By Dr. James M. Dahle, WCI Founder
[Founder's Note: The following is an email I sent to Dave Ramsey in 2015. I have not yet received a response. I publish it here as a public service to indebted physicians. Dave and I have no financial relationship.]
Dear Mr. Ramsey,
I listen to your show from time to time in the evenings and although I have criticized your investing advice in the past, I generally agree with the advice you give on most topics. You are particularly skilled at motivating people to get out of debt. For this reason, I have been disappointed to see the advice you have given physicians and their family members regarding the Public Service Loan Forgiveness (PSLF) program. As near as I can tell, you are not being malicious when giving this advice, but the advice you have repeatedly given to callers reflects a significant misunderstanding of the program. I hope this letter will provide the understanding you need to give proper advice to these physicians and other high-income professionals.
Residents and Fellows Can't Afford Full Payments
The PSLF program is coupled with the Income Based Repayment/Pay As Your Earn (PAYE), and Repaye program. These programs base your payments solely on your income, rather than amount owed or interest rate of the debt. These are critical programs for resident physicians due to the extreme debt they have acquired due to rapidly escalating tuition bills at our nation's medical schools. You see, a resident physician often literally cannot make the payments on her debt without the assistance of an income driven repayment program. Consider a resident with $400,000 of student loans at an average rate of 7%. The standard payment on a 10-year plan is about $57,000 per year, slightly more than the entire salary of a resident or fellow. The interest alone is $28,000 per year, or over half of a resident's gross salary. In reality, for most physician trainees, their debt grows during residency because their relatively tiny payments do not even cover the interest. However, all of those tiny payments generally DO count toward the 120 required payments to receive PSLF.
Not a Rural Program
Based on your response to callers to your radio show, you seem to be under the misunderstanding that PSLF is only available to those who are working in underserved or rural areas. However, the requirements of the program are that the recipient works for a government agency or a 501(c)(3). This includes military, Veterans Affairs, academic, and many non-academic physicians employed by a non-profit hospital in all states in rural, suburban, and urban areas. Since most physicians will not know if they will be working for a 501(c)(3) until their final year of training, it is premature to make the decision whether to pay off their loans or have them forgiven prior to that point. A better use of any extra funds in residency would often be to fund a Roth IRA rather than pay down student loans due to the possibility of the debt being forgiven.
Not 10 Years
Your response to indebted physicians often includes the phrase “10 years is too long of a time to carry debt.” While I do not disagree that 10 years is a long time and longer than I would like to be in debt after residency, doctors are in residency and fellowship for 3-7 years, depending on specialty. Their actual time making full payments prior to forgiveness may be as little as 3-4 years, which is quite a short time given the extreme amounts of debt many medical students now graduate with. Just as you feel a 15-year mortgage is okay, you should feel that carrying a student loan debt equal to the size of a mortgage for someone on their income for 3-7 years after completion of training is acceptable when the reward for doing so may be several hundred thousand dollars.
Program May Change
Many physicians currently enrolled in the program worry it may change prior to their receiving forgiveness. That is a valid concern, however, I suspect that even if it does change those currently in the program will be grandfathered in to its current terms. Paying off loans that would otherwise be mostly forgiven out of concern for this possible change seems imprudent. A better approach would be to save up enough in a side investing account to pay the loans off if the forgiveness does not materialize as expected.
I hope you will change the advice you have been giving to young physicians asking about the PSLF program in the future.
James M. Dahle, MD, FACEP
Founder of The White Coat Investor
What do you think? Have you heard Dave advise physicians about student loan management in the past? What do you think of his advice? Comment below!
[This updated post originally published in 2016.]