Student Loan Refinancing Ladder A case study


    Student loan refinancing manager

    I have advised several residents to refinance their student loans several times after completing their education.

    I even discuss refinancing more than once in The Physician Philosopher’s Guide to Personal Finance.

    Then I recently heard a podcast with Travis Hornsby on The Student Loan Planner. Leave it to him to come up with a good name for this multiple refinancing method: the Student Loan Refinance Ladder.

    Fundamentals of refinancing student loans

    Not everyone should refinance their loans. Let’s discuss some of the basics behind student loan refinancing. Then we will be better prepared to discuss who should consider the student loan refinance ladder.

    Note: The most important thing in advance is that refinancing student loans is NOT comparable to refinancing a house. There are no costs for refinancing student loans (in contrast to refinancing a house, which costs a good portion of the change). Because of this, the refinancing ladder discussed below works for student loans.

    First, if you intend to get student loans, you shouldn’t refinance your federal student loan.

    However, private loans cannot be made through federal programs. So feel free to refinance private loans even if you have federal loans (you can handle these separately).

    Next, it’s good to know that student loan interest rates are based on LIBOR (London Inter-bank Offered Rate), which changes monthly. This means that if interest rates go up, there is a chance your interest rate will go up too if you refinance. So if you still have a boatload of student loans, refinancing may not be the best option in this situation.

    Fortunately, you can get quotes before actually refinancing (the quotes are a «soft check» that doesn’t count towards your credit). This will tell you whether the LIBOR rate has changed and whether or not your rate will improve.

    The last thing to mention is that you can refinance to change the terms on your loans.

    For example, you could refinance at a fixed rate of 20 years to lower your monthly payment (for the general practitioners who need to increase cash flow for a bank to buy you into a business).

    Then after you are approved, you can refinance again to lower your interest rate by getting a shorter term with a floating rate (e.g. a 7 year floating rate refinance).

    Student loan refinancing case study

    The situation

    Take graduating from medical school with $ 200,000 in student loans at 7% interest (~ $ 14,000 annually).

    In this example, let’s say she is single and intends to go to a private practice after completing her five-year residency in general surgery. She wants to minimize the total amount she is paying back on her student loans and plans to pay them off in two years after her residency ends.

    Even if there are private refinancing options for residents, REPAYE is the clear winner in this doctor situation. Through REPAYE, she knows that half of her interest ($ 7,000) is paid each year by the U.S. Department of Education.

    Given the interest paid on their behalf, this effectively lowers their interest rate through REPAYE to 3.5%. This is better than what she is likely to get through private refinancing opportunities while earning a resident salary.

    That is why she carefully chooses REPAYE for the first four years of her specialist training.

    Use the refinance ladder for student loans

    In July of her last year of training, she got her dream job in her own practice. She signed a salary of $ 250,000 on the dashed line. She will earn more when she becomes a partner. As a result, their debt-to-income ratio (DIR) is <1, which is one situation I encourage doctors to refinance their loans.

    Fortunately, she now has a “contract in hand” and knows that some companies will use her “guaranteed” future income to determine their prices. Enter the student loan refinancing manager here.

    She refinances with the first company and earns her a cashback bonus through the student loan refinancing page. Some companies charge a zero dollar payment when you refinance as a resident on a contract, even though they intend to make the same payment as they did before under REPAYE.

    Her interest rate falls below her “effective rate cut” she received through REPAYE for that year. She can also throw any additional money (e.g. from sideline income) she has on these loans without being affected by a fee.

    Interest rates keep falling. She therefore decides to refinance with another refinancing company in order to lower her rate even further when she becomes the treating doctor. She knows she’s buying into a practice and chooses a 15 year term to increase cash flow so the bank can lend her the money.

    Six months later, she refinances one last time with a third company at a 7-year variable interest rate. The shorter term lowers her interest rate, and she plans to pay off the loans in 3 to 5 years anyway.

    What is the result

    In the example above, this financially savvy doctor has achieved a lot.

    She minimized her debt while training with REPAYE. Then she used a student loan refinance ladder to earn ~ $ 1000 in cashback during the process. She could have made more if she had refinanced with a few other companies as well. Remember there is no limit.

    Additionally, the lower interest rate she received from the refinance is sure to save her thousands of dollars while she repays her student loans.

    Take it home with you

    Knowledge is power. Realizing that there is no cost and no limit to refinance your student loan … there are real benefits to using a student loan refinance ladder.

    I would love to hear from those of you who have refinanced multiple times. If you are thinking of doing this but haven’t done it, what’s stopping you? Leave a comment below.

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