Written by Brent Lacey on March 27, 2019. Posted in Early Career and Young Professionals, Personal Finance.

The Beginner’s Guide to Student Loan Management

A few years ago, I was listening to the Dave Ramsey show on my radio, and a physician called in to ask for advice about buying a home. He had just finished residency (and of course had student loans), and was eager to start taking advantage of his new income. Dave asked a few questions just to get some background and then asked, “How much debt do you have?”

The physician replied, “About $600,000. So, anyway, back to the house question…” and Dave cut him off. “$600,000 in student loans? You can’t buy a house!! You’re broke!” The guy didn’t listen. He just kept going on about the cars he bought and the house he wanted to buy.

Needless to say, the call didn’t really accomplish much.

Regardless of your views on Dave Ramsey’s advice about debt elimination and building wealth, this call highlights the truth that too many doctors are complacent about their student loans.

Student loans are the financial ruin of many physicians, nurses, dentists, and other health care professionals.

I have coached dozens of colleagues on student loan planning, and I always stress how important it is to get serious about the debt. Don’t treat it like a mortgage that’ll be around for 30 years, get it out of your life!

Speaking the truth about debt, including student loans

I read all kinds of opinions on debt from various sources that I think are misguided or just plain wrong. People love to talk about things like “good debt” and “bad debt.” Let me help you with this:

There is no such thing as “good debt.”

The idea of debt being good is pure mythology, cemented in our minds by aggressive marketing. Think about this, if debt was good, wouldn’t you want to find some “good debt” to give to friends and family at birthdays and Christmas?

Debt is never a blessing. Never. It may be part of your life at times for various reasons, but that doesn’t mean that keeping it around indefinitely is a good idea.

Let’s examine four truths about debt.

Truth #1: Debt equals risk.

“But my mortgage interest is only 3.5%! If I don’t pay extra payments on the debt, I can invest money in the stock market at 7-8%. That’s a no brainer!”

No, it’s an unsophisticated evaluation of the risk equation.

By that logic, you should be fine borrowing $10 million against a mansion at 3.5% to put in the stock market at 7-8%. Of course, you would never do that! That’s because the $10 million value made you feel the risk.

Truth #2: Debt limits choices.

When I finished fellowship, my wife still had one year left in her fellowship. My first job after fellowship moved us from San Diego, CA to Pensacola, FL. We had a 7 month-old son and had to make a decision to either live apart for a year and let her finish her fellowship or have her stop short of finishing fellowship and come to Pensacola with me to be a stay-at-home mom.

She chose the latter, which has been a huge blessing to her, me, and our two boys.

We were in a position to make that choice because we were debt-free and had structured our budget to live on only my income. When she stopped working, our savings rate slowed down, but we had the option to have her stay at home with the kids.

Had we still been in debt, we would have been stuck with her living 2000 miles away for a year just to keep paying off our loans. Being debt-free gave us that choice.

Truth #3: Debt reduces your cash flow.

Any money you have to pay to student loans, car loans, home loans, or any other debt vehicle reduces your leftover income each month.

Your income is the greatest weapon you have in the fight for financial independence. The more of your money that goes out the door to banks and other lenders, the less you have to spend, save, and invest.

Truth #4: Debt slows down long-term savings plans.

All debt payments reduce your ability to invest in your IRA/401(k). Wouldn’t you rather have more money to put towards your retirement, college savings, and other major financial goals?

If you’re just getting started…

If you haven’t started medical school yet, I want you to take some time to think about some strategies to minimize the amount of debt you’re about to take on.

Don’t get tricked into believing that you should just borrow whatever it takes to go to medical school, because you’re “investing in your future.”

This is short-sighted and hazardous.

I know plenty of folks that have >$500,000 in debt and have annual incomes of <$150,000 because of taking an academic position or choosing a specialty that has a lower average income. Don’t make assumptions about future income levels in the hopes of being able to repay the loans really quickly. Minimize the debt so you have more choices in the future.

Let’s talk about a few specific strategies.

1. Go to a school you can afford.

This is probably the hardest choice for most people to make. Private medical school tuition could be over $50,000 per year, and if you also live in a high cost-of-living area you’ll start racking up the debt very quickly. Apply to good state schools with low tuition rates. You don’t have to go to the most prestigious school to be a good physician. Human anatomy, biochemistry, and physiology are the same, whether you’re attending a private school or a public school. Apply to schools you can afford to attend.

2. Apply for grants and scholarships.

Apply for 500-1,000 scholarships in the year before you go to medical school. Use sites like www.myscholly.com to find scholarships. You may get turned down for 95% of them, but if you get 25 scholarships at $500-$1,000 apiece, you can pay for a year or two of school right there!

3. Get a roommate.

Living expenses can be a killer. Get a roommate to help decrease the cost.

4. Live like a student.

You are broke! You don’t have the money to go out to eat, go to clubs, go to the theater, go to sporting events, etc. Every dollar you borrow for lifestyle now is a dollar plus interest that you have to pay later. Limit your lifestyle!

5. Get a job!

“I can’t work during medical school! I have to study all the time!” Yes, I agree you can’t work a minimum wage job. Can you mow lawns? House-sit? Dog-sit? You can make $20-25/hour doing that. Consider tutoring or writing questions for medical exam question banks. I tutored people for 20-30 hours per month during my second year of medical school. It definitely helped.

6. Consider the military or public health service corps.

This is a tough choice, and you must NOT make the choice considering only the financial benefits. Still, if this is your calling, it’s a huge financial boost.

7. M.D./pH.D. programs.

These programs are highly competitive, but it’s an amazing way to go to medical school cheaply or even for free. If you’re not interested in research, it may not be for you, but it’s an available option

****Pro tip: File your taxes as a medical student, especially your fourth year, even if you’re not making any income. You’ll need the tax filing to qualify for certain income driven repayment (IDR) plans once you have an income. I’ll have more on that later.

Public Service Loan Forgiveness (PSLF) Program

There has been a lot of negative press about this program, and I think it’s well earned. The PSLF has been a nightmare for a lot of people. Lots of borrowers are finding out that many of their payments didn’t qualify for the program, so they are having to pay longer than they were anticipating.

That doesn’t mean it’s a worthless program, but it does mean that it’s critical that you be vigilant to make sure that your payments are counting towards the 120 required qualified payments. You don’t want to get to the 10 year mark only to find out that your first 3 years didn’t really count.

Under the PSLF, you must make 120 qualifying payments (12 monthly payments x 10 years), and then the remaining balance of your student loans is forgiven. In order to meet the criteria for loan forgiveness, you need:

1. A qualified employer:

This can be a government agency, non-profit/501(c)3 organization, or public college or university. Surprisingly, over 2/3 of all hospitals nationwide meet this criterion.

2. A qualifying repayment plan:

See below for discussion on the qualifying income-driven repayment plans.

3. Qualifying payments:

You must have federal student loans to qualify. Private loans are not eligible. Payments don’t count unless you make them while working for a qualified employer. Keep documentation on everything, including copies of all checks, emails, and correspondence!

One advantage to the PSLF is that the loan forgiveness at 10 years is tax-free. The downside is you have to stay in debt 10 years in order to get the loan forgiveness. Depending on the length of your training and your income potential, it may not be worth it. For borrowers with low income and high debt, it’s worthy of consideration.

The PSLF website has more information, so be sure to check it out as well: https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service.

Income-Driven Repayment (IDR) Plans

1. Pay as You Earn (PAYE):

Under this plan, your monthly payment can’t be higher than the standard repayment plan (SRP) payment. That cap is advantageous for high-income families or as you move from residency to clinical practice and your income increases. Your required monthly payment won’t increase above the cap. To calculate your SRP, go to: https://studentloans.gov/myDirectLoan/repaymentEstimator.action.

2. Revised Pay as You Earn (REPAYE):

There is no cap on raising the monthly payment, which isn’t a big deal in residency/fellowship because your payment should be low based on your lower income. The big advantage to REPAYE which makes it the best option for most people is that 50% of the interest owed above the SRP (on unsubsidized loans) is paid by the government.

This effectively reduces your interest rate by as much as 40-50%! This is a great feature of this program. Again, your minimum monthly payment goes up as your household income increases, so many people advocate using REPAYE during your low-income training years and switching to PAYE just before your income goes up at the end of residency/fellowship.

Using the REPAYE/PAYE combination this way, you take advantage of the interest rate reduction during training years, then take advantage of lowering your required payment for the remaining years of the PSLF. This combination approach allows you to maximize the amount of loan forgiveness through the PSLF.

3. Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR):

Continue to make qualified payments for 20-25 years, and any remaining balance will be forgiven. The amount forgiven is considered income and so a huge tax bill may be due that year. I do NOT recommend staying in bondage to debt for 2 decades. If you really believe that the IBR or ICR is your only viable option based on your debt or income levels, please contact me directly at info@thescopeofpractice.com so I can help you come up with a better plan.

Private student loans refinancing options

The above options work for federal student loans, but what if you have private student loans? First off, I want to just make a quick note on consolidation.

If you consolidate your federal student loans into private loans, you won’t be eligible for the above programs anymore and you’ll be stuck with private loan repayment options. Depending on your income level, that may actually be a great option to consider.

There are a number of private loan refinancing companies that you can consider, and they offer a variety of incentives like cash bonuses that can help a little bit. In general, the private refinancing options are good to consider if your plan is to pay off the loans in just a few years instead of going through PSLF.

The one caution I offer with regards to refinancing is this: don’t get fooled into thinking you accomplished something big.

The refinancing plans may reduce your monthly payment or give you a small cash bonus, but it won’t make a major dent in your six-figure debt. It’s fine to do it and get a little bonus, but don’t get lulled into a false sense of accomplishment.

You need to make huge payments on your debt to get it to go away. If you refinance frequently to “keep the monthly payment affordable,” the loan will be around until your kids graduate high school. Get aggressive and pay those debts off!

How did I pay off my student loans?

My general philosophy is that debt is bad (see above). It’s not more complicated than that. Debt is just bad. When my wife and I started paying off our student loans, we didn’t try any refinancing programs or anything fancy. We cut our budget low enough to live on about 35% of our household income and just knocked the debt out.

We had a couple of federal loans at 6.5% that we paid off in less than a year, and a 2% private loan that we paid off in 4 years. I think we could have been done with the 2% loan in about 2 years, but we were using the rest of the money to build our emergency fund, invest in our 401(k) and IRA plans, and save for an eventual down payment on a house.

I now typically recommend against aggressive investing in retirement plans while paying off student loan debt, because I find that the intense focus on a single goal (like paying off student loans) has a higher success rate than trying to do a little on the student loans and a little for college, and a little extra on the house, and a little bit on retirement. When you focus on too many things, it’s hard to see progress, and that lack of progress leads many people to give up their intensity.

In our case, we knew we had the discipline to keep paying off the debt while we took advantage of the retirement savings plans. The math makes sense this way, but statistics and my experience with financial coaching show that the plan of intensely focusing on one goal at a time typically works best.

So, how do you know which plan is best for you?

It depends on your household income and debt levels.

Consider how long it will take to pay off your debt on your projected income. Does that get you close to 10 years? If so, PSLF may be for you. Let’s look at a couple of scenarios.

1. High debt, low income:

If your debt is 2-3 times higher than your annual household income, you may want to consider doing REPAYE during training, switching to PAYE just before you finish your training years, then coasting to the PSLF 10 year plan. This definitely starts to make sense if you have a prolonged training period like a surgical subspecialty or a residency/fellowship combination. For example, let’s imagine you have 6 years of REPAYE during training, then you switch to PAYE. You’re an allergist with a $150,000 annual income and $500,000 debt remaining. You could live on $35,000 per year and it would take 5-6 years to pay off all that debt. In that scenario, I’d probably look into PSLF, which would only take 4 more years.

2. High income, low debt:

If your income level is significantly higher than your debt, especially if your training period is short (say three years), you may be able to get rid of the debt in a couple of years, rather than waiting around making payments for 7-10 more years for PSLF. The jump start you can get on retirement savings is worth it. For example, if you have $100,000 in debt and your household income is $200,000, then cut your budget to $70,000 for a year and just pay everything off. You’ll breathe a huge sigh of relief.

3. Average debt, average income:

In this scenario, you should run some calculations on the different options described above to figure out the best scenario. If you have a short time (4 years or less) left until PSLF is granted, it might be worth it to just ride it out. If you’re stuck with 10 more years of payments, I’d probably be inclined to tighten the budget and just pay everything off.

Conclusion

Everyone’s scenario is a little different, but hopefully this primer gives you some clarity on how to make a strategy to become debt-free. Take advantage of some of the programs above if it makes sense for your situation, but don’t underestimate the benefits of just rolling up your sleeves, living like a resident, and paying the student loans off as aggressively as possible!

The sooner you get out of debt, the sooner you can accelerate your savings and investing plans. Debt is not a blessing, so work on a plan to get rid of it, starting today!

If you have questions, please feel free to ask in the comments section below. I guarantee that if you have a question, at least a hundred other people who read this blog have the same question.

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