Should You Refinance Student Loans After Medical Residency?June 15, 2020
Congratulations! You’ve graduated from medical school and completed your residency. You are most likely earning substantially more than you were as a medical resident. If you are focusing on paying down your student loans now that you are earning more, you might be wondering whether refinancing your student loans following residency is a good idea. In many cases, it can be a smart move. But there are important things to consider when deciding whether to refinance following medical residency.
By Caroline Farhat
In 2018 the average student loan debt for a new medical graduate was $196,520. With the average medical resident salary of $61,200 per year in 2019, it may seem impossible to chip away at the debt balance. But after residency when the average salary for a family physician is $239,000, paying off your student loans can become much more manageable. But once you start thinking about your other financial priorities such as purchasing a house, starting a family, or saving for retirement, suddenly the loans seem like they will never be fully paid off. To combat this, refinancing medical student loans after you complete your residency can be a great way to reduce the loan amount you owe, making it easier to pay them off more quickly.
What to Consider When Deciding Whether to Refinance After Residency
Here are the factors to consider when deciding whether to refinance your student loans after medical residency.
Student Loan Forgiveness
If you completed your residency at a non-profit hospital and think you will continue to work for a non-profit or government entity, you may be eligible for student loan forgiveness. If you have federal loans and are considering entering the Public Service Loan Forgiveness (PSLF) program, refinancing your federal student loans to private loans would not be a good option for you since private loans are not eligible for forgiveness under that program. With only 46% of medical graduates planning to work towards student loan forgiveness, this may not be a big factor for many, but it is something to be aware of. The PSLF requires 120 on-time payments while you work in a qualifying non-profit organization or government entity. Only certain federal loans and payment plans qualify for the program. Once the criteria are met, the remaining balance of your student loans is forgiven. At this time, taxes would not be owed for the forgiven amount, however, legislation is frequently introduced to change the program terms.
Your Loans During Residency
How did you handle your student loans during your medical residency? Did you put them in deferment or forbearance? Did you already refinance them? If your loans were in deferment or forbearance they most likely accrued interest, meaning you will be facing more debt to contend with. Although the balance may seem intimidating you may be able to stop the high interest from accruing by refinancing and qualifying for a lower rate. If you have already refinanced, you may qualify for a lower interest rate now since you have increased your income.
Your Financial Goals
Your financial goals and timeline are factors that will determine if refinancing after residency is a smart decision for you. Will you continue to live like you are in residency and be able to use your additional income to quickly pay off your student loans? Or is it your financial goal to purchase a home once your residency is completed? If you have other financial goals you want to focus on in addition to paying off your student loans, refinancing would be beneficial to save you extra money per month. Retirement savings is important to focus on since new physicians may be in their 30s when they finish residency. Refinancing earlier and having extra money to save for retirement while you are still young allows you to catch-up on your retirement savings and take advantage of compounding interest.
In addition, refinancing can allow you to shorten the length of your loan. This will not only save you in interest costs over the life of the loan, but it also helps you pay off your loans faster.
Your Current Financial Status
When deciding whether now is the time to refinance, take into account your financial status. Do you have a strong credit score and a good credit history? These are just some factors that are analyzed by lenders to determine your interest rate on a new loan. Lenders usually require a minimum credit score in the 600s, at ELFI the minimum required score is 680 (learn more about student loan refinancing eligibility). But if you are looking to score a lower interest rate you want a credit score in the high 700s. Lenders will also want to see three years of good credit history. If your finances need a little improvement, refinancing right after residency may not be a good time because you may not see much savings. However, a financially prudent cosigner may be able to help you qualify for a lower rate. If you are already rocking a high credit score and strong credit history, refinancing after residency could save you money now.
Your Current Income
If you are now earning a physician’s salary, instead of your medical resident salary it may be a great time to refinance. When you apply to refinance student loans, your debt-to-income ratio is calculated and helps determine your interest rate. The lower your ratio the better. All your debt is taken into account, including mortgage, car payment, student loans and credit cards. Most lenders will require a ratio of 50% or lower to qualify for refinancing.
For example: if your debts are student loans of $2,000 per month, mortgage of $3,000 per month, auto loan of $500 per month, and credit cards of $200 per month, your total monthly debts are $5,700 per month. If your monthly income is $14,000 per month your debt to income ratio is $5,700/$14,000 = 40.7%.
If you want to see how much you could save by refinancing, use our Student Loan Refinance Calculator to get a custom calculation of your potential savings.* You can also see how shortening the loan term could help pay your loans off faster and save you more interest over the life of the loan.
For many physicians, refinancing student loans after residency will be advantageous. But be sure to consider your own circumstances and finances to determine what would be most beneficial for you. Either way, having a plan to tackle student loan debt is always a good start!
*Subject to credit approval. Terms and conditions apply.
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