By: Jeff Gitlen
Originally published on Lendedu
As the massive and growing student debt issue continues to garner media attention, there is little mention of the crisis facing medical students who must contend with more than $207,000 of student debt before they even begin to earn a decent paycheck.
Maybe it’s because, as physicians, they are expected to earn sizable salaries which are more than sufficient to pay the higher medical school loan payments. However, considering that most medical school graduates have to carry that debt three to ten years through a residency program before earning a larger salary, they can end up living paycheck to paycheck well into the early part of their careers.
Refinancing Designed for Medical Professionals
at SoFi’s secure website
Fixed Rates: 3.625% – 7.755%
Variable Rates: 3.065% – 7.370%
Loan Terms: 5, 10, and 15 years
Min. Loan Amount:N/A
Max. Loan Amount: N/A
Fees: None
at Splash Financial’s secure website
Fixed Rates: 5.65% – 6.05%
Variable Rates: N/A
Loan Terms: 5, 7, and 10 years
Min. Loan Amount: N/A
Max. Loan Amount: $350,000
Fees: 2% – 2.5% orig. fee*
*Origination Fee
These alternative lenders, which will loan up to $300,000 to refinance medical school loans, base their loan qualifications on the borrower’s earning potential as determined by their future field of practice. They also have flexible repayment terms that include minimum payments during residency if desired. Among the leaders in this specialized arena are SoFi (Social Finance, Inc.), Splash Financial, and Laurel Road.
SoFi
Over the last six years SoFi has exploded on the fintech scene as one of the premier lenders for student loan refinancing. It was the first alternative lender to offer consolidation of both federal and private student loans and, through 2016, it has refinanced more than $2 billion in student loan debt. It recently announced the launch of a new refinancing program geared strictly for medical student loans. The program offers five different medical school loan repayment terms – from five to 20 years – with fixed or variable rates on loans up to $300,000. As of November 1, 2017, SoFi’s fixed rates range from 3.625 percent to 7.755 percent. Its variable rates range from 3.065 percent to 7.370 percent. Both rate ranges assume enrollment in AutoPay.
SoFi allows residents to make minimum payments as low as $100 on their loans through the end of their residency of fellowship program – up to 54 months. Once you leave residency SoFi will re-amortize your loan and your payment amount will increase based on the new amortization schedule. Although interest does accrue when you make minimum payments, you are not charged compounded interest during your residency period. Instead, SoFi simply capitalizes the accrued interest at the end of your residency period.
Refinancing medical school loans is open to residents and fellows once they have been matched to a program and are within four years of becoming an attending physician. There are no loan origination or prepayment fees.
Splash Financial
Launched in 2013, Splash Financial is one of the first student loan consolidation companies to focus primarily on medical student borrowers in residencies or fellowships with loans up to $350,000. Splash offers terms of 5, 7, and 10 years with a 90-day grace period following the completion of training. So if you refinance medical school loans with a new ten-year loan before starting a three-year residency, you would have 13 years to repay it. During training borrowers may pay as little as $1 a month towards their loans for up to 84 months with the accrued interest capitalized at the end of training.
Splash offers a fixed rate loan currently starting at 5.65 percent for the most creditworthy borrowers. Its rate at the high end is just 6.05 percent. Splash is one of the only private student loan consolidators to charge an origination fee. There is a 2.5 percent origination fee for residents and fellows and a 2 percent fee for physicians. The fee is amortized into the loan.
Laurel Road
Laurel Road started offering student loan refinancing as Darien Rowayton Bank (DRB) in 2006. It took on its current name in 2017 to reflect the “journey it takes our customers to achieve their life goals.” DRB/Laurel Road has originated more than $2 billion in refinanced student loans, which makes it one of the largest lenders in the student loan space.
Borrowers can choose any term they want under 20 years on loans up to $500,000. It currently offers a variable rate from 2.99 to 6.42 percent, and a fixed rate from 3.95 to 6.99 percent. The variable rate is capped at 9 or 10 percent depending on the length of the term. Laurel Road also offers a minimum payment option during training, allowing borrowers to pay as little as $25 per month. Laurel Road does not charge fees of any kind.
All three of these leading lenders offer forbearance options and loan forgiveness in the event of death or disability. Applications are submitted online and loan approval is received the same day. The timing of funding varies between the three, but borrowers can always expect funding to occur within about ten days if not sooner.
Debt Piles Up for Residents and Fellows
While in residency, medical school grads are allowed to defer payments until they successfully complete the program. With a residency salary as low as $60,000, that might seem like the logical thing to do while waiting to start earning a larger paycheck. The problem is their medical student loan is still accruing interest on the outstanding balance.
If your total medical school debt is $240,000 and you are being charged an interest rate of 6.8 percent, that means $17,000 of interest is being added to your debt per year. And because your accrued interest is also being charged interest, your debt can balloon to nearly $300,000 over three years. If you are specializing and working through a five-year residency and fellowship program, your loan balance could grow by as much as $100,000.
Few Good Options for Medical School Borrowers
Many student debt experts recommend that medical residents start paying down their debt as soon as they can for that very reason. However, paying a $1,500 monthly payment on $60,000 of income is a lot easier said than done.
At the very least, residents should try making the interest payments to keep the loans from growing. But considering the loan payments consist primarily of interest in the early years, it would still be a large monthly payment. Medical school graduates can look to income-based repayment (IBR) plans to reduce their monthly payment, but only the lowest paid residents may qualify for one.
Even with IBR payments, you may only cover about half of the monthly interest accrual; so, even with making payments, the loan balance will still grow. If you could qualify for IBR while in residency, you would no longer qualify once you started earning a bigger salary.
Another government option is the REPAYE (Revised Pay As You Earn) program, which forgives up to 50 percent of interest accrued on student loans while in the residency program. It also reduces the interest rate on any accrued interest. REPAYE, like other IBR programs also offers loan forgiveness after 20 years of payments.
Once you leave residency and start earning a higher income, you lose the interest subsidy and will continue to make payments at 7 percent or whatever the current REPAYE rate is. One strategy would be to opt for REPAYE while in residency and then refinance when your income increases. However, by waiting to refinance medical school loans, you risk refinancing at higher rates if current interest rates are higher.
Private Refinancing Makes Sense for Most Medical Grads
It always depends on individual circumstances, but for many medical school grads who don’t plan on pursuing Public Service Loan Forgiveness (PSLF), a potential solution is to refinance their student loanswhile in residency in order to reduce interest costs and monthly payments. It also allows borrowers to consolidate multiple private and federal loans into one, which makes managing medical school loans repayment much easier.
When you refinance medical school loans, you are essentially taking out a new loan to pay off the old ones. This would only make sense if you can obtain better terms – either a lower interest rate or a lower monthly payment – with the new loan. If you can reduce your medical school loan interest rate by 2 percent on $180,000, it can result in a savings of nearly $4,000 a year in payments.
Refinancing medical school loans must be done with a private lender. Until recently, the challenge for medical school grads has been to qualify for a private loan. Many of the traditional lenders typically require very good credit to qualify for a decent interest rate. However, in just the last few years, a new strain of student loan refinance lenders has emerged to address the specific challenges faced by medical school grads.
