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Warning! Mistakes medical residents make with their student loans.

During the years, I’ve assisted quite a few medical doctors with their finances. I’ve learned that medical school is expensive. It is no surprise that most if not all recent medical graduates have high amounts of student loan debt. In fact, 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. The AAMC also mentions: “For a 2016 graduate with $183,000 in Direct Unsubsidized Loans, the capitalization of interest accrued during school and grace will turn the principal balance into $212,800. During residency, an estimated $1,080 in interest will accrue on this outstanding balance each month.”

For the sake of simplicity multiply $1,080 by the number of months you think you’ll spend in residency. The result is a “guesstimate” of how much you can expect your principal to increase during residency when you postpone payments. Obviously, you can arrive at a more precise number if you analyze your exact student loan debt.

I understand that a lot of things are going on at school, as an intern, and then in residency. But there are certain things you should look out for that can potentially save you thousands of dollars in interest and extra payments. All this additional money spent on your student loans can go into other areas like planning for retirement, protecting yourself and your family with a solid insurance strategy, or accomplishing any other additional goals you might have.

Forbearance (Try to avoid it!)

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.

As an example, say you have $183,000 in loans at 7.00% interest rate. If you are 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.

I understand that early in your career income will be tight and postponing payments sounds good. The thought process is usually that at some point, my career income will increase substantially, and I’ll just take care of the loans then. The problem is that you not only end up paying thousands of dollars more for your loans but also life happens (marriage, children, and financial responsibilities increase) making any repayment strategy that much harder.

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.

Not taking the time to understand how student loans work

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.

Not researching loan forgiveness and understanding the process.

Public Service Loan Forgiveness “PSLF” is a program that forgives any remaining qualified loan amount after you have made 120 qualifying monthly payments under a qualified repayment plan. All this while working full-time for a qualifying employer.

A qualified employer is any government organization (federal, state, local, or tribal) and a non-for-profit tax exemption under Section 501(c)(3) of the Internal Revenue Code “IRC”.

In order to be considered a full-time employee, you must either meet your employer’s definition of full-time or work at least 30 hours per week.

Only loans under the William D. Ford Federal Direct Loan Program qualify. Although other loans like Federal Family Education Loan “FFEL” or Federal Perkins Loan “Perkins Loan” do not qualify, they may become eligible if you consolidate through the Direct Consolidation Program. Keep in mind that only qualifying payments made after consolidation count towards the 120 qualifying payments. So, for example, if you’re three years into repayment and you consolidate to qualify for PSLF, only the payments made after consolidation count towards forgiveness. This is where a resident can benefit if they plan ahead and take the time to analyze their student loan situation early on in their career.

In order to count as a qualifying payment, it must be made under a qualifying plan after October 1, 2007 for the full amount, no later than 15 days after your due date and while being employed full-time by a qualifying employer. It’s worth mentioning that you can only make payments during periods that you’re required to do so. Any payment made during the grace period, deferment, forbearance or default will not count towards the 120 qualifying payments. Also, you cannot accelerate payments as they will not count towards the 120 qualifying payments.

Only Income-Driven Repayment plans and the Standard Repayment plan qualify for PSLF. Medical doctors going for PSLF will want to pay the least amount of monthly payments possible in order for them to have the highest balance amount of student loan debt forgiven. 

This is where taking inventory and analyzing your current situation and future career goals come into play as this will dictate which repayment plan will be best suited for you given your current circumstances.

Some Income-Driven Repayment plan’s that medical doctors have traditionally benefited from are:

Income-Based Repayment (IBR)

  • Payment set at 15% of discretionary income based on AGI.
  • Government subsidizes unpaid interest the first three years for Subsidized loans only.
  • Remaining balance forgiven after 25 years
  • Payment capped at the Standard plan

Pay As You Earn (PAYE)

  • Payment set at 10% of discretionary income based on AGI.
  • Government subsidizes unpaid interest the first three years for Subsidized loans only.
  • Remaining balance forgiven after 20 years
  • Payment capped at the Standard plan
  • Must have had no outstanding federal loan balance on October 1st, 2007
  • Must have borrowed a new loan after July 1st, 2011

Revised Pay As You Earn (REPAYE)

  • Payment set at 10% of discretionary income
  • Payments based on household income, regardless of tax filing status
  • For all direct loans, 50% of unpaid interest not charged during periods of negative amortization
  • Remaining balance forgiven after 25 years for graduate degrees
  • No cap on payments

The exact plan will depend on a lot of variables. Seek expert advice before committing to a specific one.

Tax Deduction

Student Loan Interest deduction can reduce the amount of income subject to tax by up to $2,500 if your Modified Adjusted Gross Income “MAGI” is within the limit of $80,000 if single and $160,000 if married and filing a joint return. This deduction is useless as medical doctors usually have incomes above the cap. But during residency, you’ll probably be able to take advantage of this above the line deduction. The only way to do this is if you're actually making payments. If you’re in forbearance you will not have access to this deduction. Solid tax planning is required to analyze the different scenarios.

In any case, these are just a few things to look out for. As previously mentioned it’s imperative you analyze your student loan situation sooner rather than later as the consequences of not doing so can significantly increase your loan balance. This is a huge opportunity cost that everyone needs to be aware of.

Make sure to download my recent student loan eBook about student loan repayment options. Click here to get a FREE copy!

Need help? Check us out at Simpleivest, LLC.

Hermes Conesa CEO @ Simpleivest, LLC