Like it or not, student loans have become a part of our educational experience and it doesn’t appear they’re going away anytime soon. Whether we carry the balance personally or marry someone who has a balance of their own, the 1.5 Trillion America collectively owes in student debt has suddenly become quite personal. It would be fantastic if you didn’t have to invest in your medical education by taking out student loans.
But the reality is, this is the standard.
So what can we do about it? We can provide you as much information as possible up front so you aren’t scrambling years after completing your medical degree.
What You Will Learn
- 1 Surprising Statistics Related to Medical School Debt
- 2 Medical Education Costs: Types of Loans Available
- 3 Best Loans for Future Physicians
- 4 PSLF and the Impact on Medical School Debt
- 5 Repayment Plans
- 6 When You Can’t Pay Your Medical School Debt
- 7 Consolidation and Refinancing of Medical School Debt
- 8 Private Loans and Repayment Options
- 9 Action Plan for Medical School Debt
- 10 Final Thoughts on Medical School Debt
Surprising Statistics Related to Medical School Debt
There are plenty of statistics available when it comes to researching student loans and how far-reaching the loan crisis has become. But there are a few facts related specifically to medical school debt which you may find surprising.
As of 2018, the average amount of medical school debt averaged around $194,000. Compare this to 2010, the average medical college debt was $162,000. This shows you how quickly these numbers are increasing.
In addition to these averages, 51% of medical students graduate with over $200,000 when you combine both undergraduate and medical school debt. A staggering 16% of med students are graduating with over $300,000 of loan debt (both undergraduate and medical school combined).
Medical Education Costs: Types of Loans Available
Let’s talk about the different types of loans available to you. There are two categories which loans will fall into: federal and private. Although the end result is the same – you are borrowing money and must pay it back with interest – the two types of loans are vastly different.
In order to understand all the ins and outs of loan forgiveness and repayment plans, you need to know the different types of loans you are borrowing.
Subsidized Versus Unsubsidized Loans
As we are discussing the various types of student loans, one of the differentiating factors for most loans is whether or not it is subsidized or unsubsidized.
A subsidized loan simply means financial assistance has been made available to cover the accruing interest during a specified time period.
The financial assistance is in the form of a subsidy. You can receive a subsidy on either a federal loan, a repayment plan, or during deferment and forbearance, which we will discuss in further detail.
Accruing interest is another term you may see quite often. As you are aware, these loans aren’t free and the way the government or the banks make their money is by charging you interest on these loans. Accruing interest refers to the amount of interest which is accumulating as your loan matures.
It’s important to know the basic differences between subsidized and unsubsidized, as well as when interest is accruing on your loan. These are some of the most important aspects of a loan, and it ultimately affects how much you will pay over the life of the loan.
Federal loans are loans issued to students by the Department of Education. These loans are subsidized by the government. But like all things related to the government, there are multiple types of loans, mostly depending on your year in school and sometimes based on financial need.
Federal Loans can be divided into two categories: Direct Loans and Perkins.
From each of these categories, you will find variations.
Direct Subsidized Loans
As an undergraduate student, your best option for a federal loan will be a Direct Subsidized loan. Not only is the interest rate very competitive, but it’s also locked in as a fixed rate for the life of the loan.
You will not be charged interest during the time you are enrolled in undergraduate coursework, as long as it’s at least half-time status. In order to qualify for this type of loan, you will have to demonstrate financial need. Your credit history will not be factored into consideration for this loan.
Direct Unsubsidized Loans
Since Direct Subsidized Loans are not available to Graduate and Professional students, it’s likely your medical school loans are going to fall under the Direct Unsubsidized category of loans.
You do not have to demonstrate financial need for the Direct Unsubsidized Loans. And since this loan is unsubsidized, you will be responsible for all interest during the time period you receive this loan. Like the direct subsidized loans, your credit history will not be factored into consideration for this loan.
For both types of direct loans, you will be charged an additional loan fee, currently around 1%, in addition to the interest you are paying.
Direct PLUS Loans
Graduate and Professional students are also eligible to apply for Direct PLUS loans. These are loans administered by the Department of Education, just like the other types of federal loans. However, with Direct PLUS, your credit history will be a determining factor in the application.
With a Direct PLUS loan, you may be able to cover the additional costs of your education, which the other loans may not be able to cover. The maximum amount of this type of loan is the cost of attendance to your school minus the amount of other aid you are receiving. You will have to begin repaying this loan 6 months after you graduate.
This flexibility in lending is going to cost you though. Right now, the interest rate is around 7%, making it a higher rate compared to the other types of federal loans.
It’s not in your parent’s best financial interest to take out loans to finance your education, however, the reality is this situation occurs. Parents of either undergraduate, graduate or professional students are also eligible to apply for a Direct Plus loan and is referred to as a Parent PLUS loan.
It is not based on financial need but the applicant’s credit history will be considered as part of the application process. As with the graduate and professional student version, the interest rate is currently hovering around 7%.
Federal Perkins Loans and FFEL
The Federal Perkins Loan program ended on September 30, 2017 but you may still come across this type of loan as you are researching. This was a program for both undergraduate and graduate programs to qualify for federal loans based on financial need.
Similarly, you may see references to FFEL loans. FFEL is short for the Federal Family Education Loan, and were private loans which were backed by the US government. This is also a now-defunct federal lending program. This program ended in 2010, but you may still see eligibility for these loans whenever you are applying for a repayment plan.
Direct Consolidated Loan
A Direct Consolidated Loan is a program available for federal loan holders which allows you to combine all qualifying federal loans into one payment. There isn’t necessarily a discount on the interest rate, it is a fixed rate based on the weighted average of your loans. The percentage point is then rounded up to the nearest one-eighth.
Not only will you have the convenience of one singular monthly payment, this is the path you must use in order to use an income-driven repayment plan.
A word of caution here: Direct Consolidated Loans are always free to apply for through the FAFSA website. You will never be charged for this service. However, there are a lot of companies out there trying to sell you on a loan consolidation plan. Going through another company is a complete waste of time and money.
Steps to Obtaining Federal Loans
The very first step in obtaining a federal loan is to apply online with the FAFSA website and go through the process to set up your account. It’s also important to remember you must re-apply through the website every year you are seeking funding. The loans do not automatically renew and you must take action.
You will also have to sign a Master Promissory Note, or MPN. This is the legal document outlining the interest rate and repayment details regarding your federal loans. You will have to sign one for Direct Loans and a different one for Direct PLUS loans. A critical step in the loan application is for you to review the MPN, as it explains the details related to your loan.
If you are applying for a loan through a bank or credit union, then you are applying for a private loan. Private loans are unsubsidized from the government, therefore you will begin accruing interest from the moment you receive a disbursement.
Unlike most federal loans, your credit score and credit history will be used to determine if and how much you can borrow in private loans. It’s also likely you could need a cosigner for these types of loans. Most people turn to their parents in this situation, but careful thought should be put into who is a cosigner. The cosigner will be just as responsible for the payment as much as the applicant and this shouldn’t be taken lightly.
One of the attractive benefits of private loans is the ability to borrow higher amounts and there are usually not any type of restrictions on income.
Some private loan lenders do offer options of deferment and forbearance. If you are looking to take this route for your private loans, you will have to work with each individual loan holder to verify the options available to you.
Best Loans for Future Physicians
Since the chances are high you will have to invest in and finance your medical education, you are likely looking for guidance on the best choice for physicians.
You will want to apply for federal loans first. Not only will you have the most options related to repayments, but you could potentially qualify for the PSLF forgiveness option. And although not encouraged, you could potentially use deferment or forbearance for federal loans if you are experiencing hardship and there are no other alternatives for monthly payments.
Once you have exhausted all opportunities of federal aid, then you can begin the process of obtaining funding through private loans.
PSLF and the Impact on Medical School Debt
We can’t discuss loan options and future repayment plans for your loans without considering the PSLF benefit first. PSLF is the abbreviation of Public Service Loan Forgiveness. After meeting certain requirements, this program will forgive the remaining balance of your federal loans. Whether or not you choose to pursue this as an option is ultimately your choice, but should be given consideration by physicians as part of an overall approach to loan repayment.
PSLF has garnered quite the attention lately and it doesn’t appear the discussion is going to go away anytime soon. In order to know why PSLF is a hot topic these days, we need to rewind and go back to the beginning of this program.
The PSLF program began in 2007 as a way to provide loan forgiveness (for federal loans only) to those who were employed by the government and not-for-profit entities. Any entity with the 501(c)(3) designation would be an eligible employer. As you can imagine, the intention behind the program is to encourage those to choose careers in the not-for-profit segment and to do so without taking on additional education debt. Not only is this an incentive for teachers, but if you are employed by a public hospital you would qualify.
As a physician, this should automatically be of interest to you.
Requirements for PSLF
There are two main requirements for eligibility with PSLF. The first requirement is you have to have federal student loans. The second requirement is that you must work for an eligible employer while making qualified payments for 120 months, or 10 years. The 120 months do not have to necessarily be consecutive but you also can’t “pay ahead” with additional payments in order to reach eligibility. Any months spent in default or forbearance with federal loans will not count toward loan forgiveness either. For instance, If you’re unemployed for six months and your loans were deferred, then the 6 months will not count toward your 120 monthly payment minimum.
Each year during the 10 year period (or however long it takes you to make the 120 required payments) you will need to submit your employer verification to make sure you maintain eligibility. While this step isn’t technically required until you have completed the 120 months, you will be thankful at the end of the 10 years when you don’t have to go back and fill out employer information for the last 10 years. You will be especially glad to have completed this step annually if you have found yourself working for multiple hospitals.
You will also have to be enrolled in one of the four income-driven repayment plans, so the balance of your loans will be forgiven at the end of the designated time period.
Loan forgiveness after 10 years of working in a hospital sounds like a program every physician would consider, right? The assumption was yes until the statistics started rolling in.
Where PSLF is experiencing negative public perception is within the number of rejections from applications. The Department of Education gives us visibility to the number of applications received versus the number of applications approved. The percentage of approval looks to be disproportionate compared to the applicants, which is how the negative press began. However, it appears most applications are denied due to errors, therefore applicants are encouraged to resubmit.
In addition to the application issues, you have to remember the program began about 11 years ago. Many applicants are just now starting to realize eligibility after having made 120 payments. This is a situation where truly time will tell how successful this program is.
As a physician, if you have any inkling whatsoever you might work in a public or teaching hospital, you should definitely consider PSLF as a viable option. If you have any opportunity to take advantage of reducing your overall debt, then PSLF could be a major component for your strategy for debt elimination. There are clearly kinks which need to be worked out with the application process, but one way to view this is it can only get better. This is too big of an incentive for you to not take advantage of as part of a strategy of loan repayment.
It’s time to get into the details of why federal student loans offer the most flexibility and why you’re encouraged to start with these loans first. As you’ve seen, there are multiple types of loans for you to apply for depending on where you are in your education. There are also several options when it comes to the repayment of the loans. And since we know 46% of medical students will be working towards a repayment or forgiveness program, it’s important to know exactly how these repayment programs work so you can tackle your medical school debt.
It’s tempting to put off understanding repayment options when you are in the midst of your medical school days. After all, you’ll pay them off one day when you’re commanding your six-figure salary as a physician. Of course, this is a natural thought, but the reality is, you will have to pay your loans back at some point. You need to know what options are available. Understanding your repayment options now – instead of 10 years from now in the beginning of your career – can literally save you thousands in interest.
In the world of student loan repayment, there are basic repayment plans and then you have income-driven repayment plans. As a physician, or the spouse of a physician, most likely you need to pursue the income-driven repayment Plan because of the qualification requirements for PSLF. But let’s take a look at all the options.
Basic Repayment Plans
There are three different “basic” repayment plans which every federal loan holder will be automatically qualified for once the date of repayment is set to begin.
A standard repayment plan is pretty straightforward. You have a fixed monthly amount of repayment over a 10-year period. The exception to this is with FFEL loans or Direct Consolidation loans, where you will have a 30-year period to pay back your loans.
The result of using this plan is you will have a high monthly payment, however, you will pay the least amount of interest – especially with the 10-year option. The standard repayment plans is not a qualifying plan towards PSLF.
A graduated repayment plan is also a fixed monthly amount over a 10-year period. However, your rate will increase every two years. You will begin your repayment with the lowest monthly payment possible and then every two years your monthly payment will increase – presumably as your income has increased.
Similar to the standard repayment plan, this is not a qualifying plan towards PSLF but does offer a gradual increase in payments, which may be more budget friendly when you are beginning to pay back the loans.
Yet another option for repayment is the Extended Repayment plan. You can select either a Standard or Graduated payment option but the length of time will be 25 years, as opposed to 10 years. Almost all federal loans are eligible for this type of plan.
Like the other plans, this does not qualify towards PSLF repayments. There are also loan balance requirements for certain types of federal loans – some of which may require you to have a minimum balance of $30,000.
Income-Driven Repayment Plans
There’s a simple reason so much emphasis is made with the income-driven repayment plans for physicians – these are the plans which do count towards PSLF qualification. Even if you aren’t 100% sure you will end up working for a non-profit or government entity, you want to ensure you have the best chance of receiving loan forgiveness if given the opportunity.
Income-driven repayment plans for federal student loans are divided up into four categories: REPAYE, PAYE, IBR, and ICR. We are going to explore the nuances of each plan. You will have to enroll in one of these four repayment plans if you choose to apply for federal loan forgiveness after 120 payments.
Revised Pay As You Earn Repayment Plan (REPAYE Plan)
The REPAYE plan is one of the newer repayment plans available, joining the list of options in 2015. REPAYE is short for Revised Pay as You Earn. Any borrower of Direct Loans is eligible for REPAYE. Parent PLUS loan holders are currently not eligible for this type of repayment plan. You do not have to experience financial hardship in order to apply either – the plan is determined by your Adjusted Gross Income(AGI).
Payments for REPAYE are calculated by taking your AGI (which includes your spouse’s), minus 150% of the federal poverty guidelines, and factoring in your state of residence as well as family household. Your spouse’s income is also factored into the equation to determine your monthly payment. This is true whether you file jointly or separately. Your spouse’s debt burden will also be a factor considered.
You will have to update your information each year – including income and family size – so the correct monthly amount of payment can be calculated. You will need to make this update every year, whether you have any changes to report or not.
Where REPAYE can be a benefit to a physician is it can be used while still pursuing the requirements for PSLF. REPAYE is also the only income-driven repayment plan where the government will pay towards the interest of both subsidized and unsubsidized loans.
REPAYE payment terms are 20 years for undergraduate loans and 25 years for graduate and professional school loans.
Pay As You Earn Repayment Plan (PAYE Plan)
Another option for your federal loan repayment which is offered by the Department of Education is Pay As You Earn, or PAYE. This is another popular choice among physicians due to the length of time for repayment and income requirements.
Under the PAYE plan, your monthly payments are calculated as 10% of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty guidelines. Your adjusted gross income is your annual salary minus retirement, 529, HSA and other contributions. PAYE differs from the other repayment plans because it counts your discretionary income as 150% of federal poverty guidelines minus your adjusted gross income.
PAYE is designed for borrowers who have a high debt-to-income ratio. It guarantees your payments will never be larger than they would be under the 10-year plan. Every year, the government recalculates your monthly PAYE amount, which can change depending on your new AGI, family size and location.
After 20 years of payments, the remaining loan balance is forgiven. One thing to keep in mind is you will still have to pay taxes on the forgiven amount, which could be a substantial sum.
Income-Based Repayment Plan (IBR Plan)
The IBR plan is another option available to you for federal loans and qualification towards PSLF. As the name suggests, your monthly payment will be calculated based on your income. Your spouse’s income will also be factored into the calculation, however this is only true if you are filing your taxes jointly.
The monthly payment will be based on 10 or 15 percent of your discretionary income – depending on the date you first received your first loans. Your payment will never be more than you would have paid under the 10 year Standard Repayment Plan.
LIke other plans, you will have to submit your income and family size information each year, so the monthly amount can be calculated correctly. You will have a 20 or 25 year time period in which to pay back the qualifying loans.
Income-Contingent Repayment Plan (ICR Plan)
An Income-Contingent Plan, or an ICR, is very similar to the IBR. The biggest difference is how the monthly payment is calculated. Monthly payments are based on 20 percent of your discretionary income. The payment can also be based on the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
Your spouse’s income will be factored into consideration as discretionary income but only if you file your taxes jointly AND if you are paying your Direct Loans jointly with your spouse.
Where this becomes an interesting option is if you are a parent and are repaying a Parent PLUS Loan. Parents are also eligible for the ICR, but first, the Parent PLUS Loan must be converted to a Direct Consolidation Loan in order to pursue this option.
Tax Liabilities with Repayment Plans
The four different plans, as well as the PSLF plan, each has a set of rules which will impact the amount of taxes you have to pay. This is an important consideration as you begin to solidify your repayment strategy with your medical school debt.
For instance, the PAYE plan does not take into consideration your spouse’s income IF you file your taxes separately. This can be an enormous benefit to you, as far as monthly payments are concerned, if your partner is bringing in a more substantial income. Each plan will have its own unique impact on your taxes, which means it’s important for you to research and consult a professional if needed.
Other Considerations Regarding Income-Driven Repayment Plans
You may be surprised to hear you should not pay additional amounts towards your repayment plan, if you are enrolled in one of the four income-driven repayment plans. The reason for this is because the additional payments can actually harm your chances of loan forgiveness. Your best bet is to pay the calculated monthly amount.
The other potential stumbling block you may have been warned about is not being able to purchase a home while you are participating in a repayment plan. There may be additional challenges in obtaining a mortgage, however, as a physician, you may have the option of a physician mortgage loan. These lending programs base your mortgage off of your income potential, instead of your current status.
Are you still looking for answers on which repayment plan might be the best choice for you? This is where hiring a professional is the best course of action. A CPA can provide you the best advice from a tax liability perspective. There will be considerations to be made from a tax perspective if you are working towards PSLF and utilizing a repayment plan.
A Fee Only Advisor is another excellent resource for you as you navigate through your medical school debt. Not only will you receive advice on which repayment plan is best for your situation, but you will receive a tailored approach to your overall debt reduction and financial management.
When You Can’t Pay Your Medical School Debt
During the loan repayment process, you could be faced with a dilemma and the inability to make your monthly payment and you can’t wait 10+ years to confirm if you will be eligible for PSLF. We need to discuss what happens if you can’t make your payments towards your medical school loans.
Deferment of your student loans refers to a process which you can temporarily suspend your monthly repayment obligation. The time period for deferment is usually 6 months, but depending on the reasoning for deferment, you continue to apply to have this time period extended.
Deferment could be beneficial for those are at risk of going into default. There are several circumstances which are approved by the Department of Education to qualify for deferment of your student loans.
Here are the circumstances which qualify:
- Still enrolled in school
- Graduate School Fellowship
- Rehabilitation Treatment Enrollment – for substance abuse, mental health rehabilitation, or “vocational”
- Unable to find employment up to three years
- Volunteer with the Peace Corp
- Active Military Service such as through the National Guard or Deployment
- Details are still being worked out but for 2019 there is approval to be eligible for deferment if you are receiving chemotherapy for the treatment of cancer
Deferment may sound like an ideal way to press pause on your monthly student loan obligations, but there can be a negative impact. Unless you have a subsidized loan, the interest is still accruing over the time period you aren’t paying.
Alternatives to Deferment:
There are alternatives to deferment. Your first course of action should be to see if you would benefit from an income-driven repayment plan. You should also contact the loan service provider to make sure you understand all eligible options for your circumstances.
Forbearance is another term associated with a discontinuation of payments towards your loans. It is similar to Deferment but there are a couple of variations to this type of pause on payment.
Forbearance is generally for a one year time period, compared to the 6-month increments for deferment. It is also based on hardship and not a type of circumstance. You will not be responsible for payment nor will you accrue interest during the time of forbearance.
Forbearance falls into one of two categories: general and mandatory.
- General Forbearance: This is associated with experiencing financial or medical hardship, or any hardship which might be approved by your student loan officer. Forbearance eligibility can be used for Direct Loans, FFEL Program loans, and Perkins Loans.
- Mandatory Forbearance: If you fall into one of these categories, then the loan officer is mandated to approve your forbearance application. Mandatory forbearance is more common among physicians because those who are serving in a medical or dental internship or residency program will qualify.
Another example of mandatory forbearance is if you are an active member of the National Guard, or serving with AmeriCorps. You will also qualify for mandatory forbearance if your monthly federal loan repayment total is 20% or more of your total monthly income.
Alternatives to Forbearance and Why it Matters
Your first inclination as a resident could be to apply for the mandatory forbearance. There are several reasons to avoid going into forbearance during your residency or fellowship. By doing so, you will not be reducing your debt. You will not be contributing eligible payments towards the PSLF program either. You are also still accumulating interest and you could end up with negative amortization if you have a federal subsidized loan.
Again, applying for a repayment program is another alternative, as well as speaking with your loan officer regarding other options for your situation. Both deferment and forbearance scenarios are short-term solutions, which in the end provide little benefit and could have a negative impact further into your career.
Cancellation of Medical School Debt
Have you ever closed your eyes and wished your loans would just disappear? Unless you have a fairy godmother, it’s simply never going to happen. There are circumstances however, where your medical school loans could be canceled. These situations are rare but you should be aware of the possibility.
Yes, if the borrower of the federal loans passes away, the federal loans will be discharged. In order to qualify for this cancellation, a death certificate must be presented to the loan holder so the process of cancellation can begin.
If you are permanently disabled, you will most likely be eligible for cancellation of your federal student loans. You will have to prove your disability by showing evidence if it is the result of service in active duty. If you receive Social Security Disability (SSDI) or SSI benefits then you can use this to prove eligibility for cancellation too. You can also have a physician submit a statement on your behalf with details related to your total and permanent disability.
Closed School Discharge
If you are attending a school which suddenly closes and is no longer offering options for credits, then you can apply to have your Direct Loans, FFEL, or Perkins loans canceled. There are several caveats to eligibility for cancellation due to school closure.
Other Rare Circumstances
Death, disability, and school closings are not the only scenarios under which your loans could be eligible for cancellation. If you are a victim of identity theft which resulted in your receiving the loan. Or if you were falsely certified by the school, then these are situations where you could receive cancellation.
The best action to take if you believe you could be eligible for loan cancellation is to work with your loan officer.
Bankruptcy and Medical School Debt
A common misconception among borrowers is a belief you can have your student loans discharged in court by filing for bankruptcy. While there are very rare circumstances where this could happen – with the emphasis being on the word rare – you should never assume this is an option for your school debt.
But let’s assume you want to pursue this route. If you file for Chapter 7 or Chapter 13 bankruptcy, you would have to prove your payments produce “undue hardship” to you or your family. In other words, your monthly payment for your federal loans would be such a burden to you or your family and it would cause more hardship than anything. This isn’t an easy argument to make.
Bankruptcy is most likely not going to be a rational answer for you. However, an alternative you could look for is a repayment plan. If you are experiencing this type of hardship, then you should work with the loan officer to determine your best options.
Consolidation and Refinancing of Medical School Debt
When you are faced with having to make a plan for loan repayment, you will most likely consider consolidation or refinancing of your loans. You may naturally assume these are the same type of options too. However, there is a distinction between the two, and it’s important for you to know the difference – and if either could be your final choice.
Consolidation of loans is a term which mostly applies to federal loans. This is the process of combining all of your federal loans into one, singular loan. It does not necessarily result in a reduction of payment or a lower interest rate. Popularity of consolidation of federal loans continues to grow year after year and here’s why.
As mentioned earlier, the exact program is referred to as a Direct Consolidation Loan. The process to apply for it is similar to how you applied for your other federal loans.
You also have to consolidate your loans through this process in order to start the income-driven repayment plans.
The benefit to a consolidation is the ease of having one payment, instead of several to have to pay each month. It’s likely with the amount of medical school debt you have, you have multiple federal loans. This could save you quite a bit of time each month trying to keep track of payments.
Another positive benefit to the consolidation of your federal loans, is you will continue to remain eligible for your PSLF qualification. Whether or not PSLF is your final goal, at least you’ll have the convenience of one payment each month. You will also have a fixed interest rate and you will have peace of mind knowing it won’t increase based on someone else’s decision.
The Direct Consolidation Loan can be used for almost all types of federal loans – including the Parents PLUS loan.
Refinancing of your loans is similar to refinancing your home mortgage. The basic premise is when you take your current loan balance and transfer it to a new loan with new terms. Refinancing your loans can result in either a lower monthly payment or a lower interest rate.
Refinancing could be a beneficial option if you have multiple private student loans and you are able to achieve a lower interest rate. As basic as it sounds, if you go the route of refinancing, you need to understand the number of years and the interest rate, in addition to the monthly payment.
Refinancing may sound like the answer to many of your financial problems but a word of caution. First of all, if you choose to refinance your federal loans, it will automatically make the federal loans ineligible for forgiveness through the PSLF program. Secondly, the new terms of the loan could mean a longer payment time, despite a more attractive lower monthly payment. Adding years to your loans will most likely result in paying more for your loans in the long run. You have to do the math to make sure it’s the best financial decision for you to refinance your loans.
If you think refinancing is the way you want to go, then I highly encourage you to use a tool such as credible.com. This website will allow you to compare various refinance options and rates in minutes, it’s easy and doesn’t cost a dime.
The process is so simple – you fill out a form and provide details about your current loans. In as little as one day you can recieve a detailed quote, including information from lenders. Best of all, this won’t impact your credit score and you could find out you’re eligible to save thousands. Refinancing can take forever to research if you don’t use a service like Credible. Saving time and money is always a good idea, especially when it comes to paying off your loans.
Private Loans and Repayment Options
All of the information for PSLF, repayment plans, and options to pause payments have all centered around federal loans. But what options do you have with private loans? Although there aren’t as many available as federal loans, there are a few which could help you.
Reduced Payments During School
You can choose private loans which have a smaller payment while you are still in school. The idea being after graduation you can take on a larger monthly payment since you will be bringing in a higher income. This is important to keep in mind as you are pursuing a residency program. Unlike other professions, your income will continue to be limited once you have completed medical school.
Interest Only Payments During School
Another option for private loans could be the interest-only payment plan while you are in school. As the name implies, you will only be paying towards the interest of your private loan, and not the principle while you are in school. This allows you to make some type of payment toward your loan, so you aren’t accruing additional interest payments, but keeps your monthly payment to a manageable amount during school.
Deferment During School
You can also request full deferment of payments while you are in school. You will not pay anything towards your private loan balance as long as you are meeting the enrollment requirements. The advantage to this is not having a monthly payment hanging over your head while you are scraping by on a college budget. The disadvantage to this plan is that you are not paying towards the balance at all and will end up paying the most in interest with this type of payment.
Other Payment Options
You should also ask your private loan lender if there are any programs available for an interest rate reduction. Many lenders will give you this option if you sign up for automatic payments. It’s worth asking if this is available because you could end up saving thousands of dollars in interest over the life of the loan.
Action Plan for Medical School Debt
This is all great information regarding student loans, but how exactly should you use it? Like many financial decisions, it depends on what stage of your life you are in. This is one of the first major financial decisions you make and most likely it’s going to be completely on your own.
If You are an Undergraduate Student
Borrowing money is a big commitment, no matter how easy it may appear to be to obtain funding. Whether it’s a federal or a private loan, there is a reason why there are so many restrictions put into place. The government and banks are in this to make money. Your first action plan is to make sure you have exhausted all ways of paying for your education before you take out any loans.
The best advice is to try to avoid loans as much as possible. Make sure you take time to apply for as many grants and scholarships you can find. If you can take on any type of work – even if it’s only a few hours a week – to supplement your payments towards educational expenses, it will be worth it.
Start with the basics – are you going to the least expensive college possible? Could you take classes in the summer at a local community college in order to graduate on time from the school where you are enrolled? Maybe you could take classes at a state school versus a private school. Understandably, medical school is quite a bit harder to be selective with, but you have several choices as an undergraduate student.
If you do need loans to help get you through college, then start with the federal loans first. You can supplement your funding with private loans, once you have maxed out your options with federal loans.
You may be wondering why there’s such an emphasis on limiting the amount of loans for college. What’s hard to understand when you’re an undergraduate is how much life is ahead of you around the time you are expected to start paying back your student loans. Though it’s hard to imagine now, you may need to pay for a wedding, save for a down payment on a new home, move across the country, or you may start having children.
All of these big life moments take money – lots of money – and you do not want the weight of student loan payments to drag you down. Your future self will thank you when you complete your medical degree and residency knowing you borrowed as little as possible.
If You Have Completed Your Education
Some of you reading this information have already earned your medical degree and completed your residency. You might already be well on your way to your new career in medicine as an attending physician. If this is the case, chances are you have already acquired numerous student loans. Now what do you do?
The good news is, you have options. Your first course of action is to understand the exact amount of debt you have – right down to the penny. Don’t be afraid to face the number! You can’t establish a strategy if you don’t know the total amount of student loans you are responsible for.
Next you need to determine which income-driven repayment plan for your federal loans is going to work best for your future income. You should also consolidate your federal loans with the Direct Consolidated option if you have multiple federal loans.
If you have private loans, you might want to consider the benefits of refinancing – especially if you have multiple loans. Use a tool, such as credible.com, to help you easily compare rates and see if you could benefit from a potential savings.
Lastly, this is also the time to consider bringing in professional help. A CPA can give you guidance on the tax implications of the different plans, especially as you earn a higher income, which results in a different tax bracket. Or consider the services of a fee only financial advisor if you want additional advice for student loans and other financial services.
Final Thoughts on Medical School Debt
Obtaining loans and paying down your medical school debt doesn’t have to be shrouded in mystery. Is it more complicated than you expected? Probably so, but it’s a big deal to borrow money and then figure out the best repayment plan. Physicians are in a unique situation because in all likelihood, you will have an above-average salary one day – but it takes longer for you to see the payoff since you have years of training too.
Medical school debt is almost always a part of the equation as you embark on a career in medicine. And taking out loans are one way to invest in your education. Where you can do yourself and your family a huge favor though, is by researching and understanding your options now. Hey, by reading this, you’re already well on your way!
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