A medical degree is arguably the most expensive advanced degree. According to various resources, med school graduates carry an average debt of $180,000. If you take into account accumulating interest (at 6% add another ~ $60,000 in interest) the overall investment is far greater. Many have quipped it is equal to a mortgage without the home. Repaying medical school loans can be a long and arduous process, but with a bit of planning and being proactive, you can save thousands of dollars over the course of your repayment. Being smart about your debt ensures that it doesn’t run away from you.
Many assume repaying student loans will be something they will be able to handle with ease. But with ever increasing costs and contracting physician reimbursement, student loan repayment is something all physicians should take the time to plan. This includes calculating how the repayments will fit in your overall budget and how long it will take to pay all these loans. After all, you worked far too hard for too long to be saddled with debt. Here are some tips I gathered to help you save time and money.
First and foremost, a financial professional, such as an accountant or financial planner familiar with student loans can be an invaluable resource when designing a repayment plan. If you don’t already have one, I encourage you to seek one out. Besides, you will need an accountant for annual tax preparation. You can start by asking your medical school’s financial aid office for resources. Or, ask a close mentor or attending physicians, since almost all medical doctors are in the same boat.
To get through medical school you needed to be organized. Those skills will serve you well with a debt repayment plan. So make a spreadsheet or take out your highlighters or organizer and do the following:
- Create a master document that includes the contact information for all loans, including amounts, issuing institutions or programs, and entities that service the loans.
- Itemize interest rates, loan terms, and factors affecting repayment (including grace periods and deferment options).
Here are some repayment options to help guide you:
Pay Extra Towards Your Medical Student Loan Debt Each Month
This is common knowledge, but it warrants repeating: Even if you just pay a little bit extra on your medical student loan debt each month, you have the potential to shave years off the life of your loan. Also, while not my personal favorite, consider having the payments withdrawn automatically so you don’t have to think about them.
Income Based Repayment
Under the Affordable Care Act a new provision by the federal government, you are allowed to make loan payments based on your income level. The new Income Based Repayment (IBR) for those with financial hardship (most post-graduate residents qualify), you can make payments of 10% (down from 15%) of your income. So even with a modest residency salary, you can still make some payments. Additionally, there is a cap on loan re-payment duration of 20 years (down from 25) before loan forgiveness. That means if there is anything left on the loan after 20 years it is forgiven: WOW!
Public Service Loan Forgiveness
Only Direct Loans are eligible, but if you consolidate your loans into a Direct Consolidation Loan you may be eligible for Public Service Loan Forgiveness (PSLF). On the AAMC website (https://services.aamc.org/fed_loan_pub/index.cfm?fuseaction=public.welcome&CFID=1&CFTOKEN=B944240D-F2DC-1091-FC00983FB6B9423F) they have published a comprehensive list by state. In this scenario, you must be working for a qualified employer, such as:
- Federal, state, and local government agencies
- Nonprofit organizations (many hospitals are nonprofit)
- Federally designated underserved area
Under these programs there are ways to receive federal loan forgiveness. For example, with PSLF, the terms state that if you make 120 qualifying payments, whatever debt you have left over is forgiven. You’ll need to check with your accountant or financial planner regarding tax implications here, but the overall savings could be huge. These payments are based on a percentage of your income, so for those looking at many years of training this could be a great option. For example, if a physician has 6 years of training (3 yrs. Internal Medicine & 3 yrs. Fellowship), he or she will have paid 72 of the 120 payments before their annual income increases significantly. Once income has increased, monthly payments increase as well: or as in the example above only the last 48 payment will be at the higher rate.
Just like refinancing your mortgage, you can often find better rates on your medical school loans. The proven method of refinancing loans could also translate into substantial savings. This holds true especially if you had to take out private loans or if you’re already in practice and don’t qualify for IBR or PSLF. The best time to refinance depends mostly on interest rates. You can make a refinancing inquiry at any time to see if a better rate is available. For example, by dropping your interest rate from 8% to 5%, you can save thousands of dollars over the course of your repayment period. Keep in mind that you will typically need a good credit score to get the best rates. All things considered, refinancing is definitely a worthwhile strategy, but make sure it’s right for you before diving in.
Join the Military
You’ve heard of the military paying for college tuition, but did you know they will also pay you a large stipend and a grant while you’re in residency in exchange for service? Each branch of the military has a program and can amount to tens of thousands of extra stipend dollars to pay off most if not all of your debt. Another perk is that you get to enter the military as an officer. Here are some helpful links:
There are others. Of course, in return you owe service to the military, the duration of which can vary depending on your agreement with them and your specialty. Typically, you will owe 3–5 years of active duty or several more years of being a reservist. In most cases they offer about $40,000 annually that can be used for loan repayment. This is on top of whatever stipend they offer.
Deferment or Forbearance
During your ACGME accredited training (residency and fellowship), some loans have an option to defer payments until you graduate. This can be helpful for residents who are battling high costs of living, credit card debt or just other substantial expenses. However, if possible, make this your last option. While your salary is not where you would like it to be yet, allocating some funds to pay down debt makes sense. Why? Simple! Interest is still accruing and can add thousands of dollars to your overall debt burden. Look out for clauses like “capitalized interest.” This is bad.
Don’t get discouraged. Times have certainly changed in the last 50 years. In the 1960’s and ‘70s it was a rite of passage that when you became an attending you would purchase a fur coat for your wife. Now, many want an Audi or Mercedes and a large home. Most folks when they get discouraged are inclined to make an unnecessary luxury purchase or take a lavish vacation. This begins a bad trend and the start of a downward spiral.
No matter what your situation, it pays to look into your options for paying off medical school debt. Who knows? One of these tips might end up saving you tens of thousands of dollars. At the end of the day if all else fails, pay off high interest loans faster than lower interest loans.
As always, comments and suggestions are welcomed. If you have an idea for future topics please share and we can collaborate.
Michael Farca served as a residency program coordinator for the Department of Medicine at one of the largest training programs in the country. He became the Department Administrator with continued oversight of the residency program, 2 primary site fellowships and 3 rotating fellowships. Michael has dedicated over a decade to graduate medical education and is board certified in Teaching Administrators for Graduate Medical Education (C-TAGME).
Disclaimer: Michael Farca is an entrepreneur and is part owner and operator of Master the Wards, which provides Observership U.S. clinical experiences for IMGs, CV and personal statement development.
Acknowledgements: NEJM Career Center & AAMC