According to the Association of American Medical Colleges “AAMC”, 81% of the graduating class of 2015 left medical school with student loan debt averaging $183,000. It’s imperative you take an inventory of all your loans and analyze them within the context of your financial situation. This will most definitely help you choose the best repayment strategy and it’s especially important if you’re going for the Public Service Loan Forgiveness Program. In fact, here timing is of the essence. As you will soon discover, waiting until finishing residency to analyze your student loan options is a terrible financial decision.
You can access the National Student Loan Data System where you’ll find an essential source of your federal student loans. Also, if you have private student loans you can obtain a free credit report where you’ll find the details of these loans.
Because of their extremely busy schedule, a resident often times take’s the easy route when it comes to student loans. This easy route is usually forbearance. More times than not it is the wrong thing to do. During the forbearance period, interest will accrue. When interest accrues, it is added to your principal. This will not only increase your principal but it will also increase your monthly payments after the forbearance period ends. Making it that much harder and longer to pay off your loans.
As an example, say you have $183,000 in loans at 7.00% interest rate. If you’re in forbearance for 12 months, $12,810 of interest will accrue and your new balance will be $195,810. Now imagine spending a few years in residency where your principal is increasing due to forbearance.
An alternative to forbearance might be enrolling in an Income-Driven Repayment plan where monthly payments can be as low as $0.00 depending on your income and family size. Everyone's situation will be different. You should seek expert advice to determine the correct course of action.
I recently wrote an eBook about student loan repayment options. It even has a chapter for medical residents. To download for FREE, click here.
Risk Management (Insurance)
A resident is probably not thinking about insurance as they have others things on their mind but generally speaking the younger and healthier you purchase insurance the cheaper it is. Try to learn as much as possible about the subject. Especially if you have a spouse and children who will depend on your income.
Everybody’s situation is different but as a general rule, you’ll probably need a Term policy (if someone other than yourself depends on your income) and a Disability Insurance policy. You’ve gone this far not to protect yourself and the one’s you love.
A term policy is easy to understand. It protects your beneficiaries from your unexpected death. They are relatively inexpensive to purchase and should not require a lot of analysis from your part. This type of policy can be purchased in different terms, 10, 20, 30 years, etc. Hence, the name Term Policy. Below you can find an example for a male age 31 in the amount of $1,000,000 for 30 years. As you can see, in this example premiums are low starting at $79.98. Keep in mind this assumes the male is healthy and a non-smoker, among other things. Your results will definitely be different.
Disability insurance is designed to provide you with income if an injury or illness prevent you from working. As a young physician, the risks are high as you are just starting out and if an unexpected event were to occur where you became disabled and unable to work it would be disastrous from a financial standpoint.
There are lots of differences between Disability Insurance policies. It's important you read the entire policy contract before committing. But generally speaking, you want to make sure the policy has the following benefits and features:
- Non-Cancellable: This feature prevents the insurance company from canceling or changing the policy as long as the premiums are paid on time.
- Elimination Period: A typical policy should include a 90-day elimination period (period of time when benefits are not yet payable). Consider an 180-elimination period if you think you can wait that long without causing too much financial hardship as the premiums will be a little lower.
- Benefit Period: This is the period of time your benefits will be paid. Consider polices that pay up to age 65 or longer.
- Own Occupation: The insurance company will pay benefits if you are unable to work in your medical specialty even if you can work elsewhere or decide to do something else.
- Future Increase Option: As your income increases this option will allow you to increase you DI benefit without additional medical screening.
- Cost of Living Adjustments: You benefits will increase throughout your disability claim.
- Partial Disability: This occurs when you are not fully disabled and because of this are not working full time due to injury or illness.
Ideally, you want to have a financial plan that includes a risk management section. At Simpleivest we develop this plan and make appropriate recommendations as to your financial situation.
“Physicians have a significantly low propensity to accumulate substantial wealth.”
Thomas Stanley- Author, The Millionaire Next Door
There are a lot of reasons for this and I believe most are not physician-specific but rather a general population problem. Although having a late start is definitely physician specific. An undergrad or grad student starts earning income sometimes 10 years before a physician does.
Developing sound saving habits early on as a resident will help you tremendously during the accumulation phase of your career. If you employer offers a workplace retirement account, you’ll want to take advantage and contribute as well as understand all your investment options. A lot of employer retirement accounts offer a traditional 401k and a Roth 401k. As a resident, you’ll be in a lower tax bracket than an attending and will probably benefit from contributing to the Roth during your resident years.
-Traditional 401k: Contributions are made before tax and not subject to federal or state taxes. When you withdraw your contributions and earnings at retirement, you’ll have to include them as ordinary income and pay taxes on these withdrawals.
-Roth 401k: Contributions are made after tax. Withdrawals made at retirement are not subject to income taxes.
Also, if your employer offers a company match you’ll want to take advantage of this free money. In fact, at a minimum, you’ll want to at least contribute the company match percentage. So, if your employer matches 5% this is the minimum you’ll want to contribute to your retirement account. Obviously, if your financial situation does not allow it, contribute an amount you feel comfortable with.
"Employ your time in improving yourself by other men's writings, so that you shall gain easily what others have labored hard for". Socrates