Medical Student Loan Forgiveness
First, doctors who work for a 501(c)(3) organization may qualify for the Public Service Loan Forgiveness (PSLF) program. Under PSLF, the outstanding balance on doctors’ student loans is completely forgiven after 10 years of making regular, consecutive payments. What’s more,
PSLF can be used in combination with the repayment programs discussed more fully below.
For those doctors who choose to work in non-profit hospitals or clinics, the military, public health programs or even in academia, PSLF can be a significant financial savings that can help make up for earnings that are typically less than a doctor might otherwise make in the private sector.
Repayment Programs
There are also a number of programs to consider that may help make that student loan burden more manageable, regardless of whether or not you’re working in the public health sector.
Income-Contingent Repayment (ICR). ICR is just what it sounds like: payments based on your income. Qualifying for ICR is fairly easy, since you aren’t required to show financial hardship. This repayment plan is a popular choice for those in the PSLF program, as well as for any doctor who is comfortable with their loan payments going up as their income goes up.
Income-Based Repayment (IBR). The IBR payment amount is capped at 15 percent of discretionary income, and it adjusts annually based on your family size and income. If you pay under an IBR plan for 25 years and still have an outstanding balance, that balance will be forgiven (practically speaking, most doctors have paid off their loans in full before reaching that point). [Note: For borrowers who start taking student loans after July 1, 2014, the IBR program caps payments at 10 percent of discretionary income, so it’s a more affordable option; loan forgiveness occurs after 20 years of making payments under an IBR arrangement as opposed to 25 years.]
Pay As You Earn (PAYE). For residents who took their first federal student loan after October 1, 2007 and received Direct Loan disbursements on or after October 1, 2011, the PAYE plan is another option. Qualifying borrowers will benefit from an interest subsidy for the first three years of the PAYE program, payments that are capped at 10 percent of discretionary income, and a limit on how much income can be capitalized under the plan. After 20 years of making payments under a PAYE arrangement, the unpaid balance is forgiven.
Revised Pay As You Earn (REPAYE). Under the REPAYE program, more doctors will qualify since there aren’t income requirements, There’s also no requirement to show a partial financial hardship, and the date(s) loans were disbursed don’t affect eligibility. As with PAYE, monthly payments are capped at 10 percent of discretionary income. What makes REPAYE even more attractive is that up to half of the interest that accrues on your loans in the program is forgiven. This has the effect of lowering your loan interest rate, often below what you could get when refinancing the loan. After 25 years of making payments under a REPAYE arrangement, loans will be forgiven.
Other Incentives
For doctors who are in the armed services, some additional programs provide financial incentives to help with student loan payments.
Similarly, American Indians and Alaska natives might want to explore the Indian Health Service (IHS) Loan Repayment Program, which repays up to $40,000 in medical student loans in exchange for a two-year service commitment (which is renewable at the end of the term).
Several states also offer state-sponsored programs with loan forgiveness and repayment provisions for medical professionals. Be sure to also explore the State Loan Repayment Program, which is a federally funded grant program.
Refinancing
Another option to consider as a resident physician is refinancing high-interest student loans, if the lower interest rate on the new loan makes it worthwhile to do so. But, make sure you understand the repayment options offered by your new lender and that you’re comfortable assuming the obligations under the new loan. When you refinance with a private lender, you generally won’t have access to the income-based repayment options discussed above.
Subject to Change
Keep in mind that the programs and their benefits described above reflect current law. As is true of any kind of government-sponsored program, PSLF and income-driven repayment options are subject to change.
If your plan is to spend years making income-based loan payments just so you can have some debt forgiven, that may not be your smartest financial move, especially given the likelihood that these programs may fundamentally change or even disappear over time.
As you make the transition from being a student to medical resident, seek out a financial professional who has experience handling financial planning for doctors. Working together, you can review your entire financial picture and discuss the pros and cons of different options for attacking your medical student loan debt, helping you ultimately make smart decisions as you move closer to your goals.
Gold Medal Waters is a fee only financial planner located in Boulder, Colorado that specializes in serving the unique needs of physicians and high net worth clients. Coordinating a great financial plan isn’t easy. Learn more about what sets us apart, or talk to an advisor and get a free meeting to see if we are the right firm for you.