By Dr. James M. Dahle, WCI Founder
One of the most significant differences between the finances of a physician and that of most Americans is that the average doctor comes out of medical school owing between $200,000–$300,000 in student loans. Recent MD medical school exit surveys show that more than 10% owe more than $300,000 and 2% owe more than $400,000. The numbers are even higher for DOs and dentists. These students typically have little in the way of assets and, thus, start their careers with a very negative net worth. Managing these loans properly and getting “back to broke” quickly is an important part of overall physician financial management.
The average resident cannot afford to make significant payments on such large student loans. Thus, the first aspect of proper student loan management is ensuring low payments during residency. This feature is built into federal loans via the Income Driven Repayment (IDR) programs. With these programs, most commonly Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE), your payment is based only on your family size and income. The monthly payments have no relationship to your total loan burden or your loan interest rates. For a typical resident, the IDR payment on even a $400,000+ student loan burden will be just a few hundred dollars per month. Most residents will want to enroll in REPAYE, as it subsidizes your interest rate by forgiving one half of unpaid interest every month. However, there are a few unique situations where married residents may wish to enroll in PAYE, and most of these couples would benefit from getting professional student loan-specific advice.
Federal student loans should almost never be put into deferment or forbearance. In fact, consolidating loans to enable you to skip the six-month grace period and start payments right away is probably a smarter move for most. With private student loans, deferment (if allowed) may be a more reasonable option, but an even better one is to refinance those loans every time you can get a lower interest rate. Several private student loan companies will offer residents payments limited to just $100 a month, serving the same function as the federal IDR programs.
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Federal student loans are eligible for three types of forgiveness programs. The first, best, and most reliable is Public Service Loan Forgiveness (PSLF). The program is designed to allow government and nonprofit employees working full-time to have their federal student loans forgiven, completely tax-free, after just 10 years of payments.
This means that almost all academic, Veterans Administration (VA), military, and nonprofit employee doctors should qualify to have most of their federal student loans completely forgiven within just a few years of leaving training. Since most residencies and fellowships are government entities or nonprofits, all of those small IDR payments count toward the 120 required monthly on-time payments for PSLF. Thus, after a three-year residency and a one-year fellowship, an academician needs to make the minimum payment for only six years (one of which will have very low payments because payments will still be based on the fellowship salary) before having the rest forgiven.
The second type of forgiveness program is through the IDR programs themselves. After 20 (PAYE) or 25 (REPAYE) years of payments, the remainder of your federal student loans will be forgiven. However, this forgiveness will be taxable in the year you receive it, making it a much worse deal than PSLF. Besides, unless you have a high debt-to-income ratio, you will likely have your loans paid off before receiving IDR forgiveness. Nevertheless, it is an option for those in private practice with large student loans.
The final type of forgiveness is the “mass forgiveness” program favored by many left-leaning politicians. Over the last few years, this forgiveness has been offered to selected groups of people, including those who have been identified as having attended institutions considered predatory. Some politicians advocated for as much as $50,000 being forgiven, but the final program as announced by the Biden administration was $10,000 ($20,000 if you ever received a Pell Grant). This forgiveness program is currently tied up in court, but most experts expect it will eventually go through. This type of forgiveness can be almost ignored by most physicians when creating their student loan plan, as it is not a large enough percentage of their loan burden to move the needle. Take the $10,000 (or $20,000), but make sure you're still doing the right thing with the rest of your loans.
If you do not expect to receive forgiveness, the best way to get rid of student loans is to refinance them early and often and then make large payments on them until they are gone. This technique, often called “Live Like a Resident,” involves maintaining a similar lifestyle to the one you could afford as a resident while earning an attending salary and sending the difference to the lender. Payments of $10,000 a month or more are possible, and they will eliminate even large student loan burdens within 2-5 years of leaving training. Rapid payment of student loans is the best trial run for achieving financial independence. If you have the financial discipline to pay off your student loans within five years, you have the discipline to make work optional by mid-career.
The student loan holiday during the pandemic is expected to end by January 2023. For more than two years, no payments have been due on federal student loans, and no interest has accumulated. Zero percent is a better rate than these doctors could have received by refinancing. But thanks to the rapid rise in interest rates in 2022, doctors refinancing now will not qualify for the low rates they would have had if they had refinanced before 2022. However, all of those “non-payments” will count toward PSLF. Thus, a physician who finished a long period of training in 2019 could theoretically now qualify for PSLF without ever making a four-figure student loan payment.
Doctors with complicated student loan situations should seek professional advice from a student loan specialist—for instance, StudentLoanAdvice.com, which is a White Coat Investor company. Paying a flat fee of a few hundred dollars may be worth tens of thousands of dollars in interest savings or even hundreds of thousands of dollars in additional forgiveness. Managing student loans properly can help you to minimize the cost of your education, reduce the financial stress in your life, and build wealth faster. Most importantly, it will allow you to worry less, be less burned out, and concentrate better on your education and patient care.
Where are you now on your student loan journey? Have you taken advantage of PSLF? What will you do once the student loan holiday ends? Have you lived like a resident to pay off your student loans fast? Comment below!
[This article originally appeared in the American Academy of Emergency Medicine's Common Sense magazine.]