By Dr. James M. Dahle, WCI Founder

While I think it is entirely possible to finish an undergraduate education debt-free, that is becoming less and less likely for physicians, dentists, attorneys, and other high-income professionals all the time. This lengthy post is going to cover everything you need to know about managing those pesky student loans from student loan forgiveness programs to the best deals on student loan refinancing. Consider this Student Loans 101. I've divided the post by level of training, which will hopefully allow you to skip to those parts that apply to you. May this post bring some hope to those struggling under the burden of medical school debt.

 

 

Table of Contents

 

Student Loans 101

 

What Is a Student Loan and What Can Student Loans Be Used For?

Student loans are loans issued to students to pay for their education and associated living expenses. As such, it is considered fraudulent to obtain or use them for any other purpose. Unlike a mortgage or auto loan, these loans cannot be foreclosed on. Nobody is coming to do a craniotomy if you don't pay. However, in exchange for that fact, they have two conditions that make them rather onerous:

  1. They are offered at rates significantly higher than mortgage rates, especially for graduate/professional school (5%-10%)
  2. They are generally only discharged in the event of death or total disability, NOT bankruptcy

 

How Much Student Loans Should I Borrow?

Don’t borrow more money than you need for school. Some financial aid offices will recommend taking out additional loans to cover living expenses. Try to take out the least amount necessary to cover your living expense. Some may even borrow more than they need to live a lavish lifestyle on their loans. This is never a good idea. To learn more about how to live with student loans, check out The Right Way to Use Debt in Medical School.

 

Recommended Student Loan Advisors

The decisions you make with your student loans can easily be worth tens or even hundreds of thousands of dollars. Managing them, however, is getting more and more complicated each year with rapidly changing federal repayment programs. I recommend you use this post as a learning tool and guide but visit with one of our Recommended Student Loan Advisors to make a plan for your unique situation. They know these programs inside and out and are up to date with the latest information to save you the most amount of money.

 

How to Get a Student Loan

Apply for a federal student loan by completing the free application for Federal Student Aid (FASFA) form. Your results will dictate your financial aid offer.

Before receiving student loans you’re required to received entrance counseling to ensure you understand the obligations of loan repayment and sign a master promissory note, which is a binding contract in which you agree to the loan terms. Contact your school’s financial aid office for additional details.

The process for applying for a private student loan can vary but most private lending applications are accessible through their websites.

 

How Do Student Loans Affect Credit Score?

Both federal and private student loans are generally treated the same as any other installment loan such as a mortgage or car loan. If you make each payment on time it can build your credit history and may even boost your credit score. If you are delinquent on payments or default on your student loans then your credit score can take a hit. Before you are ever close to delinquency or default, make sure you are enrolled in an appropriate Income-Driven Payment plan to assure the affordability of payments.

Doctors with large student loans looking to buy a house may find it difficult to secure a mortgage due to their high debt to income ratio. An option to consider is using a physician mortgage loan (also known as a doctor mortgage). Physician mortgage loans are lending programs that give special treatment to high-income borrowers with a high student loan debt-to-income ratio. Physician mortgages are also often available to dentists, veterinarians, CRNAs, PAs, attorneys, etc…

More information here:

Physician Mortgage Loans

 

Types of Student Loans

Student loans are divided into two main types—Federal Loans (also called Direct Loans) and Private Loans.

 

Federal vs. Private Student Loans

When deciding on how to borrow for your education, take out federal before private. Federal loans can offer lower interest rates initially and have an abundance of federal protections private student loans don’t offer. Private loans don’t offer Income-Driven Repayment, Public Service Loan Forgiveness, or IDR Forgiveness. Private loans generally are also not dischargeable upon death or disability.

 

Federal Student Loans

Federal loans generally have lower rates and also have special income-based payment plans and forgiveness plans. The general rule is to max out what you can borrow in the federal loan programs before taking on any private loans.

However, some foreign medical schools qualify for federal loans and some do not. Be sure to consult this list on this page before applying and enrolling in a foreign medical school. Caribbean medical schools are notorious for not qualifying for federal loans, although the ones with the highest match rates (St. Georges, Saba, American University of the Caribbean, Ross) do tend to qualify.

Federal student loans can be consolidated. In this process, numerous loans are all lumped together into one loan and the interest rates are averaged and then rounded up to the nearest 1/8th of a point. This is distinct from the process of refinancing (available only with private lenders) where the interest rate is generally lowered.

 

Federal Student Loan Eligibility

Eligibility requirements include:

  • Demonstrating financial need
  • US Citizen or eligible non-citizen
  • Have a social security number
  • Be enrolled in school part-time or more
  • Be enrolled in a Direct Loan program

 

Subsidized vs. Unsubsidized Federal Student Loans

Subsidized loans are loans that the Education Department will pay the interest on for you for undergraduate schooling. Borrowers that qualify will demonstrate a financial need and will not have to pay accrued interest while in school. Graduate and professional degree programs no longer offer subsidized loans. Unsubsidized loans begin accruing interest the moment you receive them. PLUS loans (grad or parent) are unsubsidized loans. You'll want to exhaust any subsidized options before ever taking out an unsubsidized loan.

 

Types of Federal Student Loans

 

#1 Stafford Loans

Stafford Loans are also known as Direct Stafford Loans and come from the William D. Ford Federal Direct Loan (Direct Loan) Program. Direct Stafford Loans are the most common student loans and are currently being issued to help cover the cost of higher education.

There are 3 Categories of Stafford Loans:

  1. Direct Subsidized: Available to undergraduates
  2. Direct Unsubsidized: Available to undergraduates, graduates, and professional degree students.
  3. Direct Consolidation: Available to undergraduates, graduates, and professional degree students.

Prior to consolidation, Stafford Loans are eligible for:

  • Standard Repayment Plan
  • Graduated Repayment Plan
  • Extended Repayment Plan
  • All Income-Driven Repayment Plans (and PAYE if borrowed after Oct 1, 2007 and have a federal loan disbursed on or after Oct 1, 2011)
  • Public Service Loan Forgiveness (PSLF)
  • Income-Driven Repayment Forgiveness

 

stafford loan categories

#2 PLUS Loans

PLUS Loans, also known as Grad PLUS Loans, come from the Direct and FFEL Loan programs. Borrowers are issued these loans after exhausting Stafford Loans to cover tuition.

Prior to consolidation, Direct PLUS Loans are eligible for:

  • Standard Repayment Plan
  • Graduated Repayment Plan
  • Extended Repayment Plan
  • All Income-Driven Repayment Plans (and PAYE if borrowed after Oct 1, 2007 and have a federal loan disbursed on or after Oct 1, 2011)
  • Public Service Loan Forgiveness (PSLF)
  • Income-Driven Repayment Forgiveness

Prior to consolidation, FFEL PLUS Loans are eligible for:

  • Standard Repayment Plan
  • Graduated Repayment Plan
  • Extended Repayment Plan
  • Income-Based Repayment
  • Income-Driven Repayment Forgiveness via Income-Based Repayment

After consolidation, FFEL PLUS Loans are eligible for:

  • The remaining Income-Driven Repayment Plans: REPAYE, ICR (and PAYE if borrowed after Oct 1, 2007 and have a federal loan disbursed on or after Oct 1, 2011)
  • PSLF
  • Income-Driven Repayment Forgiveness via REPAYE, ICR, PAYE

 

#3 Parent PLUS Loans

Parent PLUS Loans are issued to parents to finance their child’s education. They are offered for undergraduates, graduates and professional degree students.

Prior to consolidation, Parent PLUS Loans are only eligible for:

  • Standard Repayment Plan
  • Graduated Repayment Plan
  • Extended Repayment Plan

After consolidation, Parent PLUS Loans are eligible for:

  • Income-Contingent Repayment
  • Income-Driven Repayment Forgiveness via Income-Contingent Repayment

In order to be eligible for additional IDR plans and PSLF, you will need to do another consolidation. This type of double consolidation needs careful review and is difficult to get right. We suggest booking a consultation with one of our recommended student loan advisors if you are in this position.

 

#4 Family Federal Education Loans (FFEL)

Before 2010, the Family Federal Education Loans (FFEL) program was the main source of federal student loans. The program ended in 2010 and all loans are now issued under the Direct Loan program referred to above.

Prior to consolidation, FFEL Loans are eligible for:

  • Standard Repayment Plan
  • Graduated Repayment Plan
  • Extended Repayment Plan
  • Income-Based Repayment (not to be confused with Income-Driven Repayment)
  • Income-Driven Repayment Forgiveness via Income-Based Repayment

After consolidation, FFEL Loans are eligible for:

  • The remaining Income-Driven Repayment Plans
  • REPAYE, ICR (and PAYE if borrowed after Oct 1, 2007 and have a federal loan disbursed on or after Oct 1, 2011)
  • PSLF
  • Income-Driven Repayment Forgiveness via REPAYE, ICR, PAYE

 

#5 Perkins Loans

The Federal Perkins Student Loan program was created to provide money for college to students with a particular financial need. The program ended on September 30, 2017.

Perkins Loans are not eligible for a number of federal programs like income-driven repayment (IDR) or public service loan forgiveness (PSLF) until they are consolidated.

After consolidation, Perkins loans are eligible for:

  • Standard Repayment Plan
  • Graduated Repayment Plan
  • Extended Repayment Plan
  • All Income-Driven Repayment Plans (and PAYE if borrowed after Oct 1, 2007 and have a federal loan disbursed on or after Oct 1, 2011)
  • Public Service Loan Forgiveness (PSLF)
  • Income-Driven Repayment Forgiveness

 

What Is a Federal Student Loan Origination Fee?

Most federal student loans hit you with loan fees when disbursed. The fee is deducted proportionately from each loan disbursement you receive while enrolled in school. Which means the money you receive will be less than the actual amount you borrow. AND, you’re responsible for repaying the entire amount you borrowed, not just the amount you received.

 

subsidized unsubsidized origination fees

 

Private Student Loans

Private loans were typically taken out by students who have already borrowed the maximum federal loans for the year. However, with Grad PLUS loans, that shouldn't be the case anymore and federal loans should always be taken out over private. One exception is for students attending some international medical schools that are NOT eligible for federal loans at all. Private loans will be the only option for students in this situation.

 

Eligibility Requirements for Private Student Loans

  • Underwriters will look at credit score, debt-to-income ratios, income, and employment history to determine creditworthiness.
  • Typically, borrowers (and cosigners) need to be US citizens or permanent residents.
  • Borrower must meet minimum legal age requirements which vary by state.

 

Private Student Loan Cosigner Requirements

Cosigners are not required when taking out private student loans but can help borrowers secure a loan and obtain better terms. Some criteria for co-signers include:

  • Good credit history. A number of private refinancing companies require a minimum credit score of 680-720. The better their credit score the better the rate.
  • Co-signer relationship to borrower. Parents, spouse, or other family members are generally cosigning on student loans. However, ANYONE with a good credit history can act as your cosigner. However, co-signers need to know that by signing their name on the dotted line, they are legally responsible for loan payments. They run the risk of ruining their credit if the borrower fails to make payments or defaults. As you can see, ruined relationships are also a risk cosigners and borrowers run with these loans.
  • Good health. Some private refinancers require loans to be paid immediately if a cosigner passes away.
  • Stability. This encompasses a number of things we’ve addressed above but considers, credit, income, job history, savings, debt, etc.

 

Student Loan Management During Undergraduate School

Let's start at the very beginning. How much should you take out in student loans? The truth is that you don't have to borrow for undergraduate school, and I think that very few should. There is a very wide range in the cost of attendance of undergraduate institutions, far wider than the range in the actual quality of the education. By making a few smart decisions and working hard as an undergraduate, most of those who will eventually become doctors can avoid having any undergraduate debt at all. Steps you can and should take in order to finish your bachelor's debt-free include:

  1. Choose a school you (+/- your family) can afford to attend without borrowing. If you will be receiving no help at all from your family, this may mean attending a state university in YOUR state or even spending a couple of years “doing generals” at a community college.
  2. Go where you can get a meaningful amount of scholarship money. It's rare that those who are academically talented enough to get into medical or dental school aren't talented enough to get some kind of academic scholarship somewhere, often for full-tuition or even a full-ride. Your part-time job as a high school junior or senior is applying for scholarships.
  3. Live at home. One of the largest expenses of college is simply your living expenses. These can be cut dramatically by living at home, saving on room, board, and even laundry costs. This might require increased transportation costs, but you'll usually come out way ahead and get better grades anyway.
  4. Work hard during the summers. Bust your butt working for tips, working overtime, or even working two jobs when you are out of school. It is not unusual at all for an undergraduate student to return to school in the Fall with $10K-$15K in their pocket.
  5. Consider a part-time job during the school year. If you're the type of person that's going to be able to handle the academic load in medical school and survive residency, you can handle 16 credit hours of science classes along with a part-time job. Many of your peers in medical school had a job, played on a sports team, AND managed a high GPA and a strong MCAT score. You can do it too, although it might require cutting down on the social activities.

If you do end up borrowing for your undergraduate degree, try to only take on subsidized debt. That way the interest won't be building during medical school and residency. If you will be borrowing for medical school, consider taking out a loan toward the end of your senior year of undergraduate for that purpose. Not only will the interest rate be lower (5.05% vs 6.6% for the 2018-2019 school year) but the first $5,500 will also be subsidized.

More information here:

Get Out of Undergrad Without Debt!

How to Get into Medical School

 

Student Loan Management During Medical School

The best student loan is the one you never take out. There are a number of techniques for lowering the amount of debt you take on for school.

  • Choose the least expensive school you can get into in the least expensive cost of living area. It is difficult to live in Washington D.C., the Bay Area, and Manhattan with a middle-class wage. Trying to do it on borrowed money is a good way to ruin yourself financially.
  • Consider taking out the maximum loan amount possible as a senior undergraduate student in order to decrease how much you borrow as a first-year medical student. Not only do undergraduate loans carry lower interest rates than graduate school loans, but they are also subsidized.
  • Apply to New York University, Columbia University, and any other schools that may offer free tuition in the future.
  • Live frugally. Get roommates. Ride a bike. Minimize meals out, vacations, expensive hobbies, and recreational shopping. Buy books and equipment used.
  • Take advantage of any possible family resources. Your parents may be in a position to help with their own savings or current cash flow. If married, your spouse should take a job, preferably with the university which may reduce your tuition.
  • Apply for scholarships like The White Coat Investor Scholarship.
  • Consider “contract scholarships” like the Health Professions Scholarship Program, National Health Service Corps, Indian Health Services, or state primary care programs.
  • Don't take out your loans until you have to. Medical school loans are no longer subsidized and begin accruing interest as soon as you take them out. Some students have even taken advantage of 0% credit card offers to further delay the date when they receive their student loans.
  • Consider your student loan burden when choosing a specialty. While finances should not be the primary driver of specialty choice, a $600K student loan burden is not compatible with private practice pediatrics.
  • As you near medical school graduation, enroll in an Income-Driven Repayment Program ASAP. Many doctors have regretted their decision to put their student loans into forbearance or deferment.

More information here:

Should I Join the Military to Pay for Medical School?

Financial Tips for Pre-meds and Medical Students

Hitting a Net Worth of $0 as an Intern

How to Enroll in Repaye Early

 

Student Loan Management During Residency

Upon completion of medical school, it is best to divide student loan management into two categories—private loans and federal loans.

 

Private Student Loan Management and Repayment

As a general rule, doctors are going to pay back their private student loans, so minimizing the interest that accrues is key. The best way to do this is to refinance those student loans as soon as you get out of medical school. There are a few companies that offer “resident programs” where you can lower your interest rate AND enjoy a lower payment than you would otherwise have to make ($0-$100/month.) While that payment doesn't cover the interest accruing on the loan, you will end up paying less interest overall because you will have lowered the interest rate from 6%-10% to 4%-6%. The following WCI Partners offer special resident student loan refinancing programs:

Laurel Road $100/month payments

SoFi $100/month payments

Reset Refinance Loans $75/month payments

 

Private Student Loan Payment Methods

Private student loan lenders typically offer four main ways to repay loans during residency. Remember, although some programs will let you defer payments to varying degrees while still in school, interest will still accrue beginning on the day you or your school receives the funds from the loan.

 

#1 Immediate Repayment

Payment begins immediately from loan disbursement, even when enrolled in school. This is the lowest cost of the four payment options allowing you to begin paying down both principal and interest from day one.

 

#2 Interest-Only

In this program, you will pay interest only while enrolled in school. Although the loan balance won't be paid down, you will keep up with the interest payments and won't have a larger loan balance at the end of your schooling.

 

#3 Partial

This option will require you to make a low fixed payment while enrolled in school. You'll have a larger loan balance at the end of residency but will make progress toward reducing the overall amount owed.

 

#4 Full Deferment

If you choose to fully defer, you will not be required to make any payments required during school  — including a 6 month grace period after graduation. This is the most expensive of the four payment options.

 

Federal Student Loan Management Repayment and Forgiveness Programs

Many federal student loan borrowers enroll into a standard 10-year payment program for loan repayment – paying off your loan in 120 fixed payments over 10 years. These monthly payments, based on loan amount and interest rate, are much higher than what a typical low-income resident with 6-figure debt can afford. Income-Driven Repayment (IDR) Programs, however, are payment plans that allow borrowers other options to repay their loans based on income and family size.

 

Income-Driven Repayment (IDR) Programs

IDR programs are highly beneficial to residents, who literally cannot afford to make the standard payment on their student loans. With payments based on a percentage of discretionary income, the monthly amount due may be as low as $0 but is more likely in the $100-$400 range.

In addition, IDR programs are eligible repayment programs for federal loan forgiveness programs such as Public Service Loan Forgiveness (PSLF) and long-term income-driven repayment forgiveness.

A major downside of an IDR plan is its inability to cover accrued interest. Given that a $200,000, 6% student loan accrues $1,000 per month in interest, IDR payments typically do not even come close to covering the accruing interest, leaving a loan that will continue to grow in size during residency.

IDR programs add an enormous amount of complexity to federal student loan management. It is vital for a borrower to understand the options available to find the most affordable payment, with the least amount of accrued interest, and the greatest level of forgiveness.

Please note that with any of the IDR programs you’ll want to file a tax return the last year of med school even if you don’t have income. This will allow you to have very low payments (~$0) your first year in any of the IDR plans.

 

#1 Income Contingent Repayment (ICR)

Income Contingent Repayment or ICR-A is really more of a legacy program. I don't recall ever running into a doctor enrolled in this program. In ICR-A, payments are 20% of your discretionary income. The one advantage ICR has over other programs is that it may be used with Parent Plus loans after they have been consolidated. Unless you have parent loans, you will likely find one of the other income-based payment programs (discussed below) offering better payment options than ICR.

Eligibility: No partial financial hardship is required and doesn’t matter what date your loans were first issued.

Who Should Consider: Parent borrowers

 

#2 Income-Based Repayment (IBR)

Income-Based Repayment (IBR) was a new and improved ICR-A. The main features are:

  • Payments capped at 10% of discretionary income for new borrowers on or after July 1, 2014
  • Payments capped at 15% of discretionary income for loans taken out before July 1, 2014
  • Payments capped at the standard 10-year repayment plan level, even if your income rises as it will for many attendings.
  • IBR is the only IDR you can use with Federal Family Education Loans (FFEL) (although those may be eligible for PAYE or REPAYE after consolidation).
  • Interest is not capitalized until you leave the program
  • If you file taxes married filing separately you can exclude your spouse’s income from your payment calculation. Recommended Reading: How Does Married Filing Separately Affect Student Loans?

Eligibility: Partial Financial Hardship is a requirement and is based on your income to debt ratio. To qualify, your monthly IBR payment needs to be lower than your standard 10-year repayment monthly payment. As a resident, it is important to enroll in this program before your payment jumps as an attending, otherwise, you may not qualify.

Learn more about Partial Financial Hardship

Who Should Consider: Dual-income borrowers and those going for loan forgiveness unable to qualify for PAYE.

 

#3 Pay As You Earn (PAYE)

Pay As You Earn was a new and improved IBR. Main features of PAYE include:

  • Payments are 10% of discretionary income.
  • Payments are capped at the standard 10-year repayment plan level, even if your income rises as an attending.
  • Married folks can file their taxes Married Filing Separately. While this likely increases their tax burden, it may decrease the required payments significantly, which may, in turn, increase the amount of their loans left to be forgiven.
  • Interest is not capitalized until you leave the program, but even then, the amount capitalized is limited to 10% of the loan balance. There is no interest capitalization cap with IBR, so if a capitalization trigger occurs the entire interest would be added to the loan principal.

Eligibility: As with IBR, a partial financial hardship is required. So make sure you’re enrolled in PAYE before you become an attending.

To qualify for PAYE, you must have taken out your first federal loan after September 30, 2007, and received a loan disbursement after September 30, 2011.

FFEL loans are not eligible for PAYE unless they are consolidated through a direct federal consolidation loan.

Who Should Consider: Dual-income borrowers and those going for loan forgiveness.

Learn more about Interest Capitalization

 

#4 Revised Pay As You Earn (REPAYE)

The newest IDR program, Revised Pay As You Earn (REPAYE), is better than PAYE in some respects and worse than PAYE in others. Here are the important things to know:

  • 10% of discretionary income payment
  • There is no cap on the payments so when you go from being a resident to a high-powered plastic surgeon, your REPAYE payments could be even higher than the standard 10-year repayment plan payments.
  • You are unable to separate your spouse’s income from your student loan payment using the Married Filing Separately trick discussed earlier with PAYE and IBR.
    The forgiveness program associated with the plan (see next section) is also worse.

However, REPAYE has one very important feature that none of the other programs have – an interest rate subsidy on unsubsidized loans. This subsidy lowers the effective interest rate for many residents.

Consider someone with $200,000 in unsubsidized loans at 6%. Each month that loan generates $1,000 in interest. If the required payment (10% of discretionary income) is $200/month, then under PAYE $800 would be added to the loan each month. Under REPAYE, only $400 would be added. Basically, half of the interest above and beyond the required payment is waived. This effectively lowers the interest rate for most residents and in some cases, even cuts it in half. 100% of subsidized student loan interest is covered for the first 3 years if enrolled in REPAYE, PAYE or IBR. However, as most of your med school loans are unsubsidized (all loans since 2012) and the subsidized loans are likely the smallest part of your loans, this won’t make much of a difference.

Eligibility: No partial financial hardship is required and doesn’t matter when you borrowed. However, loans must be direct federal loans to qualify.

Who Should Consider: Single, sole earner households, borrowers in training (residents, interns, fellows)

 

Partial Financial Hardship

Partial Financial Hardship (PFH) is an eligibility requirement under the Income-Based Repayment (IBR) and Pay As You Earn Repayment (PAYE) plans. In order to qualify, your monthly payment in IBR or PAYE must be lower than the standard 10-year repayment plan. If your payment in IBR or PAYE is above the standard 10-year payment, you do not qualify for a PFH,

However, if you’ve enrolled in either repayment plan while you qualified for a PFH you can continue in the plan even if your income grows and would make you ineligible thereafter. This is very common when income jumps as residents become attendings.

 

PFH Example #1 – Eligible borrower

Resident income = $60K
Student loan debt = $300K
Interest rate = 7%
Household size = 1

Standard 10 year payment = PMT(7%/12,120,300000,0,0) = $3,483

PAYE monthly payment = $60K – $19,320 = $40,680 * 10% = $4,068 / 12 = $339

IBR monthly payment = $60K – $19,320 = $40,680 * 15% = $6,102 / 12 = $508

The payment cap is $3,483 for this borrower. Both PAYE and IBR are below the standard 10 year payment and eligible for a partial financial hardship.

 

PFH Example #2 – Ineligible borrower

Attending income = $450K
Student loan debt = $300K
Interest rate = 7%
household size = 1

Standard 10 year payment = PMT(7%/12,120,300000,0,0) = $3,483

PAYE monthly payment = $450K – $19,320 = $430,680 * 10% = $43,068 / 12 = $3,589

IBR monthly payment = $450K – $19,320 = $430,680 * 15% = $64,602 / 12 = $5,383

The monthly payment in PAYE and IBR has passed the standard 10 year payment due to the large increase in income as attending. Since the monthly payments are higher than the standard 10 year payment this borrower no longer qualifies for a partial financial hardship. They are no longer able to enroll into PAYE or IBR.

However, if the borrower enrolled in PAYE or IBR as a resident or before income has jumped, they are able to stay in the program as long as they don’t switch repayment plans.

 

PFH Example #3 – Borrower breakeven point

Standard 10 year payment = PMT(7%/12,120,300000,0,0) = $3,483

PAYE monthly payment = $437,280 – $19,320 = $417,960 * 10% = $41,796 / 12 = $3,483

IBR monthly payment = $297,960 – $19,320 = $278,640 * 15% = $41,796 / 12 = $3,483

Here’s how to calculate the breakeven point:

PAYE $3,483 *12 = $41,796 / 10% = $417,960 + 19,320 = $437,280

IBR $3,483 *12 = $41,796 / 15% = $278,640 + 19,320 = $297,960

The income breakpoint in IBR is much lower since it’s calculated as 15% of discretionary income instead of 10% like PAYE.

 

Interest Capitalization

Interest capitalization occurs when unpaid interest is added to the principal amount of your federal student loans. This increases the principal balance on the loan. The interest rate is now charged on that higher principal balance increasing the overall cost of the loan.

 

Example #1 – Interest charges prior to interest capitalization

Principal balance = $200K
Accrued interest = $50K
Total balance = $250K
Interest rate = 7%
Annual interest charge = $200K * 7% = $14K

 

Example #2 – Interest charges after capitalization

Principal Balance = $250K
Accrued Interest = $0
Total Balance = $250K
Interest Rate = 7%
Annual interest charge = $250K * 7% = $17.5K

After the accrued interest of $50K capitalizes the annual interest charge will increase by $3.5K

 

How Does Interest Capitalization Work When Switching IDR Plans?

 

Example #3 – IBR/REPAYE interest capitalization

Principal balance = $200K
Accrued interest = $50K
Total NEW balance = $250K

The entire accrued interest balance of $50K is capitalized when switching plans. New balance is $250K principal.

 

Example #4 – PAYE interest capitalization

Principal balance = $200K
Accrued interest = $50K – $20K = $30K
Total NEW balance = $220K

The amount of interest capitalized is limited to 10% of the original principal balance at the time the borrower entered repayment. Ten percent of the principal balance is $20K. Only $20K of the $50K of accrued interest will capitalize leaving the loan balance after switching repayment plans at $220K principal $30K accrued interest.

 

Federal Student Loan Forgiveness Programs

In addition to the more well-known Public Service Loan Forgiveness (PSLF) program, several of the IDR programs have their own forgiveness programs. Remember none of these federal programs have anything to do with private or refinanced loans.

More information here:

How to Receive Student Loan Forgiveness

 

IBR Loan Forgiveness Program

The IBR forgiveness program requires 25 years of payments, but you may make them while working for any employer or not working at all. There are two issues with this forgiveness program.

First, most physicians will have paid off their loans completely in less than 25 years because after they finish training, their payments will be equal to those under the standard 10-year repayment program. Perhaps that would not be the case for a very poorly paid physician with a very high student loan burden, but for most, there just won't be anything left to forgive.

Second, the forgiveness is taxable, and after 25 years, the “tax bomb” could grow to as much or more than the original debt, at least on a nominal (non-inflation adjusted) basis.

 

PAYE Loan Forgiveness Program

PAYE improved upon the IBR forgiveness program, offering forgiveness after just 20 years. However, it is still fully taxable at your ordinary income tax rate in the year you receive forgiveness.

 

REPAYE Loan Forgiveness Program

The forgiveness program under REPAYE is actually worse than PAYE. Although undergraduate loans are still eligible for forgiveness at 20 years, graduate/professional school loans require 25 years of payments for forgiveness, which is still fully taxable. In addition, because payments are NOT capped at the 10-year standard repayment plan amount, you are even more likely to pay off your loans before 25 years, leaving nothing to be forgiven. The cap is one reason doctors going for PSLF will either use PAYE throughout residency and attendinghood, or switch from REPAYE to PAYE after residency. Remember that switching may require you to make one “full” payment as you move between the programs and interest will capitalize.

More information here:

REPAYE Case Studies

I Switched to REPAYE and I Like It

How to Enroll in REPAYE Early and Save Thousands in Interest

 

Public Service Loan Forgiveness (PSLF)

Public Service Loan Forgiveness is the granddaddy of the federal forgiveness programs and the only one most doctors should be looking at. Not only does it offer tax-free forgiveness, but it also offers it after just 10 years of payments. If you make a bunch of tiny IBR, PAYE, or REPAYE payments during your training, you may only have to make 3-7 years of “full” payments as an attending before having the rest forgiven. There is a catch, however. You have to be directly employed full-time by a non-profit (501(c)3) while making all of those payments in an eligible payment program – or they don't count. You also have to make sure you can prove you made all of those payments since the federal student loan servicing companies have a nasty habit of not being able to count payments accurately.

 

More information here:

Public Service Loan Forgiveness

Dave Ramsey's Bad Advice About PSLF

 

Student Loan Deferment and Forbearance

Many residents are tempted to put their student loans into deferment or forbearance during residency and/or fellowship. This is almost always a mistake. Nothing makes me cry more than to run into a doctor who should only be 2-3 years away from receiving PSLF who had their loans in forbearance during a lengthy training period. I hate breaking the news to them that they've basically thrown away a benefit worth hundreds of thousands of after-tax dollars. It's like working for a year or two as a doctor without being paid at all. Deferment is slightly better than forbearance for some people, but they are both very similar for most high-income professionals with loans—you make no payments but the debt continues to grow, sometimes very quickly.

 

Student Loan Deferment

Deferments are granted in six-month increments by your loan servicer and subsidized loans don't accrue interest. Unsubsidized loans both accrue and capitalize interest. There are several reasons you can get a deferment, but the main one most residents would use is economic hardship, which is limited to just three years. Other reasons include active-duty military, unemployment, and going back to school.

 

Student Loan Forbearance

With forbearance, interest accrues on both subsidized and unsubsidized loans. Just think of it as a 12-month pause on payments. For most medical students, it is no less attractive than deferment and it is easier to get. There are two types of forbearance.

  1. General Forbearance: This is where the lender gets to decide whether to give it to you or not. Typical reasons you may get it are financial difficulties, medical expenses, or a job change.
  2. Mandatory Forbearance: where the lender MUST give it to you if you ask for it, include residency training, if your monthly payment is more than 20% of your monthly gross income (only good for three years), if you are serving with Americorps or activated through the National Guard (and ineligible or military deferment), or if you qualify for special teacher or Department of Defense forbearance programs.

I tell you about these two programs and give you these links because people wonder about them, not because I think people should actually use them. If you are seriously considering deferment or forbearance, you would almost surely be better off with REPAYE or PAYE. Not only would your payments count toward possible forgiveness down the road, but they may be as low as $0 a month anyway. In REPAYE, if your payments don't cover all the interest, up to half of the interest IS NOT being added on to the loan amount.

 

Resident Student Loan Management Flowsheet

Let's summarize what to do with your student loans if you are a resident. The sooner you know if you are going for PSLF, the easier your decisions become. If you are single, or the sole earner in a married couple, it can also be very easy. But many people would benefit from getting formal advice from a specialist in student loan management. If you are married to another earner and one or both of you is going for PSLF, consider shelling out $300-$500 one-time fee as an intern to get advice. It could save you tens, or even hundreds of thousands of dollars. It is relatively easy for them to identify the red flags that indicate you're doing things wrong and they can help you run the numbers to make the difficult student loan management decisions that involve choosing an IDR program, choosing how to file your taxes, and even choosing whether to use a traditional or Roth IRA or 401(k).

 

student loan management chart resident

 

Attending Student Loan Management

In contrast to residency, where student loan management can be very complicated, involving your taxes and even your retirement account contributions, management as an attending is generally very simple.

 

Paying Off Your Student Loans

Your private loans, which you probably should have refinanced in residency, can be refinanced again and again as long as you can get a lower rate (and you usually can as a new attending). Obviously, refinancing doesn't actually make them go away, but it helps make more of your monthly payments go toward principal instead of interest. The way you make them go away is by living like a resident and dumping a huge sum on them every month. Even half a million in student loans doesn't last long against a five-figure monthly payment assault.

Regarding your direct federal loans, you need to finalize your decision of whether to go for PSLF or not. This is usually relatively easy. If you can answer BOTH of the following questions positively, you should go for PSLF:

  • Are you directly employed full-time by a non-profit (501(c)3)?
  • Did you make a bunch (it varies but in general 20+) of tiny IBR, PAYE, or REPAYE payments while in training?

If you cannot answer both of those questions positively, refinance your student loans and live like a resident for 2-5 years until they are gone.

More information here:

10 Reasons to Pay Off Your Student Loans Quickly

How Fast Can You Get Out of Debt?

The X Factor

What Does Live Like a Resident Really Mean?

 

Best Place to Refinance Student Loans

Here are the best deals on student loan refinancing I've managed to negotiate with the top student loan refinancing lenders:

 

Cash and Bonus
up to $1349†
Rates

Variable 2.50%-6.30% APR
Fixed 3.99%-6.40% APR

Residents?
Yes
Cash and Bonus
up to $1299†
Rates

Variable 1.74%-11.57% APR
Fixed 2.59%-8.19% APR

Residents?
Yes
Cash and Bonus
up to $1299*†
Rates

Variable 2.24% - 7.99% APR
Fixed 3.49% - 7.99% APR
^0% interest available

Residents?
Yes
Cash and Bonus
up to $1799*†
Rates

Variable 1.86%-9.23% APR
Fixed 2.40%-9.73% APR
^Best Rate Guarantee

Residents?
Yes
Cash and Bonus
up to $1299*†
Rates

Fixed 3.64% - 8.53% APR

Residents?
Yes
Cash and Bonus
up to $1399†
Rates

Variable 4.07%-6.99% APR
Fixed 2.40%-5.15% APR

Residents?
No
Cash and Bonus
up to $1299*†
Rates

Variable 1.89% - 7.99% APR
Fixed 3.24% - 7.99% APR

Residents?
No
Cash and Bonus
up to $1449†
Rates

Variable 1.86%-7.98% APR
Fixed 3.39%-6.99% APR

Residents?
No
** White Coat Investor accepts advertising compensation from these companies. Page order does not guarantee best possible rate and terms.
† Bonus includes cash rebates and value of free course. Borrowers who refinance more than $60,000 in student loans using the WCI links will be enrolled in The White Coat Investor’s flagship course, Fire Your Financial Advisor for free ($799 value). Borrowers will still receive the amazing cash rebates that WCI has negotiated with each lender. Offer valid for loan applications submitted from May 1, 2021 through Aug 31, 2022. Free course must be claimed within 90 days of loan disbursement. To claim free course enrollment, visit https://www.whitecoatinvestor.com/RefiBonus.
Student Loan Refinancing Disclosures

 

Refinancing Your Student Loans

The secret to refinancing your student loans is to do it early and often. If you ask your fellow White Coat Investors for their regrets, many say they wish they had done it earlier because it was much easier than they thought. While it may appear intimidating at first, most of the companies will give you an accurate estimate of the rate you will eventually receive in 2 minutes online. You'll need to gather and submit some paperwork, but it's mostly all the same for all of the companies. So once you gather it and submit it to one, it is very easy to submit it to 2 or 3 more (or even all of them.) Then just take the one that offers the lowest rate.

The rates offered to you will depend on your credit score, your debt to income ratio, and your desired loan terms. Unlike the federal government, which loaned you money just for getting into school, these private companies actually want to make a profit. They only want to loan money to people they think will be able to pay the money back.

The best way to get the lowest rate is to accept a 5-year term and a variable rate. If you are willing to live like a resident for 2-5 years after residency and pay off your loans quickly, these terms should be acceptable to you. While there is some legitimate fear of rising rates with a variable rate loan, the truth is that rates have to rise dramatically and/or early in the term in order for you to come out behind with a variable rate loan. If you can afford the worst-case scenario, I would at least consider a variable rate loan, and run the math under various interest rate scenarios.

Think of a fixed-rate loan as a variable rate loan plus an interest rate insurance policy. Since you should only buy insurance against financial catastrophes, someone planning to throw $10K a month at their loans every month for 2 years should not pay extra for a fixed rate. Just having a little more of your payment go to interest instead of principal for a few months is not a catastrophe. Even if rates rise early and dramatically, it will likely only delay paying the loan off by a month or two for someone truly committed to getting rid of them.

Some doctors fear refinancing because they are worried about what will happen to them if their income drops, if they die, or if they become disabled. This is a good reason to avoid putting a co-signer on your loans, but if you read the fine print you will see that most private companies have some accommodations for these situations. Often they will give you up to a year without payments in difficult situations (although the interest will continue to build.) Loans are also often forgiven at death and sometimes even for disability. Be sure to read the fine print before signing on the bottom line so you know what to expect if any of these unlikely situations happen to you. Even if the company does NOT offer a death or disability plan, realize that purchasing enough term life insurance or disability insurance to cover the loans or its payments is likely cheaper than paying the extra interest in the government programs!

 

Consolidate vs. Refinance Student Loans

A lot of people get confused about loan consolidation, and in fact, use the term consolidating when they mean refinancing.

 

Student Loan Consolidation

Consolidating generally means taking a bunch of loans and making one loan out of them. While that may increase the convenience of management, it does not actually reduce the interest rate. In fact, it may increase it. With federal loans, the weighted average of your loans is taken and rounded UP to the nearest 1/8th of a percentage point. You can consolidate your loans with the federal government, but to refinance them you must go to a private company and lose the benefits of federal loans such as the income-driven repayment programs and the forgiveness programs.

 

Should I Consolidate My Student Loans?

So why would anyone consolidate their loans if it increases your interest paid? Aside from the benefit of only having one loan to manage, the main reason is that you can turn some loans that were NOT eligible for IDR plans and PSLF into loans that are. The classic examples are Federal Family Education Loans and Perkins loans. By themselves, they are not eligible for those programs, but if consolidated into a direct loan, they become eligible. If you fall in this situation and want to use the IDR or PSLF programs, consolidate here.

Another reason to consolidate your loans is when you’re fresh out of med school and enrolling in IDR. Consolidation would allow you to opt-out of your grace period and begin making payments 3-4 months earlier. However, it can be a huge mistake for those who’ve been in training for a couple of years or attendings. Payment history is completely wiped out when you complete a direct federal consolidation – meaning those 3 years you’ve done to PSLF would be gone and you’d be starting over. I can’t tell you how many emails I’ve received from docs who’ve done this and were just a few years out from PSLF. Only to have the rug pulled out from them.

 

PSLF as an Attending

Things are a little more complicated for attendings who wish to go for Public Service Loan Forgiveness. These are generally academicians, or at least people who are willing to be academicians for a few years at the beginning of their careers. However, working for the military or the Veterans Administration or other government agencies can also count. There are also a few non-profits out there who directly employ their docs who should qualify for PSLF. Often these jobs pay less than a private practice job, so you need to take into account that sometimes you would be better off with a better paying job and paying off your loans, then going for forgiveness.

The big downside of going for PSLF is that you cannot refinance your loans. Only direct federal loans can be forgiven. So in the event that legislative or regulatory risk rears its ugly head, changing the program, or that you simply change your career goals such that you no longer qualify for it, you will end up paying more interest than you otherwise would have. But for those who stand to get tens of thousands forgiven, I think it is worth running those risks.

In order to maximize how much is forgiven under PSLF, you want to make as many tiny loan payments as possible. That means getting started as soon as possible, and that may be even earlier than you think. The more time you spend in training, the more you stand to have forgiven. If you spend 5 years in a surgery residency, then do a one-year burn fellowship and a one-year trauma fellowship, you may only make three years of “full” attending-size payments, leaving the vast majority of your debt to be forgiven, tax-free.

 

 

When going for PSLF, you must continue to make payments in an eligible program. For up to a year after leaving residency, those might still be relatively small payments, further increasing the amount eligible to be forgiven. But eventually, as an attending, you'll be making “real” four-figure payments toward your loans. At this point, IBR or PAYE is generally the best program to be in because of the cap on the payments at the standard 10-year repayment program amount. That means if you were using REPAYE during residency and/or fellowship, you probably want to switch to PAYE. That will require you to make one regular payment (typical $2-3000) as you move between the programs. This is a typically difficult time to come up with cash due to all the competing needs for your limited cash flow, including:

  • Saving up an emergency fund
  • Down payment on a home
  • Moving expenses
  • Buying into a practice
  • Maxing out retirement accounts
  • Roth conversions

However, it is probably worth it. Of course, if you were in a situation in residency where you weren't going to qualify for a significant REPAYE subsidy anyway (usually due to a high earning spouse), you should just use PAYE (or IBR if ineligible for PAYE) instead of REPAYE all the way through.

Another major complaint of those going for PSLF is that the student loan servicing companies such as FedLoans provide terrible service. They don't even seem to be able to count payments accurately. This makes it critical that you stay on top of everything. Not only do you need to be an expert at the requirements of the PSLF program (which of your loans qualify, which repayment programs have payments that qualify toward the 120 required monthly payments, and working full-time for a 501(c)3), but you must keep track of all the paperwork, including evidence of every single payment AND a copy of your annual certification forms. Remember, you could end up going to court with the government in order to receive your promised forgiveness. Make sure you have the evidence you need.

 

The PSLF Side Fund

In addition, you cannot just assume you will receive forgiveness. Not only could the program change and you not be grandfathered in, but your employment plans may simply change. Going for PSLF does NOT excuse you from living like a resident for 2-5 years out of residency. However, instead of sending those big 4-5 figure payments to Fedloans, you need to send them to yourself. To your investment accounts, to be specific, creating a “PSLF Side Fund.” This way, even if PSLF doesn't happen for you, you're not behind the eight ball.

Hopefully by living like a resident you've been able to max out your retirement accounts AND save this side fund up in a taxable account, and you can simply liquidate the taxable account and use the proceeds to pay off the loans. But even if most of that savings ends up in retirement accounts and you can't (or don't want) to immediately eliminate the loans at that point, at least your net worth will be where it should be.

 

Attending Student Loan Flowsheet

Let's summarize what to do with your student loans as an attending. Private loans should be refinanced whenever possible and paid off quickly by living like a resident. Federal loans should also be refinanced and paid off quickly unless you are directly employed by a 501(c)3 AND made a lot of tiny payments during your training.

 

 

Student Loans and Bad Situations

If you die or are disabled, what happens with your private loans will be dictated by the terms on their promissory notes. Worst case scenario, if you die they are assessed against your estate. Your parents or siblings etc are never responsible for your loans, but your heirs could be indirectly.

 

What Happens to My Student Loans If I Die?

In the event of death, your federal loans are discharged. With Parent Plus loans, the loans are discharged if the student OR the borrower dies.

 

Are Student Loans Forgiven If I Become Disabled?

In the event of permanent disability, federal loans are also forgiven. In a temporary disability, however, you may be limited to use of the IDR programs, deferment, or forbearance.

 

Bankruptcy and Student Loans

Student loans generally survive bankruptcy, meaning you cannot wipe them out simply by declaring bankruptcy. However, if you can prove undue hardship, you may be able to have them discharged. Defining undue hardship is going to be up to the judge, but I can assure you that if you qualify for it, you're going to be in a terrible place financially either way.

Depending on what happens to your loans at death and disability, consider carrying a little extra term life and disability insurance coverage to make up it.

 

Closed School Discharge

In the event of school closure you may be able to have your loans discharged. This tends to come up more in for-profit institutions, but it’s very rare.

 

False-Certification Discharge

In the event of the school falsely certifying your eligibility to receive a loan, you may be eligible for loan discharge. But this is very complex and unusual.

 

Should I Pay Off My Student Loans Early?

Some people with low-interest rate student loans wonder if they should really pay their loans off rather than invest. While it is intuitively attractive to borrow at a low rate and earn at a higher rate, this decision often ignores two factors.

The first is that most people simply don't invest the difference. Behaviorally, it is more difficult to maintain focus on building wealth once you have decided to make minimum payments and end up spending the money instead of investing.

The second is that an investment that provides a rate of return higher than the guaranteed return available by paying off your loans usually involves significant risk of loss. However, if you would like to carry your loans a little longer in order to invest inside retirement accounts, I think that's okay. But I would still plan to have them paid off within five years of finishing training. The financial muscles you develop paying off your loans quickly are the same ones you will use to build wealth toward financial independence afterward. I do not recall ever meeting a physician who regretted paying off their student loan quickly. In fact, most express a feeling of massive relief such as this email I received a few days ago from a two doctor couple who paid off over $700,000 in student loans in 16 months:

doctor student loans

You'll feel as good making your last student loan payment as I felt on the summit of Teewinot, with the North Face of the Grand Teton in the background.

This student debt problem is so huge and overwhelming. I had many poor nights of sleep during training fretting about, “How do we pay off this 3/4 million dollar debt?” I feel now an immense stress has been lifted. We can now go forward and make some real decisions about how we want to live out the rest of our lives.

You can slay the student loan dragon. Sit down and get started today. Figure out where you stand; list out your loans by amount owed, payment, and interest rate and add up the total. Then start working on a plan to handle them. You can do it, the entire White Coat Investor Community is rooting for you!

More information here:

Pay Off Debt or Invest?

What's Your Investment to Debt Ratio?

 

Refinance your student loans today! 

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What do you think? What other information belongs in the ultimate guide to managing physician student loans? Have you paid off your loans? What other advice do you have about them for your fellow White Coat Investors? Comment below!