Print Page   |   Contact Us   |   Your Cart   |   Sign In   |   Join MAOPS
Association Blog
Blog Home All Blogs
Search all posts for:   

 

View all (26) posts »
 

A Breakdown of Federal Loan Repayment Options for Medical Trainees

Posted By Administration, Monday, August 8, 2016

By Jesse Richards, D.O. – PGY-1 University of Kansas Internal Medicine
Edited by Caleb Scheckel, D.O. – PGY-1 Mayo Clinic Internal Medicine


With median education debt for medical residents over $200,000, we have reached the point where managing student loans effectively as a resident or new attending is a decision that can save tens of thousands of dollars or more. The magnitude of this decision, compounded by the arcane and confusing variety of loan repayment plans can lead to confusion and paralysis. However, with a little time investment, you can learn the system and figure out what options will work best for you.

The goal of this article is to break down and classify the different options for repaying student loans.  In addition, Public Service Loan Forgiveness (PSLF) is briefly discussed, because it can change the calculations for certain plans.

PSLF is a current government program that is designed to incentivize a wide range of professionals to work for non-profit and government organizations. Specifically, it states that if you make 120 payments (they do not have to be consecutive) while working at a qualifying 501c organization, the remainder of your student loans will be forgiven. There is a lot of debate about the program and whether or not it will be around in the future, but that is how it stands at this time.

For the purposes of this article, I am assuming you are a typical graduate, with $200,000 in loans at 6.5% interest, who will be in residency/fellowship for 3-6 years, making roughly $55,000 per year. Your situation may be different. To start with, let’s look at the repayment calculator on studentloans.gov.

I will divide these plans into two categories: plans that qualify for PSLF and plans that don’t.

Qualifying Plans

Standard Repayment
This is a simple plan where your loan repayment is amortized over 10 years. There is no change in your monthly payment; you simply pay down the loan. This option is good for people with relatively low student loans, but a monthly payment of $2,271 is a large financial burden for most residents. This is a qualifying plan for PSLF, however if you stay in it for 10 years, there won’t be any remaining balance to forgive.

Income Driven Repayment Plans (IDRP)
This is not specifically a plan, but rather an umbrella term that encompasses all of the plans where your monthly payment depends on your income instead of your loan amount. One term that needs to be defined for IDRP is discretionary income, which the government defines as “the difference between your Adjusted Gross Income and 150% of the federal poverty level for your household.” Now onto the specific plans.

Income Based Repayment (IBR)
IBR is the first and least restrictive of the income driven plans. Your monthly payments are capped at 15% of discretionary income. The requirements are that your loan monthly payments constitute a “financial hardship,” which virtually all residents qualify for, but few attendings do based on the ratio of loan balance to income. This plan allows you to only take your AGI into consideration if you are married and file taxes separately. If you make 25 years of repayments under the plan, the remaining balance on your loans will be forgiven, though this forgiveness will count as taxable income. Finally, the maximum payment under is capped at the standard repayment.

Pay As You Earn (PAYE)
Similar to IBR, but only available for people who did not take loans out before 2007.  It uses 10% of discretionary income rather than 15% of IBR, resulting in lower monthly payments. Like IBR, you can also separate your income from your spouses if you files taxes separately. Payment is also capped at the standard repayment amount. If not going for PSLF, forgiveness occurs after 20 years.

Revised Pay As You Earn (REPAYE)

Identical to PAYE, with for 4 key changes. First, you cannot separate your income from your spouse, even if you file taxes separately. Second, you can enroll in the plan even if you have loans from before 2007. Third, there is no cap on the maximum payment. Fourth, if your payments do not cover all of the accruing interest on your loans, the federal government will forgive half of the interest. The fourth change is the largest difference. For the typical resident above, repayment will be around $250 a month on REPAYE, while their loans accrue $13,000 a year in interest. Since that leaves $10,000 in additional interest, forgiveness of half of that saves the resident $5,000. This lowers the effective interest rate in residency to 4% ($8,000 total interest on $200,000 in loans). Finally, if you’re not participating in PSLF, the plan will forgive any remaining balance of your loans after 25 years of payments.

Income Contingent Repayment (ICR)
ICR requires you to pay 20% of your discretionary income, though it is capped at payments that would pay your loans off in 12 years instead of the standard 10-year repayment. This leads to higher minimum, but lower maximum payments than other options. However, there are no restrictions on qualifying for the program. If you make 25 years of payments, the remainder of your loans will be forgiven.

Plans that Do Not Qualify for PSLF

Graduated
A plan where your payments start out low and increase every two years until you have paid off your loans in 10 years.  While there are lower initial payments than the standard plan, it ends up paying off in the same time period and paying more interest.

Extended and Extended Graduated
These plans are similar to the standard and graduated loan repayment programs, but they are amortized over 25 years. Essentially, you pay interest only in the beginning and slowly pay down the balance. These are not great choices for physicians, because the high interest rates on student loans would end up costing hundreds of thousands of extra dollars before payoff.

Now that all of the federal loan plans have been covered, let’s wrap up with a discussion of private loan refinancing. There has been a recent growth in the student loan refinancing industry. Five years ago, there were a few scattered locations, and now there are dozens of companies that are willing to refinance education debt for medical trainees. The decrease in interest rates can save tens of thousands of dollars, however there are several caveats to refinancing.

First, not all lenders will refinance residents. At the writing of this document (July 2016) there are only two lenders that will refinance during residency: Damien Rowan Bank (DRB) and Link Capital. DRB offers no capitalization of interest and $100 a month payments during residency. Link Capital offers no payments until after you graduate from residency.

Second, the interest rates that you can receive on your student loans are very dependent on your personal situation. Lender terms can vary, and the higher your income and credit score, the lower an interest rate you will probably be offered. Keep in mind that even if the rates that you are offered as a resident are not worth refinancing for, once you become an attending that may change. It is worth noting that some people may opt for private financing due to “teaser” interest rates that are attractive but also flexible. While interest rates are at generational lows, it’s worth remembering that there is only one direction the Federal Reserve can move interest rates – up! So, flexible rates that are attractively low now could become a real pain in later years of repayment.

Wrap Up

To finish this discussion up, here are suggestions for two good pay off strategies for different career paths. This obviously doesn’t cover every person’s situation, but it does address the situations of a good majority.

Fellowship/academic career: Go for PSLF
In this case, the most important thing is to get into REPAYE as soon as possible if you are single, and either REPAYE or PAYE if you are married to an income-earning spouse. Take advantage of the interest subsidy, and pay the minimum monthly payments. Stay in REPAYE throughout residency and fellowship, then switch to IBR two months before you graduate and start working to take advantage of the capped maximum payment. Continue to work for a nonprofit institution, and once you have made 120 payments, have the remainder of your loan balance forgiven. (Hint: skip the mandatory six-month “grace period” by consolidating your loans.) Upon approval, you can start making those first 12 qualifying payments based upon last year’s income as a medical student. For many of you, that will be $0 a month.

Private Practice and Refinance Route
Once you start residency, look at private refinancing. If the rate is better than what you would get with REPAYE, then refinance. If not, enter REPAYE for the duration of residency and get the interest subsidy. After you graduate, refinance privately with whoever will offer you the lowest interest rate, and then aggressively pay your loans off with your attending salary.

I hope this article helps explain the options for student loan repayment. If you have additional questions or would like to see a specific financial topic addressed in a future article, please feel free to contact the authors at jrichards4@kumc.edu or scheckel.caleb@mayo.edu. For further reading, click here.

This post has not been tagged.

Share |
Permalink | Comments (0)
 
Association Management Software Powered by YourMembership  ::  Legal