These Are The Most Common Mistakes We See With Medical Loans
Being a physician in a residency program is a balancing act. Between trying to juggle the long hours, the workload, the relationships, and your health – you are probably stretched about as thin as you can possibly get. Then, of course, there are the financial aspects of residency to carefully consider. It’s not just your limited income and bills, but it’s the enormous load of mounting medical loans. Medical school is finally taking its toll on your financial wellbeing.
How ready are you?
Not many can say they are ready, per se. With an insane amount of pressure to know exactly how to handle an income and student loan debt, it’s almost as if you enter a play-to-fail scenario.
It’s totally not your fault.
Well, not all of it.
You’ll need help when it comes to understanding how to manage financially. And you’ll be relieved to know there are steps you can take during residency to help you avoid making costly financial mistakes later on down the road.
Thousands upon thousands of residents throughout the years have been in the same financial situation you are in right now. After working with several physicians in their residency programs, there are 5 mistakes I’ve seen people consistently make. Here you’ll learn what they are and how to avoid them.
First Mistake: Not Consolidating Medical Loans
But let’s back up for a moment and review why PSLF, or Public Service Loan Forgiveness, is important to you. If you have federal student loans, you may qualify to have the loans forgiven after 10 years (or 120 months) of payments if you are also working for a public entity. A public hospital or government agency are both prime examples of a public entity and many of you will find yourself employed by them at some point in your career.
If you think you could potentially work for a public hospital, or currently do, then PSLF could provide a major benefit towards the overall management of your student loan debt.
In order to continue to qualify for PSLF, you will need to consolidate your Direct Federal Loans through the federal government (not a public company such as SoFi or Lendkey, for example). Consolidation of your federal loans is one of the first steps on your path to PSLF.
Are you unsure which of your federal loans are considered Direct and eligible for consolidation? When you log onto your federal student loan account, simply look for the word “Direct” next to the name of your loan. If you don’t see it, then most likely it will not count towards PSLF – but you can always call to verify if you are still unsure.
Not only is consolidation a critical step towards the PSLF, but you will have the added convenience of one monthly payment versus several. With as much you as you’re expected to remember these days, this will be one less task on your never-ending to-do list.
The good news? Consolidating your federal loans is free to apply and you can do everything through your federal student loan portal. You can also select which of your loans you want to consolidate – you are not obligated to choose all of your loans.
One last note, consolidation applies to federal loans only. If you have private student loans then they are not eligible for forgiveness through the PSLF program or the consolidation process through the federal government. If you have any federal loans though, you owe it to your financial future to look at all facets of loan consolidation.
Second Mistake: Going Into Forbearance
The word “forbearance” just sounds depressing. It honestly sounds like something you would want to avoid altogether. There is a reason why it has such a negative connotation associated with it.
Think of forbearance as a temporary suspension of payments towards your federal student loans. Many physicians who are completing their residency will qualify for the forbearance option of their federal loans because it falls under the “financial hardship” category. The time period for the payment suspension with student loans is 12 months.
Sounds fantastic and exactly what you need when you can barely pay your bills each month, right?
Truthfully, forbearance is rarely the right option for your federal loans for a couple of reasons.
- First, the months (or years) your loans are under the forbearance option, they will not count towards your PSLF qualification. While the 12 months of suspended payments may help your wallet in the short-term, it will only add to the length of time it takes for you to have your loans forgiven through PSLF.
- Secondly, the application for the forbearance option is a manual process. It’s not going to happen automatically and it is a process you have to get involved in.
Instead, you are better off putting the energy of that application to see if you’re eligible for income based repayment or another that best suits your situation.
There are basically four different types of repayment plans to choose from, and they are all run through the Department of Education. These four plans are known as PAYE, REPAYE, ICR, and IBR. Each one has various guidelines and you can review each of the parameters by going to the website for information.
These monthly repayment plans (for your federal student loans) allow you to setup a monthly payment plan that is based on your current income, location, and family size. The length of repayment is anywhere from 10 years to 25 years, depending on which plan you choose. If you can find a monthly payment that works for your current situation, then you can avoid the forbearance option altogether and still work towards your PSLF qualification.
Although rates of forbearance have steadily risen over the years, It’s important to know that it’s not your only option when it comes to managing monthly payments. If you need help to make your monthly student loan obligation, then a repayment plan is going to be a better option for you over the life of your loans.
Third Mistake: Not Submitting the PSLF Certification Form Annually
An important step in receiving the loan forgiveness through PSLF is to submit an Employee Certification Form. You can find all of the information for filling out the form, where to send it, what information is needed, etc. by going through the Department of Education website. The form is easy to fill out and shouldn’t take too much of your time.
Either this form can be submitted annually OR you could technically wait until the 10-year mark to fill out the entire record of the last 10 years of your employment. I highly encourage you to submit this annually, though. You will thank yourself after 120 payments have been made and you are ready to realize the PSLF benefit.
Let’s be realistic about trying to remember the details of your employment over the past 10 years. Many of us can barely remember what we had for dinner last night. It may be a little too ambitious for you to put yourself in the position where you have to track the details of 10 years all at once.
Do yourself a favor and mark it on your calendar and set an annual reminder in your phone! You do not want to jeopardize your PSLF forgiveness because of simple paperwork that could easily be filled out once per year. Not only will you be checking off an important task, but it will also allow you time each year to evaluate your federal loans and confirm that they are still eligible for PSLF. An Annual Certification Form also gives you the opportunity to verify the institution you are working for is considered an eligible public entity. That’s pretty important!
Fourth Mistake: Choosing the Wrong Repayment Plan to Maximize PSLF
Not only as a borrower of federal loans do you have the option to pursue PSLF, but you also have an option of choosing an income-driven repayment plan as mentioned earlier.
While pursuing PSLF, borrowers have the option of choosing any of the four repayment plans available. But to really maximize your savings, you should choose the income-based repayment option which is calculated by taking your annual income, family size, and location into account.
The income-based plans all differ, with some only counting your spouse’s income if you file taxes jointly. Discretionary income under Income-Based Repayment, PAYE and REPAYE are defined as the difference between your adjusted gross income and 150% of the poverty guidelines. Income-Contingent Repayment (ICR) plans count discretionary income as the difference between your adjusted gross income and 100% of the poverty guidelines.
Choosing the right repayment method is crucial if you don’t want to end up overpaying on your student loans. For example, a resident making $47,000 a year in Louisiana with $250,000 in debt would pay the least under the REPAYE, PAYE or IBR plans – $42,746 in total. But under the ICR plan, that figure would more than double to $98,921.
Are you still unsure which repayment plan is best for you? You can use the student loan repayment estimator from the Department of Education and call your loan servicer if you have further questions. Doing a little bit of homework in this area could potentially save you thousands over the life of your student loans. It’s worth the time you invest.
Fifth Mistake: Refinancing During Residency
Several financial terms are thrown around when it comes to student loans. One of them you will hear quite often is a reference to refinancing. 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. Sounds like a great deal on paper, but it may not be in your best interest.
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 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 doubt that you will not be participating in the PSLF, then you do not want to refinance your federal loans.
You should, however, consolidate your Direct Federal Student Loans in order to remain eligible for PSLF.
You should also take the time to compare how much you could potentially have forgiven through PSLF versus the amount of your loans you would want to refinance.
For example, a resident making $50,000 a year with $400,000 in student loans at 10% interest would pay $42,746 total under the REPAYE plan. After 10 years of working for a public entity and meeting the 120 months of payments threshold, the loan balance of $523,730 would be forgiven through the PSLF program.
Using that same example, if they chose to refinance their loan for a 10-year term at 4.5% interest, they would pay $497,520 total. Yes, they would save $136,859 on interest but would end up paying over $450,000 more versus the PSLF route. When you see the math in black and white, it makes it easier to discern which plan is better for you. In this case, the PSLF is a clear choice.
Avoiding the 5 Biggest Mistakes with Medical Loans
The process of maintaining the details of your student loans can seem overwhelming. Thankfully, there are simple things you can do now that will help you immensely in the future. Taking small steps, such as filling out the Annual Employment Certification paperwork or consolidating your federal loans, can provide substantial savings for you down the road.
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