Student loan advice can be complicated. Should you refinance? Should you pursue PSLF? Here are 7 rules of thumb to help you sort it all out.
In a survey conducted by the American Psychological Association, it was determined that the number 1 cause of stress for most Americans is money. With the ever-burgeoning student loan crisis that is taking shape in this country, it is unsurprising that this is also true in the medical community. As of this writing, the average debt for a graduating medical student is around $200,000. In private institutions, the average debt is even higher.
Making a plan to deal with those pesky loans is one way to dramatically decrease the financial stress that this debt burden can cause. Here are several guiding principles to help you sort out your student loan situation.
1. Make a Student Loan Plan
The first piece of student loan advice I can give you is the simplest. Yet, it is also the most important: Your loans are not going to magically disappear.
Despite this being self-evident, physicians frequently stick their heads in the sand when it comes to student loan management. Unless you die, your student loans are likely to follow you wherever you go. Ignoring them won’t help you out.
It’s not all bad news, though. Believe it or not, simply making a solid plan for your student loan debt can dramatically lower your financial stress often caused by your debt burden.
2. Focus on Your Debt to Income Ratio
The most common question I get from my residents is whether they should refinance their loans or pursue public service loan forgiveness.
The best rule of thumb that I’ve found to help sort through this problem is the Debt to Income Ratio (DIR). As a general guide, if your DIR is less than 1, then you should likely refinance your student loans (and get a cashback bonus by refinancing your loans here). For example, if you have $200,000 in student loans and your income is $300,000 then your DIR is 0.67 (or less than 1).
However, as your debt starts to make your DIR > 1 ($250,000 in debt; $200,000 income), you should start considering PSLF. At a DIR of 2 ($400,000 in loans; $200,000 income), you better have a good reason to not pursue PSLF.
*Other considerations that might lead you to consider PSLF include a longer training paradigm and a plan to work at a PSLF qualifying employer after training.
3. Single Resident = REPAYE 99% of the time
No. If you want truly passive income, you’re stuck with traditional investments. Treasury bonds, CDs, mutual funds, REITs and similar. So quit looking for something truly passive and realize that what you are looking for is mostly passive or even just partially passive income. And be prepared to both work and take some risk.
If you file your taxes as “Single” and have (non-private) student loan debt in training, then REPAYE will be the right program for you the vast majority of the time. This is solid student loan advice 99% of the time.
Without diving too deeply into the weeds on REPAYE, the big reason why is because of the interest subsidy that is provided by this program. This REPAYE subsidy pays for 50% of any remaining interest that you have each month.
For example, if you were set to accrue $1,000 each month in your intern year and your payment was zero dollars (which it often is during your intern year since you earned no money the year prior), the REPAYE subsidy would pay for $500 in interest each month.
If your interest rate is 7%, this effective interest rate reduction would bring your interest rate down to 3.5%. That’s a pretty sweet deal. In fact, it is almost certainly better than the interest rate you’d get refinancing privately while in training.
4. Residents Should Skip the Grace Period
If I told you that I would pay you $3,500 to click some buttons online and to fill out a few forms, would you accept that job? I know that I sure would.
Well, that’s exactly what would happen to many residents who consolidated their loans in order to skip the grace period offered during the first six months of residency who would have benefited from REPAYE.
Yet, all too often, I talk to residents who decided to keep the 6-month grace period that follows medical school only to find out that they should have been in REPAYE (Revised Pay As You Earn) the entire time. Why? Because it’s the easiest thing to do and they are busy getting destroyed by intern year. It’s understandable, but not advisable.
Let’s say that you have the average student loan debt of $200,000 accruing 7% interest. Back of the napkin math shows that you ought to have $14,000 in interest accruing that first year and, therefore, $7,000 in the first six months.
For the resident who should be in REPAYE, this means you will miss out on $3,500 that would have been paid for by the REPAYE Subsidy from the U.S. Department of Education.
Another reason to consolidate early on is to start accumulating qualifying payments for PSLF when your income is the lowest it will likely ever be.
5. Use a Refinance Ladder
Many attending physicians will decide that they should refinance their student loans. Maybe this is because their DIR is <1 or they will not be working for a PSLF qualifying employer. In this situation, is there any student loan advice that can be helpful to them? Fortunately, there is.
Unlike refinancing a house, which is inundated with fees, there are no associated fees when refinancing student loans. We can use this to our advantage through something called a Student Loan Refinance Ladder.
The gist of the refinance ladder is that when you refinance with a private company, they will often provide you a cashback bonus for refinancing with them. The thing is that you can do this as many times as you want with various lenders to reap the rewards of the cashback bonus.
So, you might decide to refinance with one company to get the $700 cashback bonus, and then with another to get their $500 cashback bonus. This is a student loan refinance ladder.
(I’m not sure that a company would provide this bonus a second time. So, a little bit of strategy to get your lowest rate, in the end, is key)
6. Choose the Right Debt Paydown Method
There are different methods to pay down debt.
Some prefer the debt snowball method where you pay down the smallest debt first and then roll that payment into the next debt until it is all gone. Others prefer the avalanche method where you attack the highest interest rate item first.
Me? I prefer the Debt Hatred method. My student loans were certainly not my smallest item of debt when I finished training. And they weren’t my highest interest item after I refinanced either.
Yet, I hated them the most. So, they were the debt that I chose to attack first. By the time that I paid off my $200,000 of student loans 19 months, I felt a substantial amount of freedom that I hadn’t previously experienced. My financial stress was vastly improved because I had taken care of the debt I hated the most first.
Pick the method that works for you!
7. Complicated Situation? Consider a Consult
I am amazed at how complicated student loans can be sometimes. Every time I think that I understand how the process works, I’ll have a reader or resident email me with their situation just to find out that another quirk exists in the student loan system.
The truth is that student loans can get complicated very quickly. Particularly, if you fit into one of these categories:
- Your DIR is > 1.5
- You are a married couple who both have debt
- You are married to a high-income earner
- Your student loan burden is well above the national average
If you don’t fit neatly into an obvious student loan repayment option (like being a single resident who should enter REPAYE), then you may find yourself in a challenging situation.
Don’t worry, though! There is hope.
If you aren’t sure what you need to do in your specific situation, check out the student loan consult service provided by Student Loan Planner.
Take Home: Student Loan Advice
Student loans can be a big source of financial stress for many residents and attending physicians. Don’t let these burdens weigh you down. If you plan to refinance your student loans, check out The Physician Philosopher Student Loan Refinance Page to get a great cashback deal on your refinanced loans. It will also help support this site.
Instead, make a plan, pick the repayment option, and attack these things with the hatred that they deserve! If your situation is complicated, then consider getting a student loan consult.
Have you refinanced your student loans? Are you pursuing Public Service Loan Forgiveness? What student loan advice would you give to other readers? Leave a comment below.