The Optometrist’s Guide To Student Loan Refinancing
Introduction
Optometrists often accumulate multiple loans from federal and private lenders to fund their doctor education, which results in an average debt load of $220,000. The majority of these loans are federal loans which have an average interest rate of 5.5-6.8%.
Assuming that an optometrist is NOT going for federal forgiveness such as:
- 10 years Public Service Loan Forgiveness (PSLF) - if they work for a non-profit organization like VA
- 20-25 total loan forgiveness if their debt to income is 3:1 or greater
Then the majority of doctors will end up refinancing their student loans to save thousands of dollars in interest. Here is your comprehensive guide to the student loan refinancing process and understanding how underwriting works.
What is Student Loan Refinancing?
Student loan refinancing is when you seek out a private lender to replace your loans with a brand new loan at a new interest rate and terms. When you refinance your student loans with a private lender, it will change the existing terms with regards to interest rate and time to repay.
Refinancing is free, can be done over and over, and can save you a lot of money by lowering your interest rate. In addition, many lenders will offer a sign-up bonus each time for new clients.
This is different from Federal Direct Consolidation, which basically converts multiple loans into one loan resulting in an average, single weighted interest rate. Often making it easier to track. Consolidating is usually offered with your Federal Loan program.
Overall, when you are refinancing your student loan, you are essentially BOTH consolidating multiple federal loans into a ONE single loan, but at a lower interest rate.
8 Benefits Why You Should Refinance Your Student Loans
(1) You save a lot of money due to a lower interest rate
Range: 1.9% to 4.9% depending on banks, term duration, variable or fixed interest rate
Example: A typical optometrist will have a $200,000 loan at 6.8%, but if she/he were able to get a refinanced rate of 2.5%, he would save a total of $8600 in interest that first year alone – which could go towards principal payment. Now imagine a 20-year student loan - you would save a total of $112,049 in interest alone ($166,402 at 6.8% interest vs. $54,353.09 at 2.5% interest). That is more than half of the actual principal amount that you are saving in interest.
(2) Cash bonus
In addition to the huge savings in interest, many banks will offer a cash bonus of up to $750-1000 for signing up.
(3) Easy online application process with better service from lenders
If you have all the financial documents, most applications can easily be submitted online. The whole process from start to finish usually takes 2-3 weeks.
Also, compared to the service that you are getting from your horrible federal lender; most private lenders want to keep your business and will strive to provide the best customer services and answer any questions you will have
(4) You don’t have to refinance all your loans, and you can do it multiple times
You can select which loans you want to refinance - so if one of your old loans has a really great low rate, then you don’t have to refinance that specific loan. In addition, if you didn’t get the best rate due to your poor credit score as a new doctor or if interest rates have dramatically dropped, then you can refinance again in a few years with the same lender or select a new lender to get a better rate.
Remember that unlike a home mortgage refinance with closing costs, there is NO origination fee with student loan refinance. So remember to refinance often since it is always free.
Financial Pearl
Refi Hack: Because there is no cost to refi, a majority of ODoF members are doing a form of refi- hack, which is jumping from lender to lender to capture up to $1000 bonus
Remember that you meet the requirement minimum loan for the cash bonus and wait until 90 days for the bonus to be paid out.
(5) Five-year term and variable rates are often the best deal
For most lenders, if you want their lowest offered rate (less than 2-3%), then you usually have to commit to a 5-year term and select a variable rate. This means if federal interest goes dramatically up, then you might have to pay more in interest each month, compared to a fixed rate.
Hence, while this might seem enticing, the majority of optometrists will select 10 years fixed with a higher interest rate.
(6) Good financial background
Private lenders have certain requirements when refinancing, but usually, you are required to have a minimum credit score of 700, proof of full-time income, and an acceptable debt to income ratio (2.5 to 1). This will vary from lender to lender, but will impact your eligibility and thus your quoted rate.
(7) Flexibility between cash flow or aggressive debt pay-off
Refinancing student loans can offer quite a bit of flexibility when it comes to student loan management.
If you are in the aggressive debt payment crowd, select a shorter term like 5 or 10 years fixed term and aim to finish it off within your financial goal. Most ODs with the right mindset can comfortably pay off their student loans within 5-7 years.
If you have a lot of financial goals like purchasing a home or practice, then cash flow matters! Select a longer term like 15 or 20 years fixed. While your interest rate will be higher, it will allow you to save more cash for short term financial goals.
Remember that you can always make extra payments at no additional penalty.
(8) Most lenders offer forgiveness upon death or disability, along with hardship forbearance
Due to massive competitions nowadays, the majority of private refi lenders will offer:
- Military deferment & forbearance during times of hardship
- Fully discharge Loans on death or disability (similar to federal)
As always, feel free to contact your lender directly to confirm.
Click here to see a full list of Private Refi Lenders offering forgiveness | forbearance | Cosigner Release
7 Negative Factors to Consider When Refinancing Your Student Loans
(1) If you are eligible for 10 year PSLF and pursuing student forgiveness, then you should NOT refinance
For any optometrists working for a VA or non-profit and planning to be there for 10 years, you should be in a 10 year PSLF forgiveness program, so make sure you stick with it and don't change your mind half way through.
(2) If your debt to income ratio is too high, usually 3:1 or higher
Consider enrolling in a 20-25 year income-based Loan forgiveness and making income-based payments for now.
This is a tough decision because if you are making $100,000 in salary, but have $300,000 in debt, it is extremely hard to aggressively pay off it without sacrificing your retirement investing or saving for any financial milestones. So we need to consider or at least be educated in possible pursuing total forgiveness.
But remember, your financial situation might change in a year or some. As you progress in your career, your salary will gradually get larger while your debt gets smaller.
Example: You got a huge raise and your salary increased to $130,000 and after a year of paying, your debt is down to $270,000. This would put you in a debt to income ratio of 2 to 1, which is much more manageable and at this point, the advice is to refinance to a lower rate
Financial Pearl
Considering forgiveness program? Check out our online Student Loan Payments | Forgiveness Calculators to see all your options.
For a more professional one-on-one consult, we highly recommend hiring Student Loan Expert CFP Patrick Logue for a 90-minute consultation to do a full student loan analysis.
(3) You are in a transitory or unstable financial period of your life
You should really only refinance when you have a steady full time job or at least 5 consistent days of part time work.
For the majority of new graduates out there, we recommend waiting at least 6 months to apply for refinancing. For current residents, your income is too low so even if you get qualified, the rate will be significantly higher.
For all other life events like expected pregnancy, loss of job, transition to a new job, house purchase, etc, we highly recommend waiting until you are in a more stable position,
(4) You lose all Federal repayment benefits such as hardship forbearance and loan deferment
When you refinance to a private loan, if you miss a single payment you will automatically default and your credit score suffers significantly. This is definitely something to consider when you are applying for an upcoming home mortgage or private practice business loan.
But many private bank lenders such as Sofi, Brazos, Earnest, Commonbond will let you defer your payment and offer temporary forbearance during times of financial hardship.
(5) No federal loan forgiveness due to partial | full disability or death.
This is a significant factor when you have a life-threatening condition or higher risk for disability, so it is 100% recommended that these doctors stick with federal loans to take advantage of forgiveness. Why? These doctors won’t be able to get adequate life or disability insurances
But again, many private bank lenders such as Sofi, Brazos, Earnest, Commonbond will offer total forgiveness upon death or disability. If your specific private lender doesn't offer these perks, make sure you have enough disability/life insurance prior to refinancing.
Click here to see a full list of Private Refi Lenders offering forgiveness | forbearance | Cosigner Release
(6) Your student debt essentially becomes consumer debt
Similar to credit card debt, which means your refinanced student loan will be 100% wiped out with a complete Chapter 7 bankruptcy, giving the debtor a fresh start.
But the downside is that unlike federal loans, even if you pass away, the lender will be able to recuperate any remaining debt from your post-death “estate value” such as 401K/IRA/rental investment. This will result in little inheritance for your heirs.
(7) If your spouse co-signs your student loan during the refinancing process. Your student loan doesn’t die with you, but instead becomes THEIR DEBT.
This is why we usually don’t recommend co-signing unless both parties are completely aware of the risks involved and/or your financial situation is extremely dire. Otherwise, work to improve your financial qualifications and wait to reapply.
But again, many private bank lenders such as Sofi, Brazos, Earnest, Commonbond will offer cosigner release upon death.
Click here to see a full list of Private Refi Lenders offering forgiveness | forbearance | Cosigner Release
7 Steps: How to Refinance Your Loans
Here’s how to refinance student loans, in a nutshell: Find lenders that will offer you a lower interest rate. Compare them. Apply. If you’re approved, the new lender will pay off your existing lender. Going forward, you’ll make monthly payments to the new lender.
Here’s a deeper look at the six steps that make up how the student loan refinancing process works.
Step 1) Select the amount of loans that you want to refinance.
Most doctors refinance the whole amount to keep it simple and in one easy payment. Also, they will get the most bonus back ~$1000 (if over $150,000 loan)
Step 2) Get at least three online quick rate quotes (Soft Credit Pull), then select the bank with the best and lowest rate (2-3minutes)
At first glance, most student loan refinance lenders are very similar - but each one has different underwriting requirements and restrictions that might affect your own situation.
For example, if you are on a Visa, only Sofi or Commonbond will approve you, but at a higher rate. If your credit score is not too great (under 740), then certain banks will count against you more.
Once you identify a few lenders that fit your needs, get online rate estimates from at least 2-3 of them! It is a quick 2-3 minute online application to get pre approved for a rate. This will give you a rough personal market rate between different lenders.
As you shop, some lenders will ask you to pre-qualify — supply basic information to give you its best estimate of the rate you might qualify for. Other lenders will show you a rate only after you submit a full application, but that rate is an actual offer.
A soft credit check, or pre-qualification, typically doesn't affect your credit scores. An actual application requires a hard credit check that may briefly lower your credit scores.
Financial Pearl
We recommend starting with Splash + Credible since their platform covers 90% of all refi banks out there, then do at least 1-2 more quotes with Earnest, Sofi or Commonbond. This will give you your PERSONAL MARKET RATE across all lenders based on your financial background (Credit score, DTI, work history, etc)
Every month or so, there will be a ODonFinance promo that we will share with the community on which lenders are currently at the lowest rates .
Step 3) Choose your loan duration | Variable or fixed rate
Obviously, if you select a short-duration loan (5 years vs. 10 years), you will get a much better rate, but your monthly payment will be significantly more.
Example: Assuming a $200,000 student loan, comparing a 5 year at 1.95% vs. 10 years at 2.6%, your required monthly payment will be $3,501 vs. $1,894 (HUGE DIFFERENCE).
While the lower interest rate is very attractive, it is extremely important to make sure the required monthly payment is within your budget. We usually recommend starting with a safer term of a 10-year duration. You can always make extra payments each month (no penalty) or refinance to a shorter term like 5 years if circumstances change. Strive to pay extra payments each month.
A fixed rate means whatever the rate is at the current moment is guaranteed to be the same rate during the next 10-15 years. This is recommended if we think rates will go up.
A variable rate will be lower initially but has a risk of either increasing or decreasing depending on federal rate percentage changes. If you are planning to finish off your student loans within 3-5 years, then variable rate is acceptable.
Just think of a fixed rate, as “insurance against increasing rates” and your “premium” is the higher interest rate.
Financial Pearl
If you want aggressive pay off your student, select a shorter 5 year fixed rate to get the lowest rate possible but higher monthly payment. This is possible if you are motivated to live like a student for 5 years to pay off debt - then you will be done with your student debt within 3-5 years (Yes, it is possible! Both ODoF founders have done so!)
If you have other financial goals such as practice ownership or a home purchase, then selecting a longer term like 15 years fixed will allow for more cash flow + cash savings for business or home loan financing.
For the majority of doctors, we recommend a fixed 10 year rate to allow for optimal cash flow each month while locking in a good interest rate.
Step 4) Get all your financial documents + complete the application (Hard Credit pull)
Even if you are pre-qualified, you need to submit a full application to move forward with a lender. You’ll be asked for more information about your loans and financial situation and to upload supporting documents. You’ll need some combination of the following (Right side)
Finally, you must agree to let the lender do a hard credit pull to confirm your interest rate. You’ll also have the option to refinance with a co-signer, which could help you qualify for a lower rate.
Financial Documents Required
(1) Loan or payoff verification statements (Able to link online accounts)
(2) Bank Statements (Able to link online accounts)
(3) Proof of employment (W-2 form, recent pay stubs, 2 years1099 tax returns).
(4) Proof of residency
(5) Proof of graduation.
(6)Government-issued ID.
Financial Pearl
Once you submit the application (hard credit pull) and start the underwriting process, you are able to lock the new low rate for up to 28 days before signing the final loan papers.
Step 5) Consider underwriting factors that impact loan approval and interest rate
There are many factors that will get you approved and each bank has its own criteria. But with underwriting, the general idea is your debt to income ratio (DTI) determines if your loan is approved, while your credit score (or complicated work history) will determine your interest rate.
Underwriting Factors
(1) Total student loan amount:
- Ideally, most banks want a lower debt to income ratio, typically 2.5 to 1 or lower. So if your student debt is $250,000, your yearly income should ideally be $100,000.
(2) Total annual income salary (including any fill-in 1099 income)
- W2 Income: Job offer letter as a new OD graduate but ideally require a minimum 6 month work history
- 1099 Income (sole-prop): Minimum 1 year 1099 tax form but usually 2 years if 1099 Self-employed
(3) Total Monthly Expenses + Rent.
- Ideally, most lenders will to see low expenses, high income each month. So If you live at home with your parents or rent a cheap room, you are more likely to get approved
- Doctors with a cash flow of $10,000 monthly with low expenses will usually get the best rate because they are seen as "safe borrowers"
(4) Credit Score (min 700+ but ideally > 770+)
- To get qualified for any decent rates, most ODs should have around a 740+ credit score. Some lenders will work with lower credit scores but the rate will be significantly higher.
- The best rates are usually reserved for CS > 770+.
Get a Free Report: Creditsesame.com or CreditKarma.com
(5) (OPTIONAL): Proof of Funds “Cash” up to 10-15 % of total student loan
- Some lenders if you have $200,000 in debt, ideally some lenders want you to have 10-20% of your student loan debt ($20,000) in your checking or retirement accounts. Some lenders are stricter on this requirement than others, the idea is that banks want to make sure you have enough cash or cash flow for large emergencies, and are able to make your monthly payment.
- Note: This is difficult for most new graduates, so you might need to save up for a year or borrow money from family prior to applying to get approved.
(6) Other Restrictions like location
- Some lenders are very location-specific (such as First Republic) and will only be available if the borrowers are near a branch location
(7) Cosigner Option:
- If you are unable to get approved , you can get a spouse or family member to co-sign your refinanced loan to help your chance of getting approved (assuming they have no major debt). We usually do not recommend having a co-signer but if desired, consider a lender with a cosigner release
- Ideally, most banks want a lower debt to income ratio, typically 2.5 to 1 or lower. So if your student debt is $250,000, your yearly income should ideally be $100,000.
Step 6: Sign the final documents
If you’re approved, you’ll need to sign some final paperwork to accept the loan. A three-day rescission period begins once you sign the loan’s final disclosure document.
During that time, you can cancel the refinance loan if you change your mind.
Step 7: Wait for the loan payoff
After the 3-day rescission period ends, your new lender will pay off your existing lender or servicer. Going forward, you’ll make monthly payments to your new refinance lender.
Keep making payments to your existing lender or servicer until you get confirmation that the process is complete. If you end up overpaying, you’ll get a refund.
For any cash bonus, it will take 90-120 days after your loan closes to get paid out to your account.
Summary
For the majority of ODs out there, refinancing to a lower rate is often the recommended path because it forces you to have a game plan for your student loan payoff, whether that might be finishing it off within 5 years with aggressive payments or diverting additional cash flow toward other financial goals like practice ownership by locking in a low interest rate with a longer 15 year fixed term.
Whatever you decide to do, you have officially taken your first step toward financial freedom. Congratulations!
Want to Compare Refi + Get Special ODoF Rates | Bonus? Check out Recommended Refi Lenders
Want to get a full blueprint on How to manage your student loan? Check out The Optometrist's Guide to Student Loan
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