Paying Off Med School Debt by Refinancing vs. Consolidating

JULY 20, 2017
Future Proof M.D.


If you are like me, you may have gathered multiple loans from several different lenders over your many years of schooling.  Now that you're finally done with school and entered the workforce, you may have been bombarded with emails inviting you to consolidate or refinance your loans.  

First, let's define consolidation and refinancing.
  • Consolidation allows you to combine multiple loans into one loan, resulting in just one monthly payment instead of many. For example, if you have only federal loans and go through federal loan consolidation, you will end up with one bill and your interest rate will simply be a weighted average of all the different interest rates of the loans you consolidated.
  • Refinancing, on the other hand, also allows you to combine your loans as above.  But the difference is that your new interest rate will be dependent on your credit score and history rather than what the interest rates on your old loans were.  In essence, you are applying for a new loan with new terms to pay off your old loans, which is analogous to a balance transfer between credit cards.  In reality, consolidation and refinancing are used interchangeably.  If you are getting an offer to consolidate your loans through a private lender, they're talking about refinancing.  For the purpose of this article, I will use the term refinance.
PROS:
  • One monthly payment.  This is probably the biggest benefit of refinancing your loans.  Instead of making multiple monthly payments to multiple lenders, you get one bill and one payment.
  • You may qualify for a lower interest rate.  The standard interest rate for federal student loans are fixed at 6.8 percent.  If you have good credit and income, it's likely you will qualify for a lower interest rate.  I say may because when I went through SoFi (the largest student loan refinancing lender) to check what they would do for me, my refinancing offer was less than generous.
  • You can lower your monthly payment. This can result from you getting a lower interest rate on the new loan, by renegotiating your repayment term (15 or 20 years instead of the standard 10 years for a standard repayment plan), or a combination of both.
  • Choice of variable vs. fixed interest rates.  Choosing a variable interest rate will benefit those who are planning to pay off their student loans rapidly. 
CONS:
  • Refinancing your loans with a private lender will make you ineligible for federal loan forgiveness programs such as Public Service Loan Forgiveness (PSLF) and other benefits such as Income Driven Repayment (IDR)deferments and forbearance.
  • Your interest rate may go up if you choose a variable interest rate plan. Most variable interest rate loans have a cap as to how high the interest rate can reach, but it's usually more than the standard 6.8 percent fixed you would get through the government.
  • It's a permanent decision. If you ever leave the federal system, there is no recourse if you decide later that you've made a mistake.  
  • Fees: This is a minor consideration for those with a large loan balance, but there may be fees associated with a private loan refinancing application.
So after considering many of the above factors, I ended up consolidating my loans through the government.  I am currently on the Revised Pay As You Earn (REPAYE) repayment plan with the goal of eventually qualifying for Public Service Loan Forgiveness.  What about you?  Have you consolidated or refinanced or plan to? Are there any pros and cons that I missed?  Let me know in the comments!

Thoughts and comments? Reach out to me at http://futureproofmd.com/

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