How to Manage Student Loans During Residency

alexis brown omeaHbEFlN4 unsplash
For doctors who are finishing their residencies and beginning their practices, there is often no greater stressor than looming loan repayments. The average physician finishes medical school with more than $190,000 in debt, and the prospect of beginning loan repayment while earning a resident’s salary is daunting for young doctors.  Although the repayment process can often take a decade or more for physicians, there are steps you can take during your residency and first years of practice to cut down your repayment total five or even six figures. Mapping out a long-term strategy for student loan repayment can give young doctors peace of mind and help avoid costly mistakes. Try to make payments during residency Medical school loans begin accruing interest even while physicians are still in training. Loans usually enter repayment six months after graduation. Even though most residents make about a fourth of an attending physician’s salary, doctors should budget for monthly loan payments during their residency if it is at all possible. While there is an option to postpone payments during training, your loans will continue to accrue interest even during deferment and forbearance. As a result, postponing payments during residency can add thousands of dollars to the total balance owed, and put you even further behind on your repayment timeline. Don’t ignore your other financial priorities When it comes to balancing a budget, young physicians are sometimes prone to tunnel vision. Student loan obligations can feel so overwhelming that physicians put every extra dollar they have toward paying back loans as aggressively as possible. While this strategy can feel productive when you see your loan balance quickly shrinking, it also neglects other important financial goals.  Physicians should balance their loan repayment with other priorities like emergency funds, retirement savings, disability insurance, and major purchases like saving up for a home. Otherwise, you may finally pay off all your student debt only to realize you’re facing a new set of looming financial setbacks. By making measured repayments that still allow you to save for other financial priorities, you can gradually pay off your loans while building a stable nest egg for the rest of your life. Consider refinancing your loans Refinancing student loans can help physicians significantly lower the interest rate on their debt and save thousands in the total amount paid back over time. In addition to that, with a lower interest rate, refinancing could provide for more cash flow back in your pocket that you could put towards your other goals while still paying off your debt in a shorter amount of time. Doctors with excellent credit and a low debt-to-income ratio are ideal candidates for refinancing because lenders view them as low-risk borrowers. Refinancing for a lower interest rate is especially helpful for physicians holding graduate school debt, as these loans carry a higher interest rate than undergraduate loans.  Physicians can refinance their loans during their residencies, after their residences, or both. By refinancing during residency, you may be able to dramatically reduce your monthly payments to as low as $100 a month. However, avoid refinancing to such a low monthly payment that your repayments will not cover accruing interest, thus causing your overall balance to increase. Residents should look into refinancing for a loan that has both lower rates and a longer loan term. This can help reduce your monthly payment to an affordable level, while still paying enough to prevent your balance from growing. Then, residents can refinance again to shorten the term of their loan after they have graduated from training. With an attending position and salary, physicians will qualify for a lower interest and be able to repay their loans quickly.   Whether in training or as an attending physician, it’s important to weigh your other repayment options before refinancing. Once loans have been refinanced, they are ineligible for the public service loan forgiveness program and income-based repayment. Before refinancing, calculate how much money different repayment strategies would save you in the long run, and how long each would take to pay off or forgive your loans. If you have a mix of federal and private loans, it is also possible to refinance only the private loans while leaving the option for income-driven repayment or loan forgiveness on the table for the federal loans.  Take advantage of loan forgiveness programs There are a variety of loan forgiveness programs, such as Public Service Loan Forgiveness, that are designed to attract physicians to the public sector and high-need areas. In exchange for working in these practices for a certain number of years, these programs will forgive both public and private school loans. Moreover, the value they offer in repayment assistance is not taxed. Loan forgiveness programs are only available within certain specialities and typically require physicians to work in a Health Professional Shortage Area (HPSA). To qualify, you may need to move to a rural, low-income, or medically underserved area. There are a variety of prominent programs that offer generous student loan repayment to encourage doctors to prioritize public service in their practices, such as the National Health Service Corps Loan Repayment Program and the Students to Service Loan Repayment Program. There are also several states with their own loan forgiveness programs available to physicians.  If a commitment to public service is an important part of your professional goals, these programs can offer unparalleled assistance with loan repayment. However, even if you plan on taking advantage of loan forgiveness, it’s critical to study the exact requirements of your particular program. If you overlook the fine print, you may inadvertently disqualify yourself from eligibility for loan forgiveness. Too often, doctors neglect to submit an annual employment certification or miss qualifying payments that many loan forgiveness programs require. Loan forgiveness plans can be well worth the red tape, but be sure to consult with a financial professional as well as a representative from the program to confirm and maintain your eligibility.  Negotiate for valuable perks from your employer Employment contract negotiations are a critical opportunity for new doctors to gain valuable benefits to help pay off student loans. Depending on your specialty and region, average signing bonuses can vary from $10,000 to $75,000 for new doctors. These signing bonuses can be used to make a large lump sum payment to decrease the balance of your debt.  Additionally, assistance with student loan repayment is increasing in popularity as an employment benefit in physician contracts. Some hospitals and medical groups offer matching programs that deduct a small percentage of your paycheck to put towards your loans, and match that amount with a contribution from the employer.  By seeking out employers who offer lucrative contract perks and negotiating your contract strategically, new physicians can vastly improve their financial standing and ability to pay back loans early in their careers.  Opt for an income-driven repayment plan For residents with federal loans who are struggling to make full payments, an income-driven repayment plan can reduce your monthly payments based on how much you earn. These plans typically cap your monthly loan payments at 10-15% of your discretionary income. Income driven plans also extend the repayment period to 20-25 years and forgive any outstanding balance remaining after the repayment period has elapsed. The ideal income-driven plan for each physician varies based on their income to debt ratio, earning capacity, marital status, and loan types. The most common federal income-driven payment plans are PAYE (Pay As You Earn) and REPAYE (Revised Pay As You Earn). With Pay As You Earn, federal student loan payments are capped at 10% of a borrower’s discretionary income. Any remaining balance after 20 years of repayment is forgiven. Based on your adjusted gross income, number of dependents, and geographic location, the government calculates each year what your monthly payment amount will be.  PAYE is also recommended for married physicians in a two-income household, because it doesn’t factor spousal income into your payment plan if you file taxes individually. Therefore, your partner’s earnings will not necessarily cause your payments to increase. If you have debt from graduate school and don’t expect your income to increase significantly over the course of your career, PAYE is an excellent income-driven plan to make your monthly loan payments more manageable.  The Revised Pay As You Earn Plan also caps the monthly payment at 10% of discretionary income and adds a partial interest subsidy. With PAYE, your monthly balance may not cover all your accruing interest thus increase your balance over time. Under REPAYE, half of all accrued interest is subsidized.  However, REPAYE also has distinct drawbacks. REPAYE automatically factors in the debt and income of a physician’s spouse when calculating monthly payments, and the timeframe for loan forgiveness is 25 for years for graduate and medical school loans. Therefore REPAYE is typically suited for unmarried physicians without debt from graduate school. To maximize your savings, research carefully and consult with one of our financial advisors before settling on an income-driven plan. Conclusion With patience, planning, and professional insight, you can make strategic choices to ease the loan repayment process during your residency. One of our trusted financial advisors can help you weigh the benefits of different repayment strategies, and even potentially combine different tactics such as loan forgiveness and refinancing, for maximum value. Make an appointment with an advisor to develop a repayment plan that is tailored to your budget, your specialty, and your long-term goals.

Get Physician Specific Financial Planning

Work with advisors that know physicians.

Need help with something else?