Refinancing and Consolidating Student Loans

If you are like most physicians, you have student debt. All physicians should take the time to research and consider options for student loan repayment.  

What is the difference between loan consolidation and refinancing?  

Refinancing is when you apply for a loan under new terms and use that loan to pay off one or more existing student loans. If you use the new loan to pay off more than one loan, you are consolidating those loans into one payment. Refinancing could:  

• Lower your interest rate 
• Lower your monthly payment 
• Reduce the time it takes to pay off your loan 
• Lower your overall cost 

Consolidating could offer fewer bills and payments to keep track of each month. ​ 

If You Have Federal Loans  

Federal loans offer certain benefits and protections (such as Public Service Loan Forgiveness and income-driven repayment plans) that do not transfer to private lenders. If you’re considering refinancing, first look at your federal loans to see if any of these benefits apply to you. If you don’t anticipate needing or qualifying for federal loan benefits, getting a lower rate through refinancing and consolidating with a private lender may save you a significant sum.  

The government offers federal loan consolidation for most types of federal loans. Private loans are not eligible for consolidation through this program. Typically, this option simplifies repayment but doesn’t save you any money. Your new interest rate is the weighted average interest rate of the loans being combined.    

Things to Consider 

Refinancing and/or consolidating student loans can be a great strategy to manage student loan repayment, however it can be confusing. Inadequate research may result in decisions that lead to financial problems down the road. For questions, consider reaching out to the financial aid office at your medical school or any resources provided by your residency program.    

Here are some essential considerations:  

Refinanced loan repayment length 

Typically, banks offer 5, 10, 15, and 20- year repayment terms. Consider how much you can afford to pay now, and how much interest you will accrue over the lifetime of repayment. A shorter term accrues less interest during repayment, but the monthly payments will be higher. ​ 

Variable or fixed interest rate  

Fixed interest rates tend to be less risky, whereas variable interest rate loans fluctuate due to economic conditions. Study the economic environment, understand the risks, and assess your ability to pay should the interest rates change significantly.  

Repayment Terms  

Find out when the repayment will start. What will the monthly payments be? Are there payment options? What are the repercussions for missing a payment or defaulting on the loan? Is there an interest rate reduction for automatic payment withdrawal?  

Origination fee 

Many student loans have an origination or “startup” fee. Origination fees may be up to 2% of the total amount requested. For example, for a $60,000 student loan you will pay $600 for a 1% origination fee. Usually the origination fee is added to the loan amount due instead of an upfront payment.  

Bundled federal and private student loans 

Some financial institutions refinance federal and private loans together. This can ultimately obtain a lower interest rate to save money. However alternative and flexible repayment plans associated with a federal government loan program may be lost if bundled with another kind of loan.  

Co-signer and releases  

If your income or credit score is too low, the bank might require a co-signer to insure your student loans in the case of default. Some lenders offer a co-signer release. This can help free up revolving credit for co-signers allowing them to obtain a mortgage or auto loans.   

Credit score, salary, and debt-to-income requirements  

Depending on total indebtedness, banks may require a minimum credit score or a set debt-to-income ratio. Sometimes they may require a minimum monthly salary. Ask about these requirements before submitting your loan application. It can save you time and frustration. 

Maximum amounts of debt eligible for refinancing  

Banks typically have a maximum amount of debt they will refinance. The amount varies by bank and education level. Know their lending parameters up front. ​ 

Support and customer service  

Often this is the most important information. Lenders that provide poor customer service may not be the best bargain. Ask colleagues and mentors to provide insights into the quality of customer service. Don’t rely on what the lenders say about themselves. Remember this will be a long-term relationship (5-20 years). Choose wisely. ​