Most students who borrow to finance their education use federal loan programs, because government lenders generally offer more flexible terms. Medical students, though, are almost always better off refinancing through a private lender as soon as they qualify for a lower interest rate. They’re far less likely to need the benefits of a federal loan, and their much higher debt makes the lower interest rates offered by private lenders a decisive advantage. Doctors typically refinance their federal student loans while in residency or shortly after they become attending physicians. Some doctors wait until they’re more established to refinance.
Overview
The large debt load of medical students makes refinancing at a lower rate more urgent than it is for other types of students. To illustrate this, the average medical school debt was $196,520 in 2018, with a typical annual percentage rate (APR) of 7% and a term of ten years. Refinancing this debt at an APR of 5% would reduce payments by about $200 per month, for a total savings of nearly $24,000 over the course of the loan.
Refinancing a federal student loan through a private lender typically lowers your interest rate, but it eliminates some advantages of federal loans. For example, payments on federal loans can be kept lower and forgiven in their entirety after 25 years through the income-based repayment (IBR) program. Federal student loans also can be forgiven through the Public Service Loan Forgiveness (PSLF) program, in which the doctor works full time in public service for at least ten years while making payments. The balance of the debt will then be forgiven at the end of this period. Once doctors refinance through a private lender, they no longer are eligible for these benefits.
Like other student loans, private loans don’t go away during a bankruptcy. However, refinancing is still worth it in most cases, since medical school loans generally have a higher interest rate than traditional student loans for undergraduates.
Refinancing during residency
The two typical refinancing options for doctors are to start paying off debt during their residency and to wait until after residency to begin payments. Residents today typically earn a decent salary, although it’s still only a fraction of what they can expect to earn as a private physician. The Houston Chronicle reports that the average resident’s salary was $57,200 per year in 2017, compared with an average annual salary of $247,319 for a licensed medical doctor specializing in internal medicine.
Some lenders design refinancing programs with lower monthly payments during the term of a doctor’s residency. These payments can be as little as $100 per month, which will bump up after the residency ends. This strategy eases doctors’ financial burden during residency when they’re making less money, while still allowing them to pay off some debt.
The risk of this refinancing approach is that the resident’s minimum payments won’t even cover the interest on the loan. If that is the case, a doctor’s debt may actually increase during residency. To prevent this from happening, it’s best to make payments that are more than the minimum if possible. Many doctors will qualify for an even lower interest rate after their residency and will refinance again after they become attending physicians.
Refinancing after residency
Another approach to refinancing medical school debt is to use an income-driven repayment plan (IDRP) from the government to make payments during residency, followed by traditional refinancing through a private lender after residency. The government offers four IDRPs, with the Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE) plans being of greatest interest to physicians.
The PAYE and REPAYE plans are good choices if you don’t qualify for the lowest interest rates available, but still need to lower your monthly payments. If you don’t have good credit, these options will allow you to begin rebuilding it during your residency. Once you become an attending physician, your income will increase and you’ll have more options for refinancing your medical school loans.
Summary
The first step in refinancing a medical student loan is to ensure it’s the right move for you. Remember that you will lose the advantages of forgiveness and income-based payments when you refinance a federal loan through a private lender4. If you have a mixture of federal and private loans, you may want to consider refinancing only the private loans.
You also will need to determine if you qualify for refinancing a medical school loan. This typically requires a credit score that’s at least in the mid-600 range. A higher score could reduce your interest rate even further. Some lenders have a pre-qualification process that allows you to see what rate you can expect to receive when you apply. This step involves a soft pull of your credit that won’t hurt your credit score⁷.
If you’re interested in using Figure’s student loan refinancing option, here are the eligibility requirements:
You must be at least 18 years old
US Citizens or Permanent Residents with a 10-year non-conditional card
Current US resident of a state that Figure is authorized to lend
Graduated from a four year or graduate Title IV school
