As founder of the company Doctors Without Quarters (DWOQ), I speak to residents and fellows often about their financial goals—and how to get there. The answers to these five common questions can help you, too, manage your debt and maximize your income.
1 Most of my federal student loans are between 5.4 and 8.5 percent. Are there opportunities to refinance to lower rates, and if so, does that make sense?
This is an important question, as many students and graduates are being approached or seeing advertising for lower rates available from companies like SoFi, Laurel Road, Credible, CommonBond, Earnest and many others.
The private lending marketplace has become increasingly crowded and competitive over the last year, which is good for borrowers. The issue to consider is suitability, as lenders tend to be transaction-focused and refinancing isn’t always the best option for you.
Once you refinance federal loans to a private lender, you lose all of the federal benefits. Though a 3 percent rate might seem attractive, if it comes with a high origination fee and is a variable rate loan, you might find yourself in a more costly loan if rates go up from their current historic lows.
Even more importantly, a refinanced loan will also not be eligible for Income-Driven Repayment (IDR) plans or the substantial loan forgiveness available through these programs for those who work in nonprofits or public service.
2 Are public service and federal loan forgiveness really viable options?
I’ll assume that most of you at this point are familiar with the PSLF program (if you aren’t, please contact me), and that your residency/fellowship can count toward this 10-year clock if you’re utilizing an IDR. Some people don’t believe that this program will exist as it does currently, and in fact recently proposed legislation suggests considerable changes.
But housestaff at nonprofit programs should be reassured by a few things. For one, the Master Promissory Notes created a legal contract between you and the federal government saying that you borrowed under the assumption you’d be able to utilize the PSLF program under the terms of the program at the time you took out the loan.
Secondly, if you’re actively working toward repaying your loans through the PSLF program and have made economic decisions based on the program’s details, you’ve demonstrated a reliance on the terms as they exist today. As such, the federal government may be obligated to grandfather you in through any changes to the laws. In summary, we hope this means you’re unlikely to be affected by the proposed changes.
3 When and why would it make sense to consolidate my loans?
In July 2010, Direct Loans became the lender for all federal student loans. Stafford and Grad PLUS loans borrowed prior to this time may have been originated by a private lender (Sallie Mae, Wells Fargo, etc.) under the FFEL program. These loans need to first be consolidated to Direct Loans before making IDR payments on them will qualify for PSLF.
Furthermore, Perkins and select need-based loans are not eligible for an IDR on a stand-alone basis, but they can be consolidated to Direct Loans for eligibility. Variable rate loans originated before July of 2006 can also be fixed at extremely low rates through consolidation.
If you’ve yet to enter an IDR, the first step in your action plan is to review all of your loans and determine if a consolidation is necessary to maximize your savings opportunity.
If you have already completed qualifying payments towards PSLF, consolidating to a new loan will actually create a new loan and erase your progress toward PSLF. Don’t do this!
4 What is loan forbearance, and why might using it be a bad idea during my training? Isn’t that what residents used to do?
In forbearance, no loan payments are required, but interest continues to accrue. It’s true that in past years, many residents did not pay on their loans during training. But times have changed, and loan forbearance is typically the most costly option for today’s residents.
Though forbearance allows you more access to your modest training income, it is important to note that ALL of this interest accrues with no federal subsidy or forgiveness opportunity. Furthermore, interest can capitalize in each year that forbearance is renewed. A resident with $220,000 of federal student loan debt will accumulate almost $65,000 in additional interest over the course of a four-year residency by using forbearance.
Choosing among the available IDR plans is likely a superior alternative, as they require affordable loan payments during training, provide an interest subsidy, and can position many residents and fellows for significant loan forgiveness.
5 How should my loan repayment strategy change after training?
This is the most critical loan decision you’ll make if you’ve been using available IDRs strategically during training, particularly if you’re deciding between offers from a PSLF-qualified employer and a private sector employer after training.
In one of our case studies, a graduating resident after four years of training with $250,000 in federal student loan debt was comparing a $150,000 salary directly by a nonprofit hospital and a $205,000 salary from a for-profit program.
After contemplating the after-tax impact of PSLF and the corresponding reduction in payments required for the next six years, the $150,000 salary was actually worth over $240,000 on average for that six-year period. Only by utilizing an IDR during training can you position yourself for this opportunity.
Jason DiLorenzo is founder and executive director of Doctors Without Quarters, which helps physicians strategically manage their student loans. Since 2010, he has spoken at medical schools, hospitals and conferences nationally on the topic of student loan legislation and its impact on early-career physicians.