Great news! There is hope for residents and fellows feeling the brunt of high interest rate student loans.
Until recently, it was challenging and often impossible to refinance student loans to lower rates as a medical resident or fellow – you were limited to either finding an individual willing to privately finance or co-sign your student loan refinance or waiting until you begin practicing. Now, thanks to DRB, there is a much less risky (although not risk-free) alternative available to medical residents and fellows actively in training.
Darien Rowayton Bank “DRB” recently began offering student loan refinance options to medical residents and fellows. Their program is very reasonable and potentially of value to many student loan borrowers. As of this writing DRB is the only company I am aware of offering this type of deal. Before we get started, we have no financial connection to DRB and do not exclusively recommend them.
If you are not paying any principal on a debt (like many residents) and owe $300k at 7% APY (like many residents as well), you will incur around $21k in interest over 1 yr. If you have the same debt except the interest rate is 4%, your interest for 1 yr is $12k. That’s $9k less interest in just 1 year! Student Loan refinance can provide relief for some similar to this example. It’s a big deal, but as with anything, there are pros & cons that must be considered as it’s not for everyone. If you’re not familiar with the ins and outs of student loans for physicians, check this out.
Who Should Avoid Refinance Programs
This refinance option should NOT be under consideration for medical residents or fellows actively going for forgiveness programs like Public Service Loan Forgiveness “PSLF”. Also, if you’re spouse is going for PSLF, it’s probably best that you also hang onto your federal loans at least until your spouse finishes up PSLF. Refinancing to private loans immediately and permanently disqualifies you from these and other special federal loan programs. This option is also NOT for those with concerns about their financial security and risk management. Private lenders require regular payments and do not care if you fall on hard times. For example, if you don’t own disability insurance, you should NOT refinance student loans. Private lenders are NOT willing to offer the backstop called Income Based Repayment “IBR” or Pay As You Earn “PAYE” that you would have with government student loan programs. If you don’t have appropriate cash reserves, refinance is NOT for you.
The Ideal Candidate
If you’re a medical resident or fellow certainly not going for PSLF and you’re not married to someone going for PSLF, student loan refinance should be under consideration. This new program now offered to residents and fellows may be a great fit while you’re in training.
What is a Refinance
Refinancing involves simply finding a lender willing to pay off your current debt in exchange for creating a new debt – usually of the same size. You can refinance all sorts of things: cars, homes, and even student loans. The most common reason for refinancing is an overall cost reduction for the borrower. Student loan refinance has become more popular in recent years because private lenders are willing to offer considerably lower interest rates than government loan programs require. When you’re talking hundreds of thousands of dollars in student loans, the savings can be massive with a decent rate reduction.
Until recently, you could attempt to refinance during residency or fellowship, however, based on their standards, you would almost certainly be declined. Additionally, if for some reason you were approved, the payments would not be income based and likely too much to manage for many residents.
What’s the Catch
There’s not really a catch. Private lenders found an opportunity to make money while also saving you money. They are able to provide lending at much lower rates for loans that are locked in at much higher rates. There are, however, risks that should be considered before moving forward with any deal like this.
For starters, you are entering into a new contract with a private lender. Like any new contract or deal, you should read and understand the terms. Take note of downsides or questions and make sure they are answered before you sign. Every lender is different so don’t assume anything. Some, for example, have strict and penalizing late fee policies. And keep in mind things don’t always go as planned (for you or the lender). You should be considering all of the worst case scenarios before making a decision like this. For example… What happens if the lender goes out of business? What happens if you lose your job? What happens if you become disabled? What if you want to pay the debt off early or change the terms? What about refinancing again? Are there prepayment penalties? In general, you should be confident you can manage the downside risk. Do yourself a favor and asses the potential risks before entering into a contract like this.
Be very cautious taking on variable rate loans. The refinance programs offer variable rate alternatives that are often lower initially, but remember, they can adjust. We do not recommend them in general, but they can be more favorable in certain circumstances (once again if the individual can handle the downside risk appropriately).
The Approval Process
The institutions call this “underwriting”. Lenders like DRB require that you provide a thorough application before approval. This allows them to analyze your personal & financial situation to determine if they want to approve you and, if so, at what rate and with what terms. I recently had the opportunity to speak with Jenny at DRB she was happy to answer my questions and offer some insight into their specific underwriting criteria.
When reviewing your application, DRB has several “red flags” that cause loans to be potentially thrown out. First, if your debt to income ratio is above 40% you are likely going to have trouble and will be flagged for “further review”. This is not always a guaranteed decline, but it is likely to be the case. Hint: Maybe you should wait to buy your dream home until you have your loans refinanced. They also look at FICO credit scores. Anything in the range 650-680 is a red flag and will also be under further review and potentially declined. Hint: Check your credit before application.
I asked Jenny how they determine rates (they have a range so some people are approved but don’t get the best rate). She explained that it depends on the individual and 70% or more of their clients enjoy their best rates offered.
Here is a quick rundown of the new DRB program:
Student loan refinance now offered to medical residents and fellows (individual approval required)
Prior to Feb 2015 minimal requirements were that physicians be in practice (or about to enter practice) to qualify for refinance. Now, residents and fellows even in year one residency can refinance if they desire and qualify.
Your specialty projected income considered in DRB’s offer
DRB used to underwrite student loan refinance based on current income. For most residents, this was an automatic decline. Now they use your average projected FUTURE income for your current specialty. For example internal medicine residents would be underwritten based on future income of 150K/yr. (They use a physician salary study for projections)
Interest does not capitalize during residency
This means you will be charged interest based on the original principal balance only during residency and fellowship (as opposed to being charged interest on the principal PLUS accrued interest). The interest is added to your principal when the loan term starts (6 months into practice) and you begin making normal payments.
Payments during residency, fellowship & your first six months in practice are $100/mo
This $100/mo goes toward interest (reducing the amount of interest that will eventually capitalize once the loan term starts).
Payments increase 6 months into practice based on specific terms
Your repayment term starts 6 months after completion of training. At this point, your specific payment adjusts based on your loan terms (most will see considerable increases).
Interest rates range from 3.75% to 6.25% for the fixed rate options
These rates are the same as normal refinance options with DRB. They also offer their normal .25% rate reduction on the refinance option. To receive this, you must setup a checking account and automatic loan repayments through DRB.
We have had several clients go through the process of refinancing student loans through DRB and several other firms like SoFi. The feedback our clients have shared is that DRB’s application and process is slower and more time consuming than SoFi. However, it seems that the approved terms we see with DRB are much closer to the minimal stated rate range. We see a much greater range of rates with SoFi approvals.
The Bottom Line
The difference between refinancing when you start in practice and refinancing during residency or fellowship can be massive in terms of total interest paid. However, downside risk should be top priority when considering a deal like this.
White Coat Investor has a great post about this as well you should check out.
Also, DRB has some basic info on their website and you can use this link to receive $300 cash back if you choose to use DRB.
Or, if you are a member of the ADA, you can use this link for a .25% rate reduction!
There are now options for Dental Residents! Dental Residents of the following specialties are now able to refinance student loans to low rates while paying only $100/mo during training: Endodontists, Oral Surgeons, Orthodontists, Pediatric dentists, Periodontists, Prosthodontists. Here are some quick details:
Please contact us if you have any questions!
Have questions or care to share your experience? Ask/share in the comments!
Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.
Looking to create your own financial plan? Click here to download our free guide to getting started.
Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.