"The rich ruleth over the poor, and the borrower is servant to the lender." - Proverbs 22:7
There is no greater financial frustration for a resident or young attending physician than a large student loan burden, and the lack of financial training in the medical education system compounds the problem. As Vlad Kononchuk, M.D., an attending psychiatrist in Dix Hills, New York, says, "Frankly I did not have much of a strategy for anything when in residency, at least not for financial matters. It is hard to make those plans when you have so many other things on your plate!"
The costs of attending college and medical school have skyrocketed over the past two to three decades. When I started medical school in 1999, in-state tuition at the relatively inexpensive University of Utah School of Medicine was just $10,000 per year. In 2015, a mere 16 years later, that number had nearly quadrupled to $36,000 per year. Out-of-state tuition was nearly twice as high.
That trend has affected essentially every M.D. and D.O. school in the country. Out-of-state tuition can be particularly problematic, as displayed by the price tag at Michigan State University’s College of Human Medicine, which averages $73,000 per year just for tuition and fees. The Columbia University College of Physicians and Surgeons topped the private school list in 2015, at about $56,000. New York City is also an expensive place to live, so the total cost of attendance (COA) there is estimated to be as high as $94,000 per year for MS3s.
On average, D.O. schools are more expensive than M.D. schools. According to the Association of American Medical Colleges (AAMC), in-state M.D. students average $34,000 per year in tuition, fees and mandatory health insurance. Private M.D. schools average $56,000 per year, and out-of-state M.D. schools average $58,000. The D.O. averages do not include health insurance but clock in at $44,000 for in-state and $49,000 for out-of-state, according to the American Association of Colleges of Osteopathic Medicine. The average debt upon graduation of those who took out school loans, $183,000 for M.D.s and $229,000 for D.O.s in 2015 - as reported by the AAMC and the AACOM, respectively - is actually pretty amazing considering the cost of tuition.
However, those averages obscure the fact that, according to the AAMC, 32 percent of M.D. students graduate with more than $200,000 in debt, and 8 percent graduate with more than $300,000. In addition, since most residents do not even pay enough on their debt to cover the interest, many of those who start residency owing $200,000 finish owing $300,000 or more. So if you feel you are in a deep hole with your student loans, know that you are not alone. There is little you can do at this point about the depth of the hole, but there is a lot you can do to get out of it as fast as possible if you practice lifestyle control and proper debt management.
Although some physicians will have their debt paid off by their employers or forgiven by the federal government, the vast majority will eventually have to pay off their student loans themselves. The secret to doing this is to live a lifestyle similar to your resident lifestyle for a period of two to five years. For example, if you owe $200,000 and have an attending salary of $200,000, you can live on $50,000, pay $50,000 in taxes and put that other $100,000 toward your student loans, eliminating them completely within two years. In order to do this, however, you will need to resist the siren call you hear from peers, friends and family to grow into (or beyond) your income as soon as you can. With proper lifestyle control, most physicians can be out of debt within two to five years of residency graduation. It isn’t complicated, but it does require discipline.
Unfortunately, the other key to getting rid of your debt - proper student loan management - is far more complicated. In fact, it can be ridiculously complicated to determine the proper path during residency because a multitude of options are available to minimize interest accumulation, minimize payments and remain eligible for government forgiveness programs. Proper student loan management can even affect the best way to file your taxes and the type of retirement account to use as a resident. Much of this information I learned the hard way. As a resident who got sick of financial professionals ripping me off, I decided to educate myself on the basics of personal finance and investing. Since then, I’ve been sharing what I learned with other physicians - both in my book, The White Coat Investor, and on my blog of the same name. In this article, I’ll share some of that same information with you. Due to the complicated nature of the in-residency loan management process, this article will provide only brief general rules for residents while encouraging them to learn more about this complicated topic from other sources or to obtain professional advice. Prior to listing these rules, I’ll define the commonly used federal government programs residents need to know about.
Public Service Loan Forgiveness (PSLF) is a program that allows for complete tax-free forgiveness of your remaining federal Direct Loans after making 120 qualifying monthly payments, no matter how much debt you have left. The programs whose payments qualify include the standard 10-year repayment plan and the three income-driven repayment plans: Income Based Repayment (IBR), Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE.)
Income-driven repayment plans have several common features, but the main one is that the payments are dependent only on your income (and family size) and not on the amount of debt you have or the debt’s interest rate. You can determine what your payment amount would be by taking your income and subtracting 150 percent of the federal poverty line for the size of your family. The remaining amount of money is called your "discretionary income." IBR requires you to pay 15 percent of your discretionary income toward your student loans, while PAYE and REPAYE require 10 percent. For most residents, those payments don’t even cover the interest on the loans. The discretionary programs have a forgiveness feature too, but physicians rarely take advantage of it because it doesn’t apply until 20 to 25 years have passed, and even then, the amount forgiven is considered taxable income. REPAYE has an additional interesting feature in that half of the interest not covered by the monthly payments is subsidized by the government, effectively lowering your interest rate.
With that brief introduction to the government programs, let us consider three general rules for residents trying to navigate through these complex decisions.
Rule 1: If you hope to obtain PSLF by working for a 501(c)3 nonprofit after completing residency, then you want to stay in a government income-driven repayment program during residency.
Rule 2: Minimizing payments, minimizing interest accumulation and maximizing loan forgiveness may be mutually exclusive. For example, the best way to minimize payments is to defer your loans until residency completion, but you’d better expect them to be a lot bigger at the end than they were at the beginning! The best way to maximize loan forgiveness is to make payments that are as small as possible during residency through one of the government programs. Which program will allow you to do that best, however, varies according to your marital status, spouse’s income and the type of student loans.
Refinancing your loans can help you to minimize interest accumulation, but it also turns the loans into private loans, which are no longer eligible for Public Service Loan Forgiveness. The private lenders who refinance loans for residents do, however, allow for very small payments ($0 to $100 per month) during residency. To make things even more complicated, the latest government income-driven repayment program, REPAYE, may partially subsidize the interest on your loans, effectively lowering the interest rate to a level below that which you would get from a private lender. This is because residents don’t typically qualify for the lowest rates from private lenders. Instead of the 2 to 4 percent an attending might be able to get, a resident will probably only be offered a rate of 5 percent.
Rule 3: The best government program for most residents is the REPAYE program. There are two caveats to this, however. The first is that, depending on how much their spouses earn, married residents may be better off in the IBR or PAYE programs and filing their taxes as Married Filing Separately. The second caveat is that if you decide to go for PSLF after residency, you will likely want to switch from REPAYE into IBR or PAYE upon residency completion in order to maximize forgiveness. IBR and PAYE payments are capped at the 10-year Standard Repayment Plan payment, whereas REPAYE payments may rise above that level, depending on your income.
As an attending, the decisions become much easier. If you are directly employed by a 501(c)3 nonprofit or government employer, you should pick the income-driven repayment plan that gives you the lowest payment, pay the minimum on your loans, and obtain PSLF after 120 total payments. If you are not eligible for PSLF, you should probably refinance your loans with a private lender. Various terms and rates are available from at least 20 lenders, and what you qualify for will depend on your credit and debt-to-income ratios. You may be able to lower the interest rate on your loans from 6 to 8 percent in the federal programs to 2 to 5 percent, saving thousands in interest each year. Of course, just because you refinance doesn’t mean you want to forget about those loans and go on the minimum payment plan. You don’t get out of debt by taking on more debt; you get out of debt by living like a resident for two to five years and throwing a huge chunk of money at those loans every month - whether the interest rate is 7 percent or 3 percent.
Ethan Handler, M.D., an otolaryngologist and cosmetic surgeon practicing in Oakland, California, worried a little bit about refinancing his loans. He knew that he would "lose the government-provided safety blanket" to go into forbearance or have income-based payments in case something happened to his income. He ended up refinancing his loans at 3.5 percent and found that it was like "kicking off the training wheels. Once I refinanced and no longer had the safety net of hardship or forbearance, I took more responsibility for my debt. What had previously looked like a funny and absurdly high number ($240,000 upon residency graduation) on paper became something I’m working hard to erase."
There is also some risk that the government could change the PSLF program. The Obama administration has made budget proposals that, if passed by Congress, would limit the amount of forgiveness to just $57,000.
Amanda Weinmann, M.D., an attending family physician in St. Paul, Minnesota, didn’t like that the program seemed so politically uncertain - not to mention the fact that no person has yet received forgiveness through the program. (The program requires 120 monthly payments after 2007, and there have not yet been 120 months since 2007.) The idea of dragging out payments on the $162,000 she graduated medical school with was very unappealing. "I was psychologically uneasy with making payments that didn’t even cover the unsubsidized interest, and I felt that, since I borrowed the money and had the means to pay it back, I should." By living frugally, she paid off a car, avoided credit card debt, funded a Roth IRA and paid off $64,000 of her student loans while in residency.
Another alternative for those concerned about the political viability of the program (aside from avoiding it altogether as Weinmann did) is to save up the equivalent of the debt on the side in an investing account. If the program disappears or becomes severely limited, the funds in the side account can be applied to the debt. If forgiveness materializes as expected, the side account will provide a boost to your retirement nest egg.
Owen Vincent, D.O., a family physician practicing in Prairie du Chien, Wisconsin, uses this approach. He works for a 501(c)3 and is going for PSLF for his $315,000 in student loans. He states, however, "I’m also saving as much as I pay each month in taxable accounts [above and beyond my retirement savings]; so if [PSLF] doesn’t work out, I’ll throw a lot of money at those loans quickly and get rid of them, and if it does work out, I’m that much closer to financial independence eight years from now."
In interviewing physicians for this article, I was surprised by just how many of them had received loan assistance from their employers. This is an increasing trend among physicians and non-physicians alike. The classic example is the military with its various programs including the Health Professions Scholarship Program, which pays for tuition, books, fees and a stipend for medical students, and the Financial Assistance Program, which pays an annual grant (currently $45,000) plus a monthly stipend to residents in exchange for a service obligation.
The National Health Service Corps (NHSC) offers similar programs. The NHSC loan repayment program offers up to $50,000 toward your student loans in exchange for a two-year commitment to an NHSC-approved site. The NHSC also offers a scholarship program similar to the military HPSP program in that the student receives tuition, fees, other educational costs and a living stipend in exchange for a commitment to serve in an NHSC-approved job. Each year of support in medical school requires a one-year commitment, with a minimum of two years. The scholarship is generally considered the better deal, but the loan repayment program has its advantages as well. This program, however, is generally available only for primary care providers, mental health providers and dentists.
Vincent, who expects Public Service Loan Forgiveness, found that he also qualified for a state-specific, rural provider, tax-exempt loan repayment of $50,000. Kononchuk, too, was surprised to discover that he qualified for a New York loan repayment program designed for physicians treating underserved patients. He says, "I see way too many people not even consider such programs, as they assume that if they don’t live in a rural area, they won’t qualify. Guess what? I work in NYC and I still met criteria!" If he stays in the same job for five years, the program will have paid his entire $150,000 student loan burden.
The bottom line is that more and more employers, states and communities are offering student loan repayment programs and the qualifications are highly variable. You may be surprised what you can find. Vincent says: "My locale may not be for everyone - as some would never dream of living more than an hour from a Target - but I’ve found the slower pace allows for more meaningful time with family, friends, patients and hobbies. Plus, the much lower cost of living has done wonders for my financial situation." If you, like Vincent, are willing to work in a geographic locale where few physicians are interested in working, you may find you have significant negotiating power. Even if you cannot get a higher salary, consider asking for assistance with student loan repayment.
Whatever your strategy for your student loans, the keys are lifestyle control and educating yourself about proper loan management. As Weinmann says, "It’s literally worth tens of thousands of dollars to spend a little time educating yourself about loan options. If you compare that to your hourly rate as a resident, you’ll find this to be a great use of your limited free time."
James M. Dahle, M.D., FACEP is the author of The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing and blogs at whitecoatinvestor.com. He is not a licensed financial adviser, accountant or attorney and recommends you consult with your own advisers prior to acting on any information you read here.