Student Loan Refinancing
This is a guest post from Andrew Rombach, a content associate from Lendedu. It is my pleasure to welcome him here to talk about an area of his expertise.
The Frugal Physician has no financial relationship with Lendedu.
Should Physicians Consider Student Loan Refinancing
Most college students need to clear the hurdle of financing which often requires student loans – not the cheapest way to kick start a career. In particular, physicians can amass above average student debt compared to the average Joe.
Physicians typically attend both undergraduate studies as well as medical school for continued education. The average physician can expect to take on $24,000 from undergraduate student debt as well as $183,000 in average medical school debt. All in all, they’re looking at roughly $207,000 in total student loan debt.
Needless to say, this is a hefty sum of student loan debt, and looking at that balance could paralyze anyone. Luckily, physicians have access to beneficial student loan repayment options thanks to above-average earnings that go along with their above-average student debt.
Student loan refinancing is a student loan product offered by private banks and lenders. It allows you to consolidate several old loans and offers a new repayment term and interest rate. It can be especially helpful to physicians with high student debt balances at high interest rates. Here’s how.
How Does Refinancing Student Loans Help Physicians?
Physicians tend to start their careers with high levels of student debt. A high balance equates to a high monthly payment. When you break out $200k over a 10-year standard repayment term, the monthly payment is over $2,300 (assuming a 7.0% interest rate).
This is problematic for obvious reasons. Some physician salaries may handle this monthly payment, but many starting physician salaries may not comfortably cover it. So how does student loan refinancing help?
After a successful refinance, applicants can select a new repayment term. They have the option to extend the repayment term up to 20 years if needed; extending the term reduces payments.
A high balance isn’t the only issue, many graduate school loans carry high interest rates. For example, federal graduate direct student loan rates are 6.6% while graduate PLUS loans carry a rate of 7.6%. Not to mention, private student loan rates can push the double digit range depending on credit.
High interest rates drive the cost of a loan and can lead to larger interest payments each month. Larger interest payments take up more of your cash, reducing the ability to make headway on the principal balance. Basically, high interest rates make repayment harder, and it gets worse if high rates are compounded with a high balance.
A refinanced student loan comes with a new interest rate because you are taking out a new loan with a private lender. Ideally, the new interest will be lower compared to the previous rates. A lower rate should reduce interest payments each month, making it easier to pay down the principal balance. Check out this example success story. This family cut their rate from 6-8% down to 3.87%!
Overall, student loan refinancing helps in two main ways. It offers borrowers the chance to extend a repayment term and reduce payments if needed. But more importantly, it also offers borrowers a potentially lower interest rate which will also reduce payments and expenses.
This all sounds great, but qualifying for student loan refinancing is a whole other challenge.
Qualifying for Student Loan Refinancing
Student loan refinancing isn’t offered out to just anybody who applies. Private banks and lenders judge applicants according to specific criteria. These criteria fall under two basic categories: credit and income. At a high level, applicants with high income and great or excellent credit are more likely to qualify for student loan refinancing.
As a physician, you may be over-qualified by income; for instance, the average starting salary for family physicians in the United States is $160,000 in 2012. However, salaries vary by location and specialty. Some starting physicians may find it challenging to qualify depending on their income; however, their potential salaries still offer advantages compared to other professions.
The other main criterion is creditworthiness which may be more problematic than income. Private lenders stress great or excellent credit when underwriting refinance loans. A physician who has been struggling with payments during residency may not have the ideal credit score for approval. Furthermore, credit influences the interest rate on a refinance student loan, so a low-credit applicant may not qualify for a low rate.
While having great-to-excellent credit may be an issue, some refinancing lenders will approve an applicant with high income and moderate credit. If a physician is coming into a great salary and making payments consistently, this may be viewed as a positive signal for approval – depending on the lender.
To recap, you need solid credit and high income to qualify. All in all, it is a challenging application, but it should be reiterated that physicians have advantages compared to other professions with lower income.
Don't Forget to Consider the Drawbacks
Student loan refinancing is likely a great option for many physicians, but there are certainly a few negatives to be aware of.
As mentioned, low credit can lower your chances of approval, and it also influences the interest rate on the refinance loan. One of the main incentives to refinancing student loans is securing a lower rate on your debt. Having lower credit reduces the chances of getting this ideal rate. Basically, the difficulty of the application is a big drawback which has been touched on already.
If you are considering refinancing federal student loans, this will negate any federal benefits and protections such as income-driven repayment programs and student loan forgiveness. Why? You are transferring that federal debt to a private lender that does not offer the same benefits.
Finally, extending the repayment term through refinancing can offer relief with lower monthly payments, but it should be noted that extending a term can increase the lifetime cost of a loan. Interest has more time to capitalize and will drive up costs.
Physicians find themselves in an interesting dilemma. With high student debt loads, they face a challenging road to repayment. Student loan refinancing can offer cheaper rates and lower monthly payments as a solution to these challenges.
Of course, physicians are not guaranteed to qualify, but they certainly have an advantage with high potential income. It pays to understand what lenders are looking for before applying. That way, they can maximize their approval chances and odds of receiving beneficial terms for their student debt. This will all help you pay down your student loans faster!
Andrew is a Content Associate for Lendedu – a website that helps consumers, college graduates, and medical professionals with their finances. When he’s not working, you can find Andrew hiking or hanging with his cat, Colby.
Standard Disclaimer: Not meant as individualized financial advice. Photo by Alex Block on Unsplash