Knowing how to approach your student loans is unfortunately not something focused on in medical school. As a third year medical student, given my $200k+ student loan debt, I realized I would have to enroll in an Income Driven Repayment program to be able to manage the payments on my student loans as an ophthalmology resident. I had a small amount of panic when I googled and saw how little I knew about loan repayment options and money matters in general. Around that time, I was introduced to the White Coat Investor and from there I started learning more about student loans, saving for retirement, index funds, and more.
At our institution, the topic of student loans was covered in a two hour lecture as part of the exit process of medical school. Unfortunately, if you waited until that time to start learning about your student loans, you might have not filed your taxes and missed out on lower payments in an Income Driven Repayment Program.
If you haven’t heard of the importance of filing your taxes as a MS4, or are wanting more clarification on student loan terms, repayment options, Public Service Loan Forgiveness, and the different Income Driven Repayment options, then this article is for you.
Very high yield: File your taxes during MS4
If you are in your fourth year of medical school, be sure to file your taxes! Despite not making any money, you want to show the IRS (tax people) that you didn’t make any money. This is because after graduating you are likely going to be applying for income driven repayment programs which base how much your payments are off of your income from the last year.
You can file your taxes for free with programs such as TurboTax.
After you file your taxes and show your adjusted gross income to be $0, they will use this to calculate your initial payments for your income driven repayment program.
If your total salary was $0, then your initial payments will be $0. This is because you demonstrated with your taxes you did not make any money and they base your repayment off of your income from the previous year. This means, because you filed your taxes, your payments during intern year will be $0/month. Hooray!
If you do not file taxes, you will have to put in your resident salary and start paying around $400/month or more for your repayment program during the intern year.
Now, why does it make sense to have $0 payments during the first year of residency? (I’ve had people ask why I wouldn’t pay the minimum on loans).
- You may have moving expenses to pay for which you didn’t account for
- You may not have accounted for the month off in between graduation where you had to pay for everything including travel, food, and fun experiences. If you didn’t have money you likely put it on credit, and you want to get that paid off as quickly as possible.
- You may want to build an emergency fund
- If you sign up for REPAYE (see below), they are paying half your unpaid interest each month. If you are making $0 payments, and your interest is around $1000/month, they will pay $500 of your interest.
- If you started residency paying $400/month, the interest left would be $600, of which REPAYE would pay $300. In this scenario, REPAYE pays $200 less of your interest.
- Additionally, although your payments are $0, you could save up the money you aren’t putting toward your loan and wait until you have a large chunk accrued and then put it toward your loan.
If you save $400/month in your savings (which you would have paid monthly toward REPAYE if you didn’t file your taxes) and then at the end of the year put $4,800 toward your loan, you are:
a) Taking advantage of REPAYE paying your loan.
b) Covering the interest for the year.
c) Taking down your principal loan amount slightly. You could also choose to overpay toward your highest interest rate loan each month (if you chose to not consolidate – see below).
Those are all reasons for you to file your taxes during your fourth year. Please file your taxes!
Note: When you file your taxes you can upload your tuition bill, aka 1098-T. You go to your student registration portal –> finance –> Tax forms → 1098-T. It shows you paid tuition during that year and maybe you will get money back!
Student loans terms to understand
They always sound so sophisticated with the terms. So, here are important terms to know: (thank you Investopedia)
Deferment: the time when you are in school when you are not required to pay the interest that is accruing on your loans. This is why your student loan burden grows substantially during medical school because each year the interest is accruing and you are (generally) not paying the interest that is accruing.
Principal balance: also, called “principal” = the original amount of loan that you borrowed. The principal amount can also increase depending on when your loan capitalizes (see below).
Interest rate: aka annual percent rate, it is the percentage agreed upon by you and the lender and it is essentially the cost of borrowing the loaned money.
Interest: the cost associated with borrowing the money, it is based on the interest rate.
Grace Period: six to nine months after you graduate or leave school. It is called the “grace period” because you are not required to make payments during this time; however, your interest is still accruing.
Capitalization: when unpaid interest is added to your principal amount. This happens at specific times, such as when your grace period ends and you enter a loan repayment option for the first time (i.e. when you start residency). The interest that accrued during medical school gets added to your principal or “capitalized” on and now you have a higher principal.
The reason this is so important is that from here on, you have a higher balance so you end up paying more in interest throughout the remaining life of your loan.
Other times capitalization occurs is if you switch to a different repayment plan, you consolidate your loans, forbearance or deferment ends, loan comes out of default, or you forget to recertify your annual eligibility for income-based repayment (i.e., REPAYE, PAYE).
Refinance: refinance to a lower rate, normally through a third party such as SoFi or Laurel Road.
Basics of refinancing a student loan
At the start of medical school, you take out $50,000 at a 7% interest rate and don’t make any payments toward your loan during school because you are in deference. Your loan grows at $3,500 per year based on your interest rate of 7%. At the end of the four years, the total interest on your loan would be $14,000.
You graduate from medical school and enter the grace period of six months. At the end of your grace period, you have an extra $1,750 of interest which gets added to the total interest accrued for a final total of $15,750. You choose one of the income driven repayment programs, enter the program, and your loan capitalizes to a new principal of $65,750 at a 7% interest rate. You now pay $4,602.50 per year for the life of your loan (unless you refinance to a lower interest rate in the future).
Here's the math:
$50,000 student loan x 0.07 interest rate = $3,500 interest per year
$3,500 interest rate per year x 4 years = $14,000 interest
$3,500/2 (6 month grace period) = $1,750 interest
50,000 original student loan + $14,000 interest + $1,750 interest = $65,750 (new loan amount)
$65,750 student loan x 0.07 = $4,602.50 interest per year for loan's life!
So, there you have it! It can be quite unnerving to see how much money accrues over the time you are in school and then have it get capitalized on. Unfortunately, unless you are able to make interest payments during medical school there isn’t much we can do to prevent capitalization.
Public Service Loan Forgiveness (PSLF)
When deciding whether or not you are planning to do public service loan forgiveness (PSLF) this is an important first crossroad you will make when deciding how to manage your student loans.
Started in 2007, the concept is that after you make 120 qualifying monthly payments in a qualifying repayment program while working full time for a qualifying employer, your debt is forgiven tax free.
Take note of all the “qualifying” in the last sentence and you may understand why certain people are skeptical of this program. In the next few years we will see how many physicians start to get their loans forgiven. The stats on who have received loan forgiveness are available to see here.
Another important note is that the forgiveness through PSLF would be tax free, whereas if you simply stayed in an Income Driven Repayment (IDR) program such as PAYE or REPAYE and you pay the qualifying monthly payment for 20 or 25 years, your student loan is forgiven but it is a taxable event.
Important notes about PSLF and who should consider it (according to thePhysician Philosopher’s Guide to Personal Finance and “White Coat Investor”).
- Your debt to income ratio is >1 (i.e., you are going into primary care and plan to make $210,000 annually but your debt is $250,000+).
- Longer residencies such as neurosurgery, ENT + fellowship, interventional cardiology etc. For example, if your future residency is 8 years long, you would have already made ~96 of the 120 qualifying payments during that time. These payments made during residency are substantially less than what you would pay as an attending.
- You must submit the paperwork to re-certify your employer each year (if I were planning to do this I would call my loan servicer each time I submitted to make sure it was all correct). Otherwise, you get no credit for that year!
If you are mistrustful of PSLF, what you could do is set aside money which you would be throwing at your loans and put it in a high yield savings account. Every year you would re-certify and if after 120 payments they do not forgive your loans—no problem because you have been putting money aside for that very scenario! Not ideal, but better than being unprepared for the possibility.
Remember: you must be under a qualifying employer, making qualifying payments with federal direct loans, and be under a qualifying repayment program (i.e. standard or income driven repayment programs). Chapter 6 and 7 in “The Physician Philosopher’s Guide to Personal Finance” breaks this down wonderfully or check out the links below. I suggest reading more about the fine details there if you are considering this option!
Suggested reading
Student loan repayment options
There are different options you have to choose from for your student loan repayment when graduating from medical school and entering residency.
Repayment options
Forbearance – absolutely not. This should be the absolute last option you choose as it allows your full interest to grow on your loans during residency.
Re-financing – residents married to a high-income earner might consider this. Additionally, if you have a low debt burden you might consider this. Refinancing is where you choose a company who pays your loan for you and they in turn give you a lower interest rate on your loan. For example, Laurel Road or Sofi can offer you quotes regarding interest rate and monthly payments. See the refinance ladder below.
Income Driven Repayment Programs (IDR)
| PAYE | REPAYE | |
|---|---|---|
| Recommended for | High income, average debt resident (i.e., married to high earner) | Low income, average debt resident (applies to most) |
| Monthly payment calculation | 10% of discretionary income | 10% of discretionary income |
| Stipulations | Payment CAPPED at original standard 10 year amount | Payment NOT CAPPED, therefore increases when your salary increase and no upper limit. |
| Repayment terms | 20 years (any remaining amount is forgiven but taxed) | 25 years (any remaining amount is forgiven but taxed) |
| Married couple/Filing status | If married filing separately, then only your income | Includes spousal income regardless of filing status |
| Interest subsidy | No | Yes, 50% of UNPAID interest is paid (see example below) |
| Qualifies for PSLF | Yes | Yes |
| Capitalization | Yes, upon entering program, or if you fail to recertify | Yes, upon entering program, or if you fail to recertify |
PAYE explained
PAYE- good option for high income, average debt resident if they did not want to refinance their loans (e.g., medical resident married to a high earner).
- Caps your monthly payment at the standard repayment plan payment.
The standard repayment plan is the minimum monthly payment on your loans if you were to start paying them right away. For most graduating residents, the standard repayment is over a third of their resident salary which is why income driven repayment plans were developed.
When they say “caps your monthly payment”, they mean if 10% of your income is over the standard minimum, you pay the standard minimum payment.
This is important because with PAYE there is an upper limit to what they can charge you each month, compared to REPAYE which remains 10% of your income regardless of your income (e.g. good in residency, not as great as an attending).
- PAYE caps the interest that can be capitalized on at $20,000.
- Requires 20 years of payments for your debt to be forgiven, but this debt forgiveness is taxed (unlike PSLF where the debt forgiveness is not taxed).
- With PAYE, there is a stricter definition of “financial hardship” to qualify. I have heard most attendings do not qualify, so if you wanted to be in PAYE you would need to apply during residency.
Note: Someone told me their financial advisor said to enter PAYE first and then switch to REPAYE during residency to avoid capitalization of their medical school interest. This was an error in understanding on the school’s financial advisor’s part. When you graduate from medical school, you automatically enter the grace period.
Once you exit the grace period you then automatically enter standard loan repayment at which point your interest capitalizes. You then enter REPAYE or PAYE and your interest capitalizes again (although a few dollars at that point). You want to avoid capitalization as much as possible, and switching repayment plans causes capitalization, it does not save you from it. This story is why it’s important to do your own research!
REPAYE explained
REPAYE – good option for low income, average debt resident (i.e., most residents)
- Requires payment of 10% of your discretionary income. After your monthly payment, if there is remaining unpaid interest, half of the remaining unpaid interest is paid by the government (see example below).
- There is no cap, so after residency this is less ideal because 10% of your income would be a lot more as an attending. This is why most people who are aggressively paying off their loans refinance their loans to a lower rate after residency. Because as attendings, they would no longer have unpaid interest (because it is more than the standard repayment) which means no interest subsidy from REPAYE.
- REPAYE requires 25 years of monthly payments, and your debt forgiveness is taxed.
- Effective interest rate: this term is used in conjunction with the REPAYE interest subsidy. It just means if half your unpaid interest is paid each month by this repayment program, this lowers your overall interest rate (or “effectively” lowers your interest rate). Therefore effective interest rate means when you take into account the interest subsidy paying half your unpaid interest, your actual interest rate is lower.
Example: I filed my taxes during the fourth year of medical school. My REPAYE payments are $0/month for my first year with my loans accruing at 6% interest. I have $1,000 in interest on my loans each month. After my $0 payment, I have $1,000 left in unpaid principal, of which $500 is paid by the government. My effective interest rate during intern year is 3%.
This article has a lot of comments that were full of ideas. Additionally, here is an article comparing PAYE vs REPAYE. Finally, on our Instagram profile → pinned story highlights → student loans part 1 &2, I discussed the above concepts in case you prefer someone talking to you about it.
Married couples and tax filing status
I’ve had a couple people message me about whether getting married changes which repayment plan they should consider. For us it wasn’t too complicated, we fell into the category of two low income, average debt residents with a future debt to income ratio of <1 therefore planning to refinance after residency. We chose REPAYE.
If you are thinking REPAYE, it does not matter how you file your taxes, your spouse’s income will be a part of the minimum payment calculation. “REPAYE is based on 10 percent of income, but the tax filing status doesn’t matter.”7
REPAYE vs PAYE when thinking PSLF is more tricky. I read one article where the author was of the opinion that the risk vs reward is less for REPAYE.
If you are married to a high income earner and not planning on PSLF, then I would consider refinancing.
The White Coat Investor has a myriad of refinance options.
Final finance thoughts for ophthalmology residents
Sometimes learning more about personal finance, student loans, retirement options can seem tricky. But each time you learn a bit more, or read it again, it begins to make more sense. And as a reminder of how brilliant you are—you learned biochemistry, the anatomy and physiology of the nephron, and the layers of the retina.
These topics at first were overwhelming, but with time we have grown to understand them enough to incorporate the knowledge into our decision making and lives. Furthermore, having a grasp on this personal finance can allow you to feel less stressed, and therefore can focus more on things that bring you joy.
In this article, we discussed the importance of filing your taxes as a MS4, clarification on student loan terms, repayment options, Public Service Loan Forgiveness, and the different Income Driven Repayment options.
Stay tuned for more regarding current legislative changes regarding loans, tips on consolidating your loans after residency, and ways to use a refinance approach to help pay off your loans faster.
For more content on student loans and residency, follow our account Couple.of.Surgeons on Instagram!
References:
- “‘Will You Face a 'Student Loan Forgiveness Tax Bomb'?” NerdWallet, https://www.nerdwallet.com/article/loans/student-loans/student-loan-forgiveness-tax-bomb.
- Investopedia, Investopedia, https://www.investopedia.com/.
- Investor, The White Coat. “Repaye Interest Subsidy: White Coat Investor.” The White Coat Investor - Investing & Personal Finance for Doctors, 30 Sept. 2021, https://www.whitecoatinvestor.com/repaye-interest-subsidy/.
- Jimmy Turner, MD. “Can I Trust PSLF? The PSLF Side Fund.” The Physician Philosopher, 15 Sept. 2021, https://thephysicianphilosopher.com/pslf-side-fund/.
- Jimmy Turner, MD. “Student Loan Forgiveness - PSLF, IDR, & Much More.” The Physician Philosopher, 15 Sept. 2021, https://thephysicianphilosopher.com/student-loan-forgiveness/.
- Katzowitz, Josh. “Repaye vs Paye - MFS for Married Medical Residents: White Coat Investor.” The White Coat Investor - Investing & Personal Finance for Doctors, 30 Sept. 2021, https://www.whitecoatinvestor.com/repaye-vs-paye-mfs-for-married-residents/.
- Rob Bertman, CFA. “Married Filing Separately for Student Loans.” Student Loan Planner, 18 June 2022, https://www.studentloanplanner.com/married-filing-separate-paye-and-ibr/.
