3 Mistakes to Avoid When Paying Off Medical School Debt
By: Travis, of Student Loan Planner
Physicians are incredibly smart individuals. I know, because I’m married to one. Her SAT score was 70 points higher than mine, and she graduated from medical school at 18 (I’m the underachiever in the family).
However, when it comes to financial matters, my wife Christine doesn’t get excited. Even though she’s super smart, the extent of her financial knowledge is limited by choice.
When we started dating, Christine told me that she owed $124,000 of med school debt. I had never taken out student loans in my life, being lucky to attend a state school on scholarship. Since I was a bond trader professionally, I decided to build a student loan calculator for navigating her repayment options.
The huge response I got after releasing this tool online resulted in my company, Student Loan Planner. Since October 2016, we’ve advised $275 million of student loans for about 1,000 clients via one-on-one consulting as I write this.
I highly suggest you educate yourself on the complicated rules surrounding medical student loans.
After all, many of you will soon become residents and have to start dealing with this sooner than you think.
In my experience, it’s easy to figure out 80% of how you should pay them back. The other 20% takes a while and could easily cost you thousands of dollars if you get it wrong. By learning from the mistakes I see residents, fellows, and attending physicians make, you’ll be way ahead of the curve.
First Mistake: Not Certifying For the Public Service Loan Forgiveness Program
We submitted my wife Christine’s loans for the Public Service Loan Forgiveness (PSLF) program only to find out that her loan servicer wouldn’t credit her for years of payments that should’ve counted toward loan forgiveness.
For those not aware, the PSLF program requires 10 years-worth of payments based on your income while working at a not for profit or government employer, like an academic or VA hospital. At the end of the 10 years, the remaining balance is forgiven tax-free.
Because she was finishing fellowship, Christine would have had to figure out how to have a balance leftover to forgive after eight years of paying on an attending salary.
Since we were only credited with about two years of payments, the cost of refinancing and paying everything back over five years or less looked similar to using the PSLF program for us. Hence, we paid everything back and are currently debt free.
Unfortunately, my wife never got good advice on consolidating her loans and she pulled the trigger after residency, forgoing four years of credit toward PSLF. After FedLoan put her loans through their meat grinder certification process, she lost further credit still that she should have received during a fellowship.
Please don’t make these mistakes with your student loans. Consolidate right after med school and get your loans certified for PSLF right away by sending in something called the Employer Certification form. Even if you think you’ll go private practice, still send it in.
In doing so, you’ll make sure you get credit for your years of residency and fellowship. This will allow you to have most of your 10 years on PSLF be $300-$500 payments based on a $50,000 to $70,000 income in training.
Once you’re an attending, you can always utilize the Standard 10-year plan if you make too much money to qualify for income-based repayment options.
To borrow the old Chicago political phrase “vote early and vote often,” I’d suggest that you certify early and certify often to have the best chance at getting loan forgiveness for your med school debt.
Second Mistake: Allowing Marketing to Influence the Student Loan Refinancing Decision
When you start practicing, you’ll receive something in the mail as often as three times a week encouraging you to refinance your medical student loans. The purpose for doing so is to reduce your interest rate and put that money to principal instead of interest so you can pay your loan down faster.
You should only refinance when you’re positive there’s no chance you’d qualify for the PSLF program and you believe you’ll owe less than two times your income at some point in the near future.
A few years ago, it was only possible to refinance as an attending with six-figure income.
Now, lenders will allow you to lock in a lower rate as a resident or fellow too. The competition to refinance attending physicians’ loans has also gotten more intense.
Refinancing is a commodity, but companies would like you to think of it as an exclusive “member” benefit. It’s not. You want to get the best combination of a low-interest rate and borrower protections as possible.
Lenders have a cost of customer acquisition that they’re willing to spend to get your business. That expenditure is quite high in the hundreds and hundreds of dollars. A lender doesn’t care much if they get your business from direct mail, a Facebook ad, or through a click on a blog.
The best way to refinance is to seek out the best cashback bonuses and apply multiple places to see where you can get the best deal. Check other sites besides mine, but I try to make sure I present the highest cash back bonuses from negotiating with the lenders and reducing my own referral bonus to get more money for you.
Most of the big sites out there that write about student loans are all too happy to offer you a $0 cash back bonus for refinancing your student loans so they can keep more profit for themselves.
As with credit card rewards, you can refinance multiple times and get multiple bonuses. I know a lot of physicians might start with a 10 or 15-year loan, pay down the balance over a couple years, then refinance again to a shorter term with a lower interest rate, all while picking up another cash back bonus.
Refinancing is something to be very intentional about. Do your homework, apply at least three places, and understand that loan forgiveness is off the table. Many physicians never think through the refinancing decision carefully.
I saw one doctor who carelessly made the decision to refinance and lock in a very low-interest-rate because she gave up on the PSLF program despite having over $400,000 of debt. Her reason? She believed that her $250,000 income would make her ineligible. She was also posting on a Facebook group for PSLF eligible physicians and encouraging folks to refinance using her refer-a-friend link.
By my calculations, this move cost herself hundreds of thousands of dollars. She made an emotional decision and pulled the trigger when she should have stayed the course. She definitely did not run the math.
Another friend of ours wanted to pay back his student loans in full but was allowed to pay his 7% loans on his credit card, allowing him to earn rewards points. He was very happy to get over 1% cash back. Unfortunately, he was saving 1% and losing 3% as he would have been able to cut his interest rate to less than 4%.
Make smart decisions with refinancing devoid of the influence of marketing from lenders.
Third Mistake: Not Understanding How Student Loan Repayment Calculations Work
I recently ran into a physician, also on a Facebook group, who was paying about $2,500 a month on his federal student loans while pursuing loan forgiveness for his med school debt. He assumed because of his high combined income with his spouse of about $300,000 that he wouldn’t qualify for anything else.
He and his wife were maximizing retirement plan contributions, which reduced their taxable income. Their family was also growing, and with each child, their payments would decline.
This doctor was on the IBR program, which requires a borrower to pay 15% of their discretionary income (which is your Adjusted Gross Income) on your taxes less a deduction of 150% of the federal poverty line for your family size.
The Revised Pay As You Earn (REPAYE) and Pay As You Earn (PAYE) plans allow you to pay 10% of your income. He was already paying at the 10-year Standard payment amount and assumed that he would not be eligible for another repayment plan.
In fact, he was eligible and he was costing himself over $6,000 a year. By switching to REPAYE, he could cut his payment about $500 a month. REPAYE is 10% of your income instead of IBR, which is 15%. If he had known how the formula for calculating student loan payments works, he could have had tens of thousands in savings if he corrected the mistake earlier.
Know the math behind the formula if you’re going to figure out your student loans by yourself. If you don’t spend the time to do this, you’re begging to give the federal government more of your money than necessary.
If You Need Help Understanding Your Student Loans Perfectly, Get It!
My last tip is to spend the time understanding the nuances of student loans if you’re going to manage it alone. I’ve certainly written enough free content for you to figure it out by yourself, but it will probably take a couple dozen hours to make sure you’re not missing anything.
Check out the federal income-based repayment Q&A, scan different sites for info on refinancing, and spend time with student loan calculators to follow the math.
Alternatively, if you’d rather save yourself the trouble, you can hire someone like me to figure it out for you as a student loan consultant. After advising a quarter billion of student loans personally, there’s an excellent chance I’ll catch something you’ll miss. The average mistake that we fix saves our clients projected tens of thousands of dollars over the course of their repayment.
Hit me up at travis@studentloanplanner.com or learn how we make student loan plans.
Regardless of what path you choose, you’re way better off after making it to the end of this article than your colleagues who have no idea what they’re doing with their med school loans. I commend you for wanting to make a plan and understand how to pay the least for your medical education.
After watching my wife go through more than a decade of training, I can definitely share a personal perspective that you want to waste as little money getting rid of your debt as possible. Medicine is too intense to throw away thousands.
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