Refinancing Your Student Loans as a Resident

Update 11/2016: LinkCapital has acquired a bunch more funding and is now accepting applications again.

Last updated November 17, 2016

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 despite your best efforts, 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.

There are now two players who offer student loan refinancing specifically to residents. DRB was the first. They’ve recently been joined by LinkCapital.

This is how it works:

  • You apply for student loan whenever you want once you start residency. For DRB, you can actually even apply as an MS4 once you’ve matched (they’ll respect the usual 6-month post-graduation grace period, don’t worry).
  • For DRB, no maximum loan amount. For LinkCapital, maximum is an [un]healthy $450k.
  • Both 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 projected/future income for you and use that instead your current income to calculate your debt to income ratio (DTI).
  • If you meet the requirements, you get to trade your old loans for a new one. For DRB, physician spouses can even consolidate their loans into one.
  • Neither has origination fees.
  • For DRB, while in training (residency + fellowship), your monthly payment is $100. For LinkCapital, it’s $75.
  • 6 months after you finish training and begin making real money, you will enter standard repayment (both offer terms up to 20 years).
  • In some ways, the both programs are like IBR/PAYE 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 or $75 per month regardless of your fluctuating income as a resident, and the new private loan loses any chance of achieving federal loan forgiveness.
  • Neither has prepayment penalties. Prepayment can also directly go 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 down the rate of negative amortization).
  • 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.
  • Accrued interest capitalization won’t capitalize again until after residency (which is similar to federal income-driven repayment plans but better than forbearance).
  • Loans are discharged in the event of death and permanent disability (like federal loans).
  • Economic hardship deferments are 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).
  • The rates you’ll get as a resident aren’t going to be as good as those of an attending. With DRB, if you want to get lower, you can reapply when you’re an attending. The LinkCapital method is little different: your rate automatically goes down when you become an attending (they’ll tell you what you qualify for before and after when you apply). For Link, a trainee applying in their final year with a signed employment contract gets the attending rate automatically.

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 DRB agreed to give anyone who joins through this page $300 for signing up (the equivalent of three months free, nice). LinkCapital has agreed to give a $200 incentive as well.  If you’re interested in refinancing, just apply to both and see who gives you the lowest rate.

What I find clever about the DRB and LinkCapital plans 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.

Interest Capitalization

One thing that happens if you switch from federal income-driven repayment 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.

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. 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. The interest capitalizes at end of your six month grace period after finishing school, so if you just recently graduated, this is irrelevant. If you’ve been forbearing, then your interest already has and continues to capitalize, so that downside also 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 rates 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 or $75 a month to slow down the relentless climb of accruing interest will save a lot of money in the long run.
  • If you have federal loans and are doing IBR/PAYE 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. 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. If you’re in REPAYE, then feel free to apply for private refinance, but only pull the trigger if the rate you’re offered is lowered than your effective interest rate with the REPAYE unpaid interest subsidy.
  • Other than losing PSLF, the main downside to switching from IBR/PAYE/REPAYE 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. This matters more the longer you’ve been making income-driven payments that don’t cover the accruing interest; if you just graduated, then you don’t have to worry about this.
  • If you’re doing IBR/PAYE temporarily but think you’ll need to start forbearing (having kids soon, etc), then it only makes sense to refinance if you can afford the small token payment.
  • If you are nearing the end of residency, keep in mind that depending on your loan amount and your projected salary, your interest may soon capitalize anyway, IBR or not (i.e. you may no longer have a “partial financial hardship”). You’ll also get a better deal with LinkCapital if you’re within 12 months of the end of your training and have a signed employment contract.

Other options?

For residents with average loan burdens, options are limited. Another player that is potentially viable is LendKey ($300 bonus). The maximum loan amount is currently $300k. Additionally, on an average resident salary of $55k, the maximum loan amount without a cosigner would be approximately $75k. To hit even their old maximum of $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. Earnest ($300 referral bonus) tells me they are also willing to refinance residents despite their debt/income ratio, but you’d essentially have to have enough income to make full payments on a 20-year (the maximum) term, so it’s a no-go for big borrowers as well. So for lower loan amounts, DRB, LinkCapital, LendKey, and Earnest are worth a try. But for an average resident with average debt, LendKey and Earnest’s current offerings probably won’t cut it.

So for lower loan amounts, DRB, LinkCapital, LendKey, and Earnest are worth a try. But for an average resident with average debt, LendKey and Earnest’s current offerings probably won’t cut it. SoFi ($300 for signing up) and CommonBond ($300 for signing up), two of the biggest players, don’t offer anything at all for residents yet (but are solid should-try options for those in practice). The Credible marketplace allows you to apply to several of these companies simultaneously, but neither DRB or LinkCapital are among their offerings.

So if you’re an attending, apply to all of them 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 on your credit report, so the more the merrier.

For further reading, here is my rundown of all of the medical student loan refinance options.

What about PSLF?

See this post. Keep in mind, PSLF can only take place after 10 years of monthly payments. If you have a smaller loan burden or a short residency, the amount 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: recent budget proposals have included a proposed PSLF cap of $57,500, which—if passed—were designed to affect only new borrowers. 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, could one day have the real benefits of this program essentially washed away. While I doubt the change will actually end up happening before 2017, now that giving “rich” doctors and lawyers big wads of cash is a legislative issue with bipartisan support, PSLF may end up being a short-lived panacea for physician debt.

If you’ve heard about getting your loans discharged after 20-25 years (IBR or PAYE), you should probably forget about it. Unless you quit medicine and never make a decent attending salary, all but those with the most egregious student loan amounts won’t get their loans forgiven this way (and even if you did, you wouldn’t save much money given all of those extra years of making payments and taxes due on the forgiven amount). 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 amount forgiven, but then you would have spent a ton of extra money over the years on interest, and then forgiven amount is taxed (your marginal tax rate * a multi-hundred thousand dollar loan debt = a huge tax bomb). 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