6 strategies for taking years off medical school debt and saving thousands in the process
Graduating from medical school is a major accomplishment. But for too many doctors, the celebration is dampened by the massive student loan debt that can go hand-in-hand with a medical degree.
In the class of 2018, 75 percent of medical school students graduated with student debt, according to a NerdWallet report. The average amount: $196,520, up from $190,694 in 2017.
To put that in perspective, the monthly payment on a $197,000 student loan balance is $2,212 on the standard 10-year federal repayment plan, assuming a 6.25 percent average interest rate. That’s more than double the average American’s monthly mortgage payment of $1,029.
Many doctors struggle to afford the full amount of their monthly student loan bills during their residencies and wind up putting their loans into forbearance until they complete the program. Unfortunately, the spiraling interest charges can result in a balance that’s thousands of dollars higher than the amount they originally borrowed by the time they become attending physicians.
Such crippling debt at the start of a medical career is a bitter pill to swallow, and repayment times on traditional student loans programs can drag on for 10 to 30 years. Let’s take a look at six ways to manage medical school debt while paying it down faster.
- Refinance with a private lender. The high balances and high-interest rates that characterize medical school debt can translate into a big opportunity for savings by refinancing with a private lender. The federal student loan interest rate is 6.6 percent for graduate programs like medical schools for the 2018-19 school year.
Student Loan Hero points to reputable student loan refinancing lenders that offer rates as low as 1.95 percent – a significant saving over the length of the loan. Doctors are often ideal candidates for refinancing, as qualifying for the lowest rates requires excellent credit and a high-income relative to your debt.
Consider this: if you took out a $189,000 loan at 7 percent interest, you would pay more than $74,000 in interest payments by the time you paid off your loan. If you refinanced your debt with a 5.5 percent interest rate, you would only pay $57,000 in interest and save $17,000.
Of course, there’s a tradeoff to consider: refinancing means sacrificing federal loan benefits. That includes student loan forgiveness options, strong deferment protections, and access to federal income-driven repayment (IDR) plans.
- Consider an income-driven repayment plan. With an average first-year salary of less than $60,000, the high monthly demands of a standard 10-year student loan repayment plan can be a stretch for doctors during their residencies. But remember, deferring payments until you finish can tack thousands of dollars onto the cost of your loan.
IDR plans can be a great option for residents who can’t afford to make full payments. There are four federal plans that cap monthly payments at a percentage of your discretionary income, making them easier to afford. That can extend your student loan term to 25 years, but also fights the balance creep of accumulating interest that accompanies forbearance.
At a $56,000 annual income, you might owe as little as $315 a month. These plans also typically forgive any balance remaining after the repayment period.
Here’s the downside: your low monthly payment may not cover all the interest that accumulates on your loan, increasing your total balance. To counter this, the government’s Revised Pay As You Earn (REPAYE) program offers a subsidy that waives half of any unpaid interest.
But there’s a caveat there as well. Since payments grow with your income, your monthly payment could eventually wind up higher than it would have been in a standard 10-year federal repayment plan.
- Think carefully about how you file your taxes. For doctors who recently got married and are making payments on federal student loans, tax filing status as a married couple could significantly impact your student loan payments. Several IDR plans the only factor in joint income with your spouse if you file joint tax returns, while REPAYE considers your spouse’s income regardless of how you file.
Of course, filing taxes as married-filing-separately could lead to higher taxes for the household and negate any associated student loan savings. It’s wise to consult with a qualified certified public accountant about the best way to file taxes while paying student loans.
CPAs will also help you take advantage of relevant tax credits. For instance, if you made student loan interest payments in 2018, IRS tax law allows you to claim a student loan interest deduction of up to $2,500 on your 2019 tax return, as long as you and your student loans meet certain eligibility criteria. This credit is available to people with federal and private student loan debt, and you don’t even have to itemize your deductions to qualify. It is phased out, however, after a certain income level is reached.
- Don’t assume high salaries preclude you from forgiveness programs. If your income is low compared to your medical school debt, student loan forgiveness programs can serve as a lifeline. Public Service Loan Forgiveness (PSLF) offers student loan forgiveness after 10 years for doctors whose work qualifies as “public service.” That might include working for public or nonprofit hospitals, academia, the public health sector, or the military.
To receive this loan forgiveness, you must make 120 monthly payments on an income-driven payment plan while working for a public service employer. If your income becomes too high to qualify, your payments cap out at the standard 10-year plan’s repayment rate, which still counts toward PSLF.
Of course, there’s a catch: while public service can be personally rewarding and gives you the chance to help people who really need it, it does often come with lower salaries and less desirable locations. It can also limit your choice of specialties.
- Negotiate a physician signing bonus. Medical employers often use physician signing bonuses to attract top talent – and they can offer a great opportunity to pay down a substantial chunk of your medical school debt. In 2017, the average physician signing bonus was $30,000 – but the largest was $200,000.
If you apply an extra lump-sum payment of $30,000 to the average loan of $197,000 at the beginning of the 10-year repayment schedule, you’ll save you more than $27,000, assuming the 6.6 interest rate. It also enables you to pay off your loans 27 months early.
And don’t stop with your signing bonus. Continuing to make extra payments once you can afford to can eliminate a big portion of your student debt and help you pay it down faster.
- Live like a resident (just a little longer). To make extra payments on medical school debt, you need to make them a financial priority. The simplest way to do this is by mentally preparing yourself to live like a resident for a few more years, even though you may be earning three times as much.
If you can keep your living expenses and discretionary spending low for the first few years that you earn an attending’s salary, you can pay off your debt aggressively – saving thousands of dollars in the long-term.
Just be sure these important financial strategies are also in place:
- An emergency fund that ideally contains enough to cover three to six months of living expenses
- Investing in a retirement fund to at least get your employer’s 401(k) match
- Paying down high-interest debt like credit cards
Medical student loan debt can feel daunting, and most doctors are anxious to get out from under the burden as quickly as possible. But practicing medicine leaves physicians little time to address student loan strategies – and most aren’t sure of the best path forward. A skilled CPA can help you discover ideas and tax strategies that may take years off your loans – saving thousands of dollars in the process.
Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact on their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.