Minimize the cost of your student loans
By Dr. James M. Dahle, Founder of WCI
One of the biggest differences between a doctor’s finances and those of most Americans is that the average doctor comes out of medical school and owes between $200,000 and $300,000 in student loans. Recent medical school exit surveys show that more than 10% owe more than $300,000 and 2% owe more than $400,000. The numbers are even higher for DOs and dentists. These students typically have few assets and therefore begin their careers with very negative net worth. The proper management of these loans and the rapid return to bankruptcy are important elements of the overall financial management of physicians.
The average resident cannot afford to make large payments on such large student loans. So, the first aspect of good student loan management is to ensure low payments during residency. This feature is built into federal loans through the Income Contingent Repayment (IDR) programs. With these programs, most commonly Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE), your payment is based solely on your family size and income. Monthly payments have no relation to the total charge of your loan or the interest rates of your loan. For a typical resident, the IDR payment even on a student loan burden of $400,000+ will be only a few hundred dollars a month. Most residents will want to sign up for REPAYE because it subsidizes your interest rate by writing off half of the unpaid interest each month. However, there are a few unique situations where married residents may wish to enroll in PAYE, and most of these couples would benefit from professional advice specific to student loans.
Federal student loans should almost never be terminated or suspended. In fact, consolidating loans so you can skip the six-month grace period and start payments right away is probably a smarter move for most. With private student loans, deferment (if allowed) may be a more reasonable option, but an even better solution is to refinance these loans whenever you can get a lower interest rate. Several private student loan companies will offer residents payments limited to just $100 per month, performing the same function as federal IDR programs.
If refinancing is right for you, take a look at The White Coat Investor-approved options and get a better deal than you’d get going straight to the companies (hundreds of dollars of extra money and a free online course ) to use the WCI links by visiting our student loan refinance page or by simply clicking on the table below.
† Bonus includes cashback and free course value. Borrowers who refinance over $60,000 in student loans using WCI links will be enrolled for free in The White Coat Investor’s flagship course, Fire Your Financial Advisor ($799 value). Borrowers will continue to receive the incredible cash rebates that WCI has negotiated with each lender. Offer valid for loan applications submitted May 1, 2021 through December 31, 2022. Free course must be claimed within 90 days of loan disbursement. To claim a free course registration, visit https://www.whitecoatinvestor.com/RefiBonus.
Federal student loans are eligible for three types of forgiveness programs. The first, best and most reliable is the Civil Service Loan Forgiveness (PSLF). The program is designed to allow full-time government and nonprofit employees to have their federal student loans forgiven, completely tax-free, after just 10 years of payments.
This means that nearly all physicians employed in college, Veterans Administration (VA), military, and nonprofits should be eligible for full forgiveness of most of their federal student loans just a few years after leaving home. training. Since most residences and fellowships are government entities or non-profit organizations, all of these small IDR payments count towards the 120 one-time monthly payments required for the PSLF. So, after a three-year residency and a one-year fellowship, a scholar must make the minimum payment for only six years (one of which will have very low payments because the payments will still be based on the scholarship salary) before having forgiven rest.
The second type of forgiveness program is through the IDR programs themselves. After 20 (PAYE) or 25 (REPAYE) years of payments, the rest of your federal student loans will be forgiven. However, this rebate will be taxable the year you receive it, making it a much worse deal than PSLF. Also, unless you have a high debt-to-income ratio, your loans will likely be paid off before you receive the IDR rebate. Nevertheless, it is an option for those in private practice with large student loans.
The final type of forgiveness is the “mass forgiveness” program favored by many leftist politicians. In recent years, this forgiveness has been offered to select groups of people, including those who have been identified as having attended institutions considered predatory. Some politicians have argued for up to $50,000 to be forgiven, but the final package announced by the Biden administration was $10,000 ($20,000 if you’ve ever received a Pell Grant). This pardon program is currently stalled in court, but most experts expect it to eventually pass. This type of discount can be almost overlooked by most doctors when creating their student loan plan because it’s not a large enough percentage of their loan burden to move the needle. Take the $10,000 (or $20,000), but make sure you’re still doing the right thing with the rest of your loans.
If you don’t expect to receive a forgiveness, the best way to get rid of student loans is to refinance them early and often, then make big payments until they disappear. This technique, often referred to as “Living Like a Resident,” involves maintaining a lifestyle similar to what you could afford as a resident while earning attendance pay and sending the difference to the lender. Payments of $10,000 per month or more are possible, and they will eliminate even large student loan burdens within 2-5 years of completing training. Fast repayment of student loans is the best test to achieve financial independence. If you have the financial discipline to pay off your student loans within five years, you have the discipline to make work optional mid-career.
The suspension of student loans during the pandemic is expected to end by January 2023. For more than two years, no payments have been due on federal student loans and no interest has accrued. Zero percent is a better rate than these physicians could have received through refinancing. But thanks to rapidly rising interest rates in 2022, doctors who refinance now will not benefit from the low rates they would have had if they had refinanced before 2022. However, all these “non-payments” will be taken into account for the PSLF. So a doctor who completed a long period of training in 2019 could theoretically now benefit from the PSLF without ever making a four-figure student loan repayment.
Doctors facing complicated student loan situations should seek advice from a student loan specialist, for example, StudentLoanAdvice.com, which is a White Coat Investor company. Paying a flat fee of a few hundred dollars can be worth tens of thousands of dollars in interest savings or even hundreds of thousands of dollars in additional rebate. Proper student loan management can help you minimize the cost of your education, reduce financial stress in your life, and build wealth faster. Most importantly, it will allow you to worry less, burn out less, and focus better on your education and patient care.
Where are you now in your student loan journey? Have you taken advantage of the PSLF? What will you do after the student loan holiday period is over? Have you been living like a resident to quickly pay off your student loans? Comments below!
[This article originally appeared in the American Academy of Emergency Medicine’s Common Sense magazine.]