As of October 2013, the average medical student graduated with $169,901 of debt with nearly 80 percent of all graduates owing at least $100,000. Although these numbers are daunting, medical school educational debt is part and parcel of our profession. Truth be told, at the end of our training (which can range from three to ten years post-medical school), almost all of us will make at least $150,000 and likely be making in excess of $200,000 after six years of practice. With that said, it is important to be smart about your debt, and make sure that it doesn’t run away from you. Just because you will make six figures, does not mean that you should owe six figures in interest.
When the federal government offers medical students loans, they know that they will not only get their money back, but that they will get their money back with a sizable return due to the interest. Medical students and future physicians tend to be trustworthy customers/borrowers, and the government knows that the country needs doctors. However, no one teaches us about debt in medical school, and as such, we are easy targets for bad repayment plans.
It does not take an advanced degree in economics to understand that the longer it takes us to pay our debt back, the more we pay in interest to a lender (this holds true for all debt). And for some residents who are battling high costs of living, outstanding credit card debt or just other expenses, forbearance is a viable option. The caveat of forbearance is that if approved, while no payments are required, interest continues to accrue and the federal government no longer pays interest on the subsidized portion of a borrower’s loans. While it may seem nice to get to “keep” your entire resident paycheck, it can be a costly option. To make matters worse (or more expensive), the interest may be capitalized under forbearance, which means that you pay interest on a constantly growing outstanding debt, which can make this a very expensive option for borrowers. Under a special provision passed in the early 1990s, borrowers are able to forbear their federal loans throughout the duration of their ACGME-accredited residency program, regardless of the length of the program.
Starting on July 1, 2014, a small (under-recognized) part of the Affordable Care Act went into action on behalf of medical students. Under this new provision, the Affordable Care Act reduces the repayment formula of the income-based repayment (IBR) program from 15 percent of adjusted gross income to 10 percent, as well as reducing the maximum loan repayment duration from 25 years to 20 years before forgiveness.
In a nutshell, the new IBR lets medical residents cap their monthly repayments at a reduced rate based on income, and if they do not make a sizeable income for the next 25 years where they pay-down their debt, the government will forgive the outstanding balance.
With an average first year resident stipend of $47,716, the monthly payment is $393 compared to a typical 10-year repayment of over $2,000 a month. All residents qualify for IBR, regardless of income or debt levels. Similar to the economic hardship deferment, the federal government continues to pay interest on the subsidized portion of the loan during the first 3 years of IBR; interest continues to accrue on the unsubsidized portions. After three years, interest accrues on the subsidized portion of the loan as well. After 25 years of IBR, remaining federal educational debt is forgiven; however, physicians are unlikely to benefit from this provision.
Another program, about which many residents do not know, is called public service loan forgiveness (PSLF). Also on the AAMC website, it goes to state that, “Physicians will be eligible for the program after 10 years of loan repayment while practicing in a ’public service’ job.”
Interestingly, the definition of “public service” includes 501(c)(3) non-profit organizations, faculty in “high-needs areas and service at private organizations providing public health or emergency management services.” It is important to note that through PSLF, only direct loans are eligible for forgiveness, but borrowers may consolidate other federal loans under a single direct consolidation loan. The benefit is that physicians that participate in IBR could save upwards of $150,000 on their total loan repayment.
What it means for you
As you start to make a plan of attack for your loans, you should recognize that not all debt and not all programs are equal. If you look at your finances and you can’t figure out how to squeeze blood from a stone, then contact your lenders and make sure you enroll for deferment if/when possible and if necessary, forbearance, since you do not want to miss any payments.
However, if you can spare even a few dollars each month, design a targeted repayment plan that lowers the interest cost of a loan by paying down higher interest rate loans more quickly (typically private loans). You can then use the plans outlined above to tinker with your federal loan repayment so that if you use deferment, it is applied to lower interest rate loans in order to free up additional funds to target the higher rate debt.
Lastly, it is important to recognize when to ask for help. A trained financial professional, such as a tax accountant or financial planner familiar with student loans, can truly be an invaluable resource when designing a repayment plan. In fact, many are unaware that certain federal repayment plans are based on the previous year’s tax returns. Therefore, deciding not only which plan but when to implement a plan is a delicate decision.
Here’s a good place to start: Ask your medical school financial aid office to connect you to a trusted accountant that is known to be medical student debt friendly, go to your graduate medical education office to ask if they have a financial adviser or resources to connect with an accountant, or, quite honestly, ask your attending physicians, since almost all of us graduate with a whole lot of debt.
Brian Levine is an endocrinology fellow. This article originally appeared in The American Resident Project.