CHAPTER 8

Get a handle on your loans and what you’ll be doing with them.
Medical school, as you may have figured out, is…
Really.
Freaking.
Expensive.

According to AAMC survey data, the average cost of public medical school in 2018-2019 (including tuition, fees and health insurance coverage) was $36,755 and the average cost for private medical school was $59,076. Basically, this means you’re looking at $150-240k in expenses right off the bat (start looking under your couch cushions).

This means that not only are you investing a great deal of time and energy into becoming a doctor, you are also investing a great deal of money in the same process. Going significantly into debt is the norm for those investing in becoming physicians.

But let’s fast forward to residency, when you are finally making (a little bit of) money. What should you do about your loans? Well, the answer is… complicated.

So, first, a disclaimer: loan repayment is a very individual decision with a ton of variables, so it’s difficult to provide advice as to what is best for you. In Chapter 8 of our book Advanced Wallet Life Support: How to Resuscitate Your Finances (And Your Sanity) During Medical Training,  we dive into these variables. We won’t be able to cover all of these here, but in short they include:

1. the type of loan that you have
2. how much you can afford to pay in monthly payments,
3. your interest rates,
4. the size of your loans,
5. your living expenses,
6. your family needs,
7. your desired loan term,
8. your desired payment structure over time, and
9. your anticipated future practice setting.

Because loans can be stressful and confusing to discuss, we’ve provided a handy “dictionary” to help you decode the language of student loans.

1. Principal: The amount of money you took out in loans initially.
2. Interest rate: the percentage you pay each year for the privilege of borrowing money.
3. Repayment period: the period of time over which you are expected to pay the loan.
4. Capitalization: the bank adds up all the unpaid interest, adds it to your loan total, and starts charging you interest based on this new, larger number.
5. Federal loan: any loan issued by the Department of Education.
6. Private loan: any loan issued by any private party including your medical school, your bank, or your Aunt Edna.
7. Servicer: the company you pay your money back to (may be different than the organization who lent you the money).
8. Refinance: when you switch who “owns” your loans to a different company in order to get a better deal, such as a lower interest rate or better payment structure.
9. Deferment: the ability to delay paying back a loan in certain situations.
10. Forbearance: the ability to delay paying back a loan outside of forbearance, while interest continues to accrue.

Repaying Your Loans

In most cases, your goal in loan repayment should be to pay as little as possible overall. In general, there are two main ways to do this: get a lower interest rate (typically by refinancing), or paying off the loans over a shorter term (so that the interest doesn’t have as much time to compound). You still have to pay back the entire principal, but the big difference comes in how much interest you’re paying over time. You can save a lot of money by lowering your interest rate, shortening your repayment period, or ideally doing both.

There is one caveat to this reasoning and an important one. You may end up better off using your money on something else, if it can generate better returns for you. We go into this more in the chapters on investing (Chapter 9 and 10) in our book.

But before we delve into the balance between loan repayment and investing, let’s move forward with the idea that you probably want to pay your loans off quickly and try to save money overall. Generally, you will approach this in one of two ways:

● Refinance your loans as early as possible with a private loan company, opting to pay off your loans as quickly as possible once you are an attending. This lowers the interest rate AND has you decrease the repayment period.

● Take advantage of public service loan forgiveness (PSLF) with the goal of having a chunk of money forgiven at the end of the 10-year term.

Here, we’ll cover the PSLF program and discuss refinancing vs. PSLF. For much, much more loan repayment information, you’ll need to check out our book!

Public Service Loan Forgiveness

Right now, there is a program available that will forgive an unlimited amount of qualifying federal student loans after ~10 years. It’s called the public service loan forgiveness (PSLF) program.

The original intention of the PSLF program was to encourage people to go into professions that serve the public good, especially where it might be challenging to pay back an advanced degree. It was designed to lower the barriers to people entering public service. Eligible individuals include government employees, anyone working for the Peace Corps, public education and public health, service in law enforcement and military service and tax-exempt not-for-profit organization (that’s where you come in by working at a teaching hospital).

For better or for worse (certainly better for you), physicians do technically qualify for this program, despite their much higher income potential. Given that you work at a non-profit organization (hospital), you can participate in this program as long as you continue to work at a non-profit organization and complete the requirements.

As you start out, pretty much everyone will qualify during residency as you will work at a teaching institution that is very likely to be a non-profit organization. This means that you can potentially make at least 3-6 years of qualifying payments through the program, depending on the length of your residency. This puts you well on your way to loan forgiveness!

Loan forgiveness sounds like a pretty good deal, right? Here are the requirements:

● You must have a “qualifying” federal student loan. This includes all “direct loans” from the Department of Education. Most, but not all federal student loans qualify.

● 120 on-time payments (10 years) in a qualifying repayment program. Any IBR plan counts. Technically, 10 year repayment plans also count, but you will have repaid it all over 10 years so that doesn’t make any sense.

● You must be employed full-time by a qualifying employer while making the payments. Generally a 501(c) 3.

● The payments do not need to be consecutive. Qualifying $0 payments (e.g. at the beginning of residency) DO count.

At the end of 120 qualifying payments, any remaining loan balance is forgiven. In comparison to the income-based repayment plans, the forgiven amount is tax free! Awesome!

Choosing Between Refinancing and PSLF
This is a really tough decision for a lot of people and unfortunately there’s no universal solution, it really depends on your individual factors.

Here are some guiding principles:

1. The more you train during that 10 year period, the better the PSLF deal is.
2. The more money you have in loans, the better the deal is.
3. Your employer needs to be a qualifying employer.
4. You may make more money in private or group practice than you would in a non-profit setting.

For examples about how the PSLF works, information about private loan repayment, and much more, check out Chapter 8 of our book, Advanced Wallet Life Support: How to Resuscitate Your Finances (And Your Sanity) During Medical Training. You won’t regret it!