Managing Medical-Education Loan Debt
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Exploring repayment options, accessing all available resources are key
By Bonnie Darves
For many residents, their excitement about starting training is tempered by an economic reality: it’s time to reckon with the education debt they’ve incurred during medical school and start repaying those loans.
Although medical school remains a good investment and the associated loan debt is ultimately manageable — most physicians will earn incomes substantial enough to repay their loans, and loan-default rates are extremely low — looking at the loan tab can be unnerving. The median loan debt for graduation medical students is $200,000, and while that figure has changed little in recent years, it’s still a staggering sum.
“What we’ve seen in the past few years is that indebtedness has remained relatively stable, if you control for inflation. It’s not increasing at the same high rate we were seeing in the past,” said Julie Fresne, senior director of student financial and career advisory services at the Association of American Medical Colleges (AAMC). Fully three-quarters of physicians enter training with loan debt, according to recent AAMC data, so those who fret about paying off their loans have plenty of company.
Ms. Fresne also noted that interest rates on federal direct loans have varied little over the last decade, which helps physicians to predict how much interest they’ll pay over the life of their loans. The current interest rate for graduate or professional loans is 6.08%.
The good news is that repayment options are more plentiful and flexible than ever, giving physicians some control in identifying a payment strategy that works for them. Further, if physicians encounter financial circumstances that prevent them from repaying loans temporarily, there are ways to adjust or postpone payments.
Exploring repayment options
Traditional repayment structures are predicated on either a 10-year (Standard, or Default) or 25-year (Extended) repayment plan, in which payments are fixed over the loan period. The 10-year default plan might be manageable for physicians in training who’ve incurred a relatively small amount of debt but likely won’t work as well for physicians carrying six-figure debt loads: monthly payments for $200,000 of loan debt would exceed $2,000 a month. And while the 25-year plan is more manageable, such extended repayment is far more costly in terms of the interest charges. A third traditional option is the graduated 10-year repayment plan, in which payments are initially smaller and then increase after two years.
Because the traditional repayment options are somewhat rigid, many physicians today opt for income-driven repayment (IDR) plans. In those plans, available with 12- or 25-year terms, payments are set based on the physician’s income by using formulas that take into account discretionary income, adjusted gross income, and family size. Physicians must reapply annually to remain in the plans, which include the income-contingent repayment (ICR) plan and the newer income-based repayment (IBR) plan, introduced in 2014. For IBR, which has a 25-year repayment term, payments are capped at 15 percent of discretionary income.
The most popular income-based repayment plans introduced over the last decade include the Pay As You Earn (PAYE) and the new Revised Pay As You Earn (REPAYE) plans. Both are applicable only to federal Direct Loans, and REPAYE, the newest addition, is structured to accommodate long residencies. Here is how the two plans compare:
- PAYE. The PAYE plan has a 20-year repayment term, and payments are based on 10 percent of discretionary income. Payments are capped at the 10-year Standard rate and cannot exceed 10 percent of the principal loan amount. Any debt remaining after 20 years is forgiven, but that sum is taxable.
- REPAYE. In the REPAYE plan, introduced in 2015, payments are also based on 10 percent of discretionary income. However, the repayment period is 25 years and there is no payment cap. Any debt remaining at 25 years is forgiven and, as with the PAYE plan, the remainder is taxable.
In all income-based plans, spousal income is taken into account if the couple files jointly. Spousal income is not factored into loan payment amounts if the couple files separate tax returns.
Paul Garrard, MBA, founder and president of PG Presents, LLC, which counsels medical professionals on education-loan management, notes that today, most graduating physicians are essentially channeled into income-based repayment plans. “Residents are pretty much pushed into one of these plans today,” said Mr. Garrard, who frequently makes presentations to medical students and residents.
Although IBR is inherently flexible and makes it easier to manage loan debt because payments are based on their income in any given year, residents with high debt loads should keep in mind that their lower payments might not cover the interest due. As such, that unpaid interest will increase. “For residents who owe $200,000 and are using an income-based repayment plan, those lower payments, by the time they finish training, will not have covered the interest on that debt,” Mr. Garrard said.
Despite that downside, residents are increasingly choosing income-based repayment plans rather than traditional plans, according to Ms. Fresne. “Our data shows that physicians are showing more interest in income-driven plans today,” she said.
Demystifying Public Service Loan Forgiveness
Although the Public Service Loan Forgiveness (PSLF) program has been in place for many years, misconceptions about how it works and, more importantly, who is eligible for it, persist. The program is designed to help physicians and health professionals, and other qualified borrowers, have a portion pay of their education debt forgiven by working for qualified non-profit entities or government agencies. The other key benefit is that any loan amount forgiven is not taxable — a key difference between PSLF and many loan-repayment plans.
For physicians who have federal Direct Loans and who work (train and/or practice) in qualifying employer organizations, any education debt remaining after they have made 120 (10 years’ worth) of qualifying payments is forgiven. To be eligible for PSLF, physician borrowers must be enrolled in an income-driven repayment plan.
The requirements and eligibility criteria for PSLF are somewhat complex, but the option is worth exploring, and many physicians who think they might be ineligible may indeed qualify, Ms. Fresne points out. “It really affords any [qualifying] physician borrower to repay any level of debt, regardless of the specialty they’re in. And it can help borrowers make their payments more manageable from the tracking standpoint,” she said. That’s because once borrowers qualify for enrollment in the program, the government tracks their employment history and their payments.
Despite these benefits, some physicians fail to investigate their PSLF eligibility precisely because of the myths that have persisted. The key one is that physicians’ income will be too high to qualify. That’s not the case, at least during training. According to the Medscape 2019 Residents Salary and Debt Report, the mean salary for residents in 2019 was $61,200. As such, many physicians who have long residencies will likely qualify for PLSF throughout training at least, and possibly longer. That’s because PSLF eligibility is predicated on income relative to the balance of education loans, not just on income alone. “Some physicians have the impression that it’s very difficult to qualify for PSLF, but that’s not the case,” Mr. Garrard.
Two other misconceptions about PSLF:
1. My employer or institution won’t qualify for PSLF. That might be the case, but the odds are somewhat against it, particularly for physicians in training who do their residencies at hospitals or health systems. Of the approximately 5,000 U.S. hospitals, more than 2,800 are nonprofit community hospitals and nearly 1,000 are state or local government community hospitals. In addition, there are also 209 federal government hospitals. All three types of institutions meet the PSLF qualifications, which means that approximately three-quarters of those facilities would be eligible employers.
2. The program will be discontinued. That’s possible, based on statements coming out of the current administration, but no decisions have been made and for now it’s still operating. Further, any status change is unlikely to affect borrowers who are already enrolled in the PSLF program.
There’s yet another myth that continues to circulate, according to Mr. Garrard: Many physicians think that by enrolling in PLSF, they must continue working in public service for a long time. “If borrowers enroll in PLSF, they’re not committing to anything. Basically, they’re just having the government track their payments,” he said. “And if they’re training or working in a qualifying 501(c)(3) hospital, the qualified loan payments they make go toward PLSF.” The benefit of the arrangement is that, regardless of where enrollees work, the government will track whether the loan payments being made qualify toward PSLF, saving physicians considerable paperwork and possible guesswork.
To apply for the program, borrowers must complete the PSLF Employment Certification Form to start the process. The form must be completed annually or whenever borrowers change employers.
“The point is that by enrolling in PSLF, physicians preserve the option to use public service to require their debt tax free,” Mr. Garrard said. “There’s really no downside to enrolling.” He cited the example of a pediatrics resident in a teaching hospital who decides to subspecialize, thereby spending an additional three years in training and accruing six years toward possible loan forgiveness. If that physician were to work at a qualifying entity after training, she or he might be able to obtain loan forgiveness after four more years.
It’s important to keep in mind, Ms. Fresne and Mr. Garrard advised, that to have loan debt ultimately forgiven under the PSLF program, borrowers must have met all requirements during the period when they made their 120 payments. For example, to have payments qualify toward loan forgiveness, borrowers must work full time (at least 30 hours a week), make the full scheduled payment on time, and remain in a qualified repayment plan (PAYE, REPAYE, IBR, and ICR) during the period before they request forgiveness. However, neither the qualifying payments nor the employer need to be consecutive, so a physician who worked in the private sector and returned to a qualifying public-sector employer might still be eligible for loan forgiveness.
Numerous individual agencies and entities also offer special loan-forgiveness service options for physicians, including the National Institutes of Health (NIH), the National Health Service Corps (NHSC), the Indian Health Service (IHS), and all branches of the U.S. military.
Consolidation and refinancing: understand the risks
Physicians who hold numerous loans, including some private loans, might want to consider consolidating or refinancing their debt — if they’re in a solid financial position and it makes economic sense to do so. However, it’s worth noting that consolidation is unnecessary for borrowers who hold only federal loans; government-contracted loan servicers manage the individual loans as a package and borrowers make a single payment. That payment is apportioned among the loans.
Refinancing is a different matter. Physicians who hold private loans with high interest rates or whose solid financial circumstances permit them to exit an income-based repayment program, and the relative safety that confers, might be good candidates for refinancing. And that option may be especially appealing in a low-interest-rate environment, for physicians who are working in the private sector. The primary caveat is that in leaving the federal loan program, physician borrowers may lose the ability to overpay on their loans and thereby reduce total interest costs over the life of those loans. Such loans also don’t qualify for loan federal loan forgiveness through PSLF.
Mr. Garrard reminds physicians considering refinancing to keep in mind that refinancing eligibility requirements vary, sometimes significantly, from lender to lender. However, all lenders will look at key factors that indicate the borrower’s ability to repay.
“Physicians who are doing well financially and decide they don’t like the 6.5% interest rate on their loans might start exploring refinancing options,” he said. “But they must have good credit, a solid employment history, and a favorable debt-to-income ratio.” The latter simply means the amount of debt compared to their current income. It’s also worth noting that refinancing is usually available only to U.S. citizens or permanent residents. International medical graduates might, however, be able to secure new financing if they have a creditworthy cosigner who is a U.S. citizen or permanent resident.
Mr. Garrard suggested that physicians evaluating refinancing options — for all or part of their loan portfolio debt — should ask the following questions:
- What fixed and variable interest rates would I qualify for? Some lenders might offer a hybrid.
- With variable rates, what are the maximum and minimum rates that can be charged? Variable rates are usually based on an index, such as the Prime Rate or the London Inter-bank Offered Rate) that changes over time.
- How often can the interest rate change, and how much notice would I receive before that happens? Mr. Garrard said that this can occur as frequently as monthly or quarterly, so it’s key information for borrowers for budgeting purposes, especially if they’re paying via automatic debit.
Finally, borrowers should be fully aware of how long they have to repay the loan. The range might be five years to 15 years or longer.
Regardless of whether physicians keep their federal loans or seek refinancing, the main thing to remember is that because physicians can expect to earn good income, they’ll find a workable way to repay their loans. “Physician borrowers have options — even if their debt load is high. That’s the important thing,” Mr. Garrard said.
Association of American Medical Colleges. The AAMC offers numerous resources about education loans on its website, www.aamc.org. In addition, the AAMC FIRST program provides a wide range of overall guidance on personal finance matters such as budgeting and goal setting. It’s accessible at https://aamcfinancialwellness.com/index.cfm.
PG Presents. The company focuses primarily on counseling physicians and medical students, and its website includes numerous up-to-date resources on loan-debt management. The website is www.pgpresents.com.
Public Service Loan Forgiveness (PLSF). For a basic overview of how this option works and the types of loans and employer organizations that qualify, go to the federal Student Aid web page at https://studentaid.gov/app/pslfFlow.action#!/pslf/launch.