Should I Refinance My Student Loans?
1. Will this new private loan have a variable interest rate?
If YES, then you should know: If you refinance into a private loan with a low variable rate today, over time, the rate could rise higher than the current fixed rate on your federal loans. Variable rates are tied to an index causing the rate to rise or fall, which makes the total cost of variable rate debt impossible to calculate. Choosing variable rate loans involves taking some financial risk. Before committing to a variable rate loan, understand exactly how often the rate may change and how high it may rise. A variable rate loan could be a good option IF you will fully repay the loan in the near future.
If NO, then you should know: Fixed rate loans offer stability to a borrower's repayment, making this a good option for borrowers who don’t like risk. To make an accurate comparison of fixed rate private loans with other loans, be sure to know the terms, conditions, and fees (e.g., origination fees) of all the loans. A fixed rate loan may be the best option if high levels of debt and long repayment terms are involved.
2. Will you be working in public service? (This may include work during residency or a fellowship or while you are employed at an academic institution)
If YES, then you should know: After completing 10 years (120 on-time, monthly payments) of public service work, as well as satisfying several other requirements, forgiveness may be granted on some or all of your remaining federal student loans through the program. Private loans are not eligible for (PSLF). Only Direct Loans qualify for the PSLF program.
If NO, then you should know: Based on your expected career path, forfeiting access to Public Service Loan Forgiveness is not a factor you need to consider when deciding whether to refinance.
3. Will the payments be affordable and/or is postponing payments an option during residency?
If YES, then you should know: The lender determines the terms of private loans. If you cannot make your payments, you will be restricted to the accommodations offered by the private lender. However, with federal loans, a borrower has access to a variety of affordable payment plans and postponement options. For this reason, if you refinance with a private loan, select a reputable lender and thoroughly read the fine print.
If NO or NOT SURE, then you should know: Repaying private student loans can be burdensome if you don’t have access to the kind of flexible repayment and postponement options that federal student loans offer. So, know your current options in the federal program (such as that limit the payment amounts and can lead to forgiveness or the ability to easily during residency) and then question the private lender to see exactly how their terms and conditions compare. In general, reputable lenders will warn you about the benefits you are giving up when refinancing federal student loans.
4. Are you comfortable with assuming more risk in your financial life?
Refinancing with a private loan may be a good option if you are highly motivated to repay your student debt; have a secure job, emergency savings, and strong credit; are unlikely to benefit from forgiveness options; and have a low fixed rate option available OR you will have access to sufficient funds in the near future. However, if you do not meet these criteria, many financial advisors suggest that trading in federal loans for private loans will expose you to additional financial risk. Therefore, before you assume possible financial risk, evaluate your current situation to determine whether you could make it through if something unexpected happens.
Federal loans will give you the ability to benefit from their flexible terms and conditions, including access to income-driven repayment plans and possible loan forgiveness, potential interest subsidies, limits to monthly payment amounts, the availability of a death and disability discharge, and possible student loan tax deductions. Be sure the potential reward received in a refinance is enough to offset the potential risk you will assume.
Private debt and federal debt can operate very differently, especially when it comes to repayment. Know what you’re giving up and what you will gain because refinancing federal loans into a private loan cannot be undone.
AAMC Financial Wellness
Education Debt Manager (EDM) for Matriculating and Graduating Medical School Students
655 K St., NW, Suite 100
Washington, D.C. 20001-12399