set for life insurance

[Editor’s Note: This guest post started with a nice thank you email from its author, Benjamin Meyer, MD, an intern who suggested I put together a section of the website specifically for interns and residents and included a little Word document he was distributing to his friends and classmates. I pointed out that you can sort 7 years worth of WCI posts for those in the “student/resident” category on the archives page but also pointed out that he had done a heck of a lot of work on that Word document and I thought that it would make for a great guest post. So he tuned it up a bit more and sent it over.  It’s lengthy, but if you’re an intern, it’s solid gold. We have no financial relationship and as near as I can tell, Ben did this solely out of the goodness of his heart.]

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 What Should I Do With My Student Loans (the comments section at the bottom is also useful). Follow the algorithm to the right (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.

PSLF

There are some important points interns need to know about Public Service Loan Forgiveness (PSLF)

  1. 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.
  2. You’ll want to have your residency employer fill out the PSLF certification form on an annual basis.
  3. 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.
  4. 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).
  5. 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).
  6. 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.
  7. 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.
  8. 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 SoFi’s new resident program 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.]

Benjamin Meyer, MD

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.

RePaye and PSLF Links From the WCI Site That I Found Helpful:

In addition, here is the link to the studentaid.ed.gov site about PSLF as well as links to a couple of pdf’s: one with general information and another that’s more a FAQ.  Here is a pdf with information on income-driven repayment plans.

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.

Q. This 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 changed in the last year or so 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:

  1. Made after October 1, 2007.
  2. Received no later than 15 days after your due date.
  3. For the full amount due that month.
  4. 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).
  5. 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?

Q. 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.

Q. 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.

Q. 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 “Five Big Money 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:

  1. WCI’s “Ten Reasons Why Residents Shouldn’t Buy A House”
  2. Afford Anything’s Article on the myth that renting = throwing money away
  3. NYT’s “To Buy or Rent a Home? Weighing Which is Better”
  4. NYT Calculator

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:

  1. 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
  2. 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
  3. 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

  1. WCI Introduction Part 1 and Part 2
  2. 4 Critical Steps in Purchasing Resident Disability Insurance
  3. WCI Link to Insurance Agents

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:

  1. WCI’s “How to Buy Life Insurance”
  2. Term4Sale and Insuring Income are good places to get instant quotes without providing personal information
  3. WCI Recommended Insurance Agents

5. Retirement Savings

Q . When is the best time to start saving for retirement?

Yesterday

Q. 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.

Q. Where to 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

Q. Which funds should I invest in?

Low-cost index funds; don’t pick individual stocks. Here are some other useful tips:

“First Time IRA advice”

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. Budgeting Tools

  1. 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.
  2. You Need A Budget-I use Mint because it is free and this is not, but this has good reviews.

7. 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)

  1. 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.
  2. 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).
  3. 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.
  4. 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.
  5. 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!