I’ve been getting various versions of the following question more and more frequently:
Q.
I was playing around with a loan calculator and I figure it would be better to just take the loan forgiveness (even at 20 years via the Pay As Your Earn (PAYE) program, not just the 10 years via the Public Service Loan Forgiveness (PSLF) program) than to actually try to pay back my student loans. What do you think? Can that be right?
A.
The scary thing is, that CAN be right. The higher your loan burden, and the lower your salary (and the more family members you have) the more likely it is that the right MATHEMATICAL answer to this question is to rack up as much debt as possible and delay paying it off for as long as possible. Let me show you an example using one of these loan calculators.
The Poor Doctor
Let’s assume we’ve got a pediatrician making just $100K who somehow manages to rack up $400K in student loan debt. Let’s say $150K of it is a subsidized 6.8% loan and $250K of it is an unsubsidized 8% loan. Terrible loan burden, we would all agree. The calculator I’m using doesn’t allow you to allow for the lower payments in residency, but suffice to say they will only make these numbers look better. For these purposes, we’ll assume the doctor is married with 2 children and makes $100K right out the gate from medical school. After 10 years, the loan will be forgiven via PSLF. After 20 years, the loan will be forgiven via PAYE. The calculator assumes a 5% income raise every year and a 3.3% poverty line raise every year (not unreasonable, but perhaps a bit optimistic on the income side). Plug all this into the calculator, and you end up with this:
Standard payments of $4,759 per month, or > 57% of your gross income for a total of $571,022 with the loans paid off after 10 years.
PAYE payments start at $503 per month and increase gradually over 20 years to $1553 per month or ~ 7% of your gross income for a total of $231,543. ($772K forgiven since your payments never even covered the interest on the loan.)
Even better if you can get PSLF, since you only made half as many payments. The calculator doesn’t cover this possibility, but your payments should total up to something around $100K (less with residency, much less with a long residency.)
Moral Hazard
The mathematical answer is clear. If this program stays in place, and if you have a massive loan burden, and if you have a low salary, the right answer is to pay the minimum and maximize your forgiveness. The problem with this is the moral hazard inherent in the issue. Since payments are based ONLY on income (adjusted gross income, line 38) then your incentive is to:
- Rack up as much debt as possible in college and med school.
- Never pay more than the minimum payment.
- Keep your AGI low by maximizing any above the line deductions (like retirement account contributions) and avoiding working too hard/making too much, getting a second job, starting a business, or sending your spouse to work.
[Update: There seems to be some confusion about what moral hazard is. “Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.” So if a med student is expecting to have hundreds of thousands forgiven, he may take out more loans than he otherwise would and pay them back less than he otherwise could. It isn’t a “moral judgement” on the person. It is an economic term for the change in decision-making that results from not bearing the consequences/risk of the decision.]
In this way, you can throw the vast majority of the cost of your education on to the taxpayer. Now, I threw the entire cost of my medical school education on the taxpayer via the military HPSP “scholarship”, but rest assured the taxpayer got his pound of flesh out of the deal, mostly by paying me half of the national average for my specialty to do a job most docs would demand twice the national average for. I’ve got pretty mixed feelings about the taxpayer funding such a huge burden for the typical physician.
I also don’t like what happens to our behavior when we drag out our loans. It’s the same issue in the pay down debt vs invest question. Sure, investing is often the better move, IF YOU ACTUALLY INVEST. But the problem is that once we take our eye off the ball (the debt) we often spend the money instead, and paying down the debt is better than spending. So I fear that someone going for student loan forgiveness may become entirely too comfortable with debt (like mortgages, autos, and credit cards) and end up worse than he would have been had he just paid it off.
The Rich Doctor
Okay, you say, so that first example was kind of extreme. Let’s look at the other extreme. A single doc with no dependents with $100K in 6.8% subsidized loans making $500K. What does his situation look like? Let’s plug it into the calculator.
The standard payment is $1151 a month, or <3% of income. Income is too high for any reduced payments at all. The loan is paid off after 10 years, for a total of $138,096.
Somewhere In The Middle
Now, let’s assume a more typical situation. The average physician salary is $225K or so. The average physician student loan burden is $200K or so. What does that look like (remember we’re ignoring the value of residency, which tips the scale toward loan payment)? We’ll assume $100K in subsidized 6.8% loans and $100K in unsubsidized 8% loans. We’ll also assume married with 2 kids.
The standard payment is $2364 per month, or ~13% of income. After 10 years the loans are gone at a total cost of $283,633.
Under PAYE, the payment ranges from $1564 to 2364 (the full payment), or 8-13% of income. The loan will be paid off after 13 years, at a total cost of $323,515, and there will be no forgiveness. Was that worth it? I don’t know, you be the judge, but I don’t think so. I would have preferred to be out of debt at 2 years (by living like a resident) with a total cost of something like $215K. If this doc could have qualified for PSLF, especially when you include the benefit of the ultra-low payments in residency, and especially for a long residency/fellowship, then he still would have come out way ahead by making minimum PAYE payments. But when you have to wait 20 years for forgiveness, there’s a good chance that an average doc isn’t going to get any forgiveness at all, even with the residency effect.
One More Catch
PAYE forgiveness, unlike PSLF forgiveness, is fully taxable. Yes, read that again. Fully taxable at your marginal interest rate. Let’s go back to the poor doctor above who had $772K forgiven. His income that year is now $872K, and he’s going to owe something north of $250K (250% of his annual salary) in taxes just on that loan forgiveness. He’s still coming out ahead, but only by about $100K (plus the time value of money.)
The Bottom Line
The bottom line is that every doctor needs to run this calculation for himself. There are a lot of variables, so there will always be at least a little bit of guesswork. There is also the risk that the programs (PAYE forgiveness and PSLF forgiveness) will be modified, means-tested, or eliminated without grandfathering provisions. But here are the general rules:
- If you can qualify for PSLF by working at a 501(c)3, you should go for it.
- If you have a massive student loan burden ($300K+) and you are not an incredibly highly paid specialist, you should give very serious consideration (i.e. make some careful calculations using reasonable assumptions) to making PAYE payments for 20 years. But realize that you are swapping lower loan payments for a high tax bill balloon payment, so be sure to include that in your calculations.
- If you have an average loan burden and are poorly paid, you should give very serious consideration to making 20 years of PAYE payments, but again preparing for the balloon tax payment at 20 years by squirrelling away money for it.
- If you are relatively average (or better) in loan burden and salary, then refinance your loans upon residency graduation and live like a resident until they’re gone.
What do you think? What do you plan to do with your student loans? If you were graduating today with $300K in loans at 6-8%, what would you do? Comment below!
I normally agree with your opinions and you have taught me many facts since I have begun reading your blog but I strongly disagree with your hypocritical “moral” stance here. I believed you have crossed the line from being objective to envious. The military stipend, housing allowance, healthcare insurance, great retirement, tuition, while being your choice…and you continue to bring up the “low pay”? Pfff. Not a sacrifice.
Meanwhile, it is a “moral hazard” for a doctor to work at a non-profit? While feeling free to go to a more elite/prestigious/expensive school upon acceptance? Of course this disobeys your Mosaic Commandment #1, but I think you may want to reevaluate. The hubris in your statement of keeping low above the line deductions while “avoiding working too hard” is loud and pungent.
Man, I thought we were on the same wavelength. Not so much. This article reeks of a holier-than-thou complex.
I completely agree with Joseph on this one; unfortunately though I am not too surprised. Over the years I have noticed a strong tendency for private practice docs (and trainees destined for private practice) to become noticeably spiteful at the mention of PSLF. I’m not entirely sure why this is, since the benefits of going into private practice in many ways outweigh any benefit that one may achieve via PSLF in academics. Furthermore to Joseph’s point, the “3 incentives” for PSLF listed above are not exactly common characteristics among medical students/processionals. I don’t recall any of my medical school classmates attempting to “rack up as much debt as possible” simply because there is a chance it may be forgiven.
There are some valid considerations from this post, but overall I agree that this is more of an emotionally driven opinion piece than it is a true source of financial information.
I agree that there really isn’t any moral hazard here. I had most of my medical school costs covered because I pursued a Ph.D. Was that a good deal for the taxpayers? I don’t know and don’t really care. There was a program available and I took advantage of it. I see loan forgiveness in the same light.
Should I feel bad because my mortgage is subsidized by other (probably mostly poorer) taxpayers because of the mortgage deduction? Maybe, but I don’t.
There are a couple of other considerations people should keep in mind before opting for these programs
1. Will the programs exist in the same form in 10 or 20 years. The government can and does change things and you’d hate to pay the minimum for 18 years and then have the program be substantially changed.
2. My understanding is that not all academic positions qualify for PSLF since some academic physicians are paid out of practice groups that don’t qualify. This could really limit your options and/or screw you over.
I’m getting emails from med students all the time asking precisely this- “Should I just take out all the loans I possibly can since I’m going to do PSLF anyway?” Talk to more current med students. This is a real dilemma for them.
people really need to chill out. Moral Hazard is a basic economic term to explain how certain policies can lead to different choices that an individual otherwise will not make. This whole article just showed different choices a resident could make based on his income/debt.
The whole discussion clearly substantiates that even though doctors do study very hard and know alot of things, the claim they need to educate themselves more when it comes to business is true,
“In economic theory, a moral hazard is a situation in which a party is more likely to take risks because the costs that could result will not be borne by the party taking the risk”
I’m not sure you’re understanding the term “moral hazard.” It really doesn’t have anything to do with morals.
The fact that military emergency physicians get paid about 1/2 or less of what civilian emergency physicians do is just that, a fact. Look it up. The military salary is easy to look up in military pay tables. The civilian salary is easily obtained from salary surveys. My point was that a military scholarship is nothing like a loan forgiveness program. With the scholarship, the doc more or less comes out even. He got paid in med school, had tuition paid for, then worked for half a salary for a few years. With loan forgiveness, the doc gets a full salary, makes tiny payments for a few years, and then the debt disappears. My point was that it is quite a different financial situation.
Jealous? Hardly. I don’t have any student loans either. My “loans” were gone in 4 years. Probably could have been 1 or 2 if I hadn’t done the military route, but it’s all worked out in the end. Nice reference to a 2 year old post, but I didn’t quite make the connection between “having a second job” and attending a prestigious school.
So now you are just going to say that docs in non-profit “get a full salary”? You are clearly withholding the truth. If you are going to take a personal stand, at least be honest about it.
Much respect to you. I heard about this blog because of your personal invitation regarding my question on this specific topic. But I don’t feel you are expressing either reality or empathy.
I think you’re exactly right that the point of the PSLF (not so much the PAYE) forgiveness program was for those willing to take public service jobs should get a little extra help, since #1 public service jobs often (but certainly not always, especially in medicine) pay a little less and #2 in general tend to do more social good.
I’m not trying to take a “personal stand” in this post. I’m trying to explain #1 when it is useful to go for PAYE forgiveness and # 2 express my concerns about the moral hazard of loan forgiveness programs- i.e. that people will borrow more than they need, perhaps get burned by a change in the programs, and perhaps pay back less than they could.
Sorry to offend. It wasn’t intended.
[Ad hominem attack removed.]
i am an anesthesiologist at a 501(c)(3) hospital. while the salary component of my paycheck may be less (maybe 10-15%) then my private practice friends in the same city, after getting my disability, med mal and other health care insurance paid for, the difference becomes quite negligible. i am eligible for PSLF where i work. i would save a boatload of money. but i don’t think this program is actually going to be around to wipe out my debt in a few years. and more than that, the thought of a “poor academic doctor” getting hundreds of thousands of dollars worth of student loans wiped out just strikes me as crass. if i was a pediatrician i might feel differently. i took out these loans and i am responsible for paying them back.
as someone who supervises and trains the next generation of residents i will support WCI’s assertion – many of these residents do not care how much debt they racked up, assuming its gonna disappear through PSLF.
You are willing to throw away a “boatload of money”. I am glad that you are also a reader of this blog.
i never said i was willing to throw away a boatload of money. i said i didn’t think that PSLF would exist in its current state. i am making a calculated decision that i am better off paying off my loans then making minimal payments and being shocked in 10 years when my magic federal loan fairy doesn’t pay the rest of them off.
the rationale behind PSLF was to encourage all professions into public service. giving this money to pay off physician’s med school loans is an incredibly inefficient use of this resource. hence the “moral hazard” WCI describes. why do you care how much you borrow if the taxpayers are covering the bill?
I think there has been a miscommunication here between what you believe the term “moral hazard” means, and what the accepted economic definition is. There is no patronizing in this post, nor are any personal opinions in regards to morality expressed therein.
The meat of this post breaks down the numbers for loan forgiveness programs and lays out situations where the programs are beneficial, and situations where the programs are probably inferior to simply living below your means and taking an aggressive stance towards paying off the debt.
The portion that explain the moral hazard explains how much money can actually be saved in extreme circumstances which could easily occur if a medical student threw caution to the wind, maximized their loan amounts at an expensive school, and subsequently chose a low paying specialty or a job in a low paying area. The moral hazard isn’t explained to say that this is “wrong” for the individual to do (it is quite frugal and natural); however, moral hazards have the tendency to come crashing down when their inherent instability finally reaches a tipping point, and there will likely be some people who pay the price for this, and these could easily be people who begin to make choices with their schools or loan amounts assuming that these programs exist.
You can try and put the ideas that frustrate you (moral platitudes) into the WCI’s post to try and be frustrated with him, but I think the content of this post speaks for itself.
Not sure why first three commentors are blasting the whitecoatinvestor-I feel like this is a Yahoo or ESPN comment section with all the arguing. Joseph I think you need to lookup the definition of moral hazard because it doesn’t look like you are familiar from a previous economics course or other reading. “A situation which a party is more likely to take risks because the costs that could result will not be Bourne by the party taking the risk” -Wikipedia (sorry too lazy for better source). Just as the WCI’s article says, the moral hazard with the loan forgiveness is we won’t be as careful on not taking out too much, paying back loans early, or even just being comfortable with other debt if we are not paying the bill in forgiveness. This article isn’t at all about any kind of morality of going into non profit, just pure facts and numbers, and a perfect example of moral hazard. So stop complaining.
AJ,
Yahoo and ESPN?
From the wikipedia article you referenced: “Moral hazard arises from character flaws—or “moral flaws”—such as habitual criminality or drug abuse.” Does that seem to be a personal attack on the person at all? Hmmm.
Again this is economic theory, has nothing to do with criminality or drug use, only risk associated with finance. That one sentence you quote links to insurance analysts distinction between morale vs moral hazard, which is not the economic theory we are talking about at all, just some insurance analyst jargon. I don’t understand where your confusion is coming from. Did you read about moral hazard or just look for a separate insurance analyst definition to make some point?
I don’t general think about “character flaws” when I think about the economic concept of moral hazard. Sorry for all those who felt personally attacked by the term. I certainly don’t mean to imply that someone taking advantage of IBR/PAYE/PSLF have some moral issue. My point was that they are more likely to borrow more money than they otherwise would, with all of the attendant consequences.
Anyway good article. Unfortunately for us recent graduates there is so much unknown regarding PSLF. A big difference in interest if you expect it for 8 years making minimal payments and all of a sudden it’s gone. My situation- 2 physician couple, lots of loans (I was out of state), doing medium pay specialties (hospitalist). I plan on refinancing this fall, trying to pay off in 2-5 years very aggressively (my group won’t qualify for PSLF anyway). Probably will have my wife continue to do IBR and see what happens in next 7 years. Though I haven’t run the IBR numbers for when we are two attending salary-May be a pretty high payment anyway and may make sense to still pay it off early depending on any change to the rules. And of course live like a resident.
I recently had an email exchange with one of my kids about some financial/investing issues. One of the take-home messages I wanted to get across is that spending time “fixating on finances” is not about making lots of money so you can have lots of stuff.
It is, rather, about having the financial independence to have choices — where to live, what specific job to take, how much time to take off, whether to retire early or drop to part-time, etc… And yes, you can choose to try to buy as much stuff as possible if that is what is most important in life to you.
When you are a slave to debt or predetermined career paths, your options become increasingly restricted, and you often can’t go back and undo the choices that put those restrictions on you.
I challenge the idea that any but a select few medical students can know what it is that they will want to do with their lives 5, 10 15, 20 years down the road. Look at how few students end up matching in the specialty that they thought themselves most likely to pursue when starting medical school. Compare the number of students and residents who claim to be interested in academic careers with the number that actually go into academics (hint: it usually isn’t just because of pay differentials). And consider how many doctors start out in an academic or other lower paying career and later decide that they want to change to some sort of “conventional” medical practice.
Most medical students and residents really don’t have an accurate idea of the broad differentials in cost of various medical schools and reimbursements in different specialties and practice situations — and what those numbers actually mean to you when you are living with them. The atmosphere in medical education is all too often that it is grubby and small-minded to think and talk about such things.
Many of those who choose some of these loan forgiveness paths will find themselves with their life choices unnecessarily constricted — unable to take higher paying jobs without onerous penalties, feeling trapped in a public service job, restricted in where they can live, etc. During my stint in the military, I saw some pretty miserable people because their choice to have the military pay for their medical school restricted their choices in ways that hurt their career planning. I got to do everything I wanted to do, when I wanted to do it, but what I experienced in the military was hardly what everyone enjoyed.
I recently made a major geographical and practice situation shift after more than a decade practicing in one place. I would never have dreamed, a decade ago (let alone two), that I would want to make this choice. It was a great move for me and my family, but because it was a move to a higher-cost part of the country and one that involved some calculated financial risks, it was possible ONLY because I became debt-free early and then saved and invested like crazy for the first decade of my career. And if this doesn’t turn out to be as great as it appears right now, I will still have the financial freedom to make a different choice if I want.
Whenever I come into contact with medical students or pre-med students, I take the time to explain some of these things to them. Given a choice between a life with a lot of options and a life with very few options, I know which one most people would take in a heartbeat. I worry about students who make plans to incur large amounts of debt that they think will be forgiven or that they think won’t matter to their lives. Great if you end up loving a career path that makes it make financial sense, but woe to them if they turn around and find that they hate their public service job, are restricted in where they can live, or if the loan forgiveness program disappears or is radically changed right at the time they really need it, etc. And given the high premium that millenials place on “lifestyle,” those things will sting them a lot harder than it did those of my generation who were inculcated with more of a “it sucks but you gotta pay your dues” attitude towards our work lives.
It is easy enough in life to end up trapped. To make plans in advance to trap yourself is inconceivable to me.
I agree with you NVMD. Paying off debt ASAP should be the way of life. Our current young ones have been easily duped into thinking debt is good little realizing that it is in fact debilitating and robs one of good options in their future far and near. We are heading towards a financial collapse in this country because too many are living the millenial lifestyle of comfort and luxury and throwing all financial responsibility to the wind.
Wow WCI,
Outside of when you rag on Whole Life policies, this is the worst I have ever seen you get blasted in the comment section!
Don’t know that I agree with most of the critique, but clearly you have touched a nerve.
I feel like I’m reading a blog on Huffpo or Fox News today….This is the raciest investing for doctors comment section I have ever read….Guess I don’t need to “catch up with the kardashians” today with all this good drama.
Makes me wanna come back for more! Whatcha got next, maybe a topic on planned parenthood and how it affects the stock market? 😉
Even though none of this post has any value for me, it was still enjoyable to read today
Thanks,
Luckily I have a pretty thick skin. I got blasted over on the Bogleheads board recently for pointing out that National Parks Entrance Booths aren’t staffed after dark (so entrance at that time of evening is “free.”) I was reported to a moderator for “dishonesty.”
I think this one was all a misunderstanding about the meaning of moral hazard as an economic term. I think people thought I was suggesting they were immoral for taking advantage of the PSLF or PAYE forgiveness.
I think that if people simply understood what a moral hazard was in terms of economic theory there would not be so many hurt feelings.
And there are definitely quite a few residents and students out there spending loan money on all kinds of stuff because they have no intention of paying it back. It will create huge problems down the road if they do away with these programs after someone with these huge debts just spent the last 10 years working in non profit for a fraction of what they would make elsewhere.
I have $250K in debt, and will earn in early 200s out of residency and fellowship. I plan to live like a resident until they are paid off.
Wise decision. The years we “lived like a resident” were very happy and fulfilling years. We didn’t expand into the doctor lifestyle out of residency but loosened the budget a little. We have terrific memories of those years. Paying off the loans will give you much flexibility.
WCI,
Your point has massive implications for our country. The PSLF, once it starts “forgiving” physician’s massive student loan burdens could lead to major economic problems. Our country has a student loan “bubble” over One Trillion (http://bigstory.ap.org/article/1-trillion-student-loan-debt-widens-us-wealth-gap) dollars in student loan debt. If many physicians start collecting on this while making minimum payments, and earning 225K average salary 2 things could happen. One is that our government would be spending billions to repay loans for people that could pay it off themselves–who knows what that could do to the economy. The other is that they “change” the program so that less money is forgiven (or none/limits for physicians). I just don’t see where this money is going to come from. If they totally get rid of the PSLF program (or other similar programs for primary care), , I think many physicians that have high loan burdens will have to carefully choose their jobs just to avoid default.
The other side of the coin is that the non-medical public (who have ZERO PERCENT understanding of the stress of our job, & the duration and cost of our training) will flip out if they see a surgeon having 250K of loans forgiven tax free.
Just my 2 cents, but I thinks there are very serious implications to the PSLF program that are very easy to see. Thank you for your post on this, I have thought of these moral hazards for a while. It is one of the big reasons the PSLF program or PYE seems too good to be true.
I hope they give a maximum amount that can be forgiven for specialty physicians and leave it as is for primary care. Would make primary care much more attractive and hopefully help steer med students that route.
That would be a new way to steer people into primary care. Alternatively, they could increase Medicaid/Medicare reimbursement for primary care visits.
Thanks for having a thick skin WCI. I studied Economics in college before going to medical school. I absolutely understood what you were talking about when you spoke of moral hazard. Unfortunately, some of the critiques were clearly misguided as they didn’t understand the economic concept. Anyways, keep up the good work. Here are some examples of moral hazard I found on Investopedia:
Moral hazard is “an idea that a party that is protected in some way from risk will act differently than if they didn’t have that protection. We encounter moral hazard every day – tenured professors becoming indifferent lecturers, people with theft insurance being less vigilant about where they park, salaried salespeople taking long breaks, and so on.
Moral hazard is usually applied to the insurance industry. Insurance companies worry that by offering payouts to protect against losses from accidents, they may actually encourage risk-taking, which results in them paying more in claims. Insurers fear that a “don’t worry, it’s insured” attitude leads to policyholders with collision insurance driving recklessly or fire insured homeowners smoking in bed.
The idea of a corporation being too big or too important to fail also represents a moral hazard. If the public and the management of a corporation believe that the company will receive a financial bailout to keep it going, then the management may take more risks in pursuit of profits. Government safety nets create moral hazards that lead to more risk taking, and the fallout from markets with unreasonable risks – meltdowns, crashes, and panics – reinforces the need for more government controls. Consequently, the government feels the need to strengthen these nets through regulations and controls that increase the moral hazard in the future.” There are many more examples, including the one you mentioned in the post, but I hope this helps.
It’s not as if all med students intentionally make poor financial decisions regarding their loans. This forum has established that medical schools in general don’t offer students the best financial / business education. Schools that talk about PAYE and PSLF to students probably don’t do a great job explaining how these programs actually work during residency and after. “You have the opportunity for loan forgiveness! All you have to do is…” and now every first year med student thinks they have access to free money. Since we all know better, it’s easy for us all to assume that 23 year-olds right out of college should know better too.
My wife – now a 2nd year resident – knew OF these programs but not ABOUT them. Despite her large loan balance, we would be unlikely to benefit that much (if at all) from PAYE, and we all know the PSLF is risky.
A lengthy post above mentioned the ‘freedom’ of being debt free. I also prefer the certainty of a plan paying off the debt as fast as possible, knowing that $X over X years = no more student loans. I don’t have to worry about 501c3, variable payments based on income, potential tax hits upon forgiveness, viability of the programs, endless loan forms and red tape. Mostly, I can’t stand the thought of making an extra decade of interest payments under PAYE.
In my humble opinion I disagree with the premise of this post that economically speaking a moral hazard exists with these programs. If anything, I see the opposite as true. I believe time is more valuable than money which clouds my response. By giving time, often many years of their lives, to these programs, the physicians are not fairly monetarily compensated with the loan forgiveness aspect they receive. I remember how scared we were twenty years ago with large student loans. I remember how we financially far undervalued our time, our ability to make choices, and our flexibility. Be slow to give up your time for money. As I have said before, the years we “lived like a resident” to pay back loans ourselves were great years for us personally. The loans will be paid back with time and/or money. When you consider these programs, come up with a number that to you compensates for your time and loss of flexibility(and if you are a typical resident who financially undervalues yourself double the number). Add that figure to your cost of the program before you decide. Good luck!
Remember we’re talking about the PAYE program here as well. This program requires no sacrifices, no 501(c)3 job etc etc. All you have to do is make minimum payments for 20 years. Maybe 501(c)3 jobs also require minimal sacrifice. Consider an academic job at my local university. Many of these guys are making as much or more than their counterparts in the community, but they get forgiveness just 3-7 years out of residency. I’m not blaming them. If I were working at the university and had loans I would certainly apply for forgiveness. My point is not all 501(c)3 jobs require some kind of massive sacrifice to get the loan forgiveness.
True, if that is the job the doctor actually wanted. Given the relatively high interest rate charged on federal loans today, I am glad to see loan forgiveness as an option. But, these programs will likely change for physicians so be wary. Don’t lose sight of total paid back in money, time, and loss of choice for a lower monthly payment and uncertainty.
lost in all of this discussion is the great picture of you climbing! nice shot
Not me, but a friend and his son. We’ll be climbing the Grand Teton together in a couple of weeks. While it is fun to get sunset pictures like that, it did mean we had to rappel off by headlamp!
What Dr. Mom said: “be slow to give up your time for money.”
What is the biggest cost of medical training? Not money. It costs you your 20’s. Time is the ultimate finite resource.
We give up enough of it as it is.
I have often disagreed with you, and sometimes even let you know, but sheesh, some of these attacks are just outrageous.
I’m at the point in my career where I’ve watched CNBC about 500 times. They talked an awful lot about moral hazard when all the banks got bailed in/bailed out. It is not a personal attack or moral judgement on any person who chooses to repay or not repay their loans.
And yes, most of the military docs I know feel they have repaid their “free tuition” back in triplicate. You are not the only one!
And NVMD is absolutely right. I would like my twenties back, please.
Right now I’m a 3rd year EM resident at a 4 year program at a large teaching hospital. I’ve got 220k in debt on which I’ve been making minimal IBR/PSLF eligible payments since residency began. At the end of my residency, I am strongly considering either staying on at my current 501C hospital (they hire their ED docs directly) or else moving back to my hometown and work for the local yocals (also a 501C who hires their docs directly) to take part in PSLF for the remaining 6 years. Both jobs, surprisingly, pay at very competitive wages (geographic reasons, likely).
If my IBR payments are ~$4,000/month vs an aggressive $10,000/month via refinancing and living like a resident, it’s not hard to imagine all the investing/travelling/fun things one could do with an extra $6,000 per month.
Granted, most jobs out there for EM docs are not PSLF eligible, but for me, two of my best options just happen to be.
Will the IBR/PSLF programs last another 8 years in its current state? Who knows. If not, I would be the poster child of personal finance strategy failure, should I continue down this road.
Thanks for all the good advice, WCI.
You wouldn’t be the poster child if you took that $6K a month and invested it. If PSLF disappears, you could just use that “side fund” to pay off the rest of the loan at that point.
Good point! However, I readily admit that I would not have the self-control to invest ALL my PSLF-derived liquidity.
Maybe half.
“Half” sounds like a reasonable insurance policy against PSLF program failure 🙂
I don’t know that you would even need half. Figure out the amount that would be forgiven, divide it up over 7 years and apply a reasonable rate of return. Perhaps investing $1-2K a month would be enough to pay off the loans if PSLF goes poof. Worth running the numbers for sure.
Hi WCI ,
My question is going off on a tangent but figured this thread/question was close to the topic. Do you know if it is possible to structure a deal with a private practice group to give you a lower salary and instead pay your loans off with pre-tax money?
Since I think my question is vague let me explain what I want to do. I’m currently 2 months into my first job out of fellowship. $150,000 in student loans with a current salary of $190,000. Salary goes up to $250,000 next year. Instead of taking the whole $250,000 I wanted to take a salary of $100,000 and have my group basically do a direct pre-tax payment onto my student loans.
To make this work I am thinking it has to be done as a “loan” to me that is then forgiven over time. Even then I am not sure this is doable/legal. I know hospitals/groups offer loan forgiveness but has anyone done it once they have already been established with a group? In retrospect I probably should have negotiated this into my initial contract but didn’t think of it at the time.
Thanks for any thoughts.
It would be very easy to structure something as salary + loan pay-off. The tricky thing is to make that loan pay-off not taxable to you or to the employer. I don’t think it would ever be taxable to the employer, since it is an expense to them, and should thus be able to be written off. But it’s definitely compensation to you, so I don’t see how you’d get around it. A forgiven loan would also be compensation. I’d love to find out I’m wrong, but I can’t think of a way to do what you’re hoping to do with a typical private employer.
Here is my conundrum.
Going into psych, so not the highest paid specialty, but it is a 4 year residency (and if I do a fellowship, will be 5 total years). I am also in the National Guard, and am receiving STRAP (which is an extra $2000/month on top of my regular resident salary).
Current loans: $250,000 at a mix of 6.8% and 5.4%
I can totally afford to just put all the STRAP ($2000/month) into my loan repayments, but the question is if I should do this, or if I should just pay minimum of IBR and shoot for PSLF and squirrel away that money in an IRA/etc? I think I could work a 501(c)3 for 5-6 years post residency just fine.
Then I’d invest the money on the side and look for a 501(c)3 to work for and get PSLF.