How to Pay Off Medical School Loans Faster

    Two people sitting and discussing their medical student loan debtMedical school is expensive. To put it in perspective, 2017 graduates with medical school debt owed an average of $192,000, which happens to be the same cost as buying a house that year.

    The difference is that homebuyers get 30 years to pay off that debt. Graduates of med school want to knock it off in 10, so they can afford to buy a home themselves!

    Making that happen isn’t easy. Repayment for medical school loans boils down to three choices.

    Loan Forgiveness

    Public Service Loan Forgiveness (PSLF) is the quickest way doctors can pay off medical school debt. Federal student loans are discharged after 10 years if you work for a nonprofit hospital or medical facility that is a registered 501(c)(3), the military or academia.

    Enroll in the PAYE repayment program to keep your monthly payments as low as possible and maximize the amount forgiven. After 120 monthly payments, the remaining loan debt is forgiven.

    Be aware that this program was targeted for elimination by the Trump administration in 2018 and may not be around much longer, but those already enrolled should expect to see their loan forgiveness honored.

    REPAYE

    The cheapest way to pay off medical school loans in the private sector is to enroll in REPAYE during residency and then refinance when you start practicing.

    The advantage of REPAYE is that monthly payments are only 10% of discretionary income. On top of that, the government subsidizes half the interest that would accrue.

    A resident making $50k/year with $200k in student loans at 6.8% interest would only owe $270/month. That low of a payment won’t make a dent in the $13,600 of interest that would accumulate in the first year, but remember the government covers half. Of that total, $5,180 is forgiven, which effectively lowers the interest rate to 4.2%.

    Those REPAYE benefits are nullified as soon as you become an attending physician with a substantially higher salary. Refinance your loans before that happens to stay ahead of the game.

    Private Refinancing

    Until recently, private refinancing wasn’t an option for doctors right out of college. The residency requirement meant that standard monthly payments were unreasonably high.

    Today, several companies offer programs tailored to the medical profession. It’s a good idea to get a few quotes and see if any of the lenders can match the effective rate achieved by REPAYE.

    • SoFi – monthly payments are just $100 while in residency for up to four years and interested isn’t capitalized until residency is completed
    • Laurel Road – formerly called DRB, they pioneered med school loan refinancing back in 2015 with $100 monthly payments during residency
    • Link Capital – monthly payments are $75 while in residency, but that isn’t available to interns
    • Splash Financial – essentially offers a deferment program during residency by requiring only $1/month

    How Long Does It Take to Pay of Medical School Debt?

    The amount of time it takes to pay off medical student loans depends on if you pursue PSLF, choose to refinance or enroll in REPAYE.

    Take a typical med school graduate who owes $192k and spends three years in residency. He/she will earn the median salary of about $54,600 during residency and can expect to earn $185k post-residency. That salary could be lowered to around $140k if the graduate works at a nonprofit to pursue PSLF.

    Medical Loan Payback Options
    PSLFRefinanceStandard PlanREPAYE
    Monthly Payment (Residency)$310-$360$100$0$310-$360
    Monthly Payment
    (Post-Residency)
    $1,100-$1,300$2,270$2,900$1,500-$2,300
    Total Repayment$113k$272k$348k$405k
    Total Years10131321

    Association of American Medical Colleges

    The typical repayment plan for student loans is 10 years, but for doctors, the 10-year loan term is added onto the time spent in residency.

    Let’s say this graduate refinanced to a 4.8% interest rate and a reasonable monthly payment calculated near 15% of his/her discretionary income. That still adds up to a 10-year loan term on top of a three-year residency for a total of 13 years.

    Refinancing is certainly a better option than forbearance through residency followed by the Standard Repayment Plan offered by the federal government. The monthly payment would be more than 20% of his/her discretionary income, and the interest adds up to $76k more than the refinanced rate.

    Staying enrolled in REPAYE throughout the repayment process could cost this graduate $133k and extend the repayment period an extra eight years. REPAYE has its advantages during residency when you can take advantage of subsidized interest and a low monthly payment, but it doesn’t make sense post-residency.

    PSLF is the quickest way doctors can rid themselves of student loans, but that comes at the sacrifice of a lower salary and potentially being limited geographically.

    The PSLF program makes a lot more sense for doctors going into specialties that require five or more years of residency. That will ensure they maximize the amount forgiven by limiting the number of years they are required to pay a substantial monthly payment.

    Should I Start Repayment While in Residency or Wait?

    Paying down student loans while in residency can save money and shorten the loan term.

    Most specialties require 3-5 years of residency with a median salary of $54,600 before a doctor begins practicing (Neurosurgery takes seven years and plastic surgery six).

    The problem is that most of the student loan interest builds in the first few years while the principle is extremely high and the doctors’ residency salaries are low. Many graduates of med school decide to forbear their loans during residency and begin paying when they start practicing.

    That can be very costly.

    A better idea is to refinance with a lender like SoFi and pay more than the minimum $100 payment during residency. Then, when you begin practice, pay what the original monthly payment would have been to pay it off quicker.

    Repayment During Residency vs Post Residency
    Refinance
    (Extra Payment)
    RefinanceForbearance
    Then Refinance
    Monthly Payment
    (Residency)
    $768$100$0
    Monthly Payment
    (Post Residency)
    $2,270$2,270$2,458
    Total Payment$235k$272k$295k
    Total Years
    (Including Residency)
    11 Years, 8 Months13 Years13 Years

    The typical graduate with $192k in medical school debt accrues $9,216 in interest each year (interest isn’t capitalized until after residency under SoFi). That equates to $768/month.

    A $768 monthly payment during residency coupled with the original $2,270 monthly payment as a practicing physician would shorten the loan term by 16 months and save a total of $37k.

    Choosing forbearance through residency is a no-win situation. Zero payments means you won’t be chipping away at the principle, and interest capitalizes at the high federal rate, putting you further behind the eight-ball.

    Tips for Paying off Med School Debt

    1. Start in Residency: You can shorten the length of the repayment period and save a lot of money by making payments during residency. If possible, cover the interest that would accrue to prevent your debt from ballooning in the early years when the principal is high and the most damage is done.
    2. Refinance: The high earning potential from a medical degree means that lenders are more inclined to offer a low interest rate. Take advantage of that early and refinance before you have to make payments at the federal interest rates.
    3. Use a signing bonus to pay down loans: In 2016, 90% percent of physicians were paid a signing bonus at an average of $24,802. That’s enough to cover the interest accrued during residency on $192k in loans. Better yet, pay the interest yourself, apply the bonus and make the original $2,270 monthly payment. That route would pay the loan off 32 months sooner and save a total of $74k.
    4. Maintain a modest lifestyle: In order to pay the interest during residency and pay as much as you can while attending, you’ll need to keep your budget as low as possible. That requires some sacrifices – get a roommate; eat at home as much as possible; resist temptation to purchase a new car; limit travel — but you will be debt free years earlier and save thousands of dollars.
    Max Fay

    Max Fay is an entrepreneurial Millennial whose thoughtful writing shows he has a keen eye on both. Max has a genetic predisposition to being tight with his money and free with financial advice. At 25, he not only knows what an “emergency fund” is, he already has one. He wrote high school and college sports for every major newspaper in Florida while working his way through Florida State University. That experience was motivation to find another way to succeed financially and he has at Debt.org. Max can be reached at mfay@debt.org.

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