[Editor's Note: The following guest post was submitted by Dan Mendelson, author of BYE Loan and Debt. This is a subject we cover frequently, but it's always nice to get a new voice and perspective on it. I hope it brings hope to those struggling under the burden of medical school debt and mired in the often complex process of managing those loans. It's also fun to see a post from/about non-physician high-income professionals. We have no financial relationship. ]
In the winter of 2011, I learned that the love of my life had over six figures of student loan debt. She was starting her MBA holding a bachelor’s and a master’s degree in engineering and entering the professional workforce. Both degrees came at a price. In the process of earning them, she had racked up nearly $120,000 in student loan debt by the age of twenty-three. Fortunately for us, I graduated with identical credentials and had only accumulated a mere $10,000 of student loan debt. While we both earned our MBAs, our interest continued to accrue and our total burden of debt peaked in May 2013 to almost $150,000 – essentially the average American mortgage loan, without the house!
Not so shockingly, my now wife joined the growing echelons of students saddled with enormous debts after earning their degrees. Our story of student loan debt is not unique. In 2016, 70% of college graduates exited school with student debt – totaling 43 million student loan borrowers in the United States. All of this debt in the U.S. totals $1.4 trillion dollars in loans, and it is growing at a rate of about $3,000 per second! The average 2017 graduate will leave school with over $37,000 in debt and an average payment of almost $400 per month! [That sounds pretty nice to a lot of readers I bet -ed]
For graduates that leave with white coats, it is even more expensive. More than half of all advanced education students have over $100,000 in student loan debt and more than 30% have over $200,000 in debt. Year-after-year, these statistics continue to rise, making a frightening situation for most young professionals trying to start their careers, but especially for doctors. While my wife and I are not doctors, we both work with surgeons every day in our day job and have numerous friends and family that are doctors, dentists, or other health care professionals. While these professions lead to dramatically better earning potential then most, the debt burden that comes with them can cause loads of stress and difficult decisions in their prime for millions of young adults.
1) Figure Out Your State of Affairs
We spent an entire weekend combing through her eight different loans to figure out loan sources, principle and unpaid interest, interest rates, fixed vs. variable loans, and general repayment terms. Only with this knowledge were we able to assess the situation and create a plan. For doctors, this step is even more important, as it could dramatically change your repayment strategy. For those that do not employ a loan forgiveness option, what follows is your best course of action. However, I will address some alternatives for those that will work for a hospital or non-for-profit.
2) Create a Budget
The second thing that we did was to create an old-fashioned budget. Except in this version of a budget, there was one ginormous line item under expenses labeled ‘minimum student loan payment'. This served two purposes: it forced us to look hard at our spending habits and it showed how much money we had at the end of each month after all expenses including student loan minimums. This magic number was the amount of money we could pay extra each month to aggressively crush our student loan problem.
Dan Mendelson, Author of “BYE Student Loan Debt”
3) Set a Goal
The third part of our strategy was to set a goal. One that was tough, but realistic. For us, that meant eliminating nearly $150,000 in less than 5 years while getting married, buying a house, and living our lives the way we wanted. A helpful tool we used was an amortization calculator to determine the monthly payments required to meet our goals.
4) Loan Consolidation/Forgiveness
Before executing on this plan, you have to tilt the odds in your favor by any means possible. The main way to do this is through a beautiful tool called loan consolidation. Once you have a job, especially as a new attending physician, showing an income and having credit will do amazing things towards your loan terms.
Public Loans
You can automatically consolidate all loans into a monthly automatic payment. [You end up with the weighted average of your loans rounded UP to the nearest 1/8th of a percentage point. Also be sure to look into the income drive repayment programs like IBR and RePAYE if appropriate.-ed]
Private Loans
Showing your income and credit could dramatically reduce your interest rates by negotiating with your current or different lenders. My wife had some private loans that were over 10% and she was paying $10,000 a year in interest alone. After graduating and consolidating her loans through Wells Fargo, we reduced this interest rate to 5%, a huge savings.
Refinancing Public Loans to Private Loans
Lastly, you can even refinance some public loans into private loans at a lower interest rate. We used SOFI to take my wife’s 6.5% public loans down to 5.1%. These changes might not sound huge, but it means paying thousands less in interest every year. It could be the difference between meeting your goal and not.
[Editor's Note: Before refinancing public loans, you need to be very sure you no longer need the benefits of the income drive repayment programs and that you won't qualify for PSLF. There is no going back. Here's a list of WCI student loan refinancing partners.]
New Bonus Disclosure
Earnest Welcome Bonus Offer Disclosure: Terms and conditions apply. To qualify for this Earnest Welcome Bonus offer: 1) you must not currently be an Earnest client, or have received the bonus in the past, 2) you must submit a completed student loan refinancing application through WCI link; 3) you must provide a valid email address and a valid checking account number during the application process; and 4) your loan must be fully disbursed. The bonus will be automatically transmitted to your checking account after the final disbursement. There is a limit of one bonus per borrower. This offer is not valid for current Earnest clients who refinance their existing Earnest loans, clients who have previously received a bonus, or with any other bonus offers received from Earnest. Bonus cannot be issued to residents in KY, MA, or MI.
“*Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. If you choose to complete an application, we will conduct a hard credit pull, which may affect your credit score. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Oct 10, 2020 and may increase after consummation.”
Loan Forgiveness
For many doctors that are directly employed by a non-profit (501(c)3) or government agency, loan forgiveness is often your best choice. My sister, for example, is a pathologist who is employing the Public Service Loan Forgiveness (PSLF) program. This program will forgive all public student loans for those doctors that work for a qualified employer (most non-private practice facilities). Since she will be spending 6 years in residency and fellowship, she just has to be sure to commit to being employed by a hospital, rather than private practice, for her first four years of practice.
In addition, when paired with IBR or PAYE but not REPAYE, PSLF allows lower-income workers to cap their loan payments at just 10% of their discretionary income and never more than the minimum 10-year repayment plan. This can be a fraction of the overall payment for high debt borrowers, even those with a high-income thanks to the cap. Most residents will qualify for a lower payment in an IDR program than in a standard 10-year repayment plan. After 10 years of very low payments relative to the borrowers overall debt burden, the remaining loan balance will be completely forgiven! This is one of many forbearance, flexible repayment plans, or forgiveness options that can be employed to lessen or eliminate your loan burden.
[See upcoming “Student Loans 101” post publishing in late October for more details on all of these programs–ed.]
4) Take Action
The last part of our plan was to take action. Once you have determined your loan and budget situation, reduced your interest rates as low as possible, created a budget, and determined how much extra you can pay a month, you finally are able to execute on a plan. If the monthly payment goal you established creates a mismatch from the net income your budget allows, you have three choices: 1) You can increase your income (overtime or side hustle) 2) cut expenses, or 3) reset your goals to be in line with your situation.
While student loans can be a significant burden for most doctors, if you understand your goals and your entire loan situation you have numerous options at your disposal. Eliminating this burden will allow you to live your life that you sacrificed years to have!
Do you have a plan in place for paying off your student loan debt? What elements of your plan keep you from derailing? Why do you think some physicians take 10+ years to pay off their loans? What advice would you give to them? Sound off below!
Does this news change your thinking regarding a recommendation to pursue PSLF? https://www.npr.org/2018/09/21/650508381/data-shows-99-of-applicants-for-student-loan-forgiveness-denied
There has been an issue where the government didn’t properly acknowledge some of my qualifying payments. As far as I can tell, they should have, and my account is under review. I should have ~6 years banked toward PSLF. However, with this news, I am more pessimistic about being able to complete the program, and if that’s the case, if I have to “start over,” I’ll just plan to refinance and pay off my (massive) student loan debt.
No. I just discussed that article/news on an upcoming podcast. Most of those folks simply didn’t meet the program requirements.
Have a side fund in case something happens to PSLF.
Thank you ‘The White Coat Investor’ for making this post happen!
Josh, I agree, all indications are that properly filled out paperwork for qualifies candidates will have their loans forgiven. While there is always a risk that could change in the future, the risk is seemingly low.
No, this is a reflection of the program technicalities that particularly affect the folks who would theoretically be eligible during the program’s first couple of years. I’ve discussed the nuances here: http://www.benwhite.com/finance/yes-pslf-is-really-happening/
Increasing college/medical tuition which appears almost exponential coupled with decreasing reimbursements in the medical climate is going to make for a very interesting financial situation in the near future.
There will be a tipping point where the debt to earning potential is so high that going into a medical career would be considered a financial mistake it it’s own right. I didn’t have these public student loan forgiveness programs when I graduated. I also am not sure how long these programs are going to last if articles like the orthodontist with $1 million dollars in debt create public outcry against them (that article had tons of comments against the situation saying that the orthodontist was gaming the system having a large house, a tesla, etc while the public will be left holding the bag with the debt forgiven at the end of the program).
I made my financial mistake by trying to just ignore my student loans. I honestly did not know the amount I ended up with and even some of the interest rates/terms of the loan when I graduated. I didn’t want to address it because it was too overwhelming and I tried to put it off for as long as I could with forbearance and deferment which racked up even more interest (I fully paid my loans off 17 yrs to the date I got my MD degree).
Xrayvsn, I agree that secondary school and beyond will continue to reach a tipping point where some degrees are simply not worth the upfront investment. That is why it is important to have a plan going in on the front end or proactively address after incurring the debt. I am glad to hear it worked out for you and it is stories like this that inspired our book!
Setting a goal is the important part. For this to work, you really need a hatred for debt and/or a really strong desire to get rid of it. Otherwise it becomes very easy to pay the minimum payment and to inflate your lifestyle.
It should also be highlighted (and I know that it is elsewhere on this site) that REPAYE is often the best program while in training because of the subsidy provided by the US department of education that pays for half of the interest that your monthly payment doesn’t cover. While the payment is not capped when you finish (often not the right plan when done with training), REPAYE provides an effecrive interest rate reduction through the subsidy that is often better than what can be had through private refinancing.
TPP
I couldn’t agree more! Setting a goal and understanding your situation is by far the most important step!
I do recommend Wells Fargo for anything. The controversial items in the news will force them be be more diligent and transparent than typical banks which are most likely up to the same games for which Wells Fargo has been accused. Full disclosure: I’m long on WFC 🙂
Given how many banks haven’t been in the news for repeatedly swindling their customers, it’s beyond me why you’d choose the absolute worst offender to bank with. But, it’s a free country!
Agreed, back when we consolidated the Wells Fargo situation was not as widely known. Fortunately for us, it worked out and they gave us an exceptional rate for our situation.
Just wondering how long after graduation you consolidate your private student loans. Did you guys have to be working for a little while before you can get approved for loan consolidation? What do lenders look for to be able to negotiate for a lower interest rate? Thanks for this great post.
Most companies that refinance your loans will need proof of income. If your signed contract has a dollar figure, that’s perfect. Mine did not. I had to provide 3 months of pay stubs and a signed letter from the president of my group stating the average salary of my partners (we are fee for service). Apply to as many companies as possible and go with the lowest rate. SoFi gave me 3.375%, so I chose them.
You can certainly do it once you’ve started working. And I would use the term “refinance” rather than consolidate.
Bernz JP, thank you for the kind words. We did not refinance until we started full-time employment. I would only recommend doing it before then if you could get favorable loan terms and have enough extra income to start aggressively knocking out your debt. All of this is also assuming you will not try to get some assistance from the government like a flexible repayment option or the PSLF program.
Your rate will be primarily determined by a few factors: 1) credit score 2) your debt to equity ratio 3) your current income 4) fixed versus variable interest rate 5) length of the term of repayment. The lowest interest rate scenario is an excellent credit score, low debt to equity, high income, shorter terms, and a variable interest loan (although there are many risks that come with a variable interest loan).
Back up- how did you and your wife end up with the same degrees but one at 15X the loan burden?? I feel like this is an overlooked part of the problem. Sure, maybe you had more financial support from parents, but choosing a public rather than private school and working part time during school can be done by anyone and make a huge difference.
LizOB, I agree that this discrepancy is a problem with loans. Very small choices in the secondary education process can lead to very different loan situation after graduation. For me, I went to a private university (University of Rochester) that traditionally has extremely high tuition. However, I received large scholarships for undergraduate education and essentially had my 1-year masters program paid for. Additionally, my MBA was paid for by my company.
My wife also had large scholarships from a private university and ended up with about $35k in loans after undergraduate. She originally applied to a PhD program (fully paid for plus a stipend) but ended up only getting into the master’s program (she paid nearly full tuition for 1.5 years). This masters decision led to her tripling her debt in just 2 years. Even though her MBA was also paid for by her company, by the time she had a full-time job, 3 more years ballooned her high-interest loans.
If she knew back then what she knows now, she would have made a very different decision for her master’s program and when she consolidated her high-interest loans. That is one of many reasons why we wrote this book; we wanted to help others avoid ours and other people’s mistakes!
Hi Dan and Jim, I wanted to share this article regarding loan forgiveness with you and get your guys’ thoughts:
https://www.cnbc.com/2018/09/21/the-education-department-data-shows-how-rare-loan-forgiveness-is.html
Upcoming podcast addressing that report.