How to Pay Off Medical School Loans Faster
Medical school is expensive. To put it in perspective, 2017 graduates with medical school debt owed an average of $192,000, which happens to be the same cost as buying a house that year.
The difference is that homebuyers get 30 years to pay off that debt. Graduates of med school want to knock it off in 10, so they can afford to buy a home themselves!
Making that happen isn’t easy. Repayment for medical school loans boils down to three choices.
Loan Forgiveness Medical School
Public Service Loan Forgiveness (PSLF) is the fastest way doctors can pay off medical school debt. Federal student loans are discharged after 10 years if you work for a nonprofit hospital or medical School facility that is a registered 501(c)(3), military or academia.
Enroll in the PAYE repayment program to keep your monthly payments as low as possible and maximize the amount forgiven. After 120 monthly payments, the remaining loan debt is forgiven.
Be aware that this program was targeted for elimination by the Trump administration in 2018 and may not be for much longer, but those already enrolled should expect to see their loan forgiveness honored.
The cheapest way to pay off medical school loans in the private sector is to enroll in REPAYE during residency and then refinance when you start practicing.
The advantage of REPAYE is that monthly payments are only 10% of discretionary income. On top of that, the government subsidizes half of the interest earned.
A resident earning $50k/year with $200k in student loans at 6.8% interest would only pay $270/month. That lower payment amount won’t reduce the $13,600 in interest that accrues in the first year, but remember that the government covers half. Of that total, $5,180 is forgiven, effectively reducing the interest rate to 4.2%.
Those REPAYE benefits are revoked as soon as you become an attending physician with a significantly higher salary. Refinance your loan before it happens to stay ahead of the game.
Until recently, student loan refinancing was not an option for doctors out of college. The residency requirement meant that standard monthly payments were unreasonably high.
Today, many companies offer programs tailored to the medical School profession. It’s a good idea to get a few quotes and see if any of the lenders match the effective rate received through REPAYE.
- SoFi – Monthly payments are only $100 during residency for four years and no interest until residency is completed
- Laurel Road – Formerly known as DRB, they pioneered med school loan refinancing in 2015 with $100 monthly payments during residency.
- Link Capital – Residency has a monthly payment of $75, but is not available to interns
- Splash Financial – Offers a deferment program by requiring only $1/month during residency.
How long does it take to pay off medical school debt?
How long it takes to pay off medical School student loans depends on whether you pursue PSLF, choose to refinance, or enroll in REPAYE.
Take a typical med school graduate who has $192k in debt and has spent three years in residency. He/she will earn an average salary of around $54,600 during residency and can expect to earn $185k after residency. That salary can be reduced to about $140k if the graduate works at a nonprofit to pursue PSLF.
Association of American Medical Colleges
A typical repayment plan for student loans is 10 years, but for doctors, the 10-year loan term is added to the time spent in residency.
Let’s say this graduate considers a 4.8% interest rate and a reasonable monthly payment closer to 15% of his/her discretionary income. That still adds a 10-year loan tenure on top of the three-year residency for a total of 13 years.
Refinancing is definitely a better option than forbearance through residency followed by the standard repayment plan offered by the federal government. The monthly payment will be more than 20% of his/her discretionary income, and the interest adds up to $76k more than the refinance rate.
Enrolling in REPAYE throughout the repayment process could cost this graduate $133k and extend the repayment period for an additional eight years. REPAYE has its advantages during residency when you can take advantage of subsidized interest and lower monthly payments, but it has no meaning post-residency.
PSLF is the fastest way for doctors to get rid of student loans, but it comes at the sacrifice of a lower salary and is potentially limited geographically.
PSLF programs make a lot more sense for doctors moving into specialties that require five or more years of residency. It will ensure that they maximize the amount forgiven by limiting the number of years required to pay substantial monthly payments.
Should I start paying while in residency or wait?
Paying off student loans while in residency can save money and shorten the loan term.
Most specialties require 3-5 years of residency with an average salary of $54,600 before a doctor can practice (neurosurgery takes seven years and plastic surgery takes six years).
The problem is that most of the student loan interest accrues in the first few years when the principle is extremely high and the doctors’ residency salaries are low. Many med school graduates decide to forbear their loans during residency and start paying them off when they start practicing.
It can be very expensive.
A better idea is to refinance with a lender like SoFi and pay more than the $100 minimum payment during residency. Then, when you start the practice, make the original monthly payments to pay it off quickly.
A typical graduate with $192k in medical school debt accrues $9,216 per year in interest (interest is not capitalized after residency under SoFi). That equates to $768/month.
With a $768 monthly payment during residency and an original $2,270 monthly payment as a practicing physician, the loan term will be reduced by 16 months and a total savings of $37k.
Choosing tolerance through residency is a no-win situation. Zero payments mean you can’t eliminate the principle, and the interest capitalizes at the higher federal rate, putting you behind the eight-ball.
Tips for paying off med school debt
Start in Residency: You can shorten the repayment period and save a lot of money by paying during residency. If possible, cover the interest you’ll earn to prevent your debt from ballooning in the early years, when the principal is high and losses are greatest.
Refinancing: The higher earning potential from a medical School degree means lenders are more inclined to offer lower interest rates. Take advantage of that early and refinance before you have to pay federal interest rates.
Use a signing bonus to pay off a loan: In 2016, 90% of physicians were paid a signing bonus at an average of $24,802. That $192k loan is enough to cover the interest accrued during the residency. Better yet, pay the interest yourself, apply the bonus, and make the original $2,270 monthly payment. That route will pay off the loan 32 months early and save a total of $74k.
Maintain a Modest Lifestyle: You need to keep your budget as low as possible, in order to pay off interest during residency and pay as much as you can while attending. It requires some sacrifices – get a roommate; eat at home as much as possible; Resist the temptation to buy a new car; Limit travel – but you’ll be debt-free years earlier and save thousands of dollars.