By Dr. Benjamin Meyer, Guest Contributor
At the beginning of my intern year, I felt a bit overwhelmed in the transition from medical student to salaried resident physician in terms of determining the best strategy to pay my student loans, how to buy disability insurance, how to best save money, and what were the wisest things to do with any extra cash I had (I lived with my parents during intern year). I spent a bit of time on the internet and read a couple of books, and I especially found this website, both the blog and forum, and The White Coat Investor book to be useful. Using these sources, and borrowing heavily from them, I wrote this summary as an intended one-stop shop for interns transitioning from medical school to residency. Mentioning of specific sites, banks, or strategies isn’t meant to be overly prescriptive or comprehensive. Nor are these recommendations meant to cover each and every exception that may exist in every individual's specific financial situations. Finally, I’m not a financial advisor, so as always, definitely check all of this with someone you trust.
The Intern Survival Guide – Top 8 Things You Need to Know
#1 Student Loans
First, you'll want to start by reading WCI's post Student Loans 101. Follow the algorithm below (click on it to blow it up) and pay special attention to the “consolidate” bubble near the top left. Additionally, even if your loans are already eligible for federal programs, you will probably want to consolidate them into a single Direct Consolidation Loan in May or June before you start your residency. This will give you a head start on your Public Service Loan Forgiveness (PSLF) clock and a $0 monthly payment until you have to recertify your income 12 months later. More on that trick, however, below!
REPAYE
REPAYE stands for Revised Pay As You Earn and is one of four income-driven payment plans available. Most residents, no matter their plans for future employment as an attending, should use the REPAYE income-driven repayment plan (one possible exception being if you have a high-earning spouse) for federal loans as long as you can afford the monthly payments. Those payments may be $0/month initially [see the consolidation section below] and eventually about $250-300/month for a single resident.
REPAYE is advantageous because it allows you to both have the smallest monthly payment possible during residency (unless you go into deferment, forbearance, or refinance with a private company) and also gain an extra government subsidy that helps you minimize interest that accumulates during your training. For example, if you have $150-200k of federal student loan debt and have typical federal student loan interest rates, you will be accumulating roughly $1000 of interest per month on your loans (do the math for your own situation based on your amount owed and your interest rate) and making income-determined payments of only $0-300, so your monthly payments do not even cover the interest on your loans. However, with REPAYE, the government subsidizes half the difference every month. So, let’s assume your calculated monthly payment based upon your income as a resident is $250 per month. This is a $750 difference from the $1000 that may be accumulating on your loans. However, under REPAYE, there would be a government subsidy of $375 per month, and only $375 of interest would be added monthly to your amount owed. This subsidy is NOT a feature of the PAYE plan.
[Editor's Note: There is an interest subsidy in IBR, PAYE and REPAYE for subsidized loans covering all accrued interest for the first 3 years in repayment. But it’s often quite small since most your loans are probably from med school and those are almost always unsubsidized.]
PSLF
There are some important points interns need to know about Public Service Loan Forgiveness (PSLF).
- Because REPAYE is an income-driven plan (like PAYE, IBR, ICR), your monthly payments count toward PSLF, assuming you work at a 501(c)(3), which most residents do.
- You’ll want to have your residency employer fill out the PSLF certification form on an annual basis.
- Upon residency graduation, if you are going to work for a 501(c)(3), which would normally include any academic center or employment with a non-profit hospital, go for PSLF.
- You will want to consider switching to PAYE (or IBR if you do not qualify for PAYE) to minimize payments as a new attending (there is a cap on them unlike with REPAYE).
- Your monthly payments, still income-driven but now much higher given your attending salary, will now cover the interest accumulating on your loans, nullifying the subsidy, and PAYE/IBR cap attending payments at the “10-year payment” amount (there is no cap under REPAYE).
- Switching repayment plans capitalizes your outstanding interest, but if you are going for PSLF, it will all be forgiven anyway. Under the terms of PSLF, once you have made 120 monthly payments, including the ones you made in residency/fellowship, the remainder of your federal student loan debt is forgiven tax-free.
- If you go into private practice or any sort of practice that is not a 501(c)(3), you will want to immediately refinance with a private lender upon residency/fellowship graduation to take advantage of lower interest rates.
- At that point, you will want to “live like a resident” and pay the loans off as fast as possible.
For most residents, it is difficult to project exactly what type of job you may be taking 3-5 years in the future. However, the strategy listed above still holds up even for those residents who are not going for PSLF and who know they are not going to work for a non-profit. No matter your eventual practice situation, it is still usually wisest to use REPAYE during residency, as your effective interest rate with that program (including government subsidy) is as low as or lower than interest rates that you will likely be offered by refinancing your federal loans with a private lender upon medical school graduation with a resident’s annual income. Plus, you preserve your eligibility for PSLF should your career plans change.
[Editor's Note Prior to Publication: That may no longer be the case with some private lenders resident refinancing programs which offers lower rates than residents have been offered before. It's worth a look if you're sure you won't be going for PSLF. Hopefully their competitors will soon lower their rates for residents too.]
How do I estimate my monthly repayment under REPAYE?
To estimate your monthly repayment under RePAYE, you can go to the calculator on the studentloans.gov website and login. For AGI, enter your yearly resident salary. Other than for estimating your eventual monthly payment, I would caution reading too much into the other estimates on the table, as the assumptions the calculator makes do not apply to resident physicians whose incomes will multiply dramatically after residency.
Your monthly payment may be higher if you have a working spouse because, on REPAYE, spousal income is included in your monthly payment calculation no matter how you file taxes. Under PAYE, if you're married and file a joint tax return, your monthly student loan payment is calculated on your joint adjusted gross income, but if you file separately, you can calculate your monthly payment based on your individual income alone. Still, as long as you can afford it and it produces a subsidy, REPAYE makes more sense because of that subsidy. For most couples who are both residents (see Case Study example #6 here), RePAYE still makes sense if you can afford it, as assuming total federal student loans of around $200k, you’ll still receive a subsidy under REPAYE. If your spouse’s income is so high that you get no subsidy because your monthly payment covered the monthly interest, then you may want to consider PAYE.
You may hear of some skepticism out there about whether or not PSLF will be preserved going forward given the optics of high-earning physicians receiving hundreds of thousands of dollar of tax-free loan forgiveness from the government, but most believe that if the program were to be changed, those already in the program would be grandfathered in.
When you fill out your PSLF certification form, all of your loans will be transferred to FedLoan Servicing (from Navient, Great Lakes, etc.), which is the federal loan servicer that handles loan repayment for PSLF-eligible loans. The transfer process is done automatically by the servicers, but it does take months. Scroll down to “Consolidation” for more detailed information on a cool trick that you can use to (1) give yourself a de facto “grace period” of 11-12 months as opposed to 6 and (2) technically enter repayment so that those monthly payments, which are going to be $0 if you certify your income between graduation and residency start when your income is still $0, count toward PSLF. This has the effect of potentially saving you thousands of dollars should you eventually receive PSLF, as those six monthly “payments” of $0 on an income-driven plan during residency are going to be much less than the six ones you would make as an attending. For this to work, you must consolidate your loans before you start residency, and it also helps to have filed a tax return.
[Editor's Note: As of September 2021, FedLoan and Navient are exiting federal loan servicing.]
RePaye and PSLF links from the WCI site that I found helpful:
- Student Loans 101: How to Manage Your Student Loan Debt
- Public Service Loan Forgiveness (PSLF)
- RePAYE Case Studies
- I Switched to RePAYE and I Like It
- Dave Ramsey’s Bad Advice About PSLF
A consolidation strategy to maximize PSLF
You'll want to Consolidate early to enter RePAYE and start your PSLF clock. I'll say it again, apply for consolidation immediately after graduation and before you start residency. I Recommend you file a tax return in the spring before you graduate medical school, even if you did not earn any money while in medical school. This may make it easier to document your $0 income prior to residency.
The reason you consolidate early is to “start the clock” on your 120 monthly PSLF payments early. This effectively replaces six monthly “attending size” payments (thousands) with six $0 monthly “medical student size” payments during your intern year. You also forego your six months “Grace Period” while giving yourself a de facto grace period of almost 12 months.
This strategy sounds too good to be true! How is this possible?
In the “RePAYE plan,” again, your monthly payments are capped at 10% of your discretionary income per month, and you have to certify your income annually every 12 months. If you apply for consolidation immediately after you graduate but while your income is still technically $0/month (i.e., before you start residency, unless you had income somehow during med school), your monthly payments for that one year, until you have to recertify again the following May or June, will be $0/month.
[Editor's Note: The law has changed such that you are required to update the government whenever your income increases, not just every 12 months, although I suspect there are many residents and new attendings out there who “get busy and forget” to do so.]
A qualifying payment for PSLF is:
- Made after October 1, 2007.
- Received no later than 15 days after your due date.
- For the full amount due that month.
- Made under a qualifying repayment plan (i.e., in an income-based repayment plan such as REPAYE – payments you may have made on other federal student loans prior to medical school under the standard or extended plans DO NOT count).
- Made while you were employed full-time by a qualifying non-profit employer (almost all residencies, fellowships, and attending academic physicians qualify).
The first $0 “monthly payment” you make for your Direct Consolidation Loan AFTER you start your residency should count towards PSLF. If you have May and June $0 “payments,” these won’t count towards PSLF. However, you will likely get ~9-11 “free” PSLF-qualifying payments before you actually have to make real payments on your student loans. Pretty sweet, huh?
Which loans should I include in the consolidation?
Include any Direct, PLUS, or Perkins Loans you have from medical school. This has the added benefit of making the value of your Perkins Loans eligible for Public Service Loan Forgiveness in a Direct Consolidation Loans. They’re not eligible otherwise.
Also include any other federal student loans you have from college or other education on which you have NOT already made a PSLF-qualifying payment (see above) because your “PSLF Clock” of 120 monthly payments will be reset to 0 for those loans.
What are possible drawbacks to consolidation?
There are four potential downsides to consolidating.
First, consolidation results in capitalization of outstanding interest…but so does entering repayment after your grace period, so this is only a drawback if, for some reason, you have loans that are already in repayment AND have a significant amount of outstanding interest
Second, the interest rate for your Direct Consolidation Loan is rounded up to the nearest 1/8 percentage increment based on the weighted average of the loans you’re consolidating
Third you may accumulate a relatively small amount of additional interest, but if you do get PSLF, it will be eventually forgiven anyway.
Fourth, for loans on which you’ve already made PSLF qualifying payments, the PSLF clock of 120 monthly payments will be reset to 0 for those loans.
Fifth, you can receive PSLF in multiple installments for each group of loans, so it’s probably best NOT to include loans on which you’ve already made PSLF-qualifying payments. For the traditional medical student who went straight to medical school from college, you have not made any unless you were also employed full time during your studies.
You’ll need to select a repayment plan for your new Direct Consolidation Loan – in most cases, choose RePAYE (see above).
Private Student Loans
With regards to your private student loans, follow the WCI algorithm. Refinance at medical school graduation if you can get a lower interest rate, then refinance again at residency graduation. Refinancing is fairly easy to do. You can shop around online and get quotes from multiple companies reasonably quickly. Good options are included at this link. These will work for federal loans, too, but those are generally refinanced after residency graduation to preserve the PSLF option.
Should I use any extra money to make additional payments on my student loans, or should I invest it?
Generally, if you are on an income-driven repayment program such as RePAYE, it does not make sense to pay extra on your federal loans beyond your monthly payment while you are in residency. Doing so will not give you any extra credit toward PSLF and may reduce your RePAYE government subsidy. However, if you have high-interest private loans, or credit card debt (gasp!), by all means, pay that off. Here is a list of suggested priorities.
And Now, the Rest of the Survival Guide…
Start by reading WCI’s “Six Financial Planning Items You Should Do As a Resident”
#2 Home Buying: Should You Buy or Rent a Home?
Generally, most advice I have read recommends against residents buying a home unless you know you are going to stay in that area after residency, and even then, your concept of a “resident house” is likely different than your concept of an “attending house.” Although you may be able to get a physician mortgage without a down payment, be wary that the terms will not be as favorable as a traditional mortgage with 20% down. Here are some excellent resources on the subject:
- Ten Reasons Why Residents Shouldn’t Buy A House
- The Case Against Resident Homeowners
- Physician Mortgage Loans
#3 Individual Disability Insurance
Individual disability insurance is expensive and complicated to buy, but it’s something that you need. One advantage to buying as a resident is that you are going to be younger and healthier as a resident than you are as an attending, and thus you will get a lower rate by buying earlier. Plus, given your financial vulnerability as a resident with tens of thousands of dollars of student loan debt, you need to insure against disability regardless.
The group disability typically offered by residency programs is less expensive (or maybe even included as part of your program’s benefits) but often provides less coverage than you need and will not cover you after graduation from your program. Even if group coverage is offered for free as part of your program, buy an individual policy to go along with it. You will have to disclose that you have a group policy during the process of buying an individual one, but if you were to become disabled, you would be eligible for both benefits.
The Standard Resident Benefit is $5000 per month – your monthly premium will be 2-5% of the benefit. The standard elimination period, or time that you wait between becoming disabled and your benefit kicking in, is 90 days. You want specialty-specific, own-occupation disability insurance so that if you are not able to perform the functions of your specific specialty (i.e. the fine motor skills required by an ophthalmologist, for example), you can be considered disabled. Always ask if there are discounts available through your medical association memberships.
Riders you want included as a resident:
- Cost of Living – This is an important rider when buying disability insurance relatively early in your career. It ensures that your benefit will increase as the cost of living increases
- Future Purchase Option – Once you are an attending, you can buy a higher monthly benefit, generally up to $12000-15000/month, without having to undergo medical requalification
- Residual Disability – You can still be actively engaged in your occupation, but you will qualify for a partial benefit if because of sickness or injury you are suffering an income loss of at least, usually, 15-20%; in practice, a large percentage of claims start or end as a residual claim
Helpful links on disability insurance:
Your broker should be an independent agent that can sell policies from multiple companies, as all of these are. I asked for quotes from several of these agents and found them extremely helpful. Most of the time, you will find the rates that they offer are basically equivalent because they act as a broker between you and the insurance company, who are not allowed to sell disability insurance directly, and the agents are paid by commission; it’s just a matter of who can best help you sort through the different companies and riders that you need.
[Editor's Note: FYI-It drives the agents on my list crazy if you're using more than one of them because they put a lot of time and effort into presenting you policies from the various companies. You're basically going to get the same policies and pricing from each of them, so unless you're having a customer service or personality issue, I wouldn't bother even contacting a second one. If you do have a particularly good or bad experience, I obviously want to hear about it. But it's your choice- you can do what hundreds of WCI readers have done in the past, and learn what Ben learned- that you end up with the same policy no matter which of these top-notch, high-volume, independent agents you go through. In my view, the fact that so many WCI readers have had that experience is evidence that these agents are treating readers well. So save your time and theirs and just use one of them.]
#4 Term Life Insurance
First off, don't buy whole life insurance, aka “The Payday Loan of the Middle Class”! I do not have dependents and thus do not have term life insurance, and so I am not as knowledgeable about buying it. If you do have dependents (spouse, children, etc.), you need it. The good news is that compared to buying disability insurance, term life insurance is basically a commodity and is much simpler to buy than disability because you are either dead or not dead as opposed to disability in which there are more gray areas.
Like with disability insurance, you may get some life insurance through your residency program, but it’s likely to not be as generous with the coverage as what you need, and you lose it when you graduate from your program. In general, you want a 20-30 year term, level-premium life insurance policy. As a resident, get at least a $500k-$1 million benefit and probably buy more as an attending.
Some good resources include:
#5 Retirement Savings
When is the best time to start saving for retirement?
Yesterday
Which account should I use?
If your program offers a Roth 401(k), Roth 403(b), or traditional 401(k)/403(b) employer match, contribute as much as your budget allows up to your maximum employer match. Give preference to Roth accounts as a resident.
If your program does not offer an employer match retirement account, start your own Roth IRA. The advantages of Roth accounts as a resident are that you are in a lower tax bracket and it does not cost as much to make contributions to your retirement account AFTER taxes as it will when you are an attending and in a higher tax bracket. Once your money is in the Roth IRA, it grows in a tax-free manner, and as opposed to a tax-deferred/traditional 401(k), it allows tax-free withdrawal in retirement.
Your tax-deferred accounts will be more useful as an attending when you will want to use pre-tax income to contribute and then pay the income taxes when you withdraw the money in retirement when you have a lower annual income. For Roth IRAs, the annual maximum contribution is $5,500. You have until April 15 of the following year to contribute. For example, you have until April 15, 2018 to contribute to your 2017 Roth IRA. You can also contribute $5,500 annually to a spousal Roth IRA even if your spouse is not working.
Where should you start a Roth IRA? (if your residency employer doesn’t have a match)
Vanguard offers low-cost index funds and is a popular option among personal finance gurus
Which funds should You invest in?
Low-cost index funds; don’t pick individual stocks. Here are some other useful tips:
Don’t use the target funds. Personally, once I had saved up $3k, I bought the Vanguard Total US Stock Market (VTSMX) and then switched to the “Admiral” version of that (VTSAX) once I hit the $10k minimum for that. I plan on adding an international index fund (VGTSX) when I hit the minimum to add it and stay above the minimum for VTSAX. As a twenty- or thirty-something, your balance should probably lean toward stocks as opposed to bonds.
Classic “three fund portfolios” are easy – “the majesty of simplicity”
Obviously, if you’re living in a super expensive area (NYC, San Francisco, DC, Boston, etc.) retirement saving is going to be more difficult as a resident. No matter where you live, maxing out your Roth every year may not be possible for some. But it’s the habit you develop by saving a little bit for retirement in residency that counts.
#6 Use Budgeting Tools
- Mint-This is from Intuit, the same company that puts out TurboTax every year. It’s completely free. You can set up budgets, link to your banking, checking, retirement, insurance, and loan accounts, and easily keep track of and categorize your spending. It has a slick mobile app.
- You Need A Budget-I use Mint because it is free and this is not, but this has good reviews.
#7 Build up a Short Term Savings
Get an Online Savings Account. I do my checking through USAA, but for some reason, online savings accounts can offer higher interest rates for savings account than brick and mortar banks. Ally currently offers a 1.2% annual interest rate.
Get a 3-6 Month Emergency Fund. Most would recommend that you save up 3-6 months of expenses in case of emergencies and large expenses. This helps you avoid credit card debt. Some would argue that building up an emergency fund should be your very first financial priority. My Ally savings account functions as my emergency fund.
#8 Intern Year Tax Deductions
This section borrows heavily from the WCI Intern Thread (A special thanks to forum member akwho)
- The Lifetime Learning Credit is your biggest friend intern year. You can claim $2000 in educational credit (not deductions, CREDIT!) by completing form 8863 and submitting it with your 1040 or 1040a when you file taxes. Note you must have valid educational (read tuition) expenses in Spring 2016 to claim this credit.
- The Savers Credit is either 10%, 20% or 50% of your first $2000 invested in a Roth IRA is returned to you in credit form. That’s right you could make $200, $400 or even $1000 just by doing what you should do anyways, and invest in a Roth. The amount you get back is dependent on your taxable income (any even bigger reason to ensure you take your max deductions).
- The Student Loan Interest Payment Deduction is the first $2,500 of student loan interest is deductible. Make sure to make one $2,500 payment at some point in the first half of your intern year to lock in this deduction.
- Moving Expenses Deduction– Certain people may qualify to deduct moving expenses from their taxable income. Check form 3903 to see if you’re one of them.
- State-specific credits/deductions- California has a nonrefundable Renter’s Credit that is good for $60 back in state taxes. Check your local state tax laws to see if you may qualify for a credit/deduction.
The IRS offers free software for those with incomes less than $64k a year (you). Personally, I use TurboTax.
[Editor's Note: Be aware the legislation currently under consideration in Congress at the time of publication is likely to make substantial changes to these tax laws.]
What do you think? What other pieces of good advice are interns giving to each other these days? What other advice do you wish you were given as an intern? Comment below!
Wow! It looks like we have a “mini WCI” on our hands. Ben, this is a masterpiece. Do you want a job with me? The only thing I would add is that an intern should consider using Schwab instead of Vanguard. The expense ratio with NO MINIMUM is .03 percent. The symbol for the Schwab Total U.S. stock index fund is SWTSX. That is, an intern can get started in a Roth account with $1 into that fund. Obviously, 1 dollar will not get you very far, but it will help the precocious investor wrap their mind around investing, which is invaluable. More importantly, the intern does not have to wait until the $10,000 point to get the lower expense ratio. A similar argument can be made for the international index fund.
Thank you for the compliment!
Hey Ben! I met you a few years ago at the AMA-MSS Advocacy Day. This is brilliant! All I would add is what I did prior to consolidating my loans. At the end of my 4th year, I made targeted payments toward my highest-interest federal loans, which brought down the weighted interest rate once I consolidated, which likely will save me thousands over the lifetime of the loan.
Good to hear from you! That’s an interesting strategy. However, I wonder how much one would have to pay on those high-interest loans to make a significant dent in the weighted interest rate when all is said is done, although even a few tenths of a percent would certainly add up after 10+ years post graduation. I’m sure you’ve done the math for your own situation. Also, I can imagine for most end of fourth year students, it’s tough to make a huge loan payment just prior to beginning residency. Good on you for thinking ahead 🙂
In the nephrology would we spell it complement. Low is bad, and high is good.
YNAB (You Need a Budget) offers a 1 year free trial to students. Graduating 4th year students, sign up in the spring!
Nice idea
It also stacks with their 34-day free trial!
WCI, can you provide the reference to the new law that states that you need to notify the govt anytime your income increases in regards to IDR plans?
The student aid site still has verbiage that “you can notify…if change” and now has a new (since I last checked) update:
“You’re not required to report changes in your financial circumstances before the annual date when you must provide updated income information.”
Found at: https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven#consistent-payments
I don’t recall where I read that. I’m actually happy to see you point out that statement on a .gov site as it provides cover for what I think most residents are actually doing.
When is the best time to start saving for retirement? – Yesterday
Ha, this is the super-cliff notes of what every single money or financial advice website should have!
“cliff notes” for new residents – that was certainly my intent. thank you!
Great post. Thanks! I have it bookmarked for my son who is an M2. My only comment would be to remove the part about not using Vanguard Target Date funds for retirement. While you and I may not prefer them, they do deserve consideration especially during residency for someone who is not interested in finance but knows they need to save and diversify. My own daughter felt a three fund portfolio was more than she cared to deal with and opted for the simplicity of a Vanguard Target Date fund. She got minimal bonds (10%) and international diversification from the start. For some people, I believe they can be a very good choice. Thanks again. Best wishes!
I like them as well. My childrens’ Roths are all in target retirement funds.
You make a very good point about the Target Date funds, especially for someone who is just getting started investing. Thank you for the compliment.
Dr. Meyer, this is excellent work. You put a lot of time into educating yourself on student loans and I’d like to thank you for sharing your knowledge. This will help a lot of residents if they will just read it and impliment it.
Thanks,
Dr. Cory S. Fawcett
I have to give credit to all of the helpful info originally posted by WCI and other guest authors on this blog. I was mostly an aggregator and organizer who felt that it might be useful for stressed residents to have such information in a “one stop shop.” Thank you for the compliments 🙂
Disclaimer- no longer a resident! But re #4 not getting life insurance if you have no dependents: in our 50s dx with htn not a chance for cheap term life if we ever thought we needed it again. What if Dr Meyer receives a similar dx at 31 but doesn’t marry until 37, and is not yet FI? (Or was until he marries and has kids! 🙂 ) Just consider pricing term life, perhaps with a chance to opt for higher rates after the level term (we would’ve opted for that when our level term policies ran out if one of us had a seriously life shortening issue or if we hadn’t yet reached FI), and decide if you’re fine with telling any future spouse (and kids!!) that in case Daddy dies your lifestyle will drop from doctor’s family to grade school teacher’s family (or perhaps you and new spouse need to live at a much lower standard to bulk up savings so that the family would not suffer so drastically in case of your death).
Well, it would certainly be a way to ward off gold diggers- “Honey, I know I’m living the rich young doctor lifestyle, but if we have kids we’re swapping Ruth’s Chris for McDonald’s, no more vacations away, and swapping my deluxe 3500 sq ft for 1800 sq ft economy rental to be certain you and the kids never end up on the street. After we get the kids’ college funds filled we can resume this awesome lifestyle.”
The problem with that line of thinking is it leads people to buy life insurance on their infants.
Is there a certain risk of not being insurable if you wait until you need life insurance before buying it? Sure. But you also have to multiply that risk by the risk of you dying during the term too, and that number gets pretty small pretty quickly. You not only have to not qualify to buy the insurance, but you also have to die.
So if the likelihood of you not being able to buy insurance is 10% and the likelihood of you dying between the time you need life insurance and the time you reach financial independence is 10%, then your risk of dying without insurance is actually just 1%. That’s not too bad of a risk to run. Life is risky and trying to eliminate all risk is not only impossible, but very expensive and keeps you from spending money on other stuff.
One side note for the student loan section. if the borrower is married with a working spouse, it is not likely to have $0 payments at anytime because of either tax filing status or requirements for RePAYE. Where filing jointly obviously includes spousal income, but in RePAYE spousal income is considered no matter the filing status.
That’s correct. I thought that was pretty clear in that section though. What was it that seemed unclear about that and maybe I can edit it to be better.
I completely missed it in the post. It was very well explained.
It was a long post.
I tried to be thorough 🙂
Great post.
Good solid advice.
I did most all of these things when starting out and I’m still enjoying success from that great start. I’m not sure if I just figured it out or lucked into a good plan because stuff like this wasn’t available way back then. I hope young doctors heed this great advice.
I believe the Savers Credit doesn’t apply for the tax return you file in your intern year because you would’ve been a student for ≥5 calendar months the year before. But it will work for the return you file in your second year of residency.
That would perhaps explain why TurboTax wouldn’t allow me to claim that one. You’re right – if you graduated from medical school in May or earlier, you are not eligible. Unfortunately, for second year of residency, AGI will likely be too high for most individuals to claim it then.
Wonderful article Dr. Meyer! Very impressive.
This is great for interns/residents. Thank you.
A comment on the student loan interest deduction-
Once the intern consolidates, he/she will receive a 1098-E the following January with the accrued interest paid by the new loan holder. The interest paid most likely will be well over the $2,500 maximum deduction for the intern’s 1040, so no need to make any payments towards interest your first half of intern year.
This deduction may be a non-issue starting in tax year 2018 depending on the tax reform. Hopefully it will remain.
Thank you again for your work on this article.
Thanks for the compliment, and good point!
Thank you for the shout out Ben. Glad to give back to the community. Excellent piece hitting on all the high points of intern year finances.
To summarize intern year, I made $26,000 and owed $1873 in federal taxes. Thanks to the Lifetime Learning Credit on form 8863, I paid $0 in federal taxes. I will never again have a 0% federal tax rate, which made it all the sweeter to get that refund check. The Lifetime Learning Credit is truly your biggest friend intern year.
That forum post you made was super helpful!
Thank you again Benjamin for your great article. My Year 4 resident daughter got a nice Christmas present, a $954 check from the IRS last week. After reading your article, I amended her 2014 return to include the lifetime learning credit. Since she didn’t have a 1098-T for 2014, the credit was overlooked when the return was originally filed. Most schools issue the 1098-T in the year of billing. So her last bill and 1098-T was 2013, last tuition payment was made in Spring 2014, thus she was eligible for the lifetime learning credit in 2014. If it wasn’t for your post, I would have never been able to amend within the three year window. I’m amending my niece and nephews 2014 return this month also. Thank you so much!
Cheryl,
I’m so glad my post proved valuable! Happy Holidays 🙂
Hi Dr. Dahle,
Would you be able to clarify the rationale for switching to PAYE in #4 of the PSLF section? I’m quite confused as #4 and #5 seem to contradict each other in regards to caps.
“You will want to consider switching to PAYE (or IBR if you do not qualify for PAYE) to minimize payments as a new attending (there is no cap on them as with REPAYE).”
“…and PAYE/IBR cap attending payments at the “10-year payment” amount…”.
Thank you.
They contradict each other because they say opposite things. Thanks for the correction. It should read ‘there is a cap on them, unlike REPAYE.”
My mistake! Thanks for pointing it out.
Thank you for making this! Will come in handy very soon.
Hey WCI, quick question. As an incoming resident, will it be better to now (after the new tax bill being passed) take the standard deduction of $12,000, vs trying to qualify for all these other deduction such as The Student Loan Interest Payment Deduction? Would it even be possible as a single resident with no dependents to even surpass $12000 in deductions even if I tried?
Thanks a lot!
I think you need to spend a little time with the 1040. The student loan interest deduction is not an itemized deduction, so you can take it AND the standard deduction. Your only decision is standardized deduction vs up to $10K in taxes + charity + mortgage interest. None of that has much to do with your marital status or # of dependents.
Hope that helps.
Great post, I wish I would have seen this before starting intern year. I wanted to point out something for those who are forced to utilize PAYE during residency because of a high-income spouse (another resident in my case). We file our taxes as “married filed separately” (MFS) to keep monthly payments low. I’ve been looking into making a Roth IRA contribution for year 2017 (really just woke up to all this financial stuff this calendar year) when I stumbled on the fact that the limit for modified AGI for Roth IRA contributions is 10K when filing MFS and living with your spouse.
That would mean if you’re like my wife and I, you would have to contribute to a Roth using the backdoor method, which is fine but a bit more complex. I apologize if this is a known fact but I can’t recall having read this on any post discussing the utility of using PAYE . Below is the site I found the information.
https://www.irs.gov/instructions/i8606
That is a well-known fact, but it never hurts to publicize it more.
Hey Benjamin,
Thanks for this great post! I’ve been referencing it as I prep for intern year coming up. I just applied for REPAYE and plan on going for PSLF. My question is about The Student Loan Interest Payment Deduction for the first $2,500. You say to make at least this payment amount in the first 6 months of intern year. But if we essentially have $0 qualifying monthly payments available to us for the first 6 months and we plan on PSLF going through, is this tax deduction really worth paying $2500 on our loans when we don’t technically have to? If so any chance you could explain that logic a little more? Thanks again!
No. If you can get $0 AND are going for PSLF, I’d take that. Better never to pay that interest than to get a deduction worth part of what you paid.
Great, thanks for the clarification WCI!
If you consolidated your federal loans your intern year before going on IBR, the interest on your loan will be capitalized. That interest will be reported on a 1098-E and you can deduct up to $2,500 on your 1040 above the line. The 1098-E will be issued by your “ former” loan servicer, so you may have to call them or set up a logon again if you don’t get a paper copy in the mail next January. You should get one 1098-E for your subsidized and one for your unsubsidized loans, which I’m guessing will be well over $2,500 in interest expense. So even if you make $0 monthly payments, your intern year, you should have enough interest expense with the consolidation to deduct $2,500 even though you didn’t actually pay it out of pocket. Hope this helps.
Interesting. Side note: No reason to do IBR if you can do PAYE or even better most of the time REPAYE.
Agree with what Cheryl said. This was my experience.
In addition , this post has a good explanation of the the lifetime learning credit. If you take this credit (max non refundable credit up to $2,000) and the student loan interest deduction up to $2,500, you should get a refund of all the federal taxes withheld your intern year making approx $30K or less (1/2 year) . You should obtain your 1098-T from your school for the prior year. If you graduate from medical school in 2018 you most likely won’t receive a 1098-T for 2018, only 2017 when Spring 2018 tuition was billed. You can take the lifetime learning credit for 2018 , the year when tuition was paid. Look for the checked box on the 1098-T saying it is for tuition billed for school year 2017-2018. Hope this is helpful.
Thank you Cheryl!
Thanks for the correction WCI. I should have written income driven repayment. (IDR), not income based repayment (IBR). I appreciate all the work you do on your website …love the podcasts!
What an awesome post! Wish I had read this earlier in the year. Definitely wish I had known about the lifetime learning credit. I used Turbotax and they “calculated the most savings for me,” but somehow their calculations put the LLC to be less than $800 and recommended Tuition deduction instead reducing my AGI. I realize I can do an amendment now but since I can only use either tuition deduction or LLC, can I not amend my 2017 taxes? I also do not understand why turbotax continues to calculate my LLC at around $760 since I paid 46,000 in tuition and should get the $2k. Anybody use TT and have this come up?
You can always override TT in “forms mode.”
Good to know. Do you know if tax returns can be amended once a tuition deduction was already taken instead of LLC? I suppose my AGI would be recalculated, negating the $4K deduction for the $2K LLC instead. Just not sure if this can be done retroactively
Sure, why not? That’s what a 1099X is for. You’ve got 3 years to do it.
Thank you AR!
The federal Lifetime Learning Credit (LLC) is up to $2K. If your federal tax liability was less than $2K you should get a LLC credit up to the amount of your federal tax liability. The LLC is a “non-refundable” tax credit, meaning you can’t get a “refund”, only a $1 for $1 credit against your fed tax liability. A tax credit will almost always be better than a above the line (AGI) tax deduction.
Rules on filing an amended return (it’s not that difficult). Good luck!
https://www.irs.gov/newsroom/ten-facts-on-filing-an-amended-tax-return
Thank you! I do understand that a refund is not granted. Just was not clear on whether I can amend if I already took the deduction instead.
Yes, you can amend it within the time period specified in the IRS link I had in my last comment. Doesn’t matter if you took the tuition deduction when you originally filed. I amended my resident daughter’s return for this issue last year (thanks to the information from the WCI and Benjamin).
Love the post. Thanks for taking the time during your hectic intern year to help others! As an incoming PGY-1, would it be best to wait until September to apply for REPAYE and compare it against effective private refinancing rates? Should I be utilizing the current 0% interest rate stipulation in the CARES act to pay down my fed loans balance?
Enroll in REPAYE ASAP.
0% shouldn’t change your invest vs pay off debt decision in that direction. If anything, it should change it in the other direction.
https://www.whitecoatinvestor.com/investing-versus-debt-pay-off/
1. REPAYE ASAP despite 0% interest under CARES act until September. Got it.
2. I think my novice financial brain may be struggling with not making payments towards direct fed loan balances right now with 0% interest. Its my understanding (and I could easily be wrong/overlooking something), you were referring to point #2 in the “Investing versus debt pay off” article highlighting the point “Don’t Pay Off Loans Someone Else Will Pay Off”.
– If I am not going for PSLF, does this still apply? Wouldn’t the prospect of paying directly at the fed loan balances until September prevent the accumulation of thousands of dollars of interest over the course of my 4 year derm residency?
Thanks for responding! Bought your book and diving into your blog posts all quarantine long.
Sure. But that doesn’t mean investing isn’t a better move.
Thanks NM. I agree with WCI. Enroll in REPAYE ASAP.
How about this…as a incoming PGY… if interest is 0% until Sept 30. and you are not considering PSLF…wouldn’t it be best to not consolidate and enter REPAYE ASAP? Under normal circumstances it would be, but this year is different. If instead you wait out Grace (ending November)and do REPAYE you don’t have that 1/8% interest round up, but more importantly, your loans are not consolidated…you can then actually have a shot at paying off the highest interest loan!
Not sure it matters much for the next 6 months what you do.
I would say that you could go two ways. If you have a smaller loan like <$2000 at a high interest rate, you could do targeted payments to get an overall lower interest rate. This is what I did during my grace period. I started consolidating and applying to REPAYE in September the year I graduated and my first zero dollar qualifying payment was in December. By making that targeted payment, I lowered my interest rate when I consolidated my loans which did help me ensure a lower interest rate going forward. The one disadvantage of using the grace period is what you alluded to. It may make sense to consolidate and enter REPAYE right away after your graduation date so that come July, your payments count assuming you are at a non-profit for residency. Since I did the targeted payments, I missed out on 5 months of “qualified payments” towards PSLF. Either way, it is critical to file your 2019 tax return to ensure your first 12 payments are “qualifying zero dollar payments.” I hope this helps!
Julia, were you able to get zero dollar payments even while enrolling in REPAYE as a resident with income? I am an upcoming intern and I was under the impression you have to consolidate and enroll prior to the start of residency to qualify for zero dollar payments despite having a 2019 tax return of no income. Would love to hear your thoughts. Thank you.