image courtesy of www.sfasu.edu
Financial fitness parallels physical fitness: prevention is the best medicine. The best pill is a healthy lifestyle. image courtesy of www.sfasu.edu

 

Yes, it is possible to pay off 400k of student debt aggressively by living like a resident for 5-years after you finish training and make attending level paychecks.

But minimizing taking out student loans in the first place will save you lots MORE money and stress in the 10- 20 years following medical school graduation.

 


 

A few recent changes have made it even more important to minimize taking out student loans in the first place (ie. during medical school):

  1. 2012 there is no more subsidized student loans (ie. all loans you take out during medical school starts acrruing interest on day 1 after disbursement)
  2. student loan refi rate not nearly as good as they used to be (i know of current attending doctors who have 1-2% interest rate on student loans which they refinanced upon residency completion… this nice low interest rate is unheard of nowadays).
  3. PSLF program may disappear at anytime. Last year, there was an attempt to cap the forgiveness at 57k, which is hardly anything compared to the massive balance one will accrue during residency with income base repayment programs (as the loan balance under goes negative amortization because the monthly payment sare too small to even cover monthly interest on the average amount of student loans.)

Below, I will run a scenario for a cautionary tale to medical students, you are in the best position and time to be minimizing your debt. 1 dollar you spend now will be worth 2 by the time you pay it off.

Assumptions include:

  1. attended medical school 2012-2016 at Touro University (later classes have higher tuition)
  2. take out student loans matching full Cost of Attendance at beginning of each medical school year
  3. filing as single without dependents
  4. interest rate 6.8%
  5. pgy1 income 50k, 4% growth rate, 6 training years, 1st year attending income 250k
principle interest rate balance @ year end
MS1 86111 0.068 91967
MS2 86833 0.068 190958
MS3 93500 0.068 303801
MS4 94000 0.068 424852
total loan principle 360444 total interest accrued in school 64408

This med student will graduate with 425k of student loan, before starting pgy1.  While 360k was used towards living, tuition, fees, travel during the 4 years of medical school, 64k was the interest accrued while one is studying and testing away to graduate from medical school.  From here, there are a few scenario to get rid of this financial noose around one’s neck.

I. Paying least for what you borrowed: PSLF

If all stars align and you get a non-profit employee job after residency/PSLF did not get capped or stopped: you will pay $180,178.12 for the 360k you borrowed during medical school.

 

Income-Based Repayment Calculator Results (15% version)

Total Graduating Debt: $424,851.53  
Initial AGI: $50,000.00  
Income Growth Rate: 4.00%  
Interest Rate:       6.80%  
Discount Rate: 5.80%  
Family Size: 1  
Poverty Line: $11,170.00  
Tax Filing Status: Single  
 
Loan Forgiveness  
Forgiveness Year: 10 years
    Income-Based Repayment   Fixed Monthly Repayment
Years in Repayment: 10 years 10 years
Minimum Payment: $10.00 $50.00
 
Monthly Payments    
First Payment: $415.56 $4,889.21
Max Monthly Payment: $3,241.93 $4,889.21
 
Total Amount Paid: $180,178.12 $586,704.41
NPV of Total Paid: $121,293.43 $447,398.82
 
Total Accrued Interest: $284,938.58 $161,852.89
Capitalized Interest: $0.00 $0.00
Total Interest Paid: -$145,089.75 -$161,852.89
Total Unpaid Interest: $139,848.84 $0.00
 
Total Amount Paid: $180,178.12 $586,704.41
Total Interest Paid: -$145,089.75 -$161,852.89
Payments to Principal: $35,088.38 $424,851.53
 
Total Debt: $424,851.53 $424,851.53
Capitalized Interest: $0.00 $0.00
Payments to Principal: -$35,088.38 -$424,851.53
Remaining Balance: $389,763.15 $0.00
 
Government Payments    
Loan Forgiveness: 10 years
100.00%
 
Total Unpaid Interest: $139,848.84 $0.00
Balance Write-off: $389,763.15 $0.00
Total Forgiveness: $529,611.99 $0.00
 
Net Present Value    
Total Unpaid Interest: $79,579.68 $0.00
Balance Write-off: $221,791.09 $0.00
Total Forgiveness: $301,370.77 $0.00

II. IBR during residency, but can’t find non-profit job after training or PSLF is gone or capped.

After 6 years of making minimum payments (IBR, PAYE), the loan balance of $424,852 upon graduation has undergone negative amortization and ballooned into ~600k.

monthly payments annual payment principle+ interest year end balance
PGY1 0 0 453741.4313
PGY2 415.56 4986.72 484595.8486 479609.1286
PGY3 432.1824 5186.1888 512222.5494 507036.3606
PGY4 449.469696 5393.636352 541514.8331 536121.1967
PGY5 467.4484838 5609.381806 572577.4381 566968.0563
PGY6 486.1464232 5833.757078 605521.8841 599688.127

This new attending immediately switches gear from paying minimum to aggressively paying his debt off.

Wise thing to do is to refi his loan to a lower interest rate. However, 600k debt with 250k income may not qualify for a great rate. Be aware this debt/income ratio may very well NOT qualify for ANY refinancing.

Let’s say he refi to 5 year fixed term at 4%.

600k @ 4% for 5 years will be a total of 720k to pay off; this is equal to 144k/year in student loan repayments. Single person w/o depedents takes home 162k from 250k income in my state. This means to pay this debt off in 5 years, one has to live on 18k… That’s a lot worst then living as an average resident.

Alternatively, he can go for 10 year fixed @ 5%.

600k @ 5% for 10 years will become a total of 900k to pay off; this is equal to 90k/year in student loan repayments. Take home 162k of 250k after taxes. This means to pay this debt off in 10 years, one has 72k left for all expenses and savings. Not much… considering most docs start retirement savings late and need to catch up.

III. Neither here nor there…

This person may not have found non-profit job initially, or only worked 2 years of non-profit, then took a private job, only to return back to non-profit to finish off the 10 year requirement for PSLF.

This limbo is not helpful because during the years of private jobs, he will be making pretty high payments as payments are income based.


 

As you can see, none of the above scenario is close to ideal. But if that same med student minimizes his lifestyle and his student loans, he could have started with much less debt as he begins his medical career. This is why I hope that DFD will raise some awareness in personal finance in medical students and pre-med students. Prevention is always the best medicine.

This site has lots of posts on how to minimize debt, the main principles are common sense:

  1. live frugally and creatively during medical school (don’t buy a car, especially a new car, minimize retail therapy, etc.)
  2. delay and minimize taking out student loan (minimize interest accrued during school)
  3. have a side job (work study job at the school library, or something else light. you just may find working increases your focus and efficiency at school. it did for me.)

image courtesy of kirshclinic.com
I chose Apple, some choose pills. It’s never too late to start choosing the apple today 🙂 image courtesy of kirshclinic.com

 

  • What did you do to help you minimize student debt?
  • Did you have a side job? What work did you have as a medical student or residents?
  • Did you make sacrifices in medical school that pay off later?
  • How did you take out your student loan? Did you get the max at the beginning of school year like most med students did? Or did you take it out as you go?
  • Were your shocked at the amount of interests accrued just during medical school?

Comment below!

Prevention is the Best Medicine

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