Navigating the complexities of student loan repayment requires a strategic approach, especially for medical school graduates who often face substantial debt. It’s common for physicians to graduate from medical school with hundreds of thousands of dollars in debt. This can create financial stress at a time that typically has many other financial and familial obligations. A sensible strategy begins with understanding the type of debt, evaluating various repayment plans, and making informed financial trade-offs to expedite the repayment process.

Understanding Your Debt

Most physicians graduate with Federal loans, meaning that the Federal government finances the students’ education. The benefit of Federally financed student loans is that they come with a lot of flexible repayment plans that newly established physicians can use to their advantage. The other option is pursuing private loans through individual companies that become the students’ creditors. While Federal loans offer a lot of flexibility, private loans have limited repayment plans. Conversely, if you have a good credit score (650+), private student loans sometimes offer lower interest rates and fees than federal loan options.

Repayment Strategies

For physicians with Federal loans, Income-Driven Repayment (IDR) plans are particularly attractive, especially for those with fluctuating incomes or who are still in residency. These plans are typically the most appealing options for newer physicians because they adjust monthly payments according to earnings and family size.

While there are several IDR plans available and the details of each are beyond the scope of this article, they have a lot in common. Each caps monthly payments at between 10%-20% of the borrower’s discretionary income; allows for forgiveness of the balance after a 20 to 25-year period of on-time payments; and is often the best method of repayment for those who are going for Public Service Loan Forgiveness.

In addition to the IDR plans, borrowers can pay using the standard, 10-year repayment plan, or the graduated repayment plan, which starts payments lower and gradually increases them over time.

Public Service Loan Forgiveness

For medical professionals, Public Service Loan Forgiveness (PSLF) offers a path to debt forgiveness after ten years of full-time service in qualifying public sector or non-profit roles. Under the provisions of this program, professionals who are employed by a qualifying organization are required to make 120 qualifying monthly payments under an income-driven repayment plan. Along with the monthly payments, an annual PSLF employment certification form will need to be submitted. After these payments are made, any outstanding balance on their student loans is eligible for forgiveness. Often, this results in tens or even hundreds of thousands of dollars in tax-free forgiveness for physicians.

Refinancing Options

For physicians not expecting to benefit from PSLF because they are not at a qualifying institution or who earn very high income and don’t estimate having their student loan balance forgiven, refinancing and simplifying their loans might make more sense. Typically, when physicians graduate with Federal loans, they can have anywhere from five to 20 individual loans with different features and interest rates. This usually makes them all tough to track and hard to decide how much to pay for each loan. Refinancing can consolidate multiple loans into a single loan with a potentially lower interest rate, leading to significant savings over time. Physicians must compare offers from various lenders to secure the best terms. However, it’s important to remember that refinancing federal loans with a private lender may result in the loss of federal protections and benefits, such as eligibility for loan forgiveness programs.

Making Tradeoffs

For medical graduates, managing debt efficiently is paramount. Strategies such as making payments during residency, seeking out loan forgiveness programs, and considering side gigs for extra income to make extra payments can reduce the total interest paid over time. It’s also wise to take advantage of any employer-offered student loan repayment benefits, which can directly reduce the principal balance.

While it’s difficult for new physicians to put off many of the things they have seen their peers who didn’t go to medical school attain, we advise many new physician clients to try living like a resident for the first few years they are an attending physician. This is a difficult thing for many new physicians to do, but we have seen much higher levels of happiness, satisfaction and financial success for those who resist the temptation of the large house and luxury cars immediately following residency. On the other hand, those who do make large purchases typically have much of their monthly cash flow eaten up by debt payments and usually have a difficult time avoiding lifestyle creep.

In conclusion, a multi-pronged approach to student loan repayment can include enrolling in IDR plans, seeking loan forgiveness opportunities or refinancing under favorable terms, and making strategic financial tradeoffs to manage medical school debt. Staying informed and proactive in managing student loans can lead to a more secure financial future. For more detailed strategies and up-to-date information on managing student loans, please don’t hesitate to contact our office to speak with a CERTIFIED FINANCIAL PLANNER™ professional.