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Student Loan Strategies

June 10, 2020

Recent medical school graduates are entering residency with approximately $251,600  1 in loans, which is likely to top $300,000 by the time residency is completed. Developing a plan is one of the most important financial decisions a young physician can make. With current interest rates in the high 6% range, refinancing or working towards PSLF (Public service loan forgiveness) is a critical choice. The less earning potential and greater loan balance, the more attractive PSLF is. For those with an interest in working for a qualifying institution, starting early and documenting correctly is essential. Each year the employment certification form should be completed and signed by your employer. Payment should be made on one of the income driven repayment plans during residency to work towards the 120 monthly payments required. The most common income driven repayment plans are REPAYE and PAYE, and family financials will dictate which one is more appropriate. The goal with these plans is to make the smallest monthly payments over the 120 months and then have the balance forgiven. Currently the loan forgiveness is tax free unlike the standard repayment plans. If your residency program qualifies for PSLF, you should fulfill the requirements so you have the years counted in case a job materializes that qualifies.  

If PSLF is not available or appropriate for your situation, making payments during residency and then refinancing shortly after graduation is a common technique. During residency student loan interest expense up to $2500 may be deductible and you decrease the capitalized interest. After residency we typically see refinance terms of 5, 7 or 10 years.  If choosing a shorter term, the payment will be higher, and if purchasing a house is a short-term goal, this could negatively affect your ability to qualify for a mortgage. The recommended order is to save an adequate down payment, purchase the home, and then focus on repaying student loans.

All branches of the military offer generous student loan incentives as well as federal agencies such as Indian health services, the NIH, and National Health Service Corp.  Individual states including California may also offer incentives for working with underserved communities.

Should you invest the additional income or pay down the debt sooner? It depends on your comfort level with risk. On the conservative side, by making additional payments you receive a rate of return equal to your interest rate net of any taxes and fees.

High rates and balances can be daunting but not having a plan to deal with repayment is even worse. We utilize software to analyze which income driven repayment plan determines the appropriate refinancing term. We then lay out a 10 year plan for eliminating student loans so you can transition from reducing debt to building wealth.


1 National Center for Education Statistics.