Choosing Refinancing over PSLF

Why we chose refinancing our debt over PSLF

I wanted to write a post directly discussing my wife and I’s decision to refinance our federal medical student loans. 

There are ample opinions out there discussing the risks and benefit of pursuing Public Service Loan Forgiveness (PSLF).  To briefly refresh our readership, when my wife and I graduated from medical school, we shared approximately $670,000 in medical education debt between the two of us.  Greater than 95% of this was in federal medical student loans.  My wife had a very small portion of her debt as subsidized loans, but most of our debt was unsubsidized.  Further, we shared a range of interest rates on this debt from 6%-8%.  All-in-all we averaged about 7% interest on $670,000.  This means we were averaging an accumulation of roughly $46,900 a year in interest on top of our current principle.  We are accumulating the cost of a new Tesla Model 3 in interest each year!

Another aspect to consider is that, following entry into residency, you enter a phase of your life where you are over worked and under paid.  Here most start to realize the weight of debt they have accumulated.  During these post-graduate years, many residents only make enough to cover rent and their living expenses. 

Defaulting to the norm

Culturally there is an expectation to place federal student loans on a reimbursement plan with low monthly payments. These are often referred to as income driven repayment plans.  The most common of which are Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE).  These repayment programs determine your payment based on your monthly discretionary income, usually 10%.  Often, given the low salary of resident physicians, these payments are in the few hundreds of dollars and are less of a monetary burden.  However, keep in mind that your interest continues to accumulate despite making these payments. 

It is worthy of noting that I am making a sweeping generalization as some income driven repayment plans may offer some unpaid interest payments while you are a trainee.  That said, the majority of these plans add accrued interest payments to your total debt following completion of training. 

It just keeps on accumulating…

Returning to my example above, this would mean that at an average interest rate of 7%, we are accumulating approximately $3900 a month all while making a PAYE/REPAYE payment of $100-$300. As you can see…just a drop in the massive, massive bucket.  Further, over the course of either a 10-year to 25-year repayment plan you ultimately can pay hundreds of thousands of dollars more in interest given the duration.  Knowing this, my wife and I began finding ourselves having more and more discussions considering the pros and cons of refinancing.  The caveat is, once you refinance your debt to private lenders, you are no longer eligible for the PSLF program.

The uncertainty of the future

The difficulty that so often arose was uncertainty of the future.  We found ourselves not having a clear understanding of what our future held.  I knew that I was going to be applying for a fellowship, but my wife had found success moonlighting at a rural private hospital.  Further, following matching in the Southeast, the academic institution had no job offerings at the time for my wife.  Lastly, there remained uncertainty in the stability of the PSLF program itself.  With such polarized politics alternating in office, there was uncertainty in the longevity of a program involving sweeping debt forgiveness.  Endless testimonies of physicians meeting obstacles with PSLF were coming to light.  All this added anxiety to an already anxiety provoking financial situation. 

We felt a change was necessary.

Shopping around

We ultimately decided to start shopping around for private loan refinancing options.  We reviewed many lenders including: SoFi, Laurel Road, Earnest, Commonbond, Splash Financial, etc.  Ultimately, we were offered much lower interest rates (compared to our current federal interest rates) in 2018. 

My wife and I initially refinanced our debt with Laurel Road.  My new interest rate decreased to 4.4%, while my wife’s decreased to 3.2%.  We now were accumulating substantially less interest, saving us approximately $24,000 annually.  The process was relatively straight-forward, but did require a soft, and subsequently hard credit pull. Let’s not forget the time spent providing forms and documentation of our income and debt too. 

Sweet (emotional) relief

I must say, following refinancing, there was a small amount of emotional relief.  It was nice to no longer deal with the anxiety of knowing if we were making the right choice between refinancing or pursuing PSLF.  I was constantly oscillating back and forth determining if one option was more financially sound…driving my anxiety skyward. 

Following refinancing, it was a relief knowing that PSLF was no longer an option for us, making my path forward much linear.  We now could focus on paying down our debt and budgeting our expenses based on our required monthly payments.  It is important to add that for residents and fellows (current trainees) most private lenders only require a monthly payment of $100 until 6 months after completion of training.  We always opted to pay substantially more but were reassured that should we meet some financial catastrophe, we had a safety net. 

Then COVID-19 happened

When the COVID-19 pandemic hit, the government placed a moratorium on interest accumulation for federal loans. Our silver lining was that people stopped refinancing.  With decreased demand for student loan refinancing in the private sector, interest rates dropped.  Since we had previously navigated this process, we were quick to refinance again. 

This was a no-brainer compared to the first time, as we no longer were making a decision that effected candidacy for PSLF.  This time my wife stayed with Laurel Road and I refinanced with SoFi, getting my interest lowered to 3.6% down from 4.4%.  This again continued to chip away at our accumulating interest.  During this time we were continually putting all our supplemental income as well as previously budgeted finances towards eliminating our debt.  Between prioritizing debt payments and lowing our interest rate, we were able to develop some real momentum.

Where our debt is housed now

With all said and done, we continue to keep our debt with Laurel Road and SoFi (for the time being).  My wife, who is an attending now, has a minimum payment of $2,600, and I continue to only have to pay a minimum of $100 a month while I am completing fellowship.  However, we have set a goal of paying at least $100,000 a year in debt.  This averages to roughly $8,333 a month.  With this we are literally melting our debt away.  With lower interest rates, we are accumulating less, making each subsequent payment bite more into our principal.  All of this becomes a positive feedback loop.  I speak from a place of experience when I say that there is a real sense of accomplishment watching your debt elimination accelerate over time. 

One last thing

There is one last topic I wanted to touch on that applies to this discussion.  It is one that is personal to me, and may not be applicable to other readers. 

There is a very real sense of obligation I feel to payback all of my debt. 

I was instilled from a young age the burden of responsibility; this has grown with me into adulthood.  Even if I was incredibly young and naïve when I decided to acquire this amount of debt, as a physician and a member of society I feel it important to return all that I have borrowed.  Many may disagree, which is understandable.  Many may not ever be in a financial situation to achieve this goal should they wish.  I do find it sad that even as physicians we must fight to find loopholes in our financial institutions just to lessen the burden of our debt. 

Alas, I do not intend to address the cost of medical education.  That is a whole different conversation in its own right.

Take home points

Did we make the right or the wrong decision in regards to refinancing our student loans?  I think now I see that is the wrong question.  What we did was the right decision for us. 

Like with many major life decisions, rarely do you ever know if it is the right call with 100% certainty… you have to take the leap.  Much like in medicine, you are forced to reflect on the current facts, apply your knowledge, and make the best educated decision you can.  We chose to refinance, and to this day I do not regret it.  And as always…

Stay motivated!

The Motivated M.D.

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What have you done with your educational debt? Did you refinance? Did you pursue PSLF? Let me know your experiences below, I would love to hear from you!

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