Refinancing Student Loans After Pharmacy School

The average student loan debt for PharmD graduates amounted to $157,425 in 2016, which is an 8.8% increase from 2014, according to the American Association of Colleges of Pharmacy’s 2016 Graduating Student National Summary Report.

Being able to effectively manage your finances after graduating pharmacy school is crucial in achieving long-term financial stability. Yet, many individuals either don’t take the time to make a financial blueprint, or don’t see the value in doing so.

According to a recent survey released by Northwestern Mutual, more than one-third of Americans haven’t done anything to plan for their financial future. Moreover, study results show a lack of financial planning can lead to financial anxiety, negatively impacting careers, personal relationships, and outlooks on the future.

One important aspect of financial planning for recent pharmacy graduates involves deciding how to best manage your student loans. This article will detail what it means to refinance student loans, the benefits of doing so, common finance terminology, and my own personal experiences.

My Story

Like most pharmacy graduates, I finished pharmacy school owing a significant amount of money in student loans. Despite working throughout school, I had to take out sizable loans to pay tuition, which seemed to increase every year. To be completely honest, for quite a while, I avoided looking at the total amount owed among all of the different loans and providers because it just seemed too daunting.

After graduating in 2015, I completed a PGY1 residency. During this time, I made roughly one-third of a pharmacist’s pay, and despite working per-diem at an independent pharmacy, I made little progress on paying down my loans. I signed up for an Income-Based Repayment (IBR) plan on my federal loans, and I paid the minimum on my private loans.

After the year was over, I was hired on full-time at my current employer and knew it was time to take a hard look at my student loans. The total amount was $142,415.29, which actually wasn’t as bad as I expected. Still, I was getting killed every month due to high interest rates on my loans, and it seemed like the majority of my monthly payments would just be covering the interest.

I then started to do some research to compare my options with refinancing, thus beginning my journey to financial planning.

Consolidating vs Refinancing

Before we get into specifics, let’s first define some common finance terms.

Consolidation

This involves combining multiple loans into one giant loan. It can be subdivided into federal and private loan consolidation.

Federal loan consolidation is a government program allowing you to combine multiple federal loans into one single loan. The interest rate on your new loan becomes a weighted average of the prior loan rates. Therefore, this process won’t save you money or change your monthly payment (assuming you don’t extend the repayment period). The major benefit is convenience, in that you’ll end up with fewer bills to pay and keep track of each month.

Private loan consolidation also allows you to combine multiple loans into one. The major difference is the interest rate on the new consolidated loan isn’t a weighted average based on your old loans, but rather calculated based on a number of different factors. In practical terms, when you consolidate student loans with a private lender, you’re also refinancing them.

Refinancing

This means you use a new loan to pay off one or more existing loans. Again, this process results in a new interest rate on the consolidated loan. The specific interest rate is based on your credit history, salary, total dollar amount owed, and a number of other factors.

This can result in benefits like lowered monthly payments, paying off loans quicker, saving money on interest, and the convenience of paying off one monthly bill. Some private lenders will only refinance private loans, whereas others will refinance both private and federal student loans for additional convenience and cost savings.

On the flip side, refinancing your private and federal loans together means giving up favorable repayment terms like IBR plans and public service loan forgiveness. Although these may not be commonly used repayment options for the majority of pharmacists, you should consider all your options before refinancing.

Vendors to Refinance Loans

Once you’ve decided refinancing may be right for you, it’s time to find some vendors to compare your options. There’s a number of different banks and institutions available through a quick Google search.

Although terms may vary slightly from vendor to vendor, things to consider include whether they can consolidate both private and federal loans together, the length of repayment terms offered (5, 10, 20 years), degrees eligible to be refinanced (undergraduate vs graduate), and the interest rates they offer. After research and speaking with former classmates and colleagues, I applied through Social Finance, Inc (SoFI), an institution that offers a number of different loan types through a “nontraditional” approach.

After a few minutes of entering my personal information, estimated student loan amount, and employment information, I was given preliminary interest rates based on several repayment terms with either fixed or variable rates (explained below). To get your final interest rate, you’ll need to enter your current loan vendor information, proof of income, and some other personal verification information.

In the end, I chose a 10-year variable rate loan with a final interest rate below 5%. For me, this meant an estimated cost savings of over $30,000 by the end of the 10-year term compared with my existing loans. Of course, the magnitude of savings will vary based on how quickly the loan will be paid off. As an added bonus, the process of refinancing my loans through SoFI resulted in my parents’ being removed as cosigners on my private loans.

Other factors that enticed me to SoFI included the lack of an origination or prepayment fees on student refinanced loans, a 0.25% interest rate reduction for enrolling in their AutoPay program, unemployment protection, and free career-planning and job-search assistance.

Fixed vs Variable Rate

Most vendors will offer refinancing options as either fixed or variable rate loans. It’s important to understand the differences to determine which is most appropriate for you.

With fixed-rate loans, the interest rate doesn’t change over the life of the loan, meaning you’ll pay the same amount every month. The benefit of choosing a fixed rate is you’ll have peace of mind in knowing your interest rate will never change. On the flip side, the interest rate is generally higher than with variable rate loans.

Variable rate loans have an interest rate that will fluctuate in line with a base rate set by various institutions. This results in fluctuating monthly payments depending on changes with the interest rate. The major benefit is variable rates tend to start at a lower rate than fixed rate loans. The downside is the possibility of your interest rate increasing in the long term; however, most vendors have a maximum cap that your interest rate can’t exceed. For example, SoFi variable rate student loans are capped at 8.95% or 9.95%, depending on the term.

I chose a variable rate loan because the interest rate was significantly lower than the fixed rate loan, and I plan to pay off my student loans long before the end of my 10-year term.

If you’re refinancing with a longer repayment period (10 to 20 years) and prefer stability, a fixed rate may be the better option. Keep in mind there’s no “right” answer with which option is better and may be based on personal preferences and your opinion on how interest rates will be changing in the future.

Bottom Line

Refinancing your student loans from pharmacy school can potentially save you a significant amount of money while providing the convenience of making one payment a month. Keep in mind refinancing may not be for everyone. Individuals with a poor credit history, low salary from a pharmacy residency or fellowship, or those who want to keep the provisions in federal loans may want to closely consider their options before jumping right into refinancing their loans.

How have you managed your student loans? Tweet me @toshea125 to let me know.