Student Loans: The Elephant in the Room
There is a societal image of doctors being “rich,” with income enough to afford large homes, luxury cars, and exotic vacations, but many people don’t realize that young physicians are actually among the poorest members of the population. Why? Student loans. The average medical student graduates with approximately $200k in student debt, and this burden tends to grow even higher throughout residency to the point that most doctors have significantly negative net worth when they exit training.
Of course, the large jump in income that accompanies leaving training, if managed correctly, allows physicians to pay back those loans over a reasonable period so that they can start on the path toward financial independence. But the point remains, student loans are a big deal for most doctors and the stakes are high, since the difference between adept and poor loan management can amount to hundreds of thousands of dollars.
The Starting Point
Before diving into the details of student loans, it makes sense to start with the big picture. Begin by recognizing that, as a physician, you earn an income in the upper range of the American population. Yes, you may have a large debt burden, but you also have the earnings potential to alleviate that burden. While it may be overwhelming to think about the tens – or hundreds – of thousands of dollars you owe, you are in a position to manage your loans successfully. Answering a few key questions should help put you on the right track.
Are Your Loans Public or Private?
Your mix of public (government) and private loans matters greatly, because each type of debt has its own advantages, disadvantages, and options with regard to refinancing and repayment. Generally speaking, public loans have more flexibility. The most important benefit of public loans is that they are eligible for loan forgiveness. Similarly, loans from the government carry additional consumer protection benefits related to events such as disability or death and are subsidized in certain cases. Government loans also have multiple repayment options, including income-based repayment. The composition of public and private loans determines the options available to you when formulating your loan repayment plan.
Are You Going for Loan Forgiveness?
No other question is more impactful in determining how much you will ultimately pay toward your loans, and the answer will drive your repayment strategy. The Public Service Loan Forgiveness program allows for student loans to be forgiven after the borrower makes 120 qualifying monthly payments while working full-time for a government or nonprofit organization. This program is a valuable, money-saving option, but it also involves many details and requires the borrower to jump through certain hoops to receive forgiveness.
If you decide to go for loan forgiveness (and keep in mind that only Federal Direct Loans qualify for PSLF), your goal should be to pay as little as possible toward your loans. This implies enrolling in one of the income-driven repayment plans and getting started as soon as possible. Making income-driven payments while still in residency not only allows you to make smaller payments than what you would make as an attending physician, but if you make payments throughout residency, you will be almost one-third of the way toward meeting the required 120 payments when you finish training. If you do a two-year fellowship after residency, you will already be halfway toward having your loans forgiven.
If you decide to go for loan forgiveness, you’ll also want to ensure you are meeting the annual requirements to make certain your payments “count.” Such requirements include verifying your employment (to prove it qualifies for loan forgiveness), as well as your income and family size (to determine how large the payments will be for your income-driven repayment plan). If you’re married, you should evaluate your situation each year to determine whether it makes more sense to file taxes jointly or separately, since your payments could differ depending on which option you choose. Lastly, it’s important that, once you have made your 120 qualifying payments, you remain in qualifying employment when applying for, and receiving, loan forgiveness.
What Mix of Immediate Versus Deferred Consumption Do You Desire?
If you are not going for loan forgiveness, you will need to formulate a plan to pay back your loans. While the first step is evaluating refinancing options to see if you can lower your interest rate, the key question to consider is how quickly you would like to pay back your loans. As we alluded to in our recent post on saving, this is essentially a question of consuming now versus consuming later. While it may be tempting, as a young physician, to enjoy the consumption benefits of a large income after years of delayed gratification, keep in mind the more money you throw at your student loans now, the sooner they will disappear and the sooner that cash flow can be redirected to other uses, such as spending or saving and investing.
Student loans tend to be the number one financial concern for young physicians, which isn’t surprising. Most new doctors leave medical school with the burden of multiple hundreds of thousands of dollars in student debt. While it may be stressful to watch your debt burden continue to grow, even throughout residency, remember to focus on the bigger picture. Keep in mind that you have, or will soon have, the income needed to pay back your loans. Answering the big questions laid out in this post can help you begin to develop a plan to put you on a path toward financial success.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.