Student Loan Repayment Strategies

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Young physicians need a plan to repay their student loans

Physicians have unique needs when it comes to debt management. The most common need is to figure out how to deal with their student loans after finishing medical school and during residency/fellowship. On top of the mortgage sized student loan debt, physicians also may have ran up some credit card debt during residency, purchased homes, cars, and other types of debt like unsecured lines of credit.

The amount of debt can be demoralizing. Many of my clients have near or over $300,000 of student loan debt alone! This can make life stressful when coupled with the fact that many residents only make $45,000 to $55,000 per year for 3 to 5 years. It can truly make one second guess their decision to become a physician.

Having a plan of action can help reduce not only the debt burden but the emotional burden too. There are options for young physicians to take control of their student loan debt and obtain great home loans as well. The earlier a physician takes ownership of their debt situation leads to more control of their financial future and greater fulfillment and gratification of the career choice they have made.

Consilium Tax Services offers student loan repayment strategies. We understand the intertwined relationship of your tax situation and your student loan repayment options.

 Income-based repayment (IBR) plans

Putting together a student loan repayment strategy is much more complicated today than in the past. Before IBR, PAYE (Pay As You Earn), and REPAYE (Revised PAYE) the basic strategy was to pay off the loans with the highest interest rates first. IBR/PAYE/REPAYE can make interest rates meaningless if coupled with Public Service Loan Forgiveness (PSLF). I will discuss the pro’s and cons of IBR,PAYE, & REPAYE.

Under the standard IBR payment, it is your income that drives your payments. In particular, a number called discretionary income. What is this number you ask? Take your Adjusted Gross Income (AGI) as the starting point for determining your payment. Once you know your AGI, then you subtract 150% of the federal poverty line from your AGI. The result is then multiplied by 15% and divided by 12 to come up with your monthly payment. Let’s say you are a single, 3rd year resident, your AGI is $50,000, and you live in the Florida. The 150% poverty line number for you is $17,505. So we take $50,000 – $17,505 = $32,495. From here we multiple by 15% and divide by 12 to get a monthly payment of $406.

Pay As You Earn is very similar, but you cannot have had a student loan before October 2008 and must have had a loan disbursed after Oct 1st 2011. If you qualify for PAYE, then instead of paying 15% as under IBR you get to pay 10%. Using the same scenario as above the payment would be $270 per month.

REPAYE is Revised Pay As You Earn. It has a similar formula for repayment calculation as PAYE but you must include spousal income. However, there is a significant benefit for REPAYE in that there are more potential subsidies available under this program compared to IBR/PAYE. Even if you are not looking for PSLF, REPAYE may be for you.

Your income is checked on an annual basis under IBR, PAYE, and REPAYE. Ask yourself this question, if you just finished medical school and didn’t earn any income, what would your payment be under an income based plan? 15% and 10% of $0 earned is a $0 payment. What about your second year of residency, you know when you only earned income for 6 months when you started your residency? Let’s say a resident earned $25,000 the first 6 months of residency. That would be $93 per month under IBR and only $62 under PAYE. This is affordable and I haven’t even mentioned that borrowers receive an interest subsidy on their subsidized loans during the first 3 years of payments under IBR and PAYE and REPAYE has an even more robust subsidy than IBR and PAYE.

Public service loan forgiveness (PSLF) programs

The IBR,PAYE, and REPAYE programs really come up huge for those committed to public service. PSLF is a program where the balance of your loans is forgiven after 10 years of making “qualifying” payments. Actually, it is forgiven after making 120 “qualifying” payments on the right kind of loans while working for the right type of employer. If you don’t work for the right type of employer but are doing IBR/REPAYE your loans are forgiven after 25 years and 20 years for PAYE. Most physicians will earn too much to take advantage of the 20 and 25 year forgiveness, not to mention that the amount forgiven under this program is taxable, PSLF is not taxable.

“Qualifying” payments means a payment under IBR, PAYE, and REPAYE while working for a “qualifying” institution. Yes, your payments during residency and fellowship count towards the 120 payment requirement. A “qualifying” employer is a non-profit 501(c) or other government agency like the VA. “Qualifying” loans are federal direct loans, private loans are not eligible for these programs. If you have old federal FFEL loans you may need to consolidate those into a federal direct loan to take advantage of PSLF. Many teaching hospitals are qualifying institutions.

Loan consolidation vs. loan refinancing

You may need to consolidate your loans in order to take advantage of PSLF. Doing a loan consolidation does not reduce your interest rate. It just makes life easier and possibly sets you up for having a big portion of your loans forgiven. If you are not looking to stay in a public service institution then refinancing could help you reduce your interest rates. However, if you refinance to a private loan you will lose some benefits of federal loans such as longer repayment periods, PAYE and IBR programs.

Student loan repayment versus investing

Deciding whether to pay off student loans as quickly as possible versus investing is both a financial and emotional decision. The freedom many get from paying off their loans may very well be worth more to them than making 10% in the stock market. There may be no more valuable investment than immediately starting to repay student loans under IBR/PAYE/REP{AYE right out of medical school (after 6 month wait) and plan to do a fellowship followed by working in a public service setting. Potentially having $50,000 to $200,000 loans forgiven (tax-free) over a 10 year period is a great investment. However, if you are not planning to work in public service then the choice isn’t as clear.

If you didn’t start PAYE/IBR/REPAYE immediately upon entering residency then the reward for paying your loans is still beneficial but less so. The benefit of IBR/PAYE/REPAYE may not be worth it for those who owe less in student loans than they expect to make as an attending. At this point one must look at their student loan interest rates and decide if they are low enough to pay less on the loans and instead invest for their future. Some clients have loan rates as low as 2.25% while the majority have rates between 5.25% to 7%. Many clients would rather pay the high interest rate loans off more than invest in the markets.