage for it, no marketing copy, no big advertising push. It’s something they’ve quietly started doing right now, and the only evidence it even exists is an item on their FAQ. This is how it works:
- You apply for student loan refinancing/consolidation, even as a resident, even as an intern. There is no special application, just the normal one.
- No maximum loan amount.
- They will use a multifactorial process to look at your application, including your FICO scores, your debt and total loan amount, and your medical specialty. They use your specialty to determine the median future income for you and use that instead of a strict current debt/income ratio.
- If you meet the requirements, you get to trade your old loans for a new one. Spouses can even potentially consolidate their loans into one.
- No origination fees.
- While in residency, your monthly payment is $100.
- 6 months after you finish training and begin making real money, you will enter standard repayment (they offer 5, 10, 15, 20, and CYOA-year terms).
- In some ways, the program is like IBR in the sense that your payments are low in residency and then ramp up once you finish. It’s not like IBR in the sense that it stays $100/month regardless of your fluctuating income as resident and the new private loan loses any chance of achieving federal loan forgiveness.
- No penalty for prepayment. Prepayment can also directly goes to your balance and not to uncapitalized interest. If you are already doing IBR, this means that you can put that extra $300 or $400 you’re already used to paying every month toward your loans anyway, only now this money will go further. For example: $500 a month for IBR means you spend $6000 a year on your loans. Depending on your loan amount and your new interest rate, this amount may be enough to completely stop the growth of your loans (instead of merely slowing them down).
- Grace periods are honored (which would apply to interns), as well as a six-month grace period before entering full repayment after residency/fellowship ends, giving you a few cushion months at your new salary.
- No interest capitalization until 6 months after residency. Interest compounds daily during repayment (so the effective APY is slightly higher than the quoted APR).
- Loans are discharged in the event of death and permanent disability (like federal loans).
- Up to 1 year of economic hardship deferment is available (in three month chunks) if things get tough
- If you don’t qualify for refinancing (e.g. low credit score), it’s possible to reapply with a cosigner (and still be a part of the resident program).
It seems like all student loan refinancing companies have referral programs to drum up business, whereby you get some cash if you send a friend their way. Most don’t have anything for the referee, but after giving me the details of this new program, they also agreed to give anyone who joins through this page $300 for signing up. So if you apply and get your loan funded, you’ll get the equivalent of the first three months of payments for free.
What I find clever about DRB’s plan is that they not only stand to profit from the extra years of interest accumulation if a new borrower pays the minimum amount during residency, but that they’ve found a way to get at physicians early and compete against SoFi et al. on something other than who has the lowest offered rate on a given day. It wouldn’t surprise me if the other players eventually offer up similar programs in the future.
One thing that happens if you switch from IBR to private consolidation/refinancing is that your accrued interest will capitalize. This means that if you had loans of $180k with $40k of uncapitalized accrued interest, your new loan amount (that will now be gaining interest) is $220k after refinancing. That sounds bad, but think of it this way:
$180k at 6.8% APR/APY accrues $12240 every year in interest.
$220k at 3.5% APR accrues $7835 the first year in interest.
Over time, if you don’t make significant payments, compounding interest eats away at the savings over IBR (but it takes a while). In this example, it takes 14 years (longer than even neurosurgery!) to reach the same annual interest growth as IBR and will basically never break even.
So you are likely to still come out on top, with your loans growing more slowly than they otherwise would be with the federal government. In this example, over a ten year equivalent repayment, you save over $30k in interest. You’ll have to do the math with the rates you are offered versus the amount of unpaid interest you have sitting around to see how it works out. Online calculators (like this one) make it pretty straightforward. If you’ve been forbearing, then your interest already has and continues to capitalize, so that downside doesn’t apply.
Part of what makes refinancing so desirable right now is the fact that interest rates are at historical lows. It’s what makes this a good time to buy a house too. It’s also what makes the federal student loan interest rate particularly galling. There’s no guarantee the gap will always be so large. In fact, last year’s offered rates weren’t anywhere near so exciting, and at some point, like all cycles, interest rates will eventually go up.
So should I try to refinance?
- If you have private loans at high rates, this is a no brainer.
- If you have federal loans and have been forbearing, then this is also a no brainer. $100 a month to slow down the relentless climb of accruing interest will save a lot of money in the long run. (Plus with a sign-up bonus, the first three months would be free).
- If you have federal loans and are doing IBR to be financially responsible but have no interest/faith in PSLF, then refinancing is also definitely worth considering. As there is no prepayment penalty, you are free to still make your old IBR-sized payments ($100 is the required payment, not the maximum payment). Those payments will go a lot further at a lower interest rate. So if you know you want to do private practice, then there’s really no big reason to stick with IBR.
- Other than losing PSLF, the main downside to switching from IBR is interest capitalization (as above). Because of interest capitalization, you’ll have to do some math based on what rate you’re offered, how much you owe, and how much you plan on paying monthly to figure out if refinancing is worth it for you.
- If you’re doing IBR temporarily but think you’ll need to start forbearing (having kids soon, etc), then it only makes sense to refinance if you can handle the $1200 a year (you probably can).
- If you are nearing the end of residency, keep in mind that depending on your loan amount and your projeced salary, your interest may soon capitalize anyway, IBR or not.
For residents with average loan burdens, options are limited. The only other player that is potentially viable is cuStudentLoans from LendKey. The maximum loan amount is $175k, which means that many residents are ineligible (unless they only want to partially refinance). Additionally, on an average resident salary of $55k, the maximum loan amount without a cosigner would be approximately $75k. To hit the maximum $175k, you’d need an income of $85k. While there is no special resident program, they do offer interest-only payments, which if your loans are a small enough may be entirely reasonable. The interest only payment on $100k at 5% is around $400/month, for example. But for an average resident with average debt, LendKey’s current offering probably won’t cut it. SoFi ($100 for signing up) and CommonBond, the other big players, don’t offer anything at all for residents yet (but are solid options for those in practice).
So if you’re an attending, apply to all four and see who gives you the best rate. When you apply to several student loan companies within a short time frame once, it’s considered a single hit (soft pull, not hard) on your credit report, so the more the merrier.
What about PSLF?
See this post. Keep in mind, PSLF can only take place after 10 years of monthy payments. If you have a smaller loan burden or a short residency, the amount of loans you can theoretically have forgiven will be low (assuming the program continues; it’s new enough that no one has actually had their loans forgiven yet). PSLF is the best deal for those with long residencies/fellowships (low monthly payments for longer under IBR) and with a lot of loans (private school = more forgiven).
In fact, the desire to do PSLF is (I believe) the only real reason to continue holding federal loans if you otherwise qualify for private refinancing. At least, the current PSLF is: the new 2015 budget proposal includes a PSLF cap of $57,500, which—if passed—should only affect loans disbursed after July 1, 2015. So current residents would theoretically be grandfathered into PSLF without a cap and potentially get solid loan forgiveness. Current medical students and future borrowers, however, would have the real benefits of this program essentially washed away. Now that giving “rich” doctors and lawyers big wads of cash is a legislative issue with bipartisan support, PSLF looks like it’s going to be a short lived panacea for physician debt.
If you’ve heard about getting your loans discharged after 20-25 years (IBR or PAYE), forget about it. Unless you quit medicine and never make a good attending salary, you will never have your loans forgiven this way. Once you make good money, the calculated PAYE or IBR payment is capped at the equivalent of the standard 10 year repayment. If you make little enough (e.g. academic primary care) to stretch out your loans for 20 years but couldn’t do PSLF, then you might have some small amount forgiven, but then you would have spent a ton of extra money over the years on interest. The best reason to keep your federal loans around at 6.8% or worse is for PSLF or because you can’t yet qualify for something better.2