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Guest Writer: 
Jonathan Tue
Panoramic Financial Planning LLC

Graduating from medical school is a great accomplishment; finally moving away from book work and moving toward hands-on fieldwork is one of the most exciting times in the life of a physician—until you remember the $200K in student loan debt you’ve accumulated!  It’s easy to feel the overwhelming weight of that debt preventing you from truly enjoying the advancement in your career. There’s hope though—the light at the end of the tunnel may be closer than you realize! Let’s look at 5 strategies to help you pay down that debt a little easier.

1. Make payments during Residency

You’ve been able to defer payments during medical school, but most likely a good portion of your student loan debt has been accruing interest during that time.  Your loan balances are now higher because of that, so now it’s time to begin attacking that debt with fierce intensity.  Although you may be able to continue deferring payments until completion of your residency, it is much wiser to start making payments as best as you can (switching to an income driven repayment plan can help).  Accruing interest is your worst enemy (especially if you are not cutting into the loan balance with payments). The average graduate in 2018 had loan balances of $196,250. If payments are paused for 3 years at an average interest rate of 7%, over $41,000 would be added to the outstanding balance!  By making payments during residency, you are cutting into the loan balance and making paying off that debt much easier when you are an attending physician. 

2.  Take advantage of Income-Driven Repayment Plans

Federal (also called Direct) student loans are eligible for IDR (Income Driven Repayment) plans such as PAYE (Pay as you earn) and REPAYE (Revised Pay as you earn). This may be a great option for those who can’t afford to make the standard 10-year term monthly payment.  The PAYE plan will calculate your required payment based on your current income level and places a cap that can be no more than the standard 10-year payment even when income rises. Take a typical resident earning $60,000 a year, under the PAYE plan, a required payment would be about 10% (they actually allow you to subtract 150% of poverty level in your area from your Adjusted gross income) of income resulting in a $500/month payment as opposed to a whopping $2,278/month payment under the standard 10-year repayment schedule (assuming $196,250 @ 7% interest).  There is also built-in loan forgiveness on many of these IDR plans (discussed later). There are different nuances with the various IDR plans that make the best fit dependent on the individual’s situation.  

3. Seek Loan Forgiveness

If you’ve consolidated your Direct (Federal) loans, you may be able to take advantage of loan forgiveness opportunities.  Most of the IDR (Income Driven Repayment) programs have built-in loan forgiveness no matter what sector workplace you are in (public service or private).  For example, the PAYE plan will forgive any outstanding loan balance after 20 years. Keep in mind that the forgiven loan amount would be subject to ordinary income tax.  However, if you choose to work full time in the public sector (any government or 501(c)3 nonprofit organization), you would most likely be eligible for the PSLF (Public Service Loan Forgiveness) plan.  You are required to make 120 on-time loan payments (10 years’ worth) while working for the qualified employer and then, voila! The outstanding balance of your loan is forgiven—tax free! You must be in an IDR plan such as PAYE or REPAYE to take advantage of the PSLF plan.  To maximize this benefit, you would ideally have consolidated your federal loans into one IDR plan, then make a bunch of relatively small income-based payments during your training and then make “full” payments (since payments will be based on a significantly higher income after training) for only 3-7 years during attending.  Please keep in mind, PSLF is not the best fit for everyone.  The PSLF program will backfire on you if you switch to private sector, fail to work full-time, or fail to make on-time payments.   

4. Refinance to save on interest

Refinancing can be an extremely helpful way to save on interest in the right situations. Refinancing your higher-interest loans into one lower-interest loan will allow you to build wealth much more effectively.  If you are not eligible for PSLF, refinancing your federal loans might not be a bad idea as well. Since consolidating your federal loans into an IDR plan usually makes sense for those seeking PSLF or those who simply can’t afford a standard payment, those who will not be working for a government or nonprofit employer might be better off simply refinancing all of their student loans, federal and private, into a lower interest rate loan.  There are two strategies one can take advantage of when refinancing into a lower-interest loan.  Some will simply be able to pay down that debt much faster since more of the payment is going toward paying down the principal.  Others, who are more aggressive and understand the concept of leverage, may find it more attractive to pay only the minimum required payment on the loan and invest any extra money (that would otherwise have gone to pay down the debt) to pursue a higher growth rate than what they are paying in interest.  For example, let’s say the required payment on a $100,000 loan @ 3% is around $965/month. You can make extra payments of $500/month to pay down the debt faster. Or you can invest the $500/month into an IRA or other vehicle to pursue higher returns, say 6%, and come out ahead after the 10-year loan term.  Of course you run the risk of not earning a higher return on your investments, but that’s why it would only be suitable for those who have a more aggressive nature.  

5. Keep living like you’re a Resident

One of the most simple and effective ways to pay off your student loans is to maintain your financial lifestyle as a resident—even when you’re not! As a physician-in-training earning $60,000/year, you probably aren’t driving the Range Rover nor living in a half-million-dollar home.  More likely you’re eating at home and shopping at Walmart (maybe Target if you’re near one). By continuing to live as a resident even during your first few attending years, you’ll have more money to assault that debt and maximize your investments plans.  

6. Work with a Financial Planner 

Finding a financial planner who understands physicians’ unique situation and who has a heart to teach and help will be vital in putting all the financial puzzle pieces together.  It’s important not to look at student loan management in a vacuum. Any strategies used in paying off these debts must coincide with your overall financial plan. Delaying in creating a holistic financial plan can be detrimental to a physician’s overall financial success.  A formal, written and realistic financial plan will greatly increase the probability of reaching your financial goals (which includes paying down those student loans!).  

Panoramic Financial Planning LLC
Direct  865.443.2305
PO BOX 418 Jacksboro, TN, 37757