Residents have limited options for dealing with their loans. With the average medical school debt for a graduating doctor in 2014 being around $176,000[1], this can seem like a significant burden weighing you down. A standard 10-year repayment plan costs too much on a typical resident salary. For someone with the average loan burden, this standard payment will take up most of their resident salary.
Income-based repayment plans are great options for low-income physicians (i.e. residents). These payment plans consist of Income Based Repayment (IBR), Income Contingent Repayment (ICR), and Pay As You Earn (PAYE). All of these repayment plans are directly tied to your income. The lower your income, the lower the payment.
Public Service Loan Forgiveness (PSLF)
PSLF can be a great option for those who are employed by a local, state or federal government agency or a 501(c)(3) organization. The idea behind PSLF is to forgive your debt if you make ten years of repayments on a qualifying repayment plan, while being employed by the aforementioned entities. For a physician with high amounts of debt, forgiveness of those loans can be a tremendous help.
The good news is that many residency programs count towards PSLF, as long as you are making payments on a qualifying repayment plan (i.e. standard repayment plan, IBR, PAYE, etc.)
The bad news is that the future of this program is uncertain. PSLF began in 2007, so we have to wait until 2017 for the first 10-year period to pass. This program is not guaranteed and may be stopped at any point by the government. If they realize that the program is not sustainable, then the program may be terminated. President Obama’s administration has also submitted a budget proposal to cap the forgiveness at $57,000. This is a huge shortfall for physicians with large loan burdens. At the time this is being written, the aforementioned proposed cap on PSLF has not been implemented. We will just have to wait and see what happens.
Refinancing
Refinancing can be a good opportunity to reduce interest rates on your loans. With that said, there can be drawbacks that need to be considered. When you refinance, the new loan provider is essentially paying off your old loan and your obligation is to now pay back the new loan provider. When refinancing, you lose income-based repayment plans that are available on federal loans. In addition, Public Service Loan Forgiveness (PSLF) is only available on Direct Federal Loans. If you think PSLF is a viable option for you, it may make sense to stay away from refinancing. Most residents should consider waiting to refinance until they have a more clear understanding of their future employment situation.
Disclosure: This article was written by Tyler Rivetti. Advisory services are offered through Rivetti Investment Services, LLC, a Registered Investment Adviser.
[1] FIRST analysis of AAMC 2014 GQ data. Education debt figures include premedical education debt. Non-education debt includes car, credit card, residency relocation loans, etc.