What you should know about student loan refinancing

More than 80 percent of physicians under the age of 40 still are paying off their medical school loans, according to AMA Insurance’s National Work/Life Profiles 2013 survey. Nearly one-half of these young physicians carry a debt of $150,000-$200,000. If you’ve been considering refinancing your medical school loans, find out what you need to know—and learn about a simple solution that can help you.

Student loan lenders will buy out your loans—public and private—from your existing servicers, allowing you to have one new loan at a potentially lower interest rate. This process also will consolidate all of the loans you refinance into one payment. The average physician can save around $40,000 by refinancing.

Refinancing exists because lenders are willing to offer loans at terms that are different from the original student loans. Market interest rates have dropped over the last few years, which is one reason lenders would take on loan refinancing.

Also, when students graduate and gain employment and a work history, they become better candidates for loan repayment because their chance of default is lower. Finally, refinancing rates are based on the individual credit and financial situation of borrowers, whereas federal loans are largely one-size-fits-all, with everyone getting the same rate for most loans.

To get the best refinancing offer, you should:

• Be in good credit standing
• Have a low debt-to-income ratio
• Have work experience
• Be aware of current market rates
• Apply with a cosigner
• Compare multiple offers

If you have a credit score of 680 or lower, you should add a cosigner because it will give you a greater chance of being approved. Regardless of credit score, anyone can add a cosigner—it could potentially give you a lower interest rate. Pick someone to cosign that has a strong credit history and high income, and someone you have a strong relationship with.

Refinancing your student loans can impact your eligibility for certain benefits. For example, if you’re a family practice physician in a small town, you could be eligible for federal grants, and refinancing would affect that. Four situations in which you would reconsider loan refinancing are:

• If you’re using an income-based repayment plan, which allows you to peg your repayment to a percentage of your income rather than a set monthly amount
• If you’re eligible for public service or health shortage area loan forgiveness
• If your loans are in forbearance
• If you’ve deferred your student loan payments on the basis of economic hardship

Laurel Road has developed a brief side-by-side comparison of loan consolidation and refinancing. AMA members who refinance their student loans with Laurel Road receive a 0.25 percent rate discount through AMA Member Benefits PLUS.