Once you leave the federal student loan system, you can’t go back.
Medical students and physicians with student loans will receive many offers to refinance their student loans from private financial institutions. But before you decide to refinance, know that once you leave the federal student loan system, you can never go back.
Here are six questions to ask yourself before refinancing your loans.
Can you afford the monthly payment?
Many clients may want to refinance while in residence but don’t realize the significant monthly cost to do so. Some companies may offer a low payment during residency, but lock you into a high payment upon graduation. Be careful to put yourself at the mercy of a bank for a high monthly payment.
Running out of free money?
Be sure to explore ALL federal loan forgiveness options to see if you can qualify for them before refinancing. Paying a higher interest rate may be worth being tax exempt, if at all. Also explore if the employer’s repayment options require your loans to be federal in order to be able to be repaid as well.
What happens to loans if you die prematurely?
Federal loans currently have a tax free discharge of your loans upon your death. Private banks typically pass the debt on to your spouse, co-signer, or estate, and therefore, appropriate transferable life insurance should be in place prior to refinancing.
How are your interest rates?
It’s important to assess your current federal interest rates to see if they would even improve with refinancing. According to the Federal Register, most federal loans will be around 4-7%, but some may have loans at a lower interest rate that could be similar to refinancing and therefore not worth the change.
Is your interest rate locked in?
All federal loans have fixed interest rates, but you will have the option of a fixed rate or a variable rate when you refinance. While variable rates can be tempting, they’re rarely a better option when considering a long-term repayment strategy. If you can’t get a lower fixed rate than you got with your federal loans, it probably won’t make sense to refinance.
What if life does come?
There are many ways to lower your payment without defaulting on your federal loans. Private banks are much less forgiving and lock you into your repayment plan. If you are considering refinancing, consider a longer repayment term (even if you plan to pay off sooner) to allow for more flexibility. If the longer repayment term is still too long from a budget perspective, consider exploring other options with federal repayment programs.
Michael Foley, CFP, CSLP, is a full financial advisor at North Star Resource Group. Complementary, non-binding advice on student loans is available for healthcare professionals in training. Contact Michael at [email protected] or 480-993-9491.
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