Most medical students, residents, and attendings have heard that there are federal student loan forgiveness programs, however, they are often ignorant of the exact details of the programs. The best-known program is Public Service Loan Forgiveness (PSLF), a program that many academic physicians are using to eliminate their student loans. Under this program, if you make 10 years of on-time payments in a qualifying loan program while working full-time for a non-profit or government employer, the remainder of your debt is forgiven tax-free. This is an incentive from the taxpayer to go into public service but still allows borrowers to be student-loan free within 3-7 years of completion of training.
However, there are other forgiveness programs, collectively known as the Income-Driven Repayment (IDR) Forgiveness Programs. These are tied to the IDR programs, which are primarily designed to lower the required payments on your student loans. They are very useful for residents and fellows, who literally cannot afford to make regular payments on their massive loans during their training periods. However, their use after training is often a sign of a bad investment–i.e. you borrowed way too much money to get your job. For example, it simply wasn't a smart financial move to borrow $800K to get a job that pays $200K. However, the programs also function as a bit of a mercy program, kind of like bankruptcy. Rather than putting you into debtor's prison, we let you off easy and you can get a new financial start in your life. The IDR forgiveness programs include:
- Income Based Repayment (IBR) which requires payments of 15% of discretionary income for 25 years with a cap on the payments
- Pay As You Earn (PAYE) which requires payments of 10% of discretionary income for 20 years with a cap on the payments
- Revised Pay As You Earn (RePAYE) which requires payments of 10% of discretionary income for 20 (undergraduate) or 25 (graduate) years but has no cap on the payments. RePAYE also subsidizes half of unpaid interest each month.
Why I Hate the Income-Driven Repayment (IDR) Forgiveness Programs
While I acknowledge that going for IDR forgiveness can sometimes be the right financial move, at least mathematically, I hate the programs. I hate seeing doctors considering them and I hate seeing student loan specialists recommending them. Let me explain twelve reasons why.
# 1 The Tax Bomb
Perhaps the biggest reason I hate the IDR forgiveness programs is that the forgiveness is not tax-free. It is considered taxable income, is paid at your ordinary income tax rates, and is all due in the year you obtain forgiveness. That is dramatically less attractive than the PSLF program.
Let's run the numbers:
Let's say you borrowed $800K at 7% and got a $200K job afterward and are going for forgiveness under the PAYE program (20 years of payments of 10% of your discretionary income.) Your payments might be $10K per year. But the interest on that loan is about $56K/year. So obviously your loan is going to grow by $46K/year. Luckily, that is simple interest and not compound interest, but even so, after 20 years your loan balance is your original $800K + $46K*20 = $1,720,000. So now that is forgiven and you now owe taxes. If you're single in California, your tax bracket could be as high as 32% federal plus 9.3% state, or 41.3%. 41.3% of $1,720,000 is $710,360.
But wait! With that much taxable income, you're going to fill the brackets as you go. Some of that income is going to be taxed in the 32% bracket, some in the 35% bracket, and some in the 37% bracket. (Plus, lots of people think tax rates will be much higher in 20 years.) State tax brackets are progressive too in many states. In California, some of that income is going to be taxed at 9.3%, some at 10.3%, some at 11.3%, and some at 12.3%. So suffice to say, the tax bill will be more than $710,360. Perhaps $900K. PLUS, you paid $10K/year for 20 years, another $200K. So sure, you received forgiveness of your student loans. But you still ended up paying $1.1 Million anyway.
Sound like an awesome deal? Probably not. Even considering the time value of money, this is an approach only a desperate person would find attractive.
# 2 Higher Interest Rates
Another big issue with the IDR forgiveness programs is that you have to stay in the IDR payment programs. Now the government will loan you hundreds of thousands of dollars just for having a pulse and getting into dental or medical school. But they're not going to give you very good terms. Those loans are usually at least 6% and often 7%. Under current law, there is no way to refinance that loan, even if interest rates drop dramatically while staying in the IDR programs. So instead of being able to take advantage of 2-5% rates like your classmates who are paying off their loans, you're stuck with 6-8% loans, watching that balance skyrocket while praying nothing happens to the program for a third of your life.
One of the models for this website now refuses to have her picture taken for anything. Should I dock her pay?
# 3 You Are In Debt for 20-25 Years
Perhaps the worst part of the IDR programs is simply that you have student loan debt for a third of your life. Perhaps half of your adult life. If you start borrowing at 23 and, like many of those who end up going for IDR forgiveness defer your student loans during training, and then begin payments at age 33, you won't receive forgiveness until age 58. You would be in debt for a full 35 years. Basically half of your adult life. Just to pay for four years of school.
Personally, I became debt-free in 2017 (including mortgage), 11 years out of residency. I really like how it feels and don't plan to ever go back into debt. I dislike it so much I run my business without debt, buy cars with cash, and cash-flowed my home renovation. People who owe money have to do things they otherwise would not do. For instance, my med school “debt” forced me into a war zone, away from my family for months at a time. Consider the advice of depression-era religious leader J. Reuben Clark:
“It is a rule . . . in all the world that interest is to be paid on borrowed money. May I say something about interest? Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels . . . it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands nor orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.”
Now I know that there are some protections with the IDR program. If something happens to your income (or heck, if you just want to stop working completely) your payments decrease along with your discretionary income. But that student loan debt still has significant effects on your cash flow, your investment decisions, your tax decisions, your retirement account decisions, your retirement date, and your career decisions.
# 4 Must Rely On Investment Returns
Proponents of the IDR forgiveness programs know about the tax bomb and have a plan for it. The idea is that you pay your required payment and then, in addition, invest an additional amount each month toward the tax bomb, presumably in an investment like a stock index fund. They point out that the sum total paid each month is less than what it would take to actually pay off the debt and that's why IDR forgiveness comes out ahead. However, they ignore an important principle.
Paying off debt provides a guaranteed investment return. Stock market returns are anything but guaranteed. In fact, if you wish to save up for your tax bomb using guaranteed investments like CDs or treasury bonds, you may not end up paying less overall. You would basically be borrowing at 6-8% in order to earn at 2%. Not exactly brilliant. That investment risk gets worse as you approach the forgiveness/tax bomb date. If that date is 5 years away are you going to make your asset allocation less aggressive? How about 2 years away? At a certain point, that expected return on the portfolio becomes lower, and most likely at the time when it matters most (i.e. when the portfolio is at its largest.)
This is very different from a PSLF Side Fund, which is most likely just going to be folded into your retirement nest egg. The tax bomb money is definitely going to be spent and at a very specific time. If you're 100% invested with it and the market tanks 50% the year you qualify for forgiveness, you're going to be up a creek and owe money to the worst creditor in the world. The IRS may not break your kneecaps, but they can certainly drain your bank account and garnish your paychecks. Don't forget an additional factor either–this taxable account in which you are saving up for your tax bomb is very different from a Roth IRA. In order to write the check to the IRS the year you get forgiveness, you have to liquidate the account. Given your new, super-high tax bracket that year, you may be paying up to 23.8% (or more if Long Term Capital Gains [LTCG] tax rates climb) on the gains in the portfolio.
# 5 Lengthy Exposure to Legislative Risk
Lots of people going for PSLF are worried about legislative risk, the idea that Congress, the Department of Education and/or the IRS will change the rules. Although it seems likely to me those currently making PSLF-qualifying payments would be grandfathered into the old terms if there were significant change, they may be right to worry. Both conservative and progressive administrations have placed proposals in their budgets that would dramatically change the program. Bills have also been floated in the House from time to time.
With PSLF, assuming you made payments during training, you may really only be exposed to this risk for just 3-7 years. With IDR forgiveness, your exposure will be a minimum of 13 years, and perhaps as long as 22 or even 25 years. That's a lot of administrations/congresses. Now, to be fair, legislative risk can go both ways. Maybe there will be a student loan jubilee and all loans will just be forgiven. But it seems kind of cavalier to bank on that to me. Why would a doctor, who is a top 1-2% earner, take on those kinds of financial risks? One answer–desperation. They simply don't have a better option due to their debt to income ratio.
# 6 Mindset
One of the worst parts of being in debt is that it changes your mindset. I often hear people making the mathematical argument to borrow at lower interest in order to invest and hopefully earn a higher rate. The problem with this mathematically sound argument (at least if you ignore risk) is that it often is not behaviorally sound. Instead of investing the difference, people spend it. It is just really hard to maintain focus on a plan like that for decades. You become debt numb like so many doctors I run into with fat student loans, fat car payments, fat mortgages, and fat practice loan. All of a sudden they wake up at age 60 and realize they only have a half-million-dollar net worth after 30 years of physician paychecks.
# 7 Have Student Loans Longer Than 5 Years
A major part of the WCI Wealth Plan is to Live Like A Resident for 2-5 years after residency no matter what your student loan plan. A big part of your plan is to be rid of your student loans within 5 years of getting out of training. Over and over and over I see doctors doing this and becoming financially stable, then wealthy, and even financially independent relatively early in their career. Do I see that happening with doctors who are dragging out their student loans, even lower interest rate ones, for decades? Not really.
Even if you're going for PSLF, you're probably still going to be out of debt within 5 years of completion of training (7 at most if you don't build a PSLF Side Fund). But that's never going to happen with IDR forgiveness. At best, it'll be 13 years. More likely, 20-25. What a contrast between the docs I see crushing their student loans in 18 months and docs I meet who still have student loans in their 50s. The first are empowered and excited about their financial futures. The latter are depressed and burned out. Do “Future You” a favor, and figure out a way to get rid of your student loans within 5 years out of training. I still haven't met a doc who regretted doing so.
# 8 Centerpiece of Your Financial Life
# 9 Sticking It to the Taxpayer
At the end of the day, a student loan forgiveness program leaves the taxpayer, your fellow Americans, holding the bag. Under PSLF, at least you're providing them something in exchange–3 to 10 years of public service at presumably a lower salary. With IDR what are you giving the taxpayer? Nothing. You're just taking. In many ways, IDR is a mercy program. A welfare program. Like Medicaid and food stamps it is designed for people who have had bad things happen to them financially. Yes, you qualify for it. Yes, you learned the rules and you checked the boxes. But it still doesn't feel right to many of us and maybe that's why the legislative risk is so high. At the end of the day, you didn't do anything to earn the right of a potentially 7 figure windfall from the government.
#10 Now You Have to Pay for Advice
Managing student loans in the most efficacious manner for an IDR forgiveness is complicated. Almost no doctor is going to do it perfectly without paying a student loan specialist for assistance, probably multiple times over the course of the 2+ decades they are in the program. While that cost is only a few hundred dollars a time (and thus pales in comparison to the amount forgiven), it is still a very real cost. It doesn't take much advice to refinance your student loans and send the lender $10-15K monthly checks for a few years. It's a pretty simple plan. Still, don't let this item discourage you from getting advice if you are even considering this option. I still consider it money well spent and it is good to run the numbers and make an informed decision upfront. It is far more complicated than the vast majority of financial decisions you will make in your life.
# 11 Doesn't Forgive Private Loans
A lot of people with monster loans forget a really important aspect of the IDR forgiveness programs (and PSLF forgiveness for that matter.) Only federal loans qualify (and sometimes not even all federal loans.) Any private loans that you have still have to be paid back. If you have monster student loans (3-4X your salary), chances are good that a significant portion of them are private loans. You will need a totally separate plan to deal with those, and of course now have to deal with the complexities of having not one, but two plans for your student loans.
# 12 More Disability Insurance
While federal student loans are forgiven tax-free in the event of your death or permanent disability, they are not forgiven for temporary disabilities, even those lasting years. In fact, there will be a period of time up to a year before the IDR payments even drop due to the disability. You will want to carry a little extra disability insurance you otherwise would not in case this happens to you like it does 1 out of 7 doctors. There is a cost to that which should be incorporated into your plan.
A Few Words of Advice if You Are Considering IDR Forgiveness
Do I think nobody should ever use IDR forgiveness? No, I think it is probably still the right path for a relatively small (but growing) percentage of doctors. Which doctors? Well, primarily those with monster-size student loans, i.e. those owing 3-4X+ their gross income who for some bizarre reason are unwilling to take a job with a PSLF-qualifying employer for 3-10 years.
If you have a debt to income ratio of 1X, let's say an income of $300K and student loans of $300K, you could simply refinance the loans and live like a resident for two years and knock that out. ($75K in taxes, $75K to live on, and $150K/year toward the debt.) Even at a debt to income ratio of 2X, at which many student loan specialists may recommend an IDR forgiveness program, you can still get out of debt in less than 5 years with a simple Live Like A Resident plan. Only at ratios of 3-4X does that plan start becoming onerous (i.e. 10+ years of living like a resident.)
You also need to be comfortable with several risks:
- Leverage risk
- Legislative risk
- Investment risk
and several complications/costs
- More complicated financial life
- Additional taxes (unless willing to file them twice for each year)
- Additional advisory fees
- Additional disability insurance
Is IDR forgiveness attractive to you? Why? Is it because you simply made some terrible financial decisions in your 20s while pursuing your dream to save the world? Or maybe you had something terrible happen to you (like not match.)
But perhaps it is just because you want your cake and want to eat it too and aren't willing to make the sacrifices it takes to pay your bills. Do you want your fancy doctor house and your Tesla BMW Audi Ferrari and your Paris vacations while dumping your student loans on the taxpayer without providing any sort of public service for it?
If it is mostly the first, I think IDR is for you. If it is mostly the latter, I think you ought to reconsider the risks of your plan and the benefits of a simple “refinance and payback” strategy. I think IDR forgiveness is a bad plan for most doctors.
What do you think? Are you going for IDR forgiveness? Who do you think it is right for and why? Comment below!
† Bonus includes cash rebates and value of free course. Borrowers who refinance more than $60,000 in student loans using the WCI links will be enrolled in The White Coat Investor’s flagship course, Fire Your Financial Advisor for free ($799 value). Borrowers will still receive the amazing cash rebates that WCI has negotiated with each lender. Offer valid for loan applications submitted from May 1, 2021 through October 31, 2023. Free course must be claimed within 90 days of loan disbursement. To claim free course enrollment, visit https://www.whitecoatinvestor.com/RefiBonus.
An ounce of prevention is worth a TON of cure. How are medical schools doing about debt education prior to their students joining med school? I know that law schools do not do all that well in this regard. I think that is awesome that you run the WCI debt free. Buffett has an outstanding essay in one of his annual letters about three types of businesses—the good, the bad, and the ugly. The good business can run debt free and have large returns on equity with little additional capital investment. Does this remind you of someone? A single family home rental business does have capital expenditures making it less favorable (but the returns are ok). The ugly business requires tons of capital investment year after year with little to no return on that capital—a money pit like a commodity mining company. Can most ER private practices run their business with little debt? I think medical schools need to focus on debt reduction education and strategies starting with the acceptance letter. There is a disconnect in that the goal of the medical school is to create these outstanding physicians but they may not realize that “if you don’t have all your financial ducks in a row” that won’t happen. What percent of docs would you estimate use the IDR program? Do we have any more data on the PSLF and its problems or its authenticity?
My practice doesn’t have any debt other than a business line of credit.
Most docs use the IDR program to keep payments low in training, but I think very few actually plan to go for IDR forgiveness. However, they are being given that advice more and more often.
Not sure what you mean about the “autheticity of PSLF”. Yes, it’s an authentic law. Yes, the loan servicing companies suck at counting to 120.
It seems to me that getting a health professions scholarship program/HPSP from the US military might not be a bad way to go, given the steep increase in medical school tuition.
If you make $200,000 per year on the outside, you probably make $150k in the military. You owe four years.
You only lose $200,000 over four years to pay off $800,000. I know that in the “Whitecoats Investor” book, you say it’s a bad financial move to join the military. Looks to me like it would be a good move if tuition were really that high .
I’m I missing something? Your blog didn’t mention this possibility to pay off student loans, joining the military during school or during /after residency.
An HPSP contract CAN be awesome for debt avoidance, but it really only makes sense if serving your country in the military is something you value. It is also much better financially if you do a military residency (so Med School is debt free, residency is paid at a much higher rate than civilian, and then you make less as an attending during your payback time.) The math on that works out great, especially if you’re not in a high-paying residency/career. The math does not work out as well if you enter a high-paying Specialty, or if you opt for the non-sponsored residency deferment where are you only make 50 K or so as a resident.
The other huge advantage, if you have a five year residency, is that you are earning credit towards both retirement (if you are willing to stay in for 20 years to vest) and towards the potential to pass on your post 9/11 G.I. bill (you can opt for transfer of the benefit at your six year mark and finishing the obligation concomitant with your HPSP obligation at the 10 year mark. So if you had a five year residency, then five years of payback of HPSP, in the end you would be debt-free and also have a free college education to pass on to your self or one of your immediate family members. I used mine to pay for my daughter’s four years at Duke University and it was easily worth over $200,000. After tax.
That is 100% true for post 9/11 veterans.
I forgot about the value of that benefit. And when you are stationed in the US Army, it used to be you didn’t have to even pay state income tax, no matter where you or station.
full disclosure: a friend of mine was an Army recruiter for the HPSP program a few years ago. We didn’t talk much about his work, but I do know that things have changed. Benefits maybe even better than we talked about. And if you are a resident, there may be a signing bonus if I understood him correctly.
Now women get one year where they can’t be deployed after having a baby. And I believe you can use the benefit as many times as needed.
It doesn’t hurt to talk to a recruiter. And you can doublecheck everything on their websites.
And a benefit that no one really talks about is that veterans help other veterans whenever possible. Once a soldier/sailor/airman/Marine, always a soldier/sailor/airman/Marine.
And if you do sign up… God bless you .
I did an HP SP contract myself Mullen medical school. My intention was to go into pediatrics when I signed the contract but I caught the public health bug.
I never could’ve went into public-health if I had a high student loan debt from medical school and all the interest that accrues these days during residency training.
I agree with everything that you’re saying sir. I did the HPSP contract in large part because my father served in World War II and my grandfather in World War I and I wanted to help my country by caring for its service personnel and delivering high-quality service. And that’s exactly what I did.
There is some competition for the contracts. For example, I did not get the Air Force scholarship but did get an Army scholarship. ( I would have chosen the Army anyway.)
I don’t recall saying the HPSP scholarship is a bad financial move in any sort of way. I think I told people to run the numbers and perhaps even that it was a bad financial move for me due to my cheap med school, low interest rates, and higher paying specialty. But I certainly didn’t say it was always a bad financial move. It can work out great financially for someone attending an expensive school and going into a low paying specialty.
That was my exact situation. Expensive medical school going into primary care. No scholarship. Coming from a poor family.
Another interesting point about the military is that you may be able to get into a competitive specially you couldn’t get into in the civilian match. doing an internship year and then a hardship tour as a GMO/flight surgeon in South Korea or Alaska made one immediately competitive for an Army hospital orthopedic/ophthalmology/derm residency. Some physicians I know joined for that exact reason and it worked out for them.
Thank you for this post, was interesting to read. I’m going for loan forgiveness via the PSLF route.
Finished residency 06/2019 and started an Academic Hospitalist qualifying position 08/2019 currently at 37/120 payments (wish I would have found the blog earlier and read about forgoing my grace period back in 2016!!!). However, targeting forgiveness in December of 2026.
I’m in a unique situation in that I took a gap year and starting a 3 year fellowship in July of 2020. As of right now not planning to sub-specialize any further, so by the time I complete fellowship I’ll be 3.5 years away from forgiveness. At that point, I’m sure we will hear a lot more about those successfully being forgiven My prinicipal with Fedloans is currently at 300K with 50K of interest. I anticipate that by the time I complete fellowship it will be ~400. My goal would be to be loan free within 4 years of fellowship so if I stay with a 503c company or don’t sign with a 503c, refinance and pay 100K a year in loans I would hit my goals on target. Thankfully, have been able to eliminate my relatively small private loans of 20K within a few months of starting my attending job in August.
I know it’s not much to add to this particular conversation, but I have a lot of gratitue towards this blog and what you do WCI. I’d be lost without it.
I live in an area where you can go to the public service loan forgiveness route. It’s not so bad.
My wife is from this area and they are good people really in need of help. My sincere and heartfelt thanks go out to anyone who agrees to work in Southern West Virginia Appalachian region.
Once you get past all the stereotypes about hillbillies, you’ll find they’re very warm and good people . And there’s plenty to do within an hour in Charleston WV, A city of about 100,000 people.
24 hours and not a single comment about IDR forgiveness, the subject of this post. Some about HPSP. Some about PSLF. But nothing on IDR. Really surprised as I thought I’d start a fight publishing this one.
Maybe nobody is reading because it is Christmas.
Perhaps there is some selection bias. The audience members may agree with you about the 12 reasons. Or, most readers that have the WCI mentality do not need to go this route. The ones recommending it have little counter argument, other than the one that you have given. There is nothing to fight about. The facts support the thesis of the post, hence there is no controversy. At least, that is my take on your comment. The ones that don’t agree with the 12 reasons have not had the knowledge to educate themsleves on the facts, by reading articles such as this one. The lenders recommending it would not want to be a contrarian on this venue. Those lenders may not be “recommended lenders” anymore!
You definitely got my blood boiling on Christmas. I love your blog and read almost every day, but honestly this post makes me sick. Here instead of promoting sound financial advice for someone like me and my wife who IDR is good for, you’re making inflammatory comments to make ideas for repayment that give you kickbacks look more attractive. What did I do to deserve a taxpayer funded “buyout” after 25 years of paying my hard earned money to the government at insanely overpriced and unfair interest rates? First off, how about the math, just like you taught me to WCI. Now because you get big kickbacks from big corporations who your readers refinance their loans through if I stay on IDR that makes me an entitled welfare loving lazy loser who didn’t do anything to earn a 500k tax bomb 25 years down the road? My wife and I have been “living like residents” for the last 6 years, maybe you’re too far removed from that lifestyle now to remember but loans are the enemy. Not your dedicated followers who practice what you preach. I have no problem with controversial posts or comments to generate clicks to build your passive income, in fact I admire you for it, but please in the future, maybe think twice on how you want to phrase things so you don’t insult people who have learned so much from you and truly dedicate themselves to your path of financial independence… on a happier note Merry Christmas 😁 like I tried to convey above I really do admire your hard work and dedication to this blog, you have taught me so much, I appreciate all you do even if you got me all fired up on Christmas Eve 😜
There’s the fight I expected, just two days later. Now that you’re done expressing your frustration, tell us why you think IDR forgiveness was a better option for you than the other options mentioned in the post and this comments section such as:
1) Getting a PSLF qualifying job and getting tax free forgiveness after 3-7 years
2) Refinance, live like a resident, and pay it off in 2-5 years or
3) HPSP and pay it off in 4 years
So IDR is best for us for a number of reasons. Mostly because we feel that it was the repayment plan that allows us to get the most value for our time, and the most time value for our money. Would’ve loved to have got a PSLF job to have the loans forgiven after 10 years tax free but with the current healthcare landscape for emergency medicine in the US that is actually very hard to come by. As I’m sure you know most ER groups are “for profit” and even though my wife and I wanted to live in a rural area it was difficult to find a place that needed, not one, but two docs and could give us time to see one another as well…
The plan to refinance and live like a resident sounds so simple on paper and really is not difficult to do but we chose not to do this either for several reasons. The first being that the interest rates they will give you on 800k in loans surprisingly isn’t that much better than what the government already was taking us for. Turns out Uncle Sam isn’t the only predatory lender out there…We looked at several companies including a few of the ones listed on your site and only could get offers for rates that were around 1% lower than our current loan rate of 7.25%. So again when you crunch the numbers and factor in inflation and the time value of money, it was not worth it for us to privatize our loans. When I did the math on this even factoring in the tax bomb we will incur at the end the gross amount we will pay in IDR after 25 years is only about $150k more than the gross amount we would pay by privatizing and paying everything off with a debt avalanche method while living like a resident in a 3 year span. $150k is certainly nothing to sneeze at but when you spread it out over 25 years of repayment and use the additional capital saved by directing our debt avalanche towards owning assets such as buying our first home in cash and avoiding all future debt my wife and I decided that being consumer debt free and having ample amounts of available capital to purchase assets was much more of a powerful wealth accumulation tool than just paying off our student loans quickly. Also we vowed to more than make up the $150k difference by keeping our frugal lifestyles for additional years. We love our lives on a $5k/month budget (this does NOT include our student loan payment which is actually more monthly than the whole budget!) and have even toyed with the idea of FIRE and retiring 4 years from now when I turn 35 which we could if we kept this lifestyle and the IDR plan which will drop loan payments proportionally if we just lived off investment income… but we won’t because we love our jobs and serving our community to much to retire. Certainly not something I think I could say if we went the HPSP route. I love our vets and have numerous friends in the military but like several of them told me when I was close to joining the Army in Med school, unless you want the military lifestyle no amount of loan repayment will be worth having to do what the government tells you to.
In summary I think my point is that in life you have to do what is best for you and your family. Different repayment plans and different debt strategies and financial plans will better suit different people. However, at the end of the day the best approach is what makes you and your family the most happy, and that isn’t necessarily the same approach as what makes you the most money.
Were your quotes for 5 year variable loans or 10 year + fixed loans?
I guess I’m surprised you made this choice with a 1X DTI ratio. Emergency docs can find a job that pays $400K/year pretty easily. Now you’d pay a ton of taxes on $800K of income, but you should still have half a million of income afterward anyway. Live on $100K and the loans are gone in 2 years. Refinancing is really incidental on the “live like a resident” plan. The lower interest rate helps a little, but what really makes a difference is throwing a ton of money at the loans by, well, living like a resident and dedicating everything else to building wealth.
You said you lived like a resident for 6 years. I can’t quite figure out how you still have loans after doing that. I mean, if you’re really making $800K, living on $60K, and paying $200-300K in taxes…where’s all the money going?
I agree with you that it’s your money and your decision, but I was expecting you to say you were an endodontist making $210K with a stay at home spouse and $800K in debt. Not two emergency docs with a mere $400K a piece.
I agree the military life has its issues, but I’d certainly take it for 4 years than have student loans for 25.
I appreciate the perspective that you take here as well as throughout your posts that paying off loans is the best investment that you can make and fundamentally I agree. However this is the heart of the debate for this particular topic. You are absolutely correct that I could take all my extra cash after 60k of living expenses and 250k of state and federal taxes and put it towards the loans and have them paid off after 3 years. But my point is with a program like IDR available why would I do that? If it was a normal loan that kept increasing with compound interest working against me, absolutely I’d pay it off as quickly as possible! Like you always say, it would be very hard to find a better investment than paying off debt. However IDR is not a normal loan and it changes the numbers dramatically. The way I see it the longer I hold the loan the lower my interest rate becomes because unlike a typical loan with IDR the interest stops accumulating and I have no obligation to pay the principle. Per the current loan terms, which I know could change at the will of Congress, I only have to pay the taxes on the subsidy I get when the loan is “forgiven” at the end of the term. I can send you the real numbers if you like but basically the simplified breakdown looks like this.
Current loan balance = $1.2 million
Current interest rate = 7.2%
Current monthly loan payment with IDR = $6800
We have 13 years of repayment left until forgiveness if monthly payment stays about the same = $1.1 million
Tax bomb to pay off 13 years from now = $300k (after converting from Pre-tax dollars to post tax dollars as tax bomb in my understanding can be paid with Pre tax dollars)
So, you asked where all our money is going. It’s all going towards buying assets to try and accumulate more wealth. We own our home in Northern California with no mortgage, so a large portion of equity is tied up here. Yes I see your point as to how I could with the rough math above save about $200k in the next 13 years if I just paid off my loans outright today. But my question to you is would that really be worth it? Should I trade my 1.2 million in hard and liquid assets that allow me to live a life without a mortgage, generate passive income, and have purchasing power just to take my loan balance to zero?? I agree with you that for most loans it’s very hard to find investments that will beat paying off the debt but if my math is correct here this is only costing me about $15k/year extra to hold the loan and that can easily be beat with a million bucks generating dividends from my favorite vanguard tax free bond fund VCADX with very little risk to the principle.
This is where all the money goes…I don’t know, maybe I’m missing something, or maybe I did the math wrong, but either way it’s the path we are on and it seems to be working really well for us. Im not opposed to changing directions though because it sure would be nice to have a loan balance of $0, and not have to worry about all this. So please tell me if you see it differently but right now I just think this is the better way… I look forward to your response and reading your thoughts!
Oh, you’re up to $1.2M now. Could be a different story. I can’t quite tell what’s going on obviously without all the info that only you have (particularly your income and future work plans)
I’m not sure why you think you can somehow pay taxes with pre-tax money. That’s not the way taxes work. Does that change your numbers?
And of course what is the right path going forward from today may be very different from what was the right path from the beginning.
Ya, sorry I’m not able to explain myself better here but if you’re ever in the Napa Valley email me and I’ll be glad to meet you for dinner or drinks and show you all the numbers. It’s quite complex especially when you start to consider inflation and other variables…I sure hope I’m not wrong or maybe this is just a big gamble but either way life is great and it’s only money…
Keep track of it and send me a guest post about it when you get there.
Will do! Maybe 13 years from now I’ll change your mind…
Just thinking about you still having student loans 13 years from now makes me depressed.
Or possibly nobody’s posting on IDR because they agree with everything that you say. No reason to comment. I agree with what you said. I should have chosen a higher-paying specialty, but went with my gut instead of my brain.
Thank you for publishing this.
This post has changed my mind on IDR and dragging out our combined 1M in student loans over 25 years. To be honest it “felt” easier to just pay the monthly IDR and pray for a miracle. My question now is where or who do I go to for advice on our financial landscape and to set up a payment plan that would help my wife and I pay our loans off in 5 years or less? Accountants seem to have somewhat limited knowledge in student loans, student loan groups like DWQ seem to have limited knowledge of budgeting and planning and financial planners probably less of both. Where can I turn for help? Thanks.
If you need general financial advice, I’d hire a financial planner:
https://www.whitecoatinvestor.com/financial-advisors/
If you need student loan specific advice, I’d hire a student loan specialist:
https://www.whitecoatinvestor.com/student-loan-advice/
Best bet for somebody who does both? Maybe Daniel Wrenne: https://wrennefinancial.com/
Just need a calculation? If you owe $1M at 5% and want it paid off in 5 years, put this into excel:
=PMT(5%,5,-1000000,0) = $230,974.80
So you have to pay $231K/year to pay that off in 5 years. Divide by 12 months and it works out to about $20K/month.
Thank you very much. 2020 will the year we solidify our long term financial plan to become debt free from student loans.
Paying of a loan over 25 years through REPAYE definitely sucks. The only solution is to connect with REPAYE by
using income reducing scheme so the required loan payment are kept at the lowest number legally possible. Then
add extra payments to the principal of the loan through monies generated from moonlighting, infusions of
monthly funds from parents/spouse/relatives/friends etc. so the term becomes 10 years rather than 25. REPAYE
gives you the floor, but you have to add extra money to the loan principal to get clear of the debt. You can stick it out
for 25 years and wait for the forgiveness factor if your AGI number works for the long-term.
“ Your payments might be $10K per year. But the interest on that loan is about $56K/year. So obviously your loan is going to grow by $46K/year. Luckily, that is simple interest and not compound interest, but even so, after 20 years your loan balance is your original $800K + $46K*20 = $1,720,000.”
This math is quite inaccurate and IMHO it is misleading. Interest in PAYE program does not capitalize or accumulate as you simply described here. One of the clause of PAYE is interest is forgiven on yearly basis. Prove me otherwise.
PAYE interest isn’t forgiven. Are you thinking of the REPAYE interest rate subsidy?
Yes, it is simple (not compound) interest, which is how I calculated it.
I heard a ton of great things about REPAYE (admittedly I’m only starting to learn about the entire financial world) and ended up switching my student loan to the REPAYE option. I am 2.5 years out of med school in residency with 1.5 years in residency left. Started out with ~155k of student loans aggressively paid down to 135k now after these 2.5 years.
Now that I switched to REPAYE and read the above article … is there a drawback if I’m not* planning on taking the full 20-25 years to pay my loans back (current plan is to pay it off ~2 years post residency by aggressively paying down). But does it not make sense to sign up for REPAYE, make minimal payments while in residency for the subsidy and once out of residency aggressively pay down for the next two years and get it done. Does this not minimize the potential ‘tax bomb’ while maximizing my financial situation in residency?
Also as an aside considering for 11 months of the year only meeting minimum payments for REPAYE and getting the subsidy. And on one month of that year dump all the extra cash I have into my loans (I won’t get the subsidy that month but would have made a sizable dent into my loans). Is there a drawback to this option to maximize my subsidies AND getting my total loan $ down every year?
Thank you so much for what you do
Sure. That’s a great plan. The tax bomb only applies to REPAYE forgiveness, which you are not going for. Don’t confuse the lower payment program with the taxable forgiveness program.
On your second question, well, it depends. I think you should read this post about it:
https://www.whitecoatinvestor.com/repaye-interest-subsidy/
I had a friend from med school recently reach out to me for advice on this topic.
He had to drop out after 3 years of med school (finally an inexpensive one) and it’s now pursuing IDR forgiveness.
He didn’t want to share his financial details with me, but I did my best to explain the significant drawbacks to IDR forgiveness. He was convinced and insisted that IDR forgiveness was right for him. Maybe it is in his case of not having the debt without the doctor income.
But I just felt so sad for him at the idea of carrying those debts until he’s almost 60.
It very well might be. It is sad. See why I hate it?