What to do with your Student Loans?
Most Docs I speak with are trying to figure out what to do with their student loans. Usually I’ll see interest rates at 6.8% for their federal loans, sometimes worse. I understand the common response of “I’m going to continue living like a Student or Resident and pay these off in 2 years once I finish training.” When you run the numbers and figure out how much interest you will be paying if you wait to pay them off over 10 years, 15 or 20 years it can be nauseating.1 If you have $200k of loans at 6.8% if you pay those over 20 years you will pay ~$1500/mo or $360,000 over the course of 20 years ‐ $160k worth of interest. If you pay them off in 10 years your monthly payment will be $2300/mo or $276,000 – only $76,000 of interest. If you pay them off in 5 years your monthly payment will be $4000/mo or $240,000 – only $40,000 of interest. So when you look at these numbers in a vacuum the obvious choice is pay them off in 5 years. The reality is we don’t live in a vacuum. In the real world I have only met a handful of Docs in my past 4‐5 years who have actually accomplished this. When you factor in a spouse you have dragged across the country through med or dental school, Residency, Fellowship, while being broke for a minimum of 4+ years, plus kids, plus your old car is now breaking down, plus wanting to buy a house, plus you need to save to actually want a comfortable retirement one day, plus all other bills, etc, etc….this is why it’s so difficult to actually continue living like a Student and pay your loans off in less than 5 years. I’m not saying it’s impossible nor am I approving that you should buy a house, get a new car, etc etc all within your 1st year of practice. You need to live below your means in order to achieve financial independence one day but I don’t believe you have to continue living like a Student in order to do this.
Let’s look at two examples of Doctors I’m currently working with:
Doctor 1, let’s call him John: finished training with $330k of student loan debt – over the past 10 years he has paid that down to now $10k, well done. In his 1st year he paid off $175k and he admitted that was probably a mistake looking back at it. Why? He got an opportunity to start his own practice, didn’t have any cash in the bank and didn’t feel comfortable taking that risk. At this point, he has solely focused on paying down debt that he has virtually nothing set aside for retirement and just bought his 1st house 1 year ago. At this point his only asset is his house which isn’t an asset, since he still owes a large amount on it. His total net worth (Assets – Liabilities) is in the negative. He still doesn’t own his own practice and isn’t happy with his current position.
Doctor 2, let’s call him Jim:2 finished training with roughly the same amount of debt: $300k. Over the past 10 years he has paid his balance down to $200,000. In the early years of his career, he took the additional monthly savings he got from stretching his loans out over a longer period and used that to build up an emergency fund. Then he started investing his monthly savings in the market. He started his own practice after 1 year and he now works 3‐4 days/week and can take a salary or $450k/year off his practice. He has already accumulated roughly $1.5million in total investments or assets. Jim still has $200,000 of student debt so his total net worth would be $1.5million minus $200,000 = $1.3million. The big difference here is that Jim has the choice to write a check today and pays off his student loans. Let’s say he does that, and he now has $1.3million in his investment account. Also, let’s say he never adds another dime to this account and it hypothetically grows on average at 7% per year over the next 30 years when Jim will be 67. His account balance at that time will be roughly $9.9 million. On the other hand, John at 37 years old doesn’t have any student loan debt, but is way behind in his asset category. So in order for him to reach that same level of assets that Jim will have in 30 years he will need to save roughly $8,000/mo for the next 30 years or $2,880,000 (assuming the same rate of return of 7%).
I would argue that Jim has figured out how to build real wealth. Generally speaking this is how large companies balance their debt to income, hoping that the accumulation exceeds the debt owed and managing their finances around that goal.3
So the next question is, what should I consider doing right now to make my student loan picture better?
Option 1: Figure out if you are going to qualify for the Public Service Loan Forgiveness program (PSLF)
What is the PSLF: PSLF forgives the remaining balance on your Direct loans after you have made
120 qualifying monthly payments under a qualifying repayment plan while working full‐time for a qualifying employer. That’s a lot of qualifiers…
- 1st, what is qualifying employment:
- Government organizations at any level (federal, state, local, or tribal)
- Not‐for‐profit organizations that are tax‐exempt under Section 501(c)(3) of the Internal Revenue Code. Generally, most hospitals where you do your Residency/Fellowship qualify as a not‐for‐profit
- 2nd, what is a qualifying repayment plan:
- Qualifying repayment plans include all of the income‐driven repayment plans:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Pay As You Earn Repayment Plan (PAYE Plan)
- Income‐Based Repayment Plan (IBR Plan)
- Income‐Contingent Repayment Plan (ICR Plan)
- 3rd, what is a qualified monthly payment:
- A payment that you make:
- After October 1, 2007
- Under a qualified repayment plan (see above)
- For the full amount due as shown on your bill
- No later than 15 days after your due date; and
- While you are employed full time by a qualifying employer (see above)
- Payments do not need to be consecutive however you cannot make payments while your loans are in deferment, the grace period, or forbearance.
- A payment that you make:
To determine if you are on the right track we recommend you fill out the following form each year: https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf
If there is any question that you will be working for a qualifying employer beyond your Training, then you should start as soon as you can afford to on a qualifying repayment plan. For example, if you have 5 years left of training to go that is 5 years worth of qualified payments that you can get under your belt at a cheap rate due to your current salary. You will only need 5 more years of payments once you are in practice to have your loans forgiven.
Option 2: If there is 100% chance you will not qualify for PSLF you should consider refinancing your loans, assuming you can get a lower rate than what your current rates are.
While I cannot recommend particular refinancing options, feel free to contact me and I can refer you to refinancing institutions who can recommend options that work for your situation.
Is refinancing the right move?
- If you have no chance in qualifying for the PSLF program
- If your rates are high and you can get them lower through refinancing
- If you have federal loans in forbearance and the interest is accruing
- If you do qualify for PSLF but your income is a lot higher than your student loans. You’ll have to do some calculations to figure if it’s worth refinancing or not or the PSLF is better for you.
I recommend you seek outside prospective on what to do with your student loans. Use the 10 year rule, talk to as many Doctors as you can that are 10 years ahead of you and ask them what they did.
Let me clarify that “ask as many financially savvy Doctors as you know”. You’ll get good and bad advice but you can learn from those who have made mistakes and get a better perspective.
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1 This information contains hypothetical examples for illustrative purposes solely. They are not indicative of any specific situations in particular.
2 This information contains hypothetical examples for illustrative purposes solely. They are not indicative of any specific situations in particular.
3 These values assume that the currently assumed hypothetical elements will continue unchanged for all years shown. This is not likely to occur and actual results may be more or less favorable than those shown. It does not take into consideration of fees and expenses and if it did results would be lower.
1667509 / DOFU 12-2016