By Dr. James M. Dahle, WCI Founder
Most of the time, refinancing your student loans is a great move. You enjoy all kinds of great benefits:
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- A lower interest rate
- Fewer loans to keep track of
- Better customer service
- Easier to understand terms (government programs can be complicated)
- $300-$1,500 cash back (if you refinance through the WCI Student Loan Refinancing links)
- Free enrollment in our Fire Your Financial Advisor online course (a $799 value) if you refinance $60,000+ through our links
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You can see why financially savvy docs refinance their loans early and often. However, there are times when refinancing is not the right move. In today's post, we'll go through those situations. If, despite reading this post, you still aren't sure whether you should refinance, we recommend you hire Andrew Paulson at StudentLoanAdvice.com to help you run the numbers and make a decision.
Refinancing Private Loans
One situation that isn't complicated is when you have private loans. There is no risk in refinancing these. Any time you can get a lower interest rate, you should refinance these. Heck, even if you get the same interest rate, you should refinance through our links and get back a few hundred bucks (and the Fire Your Financial Advisor course). Private loans aren't eligible for federal forgiveness or income-driven repayment programs, so there is no harm in refinancing them. If you are worried about cash flow during residency or fellowship, you'll be pleased to know that several companies offer you the ability to make payments of just $100 a month until you finish training.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) program is one of the best possible ways to manage federal loans. If you are eligible for this program by virtue of your employment situation, you should almost surely take advantage. PSLF offers tax-free forgiveness of any remaining direct federal loans after 10 years of payments have been made.
Public Service Loan Forgiveness Requirements:
- Only direct federal loans are eligible
- Must be employed full-time (30+ hours per week) by a nonprofit (501(c)(3)) or governmental employer
- Must make 120 on-time monthly payments in an eligible program (usually an Income-Driven Repayment (IDR) such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), or Revised Pay As You Earn (REPAYE))
- Must correctly fill out the annual employer certification forms and application
A doctor who does a three-year residency and a three-year fellowship and then works as faculty in the program for four years may have more debt forgiven than was actually borrowed to pay for medical school, and it's all tax-free. Needless to say, doing anything that jeopardizes this when you would otherwise qualify would be a terrible mistake. One of those things is refinancing your student loans. When you refinance (not consolidate) your direct federal student loans, they are no longer direct federal student loans. Instead, they become private loans, and thus, they are no longer eligible for PSLF. So if you are:
- Definitely going for PSLF (i.e. planning on working full-time for a 501(c)(3)),
- In the military,
- Think you might work for a 501(c)(3), or
- Could even possibly work for a 501(c)(3) in the next few years,
then don't refinance your federal student loans. (You can still refinance your private ones early and often, of course.)
Income-Driven Repayment (IDR) Forgiveness
While PSLF is a no-brainer, the other forgiveness programs out there for federal student loans require a lot more thought and number-crunching. IBR, PAYE, and REPAYE all offer a forgiveness program. While there are slight differences, there are many similarities:
- Do not have to work for a 501(c)(3) (or even work at all)
- Do not have to work full-time
- Require 20-25 years of payments (20 for PAYE and 25 for IBR and REPAYE for grad/professional school loans)
- Amount forgiven is fully taxable as ordinary income in the year it is received
I've never been a big fan of IDR forgiveness for the 12 reasons outlined here. The two most significant of those reasons are the tax bomb and the long period of indebtedness.
The Tax Bomb
Imagine a doctor who gets $800,000 forgiven this year. Let's say that doctor is single and making $300,000 this year. That $800,000 is added on to that $300,000 income. Let's say the doctor lives in a high-income tax state, too. What is the tax bill for this forgiveness? Well, this doc has already filled the 10%, 12%, 22%, 24%, 32%, and part of the 35% bracket with current earnings. In 2021, the entire amount forgiven is taxed at 35% ($223,600 * 35% = $78,260) or 37% ($576,400 * 37% = $213,268) for a total of $291,528. Add on about 12% ($96,000) for California state income tax and we're up to $387,258, almost half of the amount forgiven. That is probably more money than the original debt (which grew over 20-25 years).
Now the size of the tax bomb is going to be different for everyone that gets IDR forgiveness, but it certainly makes the program dramatically less attractive than PSLF. So much so that when I see somebody going for it, I can't help but ask, “Really? You're really not willing to go work full-time at a 501(c)(3) for 4-7 more years? You REALLY can't find a job anywhere in the country that qualifies for PSLF?” Too many people who go down this path simply trade a debt to the Department of Education for one to the Department of the Treasury (IRS). I can tell you which department of the government I'd rather owe!
The Long Period of Indebtedness
My biggest problem with IDR Forgiveness programs is that they require you to be in debt for 20-25 years. Even if you do a three-year residency and a three-year fellowship, you will still have student loans in your life for 14-19 years after you finish training. I'm 15 years out of training, and I am financially independent. I have not thought about my student loan debt for 11 years. I have zero regrets about getting that out of my financial life within four years of finishing training so I could focus on other financial priorities. I cannot imagine having student loans at an age when many other docs could retire. It is super depressing for me to even think about. So, it is hard for me to recommend that path to anyone but the most desperate, no matter how the numbers shake out.
Who Does IDR Forgiveness Work Out Well For?
It would be a lie, however, to say the numbers don't shake out well for some people. Here are the factors that make it more likely to work out well for you:
- Not working for any reason
- Non-working spouse
- Low-earning spouse
- Working part-time for any reason
- Large family size
- High household debt-to-income ratio (2.5X+)
- High debt levels ($300K+)
- Ability and willingness to invest aggressively and stick to a long-term plan
For most of these (numbers 1-6), the reason it works out better is that it results in lower IDR payments, which leads to more forgiveness. In addition, factors 1-5 also reduce the tax rate applied to the tax bomb. High debt levels make IDR forgiveness more attractive because you are likely to have a high debt-to-income ratio and simply because there is more money at stake, making you more willing to go through the hassles inherent in dealing with a government program for over two decades. The discipline and investing ability matter because there is no other way to save up for the tax bomb than to start early and to invest regularly toward that goal. You're simply not going to be able to cash flow a six-figure tax bill.
The Comparison
If we take two identical families and compare a strategy of refinancing and paying back their student loans quickly with massive sacrifice (i.e. live like a resident for 2-5 years) to an IDR forgiveness strategy, you have to compare the extra principal paid back by the non-forgiven doc to the additional interest paid by the forgiven doc plus the amount put toward the tax bomb. To make the comparison, one must make some assumptions. If you don't like my assumptions, make your own and run the numbers yourself. I'm going to assume 6% after-tax returns on investments and that tax brackets remain the same but increase by 3% a year with inflation. I'm also going to assume that income climbs 3% a year with inflation. I also make the simplifying assumption that the doctor did what many doctors (incorrectly) do and left the student loans in forbearance during training.
Case Study: A Single Doctor in California
This doctor makes $200,000 and finished residency with $400,000 in direct federal student loans at 6% and enrolled in PAYE.
A PAYE calculator shows us the following:
Total amount paid of that original $400,000 would be $491,934, leaving almost the original debt to be forgiven, $388,086. The tax bill on that in California is going to be in the range of 40-45%. Let's call it 40% just to make it not look so bad.
$388,066 * 40% = $155,226
So, in addition to paying $491,934 to the lender, the doc also has to pay $155,226 to the taxman! That's a total of $647,160 on an original debt of $400,000. Does that sound like loan forgiveness or loan “cancellation” to you? Me neither.
Now imagine this doctor had buckled down and paid off this debt over five years by living like a resident. How much would have been paid? Well, let's assume it was refinanced to 3%. The doc would pay $87,000 a year for five years for a total of $437,000. Which would you rather pay: $437,000 or $647,000? Easy decision, right?
However, that's not quite the question. The question is would you rather pay $437,000 over five years or $647,000 over 20 years, and that's a much different question. There's a time value of money calculation in there somewhere. For example, consider the debt bomb. You don't really have to pay $155,000 to the taxman if you invest toward that goal for 20 years. At 6%, you only have to invest
=PMT(6%,20,0,-155226) = $4,220 per year or $84,400
That lessens the pain, right? Let's also consider an alternative use for that money you sent to the lender while living like a resident. Let's say you invested it instead. If the doc going for forgiveness pays $1,516 * 12 = $18,192 to the lender and $4,220 to the tax bomb fund in year one, that's $87,000 – $18,192 – $4,220 = $64,588 that can be invested. The amounts invested in years 2-5 are similar. Then, of course, you have to make the same calculation for the doc who lived like a resident for the next 15 years with the money saved by not making student loan payments for those 15 years. Then you have to compare it all to each other. Ugh. And people are supposed to do this themselves to make a decision? Give me a break.
Let's make some more simplifying assumptions. Let's say the doc going for forgiveness puts away $62,000 a year for five years, then lets it ride for 15 more at 6%, and let's say the doc who lived like a resident saved $26,000 a year for 15 years and earned 6% on it. How does it work out?
For the forgiveness doc, it adds up to =FV(6%,15,0,-FV(6%,5,-62000)) = $839,000.
For the live like a resident doc, it adds up to =FV(6%,15,-26000) = $605,000.
That's a $234,000 difference, which barely makes up for the extra $210,000 in extra debt payments.
So mathematically, and assuming all these assumptions are accurate, going for IDR would be better for this doc, but not by much. Enrolling in PAYE in residency would help, as would earning a higher investment return. But I think most people who run the numbers and get this result would probably just choose to refinance and pay off the debt. But what if the doc had $600,000 in debt and a family of four? Now the IDR forgiveness scenario looks way better. Just look at the calculator results:
How much would this doc have to pay a year in order to pay off $600,000 in student loans in five years? Oh, just $131,000 a year. No problem in California on a gross income of $200,000. Even with a need to invest $12,000 a year or so at 6% to meet that huge tax bomb, this is still a more attractive route than refinancing and paying off.
Some readers might be wondering what happens to IDR forgiveness if you're not in a desperate student loan situation. An example might help. Consider a doctor with $200,000 in student loans who makes $300,000 and enrolls in PAYE. Monthly payments are about $2,200, and you end up paying off the loan in just over 10 years. You would have been better off refinancing, even if you had just refinanced into a 10-year loan.
There are no hard and fast rules, of course, and you have to look at your own personal situation. But in my opinion, here is a good rule of thumb for those not going for PSLF:
- If your student loan-to-income ratio is < 1.5, go ahead and refinance and pay those loans off ASAP.
- If your student loan-to-income ratio is > 2.5, IDR forgiveness is likely a good option
- If your student loan-to-income ratio is between 1.5 and 2.5, you really need to run the numbers. For a flat fee, you can get help doing that from StudentLoanAdvice.com, a White Coat Investor company.
Unfortunately, there are a lot of docs in that 1.5-2.5X range, and that's one reason why we started a student loan advice company. It's just too complicated for most people to figure out on their own.
What do you think? Are you going for IDR Forgiveness? Why or why not? Comment below!
[Editor's Note: This updated post was originally published in 2018. Many of the comments below pertain to a similar article written by a different author in 2018.]
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Hi, My wife just forwarded me this article as her residency at BayState is using you to help their doctors. As a formal employee at GL Advisor I know quite a lot about student loans and it concerns me that there is misinformation in your article and the hospital just spent a ton of money on your book.
Forgiven debt via PSLF is not taxable income. (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/questions )
25 year IBR debt forgiveness is taxable (http://www.finaid.org/loans/forgivenesstaxability.phtml).
20 year PAYE “may be” taxable. (https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven)
From Uncle Sam:
“Are loan amounts forgiven under PSLF considered taxable by the IRS?
No. According to the Internal Revenue Service (IRS), student loan amounts forgiven under PSLF are not considered income for tax purposes. For more information, check with the IRS or a tax advisor.”
I’m not sure whether you’re addressing me or Travis, the author of the article. I don’t think Travis has a book though, so I’m assuming you’re referring to me.
I don’t think either I or Travis has ever stated that PSLF is taxable. PAYE forgiveness (like IBR forgiveness and REPAYE forgiveness) absolutely is taxable.
Hope that helps clarify whatever was confusing to you in this post. And I hope you’ve been able to move on in your career after the debacle at GL Advisor. For those who aren’t aware of that, here’s a brief summary:
http://www.student-loan-consultant.com/gl-advisors-whered-they-go/
http://news.vin.com/VINNews.aspx?articleId=40964
I was referring to this blog post. It appears that the original text I was referring to has been updated. Thanks for doing that, but I thought it was common practice to notate changes to original articles…
GL Advisors downfall was extremely unfortunate for it’s clients and employees, especially as the void for accurate student loan advice has apparently not been filled. It’s amazing how the decisions of one person can have such a large impact, good or bad. I just read those blog post and they don’t get story right. It appears Jan Miller (who used to refer business to GL) wrote that post to help her student loan consulting practice in wake of the GL Advisor crisis. She is great and luckily she was there to fill the void. However, I would recommend reading this article from the Boston Globe, a nonbiased source, on what happened. https://www.bostonglobe.com/metro/2016/06/16/financial-advisor-sentenced-nine-years-prison-for-fraud-schemes/o46TVGYgtvT6OFlN2MoCYK/story.html
This post written by Travis published this morning on my blog? No, it hasn’t been updated. I just logged on today for the first time and Travis doesn’t have the ability to update it without me. Is there something that is inaccurate and needs to be corrected, or were you mistaken in your initial assertion. I still can’t tell what you disagree with. Can you spell it out?
Your link from the Globe is behind a firewall. A lot of the GL Advisors folks ended up with the Larson folks under the name Doctors Without Quarters, but I haven’t heard from them in a while. Their site is still up though, so I assume they’re still in business. Are you with them?
Man, this is a radical way to pay off debt. I don’t think that I am a fan either.
I understand the math that Travis is throwing up there, but have a few major issues:
1) Who knows what is going to happen 15-20 years from now in terms of governmental programs? There’s already been talk about changing forgiveness programs… surely that’s going to only amp up over the next 15-20 years as our government debt grows.
2) The huge bump to your financial health when you become “debt-free” from anything is real. Knowing that you don’t owe money to anyone is huge. Delaying this until you are 45-50 years old seems strange.
3) Given the push for financial independence in the personal finance community (and the very real fact that this is achievable for many many people), this kind of method to paying off your debt will delay that further and further.
4) I imagine in my mind that the sort of person who is “okay” with holding onto this much debt, is going to be unlikely to be disciplined enough to save enough in a taxable account to pay off a$100,000 tax bill in a single year. That’s a TON of pressure to save, but I bet most people don’t even start saving for that until 5-10 years out because, hey…we many people have trouble delaying gratification.
5) This really does normalize debt in a way that our country doesn’t need. I can understand why for a rare person with massive amounts of debt that they simply cannot pay off based on their income level why it might be necessary. But unless you are in that situation, it seems like the normalization of debt is probably a bad thing and will encourage expensive debt-growing habits in other areas of life (a big home, consumer debt, etc).
I personally am a huge fan of REPAYE during training because of the subsidy paid towards 1/2 of the interest that your payment doesn’t cover. These residents then can continue on PSLF if it makes sense for them thereafter. Otherwise, I think paying off the debt is huge for your mental and financial health; I’d recommend doing it as soon as possible.
1) That’s very true to not know the future of governmental programs. However, one must look at the downside and the upside risk as well if you’ve got a very high student debt to income ratio and will for the foreseeable future. Sen Warren and others have already proposed to make the forgiven debt tax free, which could greatly enhance the numbers above. I’m simply planning according to the current rules. Could they become less generous? Yes, except you’ve got a promissory note that contractually promises the program to you.
2) I agree there is huge psychological benefit to being debt free. However, most physicians don’t pay off their mortgage til their 40s or 50s. Is it ideal? No, but there’s a precedent for it.
3) That’s true, but paying off monster debt would also delay that, especially for female professionals who are take part time assignments temporarily. Also once you have enough for the tax bomb, you don’t need to worry anymore and can save towards FI.
4) That’s a clear risk, but often the debate is do I put $3000 a month on a loan that will take 20 years to pay off or put that into retirement and investments?
5) Normalization of debt is also a risk. However, consumer debt didn’t grow to what it is w the govt creating a special set of rules allowing it to explode. Student debt did w the Grad Plus program. So I’d argue that the normal rules of shunning debt should apply.
I agree about REPAYE for folks who want to pay it off! And you make good points.
As a counterpoint to # 2, a doc could sell the house and pay off the mortgage. You can’t sell off your brain.
In Indiana, apparently, you can.
https://motherboard.vice.com/en_us/article/ypwjev/the-brain-market-how-to-acquire-brains-both-legally-and-illegally
It smells funny. I don’t like it because I busted my butt to pay off $420,000 in student loans in <5 years. The forgiven debt isn't magically forgiven, just in a roundabout way distributed to the few that pay taxes. But personally I am against handouts especially with many degrees of separation where you don't see the sacrifices of those paying for the handout.
Um…you’re one of the few paying taxes, a whole lot of them. Im sure you more than paid off the loans in taxes as well right? I know I have, only takes a few years.
That said I never trusted this to be around in the future and didnt want some massive balance hanging over my head.
I agree with WCI on this one. Can’t imagine paying my loans for 20 years, then owing a monstrous tax bill at the end of it (even if inflation makes it slightly less monstrous). The psychological burden can’t be quantified into the calculations. I would only consider staying in PAYE for 20 years if I had especially low income, and then PSLF would still be preferable.
I’ve disagreed with Travis in other comment sections and disagree here again.
1) I don’t like the plan of kicking the proverbial can down the road. I took out the debt and should pay it back.
2) That huge tax burden can hit right around the time you have your kids applying for FAFSA and I’d imagine it would completely eliminate any hope of financial aid.
3) It discourages you from earning more and progressing in your career. Why try for a raise or to become a partner or owner when it just means you’ll have a greater monthly payment due.
I think a Travis has found a few specific situations where it could be disadvantageous, but I don’t know how common those really are and most in this community likely have a different view of debt.
“3) It discourages you from earning more and progressing in your career. Why try for a raise or to become a partner or owner when it just means you’ll have a greater monthly payment due.”
I’ve always felt this was the biggest potential drawback to any IDR/IBR/PSLF plan. It’s a disincentive to earn more prompting the borrower to stay within a narrow income range.
MochaDoc and Two Vet Couple make good points, here’s my thoughts.
1) If you borrowed from a bank for your student debt and the govt was prohibited from being involved, they would’ve lent an amount that would be practical and fair to pay back. While there would be some abuses I’m sure, banks would want to know that a physician or veterinarian would not be leaving school with over 2 times their income in debt. This would limit tuition increases to what banks would lend, which would be based on economic demand for these occupations.
Instead, Grad Plus allows for unlimited lending untethered to economic value. The debt borrowed is essentially a federal program. Believing in the moral obligation to repay principal and interest is a personal choice, and it’s one I believe in too except with mitigating circumstances.
2) It’s true that you could have a big surge in income right as kids apply for FAFSA, but it’s something that could probably be mitigated with good planning. Also if you’re high enough income to pay the debt off (the alternative) you probably won’t qualify for much on the FAFSA anyway.
3) The population on WCI if I had to guess skews more high income, male, and self-employed than the general population. That group is an excellent candidate to refinance. However, making more money with this strategy is no different than a 10% tax. If you live in Sweden and get taxed at 60%, you should would want to work more. This strategy is no different. And the “tax bomb” strategy is one that can be abandoned too if you start making too much money.
There’s a normal distribution of incomes in any profession, and if a 2 std deviation range of incomes for a lower earning specialty like pediatrics ranges from 120k to 180k, you can be fairly certain that no matter how intensely you work, you will have a hard time crossing 250k. I’m just making up those numbers, but it’s a safe bet that if you’re in a highly saturated market, in a low earning specialty, and don’t care much for business, then your income potential is already limited and your financial planning might as well incorporate that fact.
Under your # 1- the alternate possibility is tuition will continue to go up, but only the children of rich folks will be able to become physicians and dentists.
Excellent comments WCI. I was going to say the same sort of stuff, but really emphasize the fact that it’s a MAJOR risk to assume that government is going to bail you out after 20 years! I personally have ZERO faith that this program will be around 20 years from now. It could leave that first scenario physician paying over 800k back after they make 20 years of payments and then find out they are not getting their loans forgiven. I absolutely could not sleep at night knowing that was a real possibility. This program is for low income people who can’t afford to do anything else and have to depend on it for any chance of getting out of debt. It should not be used for people with the means to responsibly pay back your debt quickly.
Follow the WCI way and pay off your loans within 5 years or so of graduation!
Why do you emphasize that it’s a major risk??? The Trump administration and republican congress just renewed guidance on the program and it’s very clear. https://www.cnbc.com/2018/03/26/student-loan-forgiveness-gets-one-shot-350m-boost.html
It seems like this article and now comments are misrepresenting information to sell a specific approach to paying back loans. I am not trying to troll you, but my wife is a doctor, I’ve worked with 1,000s of doctors and there is no need to take this approach to help them manage student loans correctly. I am also concerned if this is the information that will be provided the residents at Baystate for your partnership with them.
Also, here is some fact checking about PSLF and whether forgiven debt is taxable:
Forgiven debt via PSLF is not taxable income. (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/questions )
25 year IBR debt forgiveness is taxable (http://www.finaid.org/loans/forgivenesstaxability.phtml).
20 year PAYE “may be” taxable. (https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven)
From Uncle Sam on PSLF:
“Are loan amounts forgiven under PSLF considered taxable by the IRS?
No. According to the Internal Revenue Service (IRS), student loan amounts forgiven under PSLF are not considered income for tax purposes. For more information, check with the IRS or a tax advisor.”
You’re already posted those links once in this comment thread.
I think the article cited in CNBC is an interesting thing to mention. A Republican Congress w a Republican President just passed legislation to give an ADDITIONAL $350 million to a program (PSLF) that was not already pledged. Democrats sought closer to $3 billion extra I believe.
If Congress was on a war path to eliminate these programs, then they wouldn’t have just given them a bunch of extra money they hadn’t promised already.
Refinancing is a WONDERFUL approach for the right person, who often has a high savings rate, earning potential, moderate 200k to 300k debt, and who plans on working really hard to maximize their compensation.
Many physicians, particularly women with low earning partners who have children (but not all), might benefit from having full retirement accounts and less financial stress with this 20 year PAYE strategy.
It’s just an approach to consider, and then if you decide it’s not for you, refinance. I’ve seen plenty of cases where people pulled the refinancing trigger only to have economic realities make them second guess their choice later.
Isn’t it crazy that you consider $200-300K “moderate”? Remember that according to the AAMC, the average person with debt (not even the average since 25% don’t have debt) graduates owing ~$200K. So despite the fact that there are tons of people out there with $400K-$1M, I’m still not sure that $300K can be called moderate, especially for a primary care physician or dentist.
FM here….graduated from private med school. 5 years out of med school debt is now $510k ($0 debt from undergrad). I don’t think I’m alone, either. WCI, I think you are underestimating (and AAMC, for that matter) the amount of med student debt.
I’m not underestimating it. I meet folks like you all the time. Today I surveyed a room of endodontists. 20% of them had student loans between $500K and $1M. The AAMC data comes from the reporting of MS4s, so garbage in garbage out. Those guys haven’t even finished borrowing yet, much less been through residency where the debt grows. Plus, the AAMC numbers are averages. 25% of graduates have zero debt, so it takes quite a people like you to balance them out to end up at $200K. This post may help:
https://www.whitecoatinvestor.com/what-to-do-if-you-have-monster-debt/
I’m still lost. Are you referring to Hightower, to me, or to the author of the article? And which approach mentioned do you feel is a misrepresentation?
I have a 130k chunk left sitting at 1.75%. I am beyond lucky to be in time period of that low of consolidated interest rate. It takes up about 650/month cash flow. From what I’ve garnered on WCI forum advice is it seems that at that low of interest rate it is an inflation hedge and not worth sacrificing the here and now and other investments to get rid of it. I still struggle a little psychologically being a debt adverse person. And will continue debating in my head whether to just bite the bullet and pay it off quicker so it’s off my excel file.
I’m thinking maybe the year I retire I will use it as a linchpin. The year I pay it off will be the year I retire ? Who knows.
What kind of terms is the debt at that you’ll still have it when you retire?
Still have 24 years of the 30 yr term left. But I hope to retire in about 17 yrs at age 55.
I had deferred the consolidation through 6 yrs of post grad training and even 2 yrs of med school. The fed let us consolidate while in school at the historic lows when I was entering my third year.
Still capitalized quite a bit and obviously I didn’t have WCI teaching me so I let the debt sit and grow. Thankfully at a very low rate but still stunk to be paying interest on the interest. After 6 yrs of repayment I’m just hitting even on the original amount from 2005.
WCI, at this crazy low rate, well below expected inflation, would you let it sit and make minimum payments?
30 year student loan term? Wow. That’s not very common, for good reason.
It’s not crazy to carry very low interest rate debt. Certainly if you have a better use for your money (retirement accounts, higher interest debt etc) I’d do that first. But when you get down to investing in taxable, particularly in bonds, it’s probably worth taking another look at that and seeing if it makes sense, even for non-mathematical reasons, to pay it off. Kind of like when I paid off my 2.75% mortgage last year. It just seemed silly to be trying to arbitrage 5% of my portfolio and 2% of my net worth in order to earn more.
Thank you for the reply. Totally agree.
Will reassess the situation and eventually I’ll tire of reasssessing and my portfolio will finally be at a point where that will certainly make sense.
I wrote an IPS this winter modeled after your post and the link to the boglehead forum. In it, I figured treating the debt payoff like a return on bonds and not investing in bonds specifically until it was gone and I was closer to retirement.
Long as you can handle the volatility of an equity only portfolio, that makes a lot of sense.
Users commenting dissenting opinions on Travis’s notes are touching on things he doesn’t mention: psychological/moral impact of having the debt, future of the PSLF/REPAYE balance payoffs, etc. Travis is simply making a mathematical argument. Can anyone find fault in the numbers?
Brad the Allergist in example 1 better think twice before he accepts a big pay raise, marry someone with a high income, do too much moonlighting, start a successful financial blog, etc. Counting on loan forgiveness will put some restrictions on his financial decisions for the next 16 years.
BTW, we refinanced in January. Debt a bit over 1.5x income, almost 350k loan balance, so arguably in Travis’s candidate pool. I figured that even with the IBR we’d pay off the balance before forgiveness would kick in, though I didn’t run the hard numbers. I look forward to paying it off in a few years. Will be a great relief to see it go.
Sounds like you made a good decision Tyler. I would suggest that anyone who decides to pursue the forgiveness route is free to change their mind if they get an unexpectedly large pay raise or take a new job. It shouldn’t deter you from earning more. It’s merely a hedge against earning an average income adjusted for inflation for the majority of your career. The numbers suggest that that’s a lot of people out there. We’ve got friends crushing it as private practice ortho and folks who are barely cracking 200 as fellowship trained docs in big cities. Pay scale really varies.
No, I think the numbers are fine. I didn’t recalculate them myself, but I’m confident in Travis’s ability to run them. My only beef is the assumptions that by necessity must go into this sort of a spreadsheet. Like that it is okay to carry student loans for 2 decades after med school graduation.
Most docs ARE in your situation, where the debt would be gone under PAYE before 20 years. But if you have a very high DTI, that’s not necessarily the case, and people with those high DTIs are becoming more and more common.
I got this advice from my financial planner, and it made sense to me at the time. I’ve been paying back my loan over 20 years/ interest rate 2.9 %; about 220k in loans initially. I am a well paid specialty and Was advised to invest my money with a higher rate of return given my lower interest-rate. This worked great until my divorce. My husband was a stay at home father. I am a higher earning specialty. Guess what, student loans taken out before you got married stay on your side of the ledger sheet when deciding spousal support and child support. So he gets 1/2 gross take home (not net); half equity in our house; and in 2018 alimony no longer tax deductible so you are paying the full tax burden on your pay but taking home only less than half gross.
If there is any chance that u may get divorced- pay these loans off while u are married s you are not stuck with an express expense the courts could care less about.
Another great reason to pay them off quickly. I’m sorry to hear you’re going through that.
In my situation I had a decent amount of medical student debt (which I paid finally after 22 years from it’s initiation). Because of my income level, my student loan interest deduction was essentially phased out at the get go.
What I ended up doing was refinancing my home (got a 2nd mortgage mainly to buy a condo and then decided to go above what I needed and pay the majority of my student loan balance). That way I got to get some tax benefit from the mortgage interest deduction that I wouldn’t have if I just left it with the original lenders.
That’s not a bad technique. Bear in mind that even though it feels like you FINALLY got rid of them after 22 years, you weren’t even at the point where you could have gotten PAYE forgiveness because that was 22 years from taking them out (MS1) NOT making payments on them (PGY1). You would have had to drag them out for ANOTHER 2 years to get that. I bet 22 felt long enough, no?
Dragging your student loans out for 20 years is an extremely risky proposition. It also plays into “Debtabetic Neuropathy” as I described in my book, The Doctors Guide to Eliminating Debt. Work to get this debt out of your life as quickly as possible. Stop managing your debt and start eliminating it.
A side note for example #3. They pay $3,000 a month for child care. The lower paid working spouse earns $3,333 a month before taxes. In makes no economic sense for the second spouse to work. It actually costs the family money for him to work in this situation. It increases their tax bill and worsens their IBR situation. He had better really love doing that job, since he is paying for the privilege of working rather than earning money for the family. How many teachers would really work for free, let alone pay to work? This situation happens a lot when two career families don’t take a close look at their finances and see how each job contributes. If you have a big family, the lower paid spouse has to earn a pretty high income to make up for the cost of child care. It is often not worth it to work.
Dr. Cory S. Fawcett
Prescription for Financial Success
Good point about the childcare Dr. Fawcett. I respect that people have a lot of different opinions on this. Often I find that the lower earning spouse wants to work regardless of the financial implications. Also if you include the pension the teacher gets it might make it make sense. Also childcare doesn’t last forever.
I agree strongly w WCI that if you’re going to pay off your debt, you need to do it ASAP and hopefully within 5 years or less. What I see often that makes 0 sense if folks who are struggling to pay the monthly payments doing a 15 year refinancing. If you’re going to do that, you might as well roll the dice w forgiveness.
Aaargh…15 years. I hate that too.
That’s a good point. A state pension in NY includes health care. May be a good reason for my wife to look at the state universities if she goes back to work when the kids are a little older.
Would help bridge that gap in healthcare awaiting Medicare age. That’s a significant benefit
Reminds me of a post I read somewhere: https://www.whitecoatinvestor.com/the-hidden-costs-of-a-dual-income-household/
It made no sense for my wife to teach. It does, however, make sense for her to be a part owner of WCI!
Hahha. I thought the exact same thing about your post WCI when reading the comment.
That was a post I forwarded to my wife and a few friends for sure
When we ran the numbers a few years ago we had the same conclusion. So my wife quit for several years. Now the kiddo is older, day care slightly cheaper and she makes much more. The tax cut helps as well as the marginal income takes less of a haircut. Its still pricey to work but it makes a lot more sense.
Interesting points made and thank you for the article. I decided to get creative in my student loan repayment(accomplished in 2.5 years).
https://passiveincomemd.com/student-loan-hack-for-high-income-professionals/
The behavior lessons learned from being committed and disciplined to pay off debt will prepare you better in life than just comparing 2018 dollars.
I agree with that. The mindset that gets rid of your loans in less than 5 years is the mindset that brings you to FI in 15.
Looking at my family’s experience, we probably would’ve been better off having not refinanced my wife’s loans when we did (at least for the short term). I’m a neonatologist in my first year as an attending at a university hospital, and my wife is a general dentist. We have about 650k combined loans and 3 children. I’ve always been on the PSLF path, since residency + fellowship was 6 years and I knew I wanted to stay in academics, and for those 6 years we filed separately to minimize my IBR payments since her income ranged 100-150k while I was in training. We refinanced her 350k in loans with SoFi last fall once I was settled in my new job.
Since settling in our new “forever” jobs (and new city), I’m saving 25-30% of my income (403b, 457, HSA, 2 backdoor Roth IRAs, employer 403b match) and using the rest to cover our family’s expenses (including my rising IBR payments). The problem now is that my wife has had to start all over building up a new patient base in a new area, and is on track this year to earn about half what she had been earning, which is just enough to break even paying her $3700 month minimum loan payment (10 year, 4.3%) plus a couple recurring business expenses. She is looking to buy the practice where she currently works as an associate in the next 1-2 years, which 1) will require building up a cash fund of 40-50k to show the bank prior to obtaining a practice loan, and 2) will quite possibly result in a year or so of minimal net income as the business is established and grows.
Now that my income is much higher than it had been, had we NOT refinanced her loans, 1) we could file jointly (avoiding the significant tax penalty of filing separately) and do REPAYE instead of IBR, 2) her REPAYE payment would be a fraction of the $3700/mo she’s currently paying, and 3) my REPAYE payment would be higher than my current IBR payment, but not enough higher to offset #1 & #2. The improved cash flow would greatly ease the burden of saving for her dental practice purchase and allow for more of a buffer while the business is starting out.
We’ll still get there, though, it just may be a tougher in the short term. Even having said all that, I don’t think we would’ve pursued her sticking with REPAYE for a full 20 years–just for the next couple years until her business takes off, at which point we’d pay off her loans aggressively.
Still, in light of this post I thought it was worth sharing a scenario in which NOT refinancing might make sense.
You do have a complicated situation. Bear in mind that only PAYE is 20 years, REPAYE is 25 years to forgiveness for graduate loans. Plus your payments rise with your income after residency. So even if REPAYE is right for you during residency, people often change to PAYE afterward.
This is an extremely common situation I see with dentists who are associating who want to buy practices. You use REPAYE for the subsidy and the lower required cash flow to get an improved underwriting situation for the bank who’s lending you the practice loan.
Glad everything will work out for you in the end, but this is a classic example where even when refinancing makes sense it might not make sense right away.
I also wanted to mention that both my wife and I were clients of GL Advisor the first couple years after we graduated — that’s a name I hadn’t thought about in a long while! They handled our initial federal loan consolidations at minimal cost, but after that we didn’t really use them for anything (we filed our own taxes and IBR recertifications every year). Still, it was very odd one day to realize I hadn’t heard from them in months, and then log on to their website to see that the business no longer existed and the CEO was under trial!
The one good thing that GL Advisor did was get a lot of people to consolidate their loans who otherwise probably would not have. Also, the CEO actually went to jail for stealing money from an investment fund that was an early precursor to today’s student loan refinancing market, not giving fraudulent advice to student loan clients.
But yeah super jarring. They would probably be a huge player in the market had the people at the top not been so crooked. I run into ex-clients of GL quite a bit.
I finished med school in 2001 (same school and 2 years prior to WCI graduating there-Go Utes!), FP residency in 2004, with about $110K in loans. My wife stayed at home with child number 3 (and we’ve since had #4 and #5). I got some loan forgiveness from the state for practicing in a rural area. I also was able to refinance in about 2005 or 2006 at 2.125%. My monthly loan payment was only about $280. Since the rate was so low, I wasn’t in much of a hurry to pay it off.
But after 10 years, I decided that I hated having the loan, slowly getting smaller but would take another 10 years or so to pay off. So I started throwing an extra $500-1000 at it every month and paid it off in a year. Yes, I could’ve invested the money and probably made a bit more money than the 2.125% was costing me.
Now, I look forward to the student loan telemarketers calling me. Whenever they ask if I have student loans, I grin and say, “Nope, I paid those suckers off!! Thanks for asking!”
Amazing to think that if you graduated only 15 years later it might have been 2 or 3 times that at triple the interest rate. No wonder folks are having such a hard time these days.
What about the burden of loans to my family? Graduated med school in 2013, 3 years of residency (FM) and now $515k or so in student loans, only from med school. I have considered refinancing but can only refinance up to $350k.
To further complicate things, it appears that if I were to die (sole income earner to family of 6), refinanced loans are still owed to my heirs. If I had a government loan, without refinancing, these student loans are expunged should I die.
Suddenly, Travis’ advice doesn’t seem too crazy…
Does it seem crazy to you to borrow $515K to get a job that pays $180K? It does to me. When your DTI ratio gets to 3X, some pretty extreme solutions may be required, including going for PAYE forgiveness. But you know what I’d do in your shoes? I’d go work for a 501(c)3. If you have been making payments since you were an intern, and had been at a 501(c)3 like a community health center, you’d be only 5 years away from having your $515K wiped away, tax-free. You don’t think that sounds better than carrying that debt for another 15-20 years? When an MS4 looking at $500K in debt by the time they get out of residency considers going into peds or FP or whatever, they’ve got to realize that the math behind the DTI ratio cannot be ignored. You’re either living like a resident for a long, long time, working for a 501(c)3 and going for PSLF, or considering PAYE forgiveness. Personally, I’d pick the second option, not the third, if I were you.
A couple things are way more important than loans for your situation Matt. Main thing is having stellar term life and disability insurance as you’re the sole earner. Making monster payments on the loans could make that tougher to have fantastic policies.
One point is that I definitely agree w WCI that if you go into medicine knowing that will be your DTI, then it’s advisable to pick a difference specialty or even career. However, most folks just might not have fully understood the magnitude of the debt or known their path until it actually happened.
In that case, no point in re-litigating the past. You pick the best option available to you based on the rules that exist. As a sole income earner, you might not have $5000 a month to pay back the loans and live a decent lifestyle with the family. That means you pay about 1000 and another 1000 for the tax bomb and have plenty leftover for retirement savings, travel, and family stuff.
Is it ideal? No. But it allows you to live a lifestyle free from crushing debt affecting everything you do. I’d also not have someone choose a not for profit job if they’d be miserable for several years waiting around for PSLF. You don’t want the tail of student loans wagging the dog of life.
Thank you for your replies, WCI and Travis. I love what I do. I would be miserable in a 501c3…I wanted to own my own business so started my practice right out of residency. Financially, that has been very difficult (especially with 4 kids now).
I was speaking with a friend of mine and he had around $175k and it took him 17 years to pay off his debt. I’m thinking with my now ballooned $515k in student debt, the best thing would be to ride it out.
Very helpful article. Thank you so much for sharing.
Did owning your business improve your ability to pay for your education? Better to double your income and pay off your loans yourself than to get forgiveness because that higher income persists even after the loans are gone.
Sometimes it is better to make a short-term big sacrifice than a long-term small sacrifice, or better said, scrunch all the sacrificing into as short a time period as possible. Kind of like residency that way. I spent nearly half a year in the Middle East paying off my medical school loans in addition to living in a state I didn’t want to live in working a bazillion hours even when I wasn’t deployed for less than half the going rate for my specialty, so no, I don’t think it’s a big sacrifice working in the United States at a Community Health Center and being with your family every night. I’m not sure why a scenario like that would be “miserable” for a family practice doc. You’re doing family practice. You’re living with your family. Your income adjusted for the loan forgiveness is incredibly high. Dunno…I guess we have different definitions of miserable. So you had to delay owning your own business a few years. Big deal. Welcome to the club. Those of us whose parents weren’t rich had to figure out a way to pay for med school. There’s going to be some sacrifice involved no matter which route you go down.
17 years to pay off $175K? On a $150-200K income? Let me introduce you to my friend, Mr. Budget. The skills that allow people to pay off their debts in less than 5 years are the same ones that bring financial success in the rest of their life.
I guess I just hate watching doctors become indentured servants. I can just about guarantee a doc will be less excited about practicing medicine 15 years out of residency than as a new grad. I hate to see them running financial scenarios out to spend half or more of their career paying for their schooling.
This article was a great read. Travis really put a spin on some of the examples I had not considered and I agree that all doctors should do more research before they refinance……
That being said, I am in agreement with Dr Dahle in suggesting most Docs pay off their student loans ASAP.
My wife and I got married with a combined $700,000 in debt (That was just grad school and dental residency, we had full rides in undergrad).
Less than 4 years out of school we will have that $700,000 debt behind us. It is possible. And that was while we both maxed out 401Ks and back door roth IRAs.
The secret? We don’t have kids (yet), we drive 10 and 12 year old cars, we have rented a small $1200/month apartment the past three years, we don’t care for fancy clothes/watches/handbags, and we buy our groceries at WalMart…thats probably our biggest expense.
Get rid of your debt ASAP, then invest all that money you were putting toward debt and continue the resident lifestyle, and you are well on your your way to FI.
Patrick, that is a fantastic account. Did your dental partners or patients give you a hard time about driving an “old” car or living in a tiny place not befitting a man of your educational attainments? I’m speaking a bit sarcastically, of course.
I could afford to drive a fancier car than my 2007 Mazda 3. But I like to tell people that “no car feels as good as having no student loans any more.”
Surprisingly, most of my friends are dentists and are frugal like me, so we’re all kind of doing it together, which I guess makes me fortunate. To be honest, my old boss sold his boat and his new Cadillac once I told him about some of my financial goals, clearly it was a wake up call to him of what was “possible” on a far smaller income than his. I like the like the line about no car feeling as good as being debt free, I’m going to use that!
Semi-kicking myself for refinancing a large portion of my government loans (originally all unsubsidized at >6%) a few years ago, when it now looks like I’ll very likely be taking a job with a non-profit that I could easily see myself working for for 5+ years. That said, plan is still to pay everything off in two years, and not have the potential for “golden handcuffs” keeping me in a job for any length of time just to wait out PSLF. Helps that my income-debt ratio will be about 0.5.
thank you for helping the white coats get a fair shake
I’m an FM resident at a For-Profit (not PSLF eligible) 3-year FM program. I am considering adding on a 1 year fellowship afterwards. I graduated with 244k in undergrad+med school loans with an average rate of ~6%, some 4-5, most at least 6-7%. I am located in Chicago (high COL) and I am unsure of my practice plans after graduating, whether I’m thinking academic vs private practice vs other. I am currently in the REPAYE program for the interest subsidy and expect my payment to be ~$300 a month, but my question is, would it be better to refinance now and lower my interest rate and monthly payment? Or, if after 3-4 years I enter academics, would it then be best to start PSLF and pursue 10 year forgiveness from scratch? I am not entirely sure how to do the math to compare these two options. Thank you for your help!
Hi Michael,
Assuming you’re working at a qualifying employer out of training (and perhaps your fellowship yr would count) and making ~200k starting salary it’s likely PSLF would have value add for you.
Generally if your federal student loan debt is equal to your attending income 1:1 or greater 1.5:1 or 2:1, then PSLF would financially benefit you.
If your debt to income was less than 1:1, essentially earning more as an attending than what you owe in federal debt, you’d probably be better off private refinancing now with the interest rates so low.
If you need additional help running the numbers, please feel free to contact me at studentloanadvice.com.
Andrew StudentLoanAdvice
Don’t refinance until you’re absolutely sure you won’t be going for PSLF. Depending on how much you make, you might still come out ahead going for PSLF despite being in a for-profit residency. You can hire Andrew at Studentloanadvice.com to help you run the numbers if you want.
I agree with WCI on this one. Can’t imagine paying my loans for 20 years, then owing a monstrous tax bill at the end of it (even if inflation makes it slightly less monstrous). The psychological burden can’t be quantified into the calculations. I would only consider staying in PAYE for 20 years if I had especially low income, and then PSLF would still be preferable.