The Definitive Guide to Medical School Debt for New Doctors – What Every Physician Needs to Know Right Now
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 upfront so you aren’t scrambling years after completing your medical degree.
Who is this guide for?
This guide is really for anyone that has student debt and wants to learn more about the best repayment and refinancing options. Understanding whether it is right to refinance and pay off their debt quickly or to stay in the federal program and participate in programs like PSLF. While refinancing isn’t for everyone, if you already know that refinancing makes sense for your situation, and you’re looking for the best place to compare options in 2 minutes with no credit check, we recommend Credible.
Medical school debt is a common problem.
Borrowing money to pay for medical school is extremely common. It’s so common that the only way to attend medical school, unless you are incredibly wealthy, is to borrow the money to pay for it. That includes enough money to cover living expenses for the entire four years that you are in school, in addition to borrowing money for tuition.
There is no work-study available because medical school is such an intensive program. Forget getting a part-time job– the coursework is too rigorous.
Becoming a doctor is essentially a full-time job, no matter how you look at it. Time is short, stress looms large, and focusing on learning what you need to have a job that involves saving lives is not a small endeavor.
Regardless of what school you attend or how good a student you are, while you are in medical school, you will eat, breathe, and live medical school.
If you are finding yourself with a six-figure student loan debt to go along with your medical degree, know that you are not alone. Know, too, that you do not have one reason to be ashamed of this. There are some important reasons why the majority of medical students in the United States graduate with the kind of debt they’ll have to spend the rest of their lives paying back.
Our goal with Financial Residency is to demystify the student loan process, help you take control of your finances, and pay for medical school in a way that will help you create an ideal life. Understanding how and why medical student loan debt is as prevalent as it is is a great first step toward taking back ownership of your finances and moving confidently forward building your financial future.
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.
This data is directly from the Department of Education and is available to the public through their data portal at studentaid.gov/data-center/student. We used the Federal Student Loan Portfolio data as well as the Loan Forgiveness Reports data.
Student Loan Stats Overview
Total borrowers have continued to trend downwards for another quarter. As of the first quarter of 2020, there were 42.8 million borrowers who have federal student loans.
- Direct Federal Loan Recipients 35.3 million
- FFEL Recipients 11.8 million
- Perkins Recipients 1.9 million
The average student loan balance of borrowers has continued to grow for another quarter. As of the first quarter of 2020, each borrower owes roughly $35,397 in federal student loans.
Public Service Loan Forgiveness (PSLF) Application Data
As often as these metrics are mentioned in the news, you might think that the chances of obtaining Public Service Loan Forgiveness were unrealistic. Fortunately, the trends have shown a slight improvement in the approval rate and processing of forgiveness of borrowers who applied for Public Service Loan Forgiveness.
For more on student loan stats, read our student loan stats and news mega-post here.
Attacking Your Student Loan Debt
As a physician, you have several options to attack your student loan debt. They all boil down to three main strategies:
- Pay them off, and maybe refinance
- Have them forgiven, possibly through Public Service Loan Forgiveness
- Work towards loan repayment assistance, through your employer or programs such as the National Health Service Corps
Each strategy has its own benefits and drawbacks, you’ll need to spend time reviewing each path and decide which route is best for you.
In order to project the math behind your strategy, I created a tool just for you. LoanBuddy is a student loan analysis software that is free, easy to use, and very comprehensive.
Within LoanBuddy, we pull in your student loan data and analyze it through a series of scenarios and calculations. We give you the math behind the various scenarios, including forgiveness paths and how a different repayment plan could help you save money.
Before deciding on a strategy, we’ll need to start by understanding the framework of student loans, including what type of student loans you have, what your repayment options are, how loan repayment and forgiveness programs work, and how to implement your strategy.
Types of Student Loans
There are two types of student loans: federal loans and private loans. Within each of these two categories, you have several different choices. Within all of these choices, there are distinct differences between them that you need to be aware of. Being armed with knowledge about these loans could potentially help you save money in the long run.
For more information on how to choose between a federal and private loan, read our Types of Student Loans mega-post here.
Not only are their two main groups of student loans, federal and private, but there are also many sub groups of federal loans to be aware of including:
- Federally Owned vs. Federally Backed
- Subsidized and Unsubsidized
- Direct, Stafford, FFEL, Graduate, Parent PLUS, and more.
Fortunately, if you have the wrong type of federal student loan to participate in a forgiveness program or to enroll in the repayment plan that fits within your strategy, you could consolidate your loans into a Direct Consolidation loan to become eligible.
Federally Owned vs. Federally Backed
Some federal student loans are not owned by the federal government but are actually owned by commercial lenders.
Federally Owned Student Loans
Federally owned student loans are owned by the Department of Education and are a part of their debt portfolio. These loans are controlled by the Department of Education’s policies but are managed by Loan Servicers. Loan Servicers are entrusted to follow the Department of Education’s guidelines.
Federally Backed Student Loans
Federally backed student loans are owned by commercial lenders, just like private student loans. However, federally backed student loans are backed by the Department of Education. Because lenders have the protection from default risk, they are typically able to offer lower rates – comparable with private student loans.
Federally backed student loans typically will not qualify for forgiveness programs enacted by the Department of Education. Because they do not own the loans, the Department of Education cannot “write-off” loans owned by other entities.
Subsidized and Unsubsidized
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 that 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. However, 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.
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 that 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, but this is also 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.
For more information on the various types of federal loans including Direct Consolidation Loans, read our Types of Student Loans mega-post here.
Once you know what type of loans you have, you can decide what repayment plan will work for you to reach your goal.
Student Loan Repayment Plans
There are two main groups of repayment plans for federal or private student loans; Income-Driven and Non-Income Driven. Within each of these two main groups, there are many repayment plans for you to choose from, each with their own benefits.
Income-Driven Repayment Plans
This group includes the following repayment plans:
Income-Driven Repayment Plans are, as the name suggests, have payments that are based on your income. These repayment plans require an annual update, so as your income changes every year so will your payment. Depending on your income to loan ratio, some of the Income-Driven Repayment Plans might not be available to you.
Borrowers working towards a forgiveness program, or whose income is low compared to their loan balance benefit the most from being on an Income-Driven Repayment Plan. Most Residents and Fellows are on Income-Driven Repayment Plans due to their fairly low income to loan ratio.
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 your household size. 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.
Non-Income Driven Repayment Plans
This group includes the following repayment plans:
- Perkins Loan Repayment
- Private Student Loans
- Loans for Disadvantaged Students Repayment Plan
Repayment plans that are not based on your income are based on the loan balance and rate. Each of these repayment plans has different rules for how the payment is calculated, and some offer a payment that starts small and gradually increases over time.
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 for 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.
Private Loan 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 of 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.
For more information on the various types of repayment plans for federal and private student loans, read our Types of Student Loan Repayment Plans mega-post here.
Loan Repayment and Forgiveness Programs
Public Service Loan Forgiveness
Public Service Loan Forgiveness offers full federal student loan forgiveness for physicians who work for a non-profit organization. This 10-year program can pay off all of your student loans if you meet the qualifications.
Here’s What You Need To Do To Qualify:
To use Public Service Loan Forgiveness, you’ll need to meet three main qualifications for 120 payments:
- Work for a qualifying organization
- Have Direct Federal Student Loans
- Be on an Income-Driven Repayment Plan
Public Service Loan Forgiveness (PSLF) is a program in which federal student loans may be eligible for forgiveness after 10 years of working for a government or non-profit entity. The program was established in 2007 to encourage college graduates to work for lower-paying organizations.
There are two main requirements. Only borrowers with federal student loans, not private loans, qualify for this program. You also must work for an eligible employer while making qualified payments for 120 months, typically over 10 years. Any time spent in default or in forbearance on a loan won’t count toward your forgiveness. If you’re unemployed for a month, that month won’t count toward your 120 minimum.
While working toward PSLF, graduates can choose from one of several income-driven repayment plans, which have a lower monthly payment than the standard plan. By choosing an income-driven repayment plan, they can reduce their monthly payment while still aiming for loan forgiveness.
Though the federal government has other forgiveness programs, none are as beneficial as PSLF. Student loans forgiven through the public service loan forgiveness program are not considered taxable by the IRS the way other programs are – and you only need to make qualified payments for 10 years to get your loans forgiven.
Doctors who plan to work for non-profit or public hospital organizations should absolutely consider PSLF. They’ll save thousands on their student loans and shorten their repayment timeline at the same time.
For more information on Public Service Loan Forgiveness, read our Public Service Loan Forgiveness mega-post here.
Time-Based Forgiveness on an Income-Driven Repayment Plan
Time-Based Forgiveness is for borrowers who stay on an Income-Driven Repayment Plan for 20 or 25-years based on the requirements of their loans. This multi-decade long program is best for borrowers with extremely high student loan balances and comparatively low income.
Maximum Amount Forgiven:
Here’s What You Need To Do To Qualify:
To use Time-Based Forgiveness, you’ll need to meet three main qualifications for 20 or 25-years:
- Have the right types of Federal Student Loans
- Stay on a qualifying Income-Driven Repayment Plan
- Not default or defer your loans
Time-Based Forgiveness is treated as taxable income once it is forgiven, so it’s important for borrowers to begin saving for this tax burden early if they are going to pursue this forgiveness program.
Military Student Loan Forgiveness for Physicians
The College Loan Repayment Program (CLRP) is the primary student loan repayment program that gives guidance to all branches of the military for their individual programs. Each military branch is allowed to decide how much it offers. For all of the programs below, your loans will need to be federal and not in default.
It’s important to confirm, before signing up for any of these programs, if you are typically required to waive any benefits from the Montgomery GI Bill. If you are required to waive the Montgomery GI Bill, be sure to compare the benefits of each program carefully before making your decision.
There are a few other programs that aren’t exactly student loan assistance programs that could impact your student loans. The Servicemembers Civil Relief Act (SCRA), which was passed by the Bush Administration in 2003 sets an interest rate cap of 6% on all debt that was incurred before enlisting in the military. Creditors are required to retroactively credit overcharges. With many student loan rates hovering around 5-7%, you may see a credit due to this law.
While on active duty in an area of hostility, your federal student loans could qualify for a 0% interest rate. You can apply after serving in a hostile area and have the interest charges changed retroactively.
In our mega-post on Military Programs for Physicians with Student Loans, we review each of the following student loan repayment and forgiveness programs:
National Defense Student Loan Discharge (NDSLD)
Veterans Student Loan Forgiveness for Total and Permanent Disability
Air Force Student Loan Forgiveness Programs
Air Force Health Professions Scholarship Program (HPSP)
Air Force Active Duty Health Professions Loan Repayment Program (ADHPLRP)
Army Student Loan Forgiveness Programs
Army College Loan Repayment Program
Army Reserve College Loan Repayment Program
National Guard College Loan Repayment Program
Navy Student Loan Forgiveness Programs
Navy Health Professional Scholarship Program (HPSP)
Navy Loan Repayment Program (LRP)
To learn more about each branch’s student loan repayment and forgiveness programs, read our Military Programs for Physicians with Student Loans mega-post here.
National Health Service Corps
The National Health Service Corps brings health professionals to high-need areas of America by offering extra benefits, through student loan repayment, to otherwise low-paying and possibly undesirable positions.
The National Health Service Corps (NHSC) serves two roles:
1) To award scholarships to students training to become health care workers.
2) To pay school loans for current primary health care workers.
Their mission is to support skilled health care workers serving in high-need areas, called Health Professional Shortage Areas (HPSAs). Their work in 2019 brought care to 13.7 million people from more than 13,000 clinicians. Since their inception in 1970, more than 50,000 primary care medical, dental, and mental and behavioral health professionals have served.
To encourage health professionals to serve, the National Health Service Corps provides funding to help pay back the student loans of their members.
The National Health Service Corps offers four student loan assistance programs:
- NHSC Loan Repayment Program
- NHSC Scholarship Program
- NHSC Students to Service Loan Repayment Program
- NHSC Substance Use Disorder Workforce Loan Repayment Program
Each program requires a two to three-year commitment to work in a high-need area. The amount of loan forgiveness varies by location and can be up to $50,000 per year.
To learn more about the National Health Service Corps’ programs, read our Student Loans and the National Health Service Corps mega-post here.
State-By-State Student Loan Forgiveness Programs
Outside of the national programs for student loan forgiveness, many states offer their own student loan forgiveness or repayment programs for physicians.
To learn even more about these state by state programs, read our Student Loan Forgiveness Programs By State mega-post here.
Crushing Your Loans
If a forgiveness track isn’t right for you, you’re probably wondering how you’re going to crush your student loans. There are a few paths you can take if you’re looking to pay off your loans.
The first path is to get on an income-driven repayment plan, but make extra payments if needed to ensure that you are not only paying the accruing interest but also making a dent on your balance.
The second path is to get on the 10-year standard repayment plan and make equal fixed payments for 10 years. This offers a predictable monthly payment, however, the monthly payment on six-figure student loan debt is oftentimes too high. If you’re considering using the 10-year standard repayment plan to pay off your loans, be sure to review the interest rate and payment offerings through refinancing.
Finally, the most common path that borrowers take when crushing their loans is refinancing their loans into a private student loan.
Refinancing Your Student Loans
Many people confuse this term with consolidation, but it’s actually a very different concept.
Similar to a refinance of your home mortgage, you can potentially combine all of your loans into one payment with the goal of having a lower interest rate or a lower monthly payment. It sounds like a great deal on paper, but it may not be in your best interest.
Refinancing your student loans is simply the act of taking out a new loan to pay off one or more of your student loans. You can choose to refinance several loans or only one. Almost always, the number one reason for someone considering a refinance option is to lock in a lower interest rate on their loan.
If your private student loans have higher interest rates, and you are able to refinance to one, single lower interest rate, then refinancing could make sense. You should be able to calculate how much you can save by refinancing one or more of your loans.
Refinancing your private students may actually be a smart financial move for you, but only if you are paying less in interest and saving money over the life of the loan.
If you decide to go down the path of refinancing, whether it’s your private or federal loans (or both), then you will have to do your homework to compare rates. Just like you would shop for a home mortgage based on different interest rates and payment terms, the same is true for a refinance option.
You will want to compare information from several private lenders such as banks, or if you qualify for a credit union.
One quick search of the internet for information regarding student loan refinancing, and you’ll quickly realize how many companies are out there trying to lure you in with promises of lower rates. As tempting as it is for a lower payment, there are consequences to a refinance option that you need to be aware of when it comes to student loans.
The moment you refinance your federal loans, the loans will lose eligibility for forgiveness through PSLF. Unless you are 100% sure beyond any shadow of a doubt that you will not be participating in the PSLF, then you do not want to refinance your federal loans.
When You Can’t Pay Your Student Loans
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 in 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 at risk of going into default. There are several circumstances that 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 for 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 a 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 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 that 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 a 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.
Creating an Action Plan for Your Student Loans
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 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 is 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!