Points of Interest There Are Many Factors to Consider When Tackling Student Loans

There is probably no greater financial concern for young physicians and dentists than dealing with student loans. Like all students, medical students take on outsized loans to pay for the escalating cost of school. Upon graduation, they face the daunting task of digging themselves out of an enormous financial hole.

According to the Assoc. of American Medical Colleges, the average 2011 graduate of medical school had education loans of $160,290, while 33{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} had a debt of more than $200,000. Additionally, in the Budget and Control Act of 2011, Congress eliminated the availability of subsidized Stafford loans to all graduate students, including medical students. This change will force graduate students to take unsubsidized loans that begin accruing interest immediately. As such, the huge debt burden will likely continue to grow.

Upon graduation from medical school, doctors usually have a relatively modest salary to begin paying off loans. In 2011, the median first year resident/fellowship stipend was just $48,677. With the scenario of a low salary and a huge debt, many residents have historically chosen to go into forbearance and not make any loan payments during residency. With an average debt load, this choice may add an extra $1,000 per month in interest costs to the resident’s loan balance.

While this landscape may look bleak, there are a host of options for repaying medical expenses. The optimal choices depend on many factors, including income, tax status, family size, career path, and loan portfolio.

One of the newer options new graduates may want to consider is combining the Income Based Repayment (IBR) plan with Public Service Loan Forgiveness (PSLF). IBR has been available since 2009, and it caps loan payments at 15{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of discretionary income (this will be reduced to 10{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} in 2014). Since most residents have a low salary, they can qualify for entry into the IBR program. The PSLF program provides tax-free loan forgiveness to federal direct borrowers who are working for a public entity and who make 120 qualifying payments. Residents and physicians who work for nonprofit hospitals may qualify for PSLF. If a resident chooses the IBR and PSLF programs and then goes on to work for a nonprofit hospital, they could be student debt-free in 10 years while maintaining reasonable monthly payments.

Practices looking to hire young physicians may want to consider the financial incentive for debt-burdened candidates to stay employed by nonprofit institutions so that they may qualify for federal tax-free loan forgiveness.

When considering how to proceed with addressing student debt, medical school graduates may want to consider the following.

Understand Your Loans

When considering payment options, forgiveness programs, and consolidation, it is important to understand your loans. Are your loans federal Stafford, Grad Plus, Perkins, Private, etc.? Is your lender federal direct, federal through private lender, or non-federal private lender? What is the interest rate on your loans, and are they fixed or variable?

Consider Loan Forgiveness

If your career path will allow you to take advantage of loan-forgiveness programs by working in a public capacity for part of your career, this may be one of the quickest ways to eliminate your student debt. For a doctor who plans to work for a nonprofit hospital — as an emergency-room physician, for example — the PSLF program is an option for them to have part of their loan forgiven tax-free.

Review Your Tax Status

Your adjusted gross income (AGI) can have a big impact on your monthly payment amounts and your potential tax savings when you are repaying student loans. If you are able to enter the IBR program when your AGI is low, your payments will be low for the following year. Married borrowers may want to discuss with a tax professional whether their tax status should be ’married’ or ’married filing separately’ to take maximum advantage of the student-loan-interest deductions.

Paying Off Loans

When you are paying off individual student loans, it is better to pay off higher-interest loans first. If you pay an extra amount each month to retire debt early, ensure that it is going to the highest-interest-rate loan. The decision of whether to invest or to pay off loans early depends on your interest rate and your expected after-tax return on your investments. If your interest rate is 6.8{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, that is a relatively high hurdle for your investments to beat, and you may want to use excess cash to pay off the loans. Going into forbearance should be a last resort because interest costs can quickly add to your total loan cost.

Consolidating Loans

There are many factors to evaluate when considering the consolidation of student loans. One reason to consolidate loans is to push out the loan repayment past the typical 10 years. While this will reduce monthly payment amounts, it will increase the total cost of the loan. Generally, the interest rate of a consolidated loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} and capped at 8.25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. Thus, consolidating loans is not saving interest expense and is removing the ability to pay off higher-interest loans first. Another reason to consider consolidating loans is because only direct federal loans are eligible for the IBR program, and it’s possible to consolidate loans to have them qualify. When loans are consolidated, the grace, deferment, and forbearance options are changed and must be considered carefully. Loans can be consolidated only in the grace period or during repayment.

Student loans are a fact of life for today’s medical-school graduates. Tackling this debt with a thoughtful plan that considers your career goals and financial resources is an important step toward building the financial security you desire.

Doug Wheat is director of Family Wealth Management in Holyoke; www.fwmgt.com