Money Minutes for Doctors #18 - Student Debt
And now for a dreadful subject that ~ at best ~ was glossed over during your university years: Student Debt. Ah yes…the one topic that was not in the shiny brochure you picked up at the college fair. “But”, you say, “I am a doctor! This should be an easy one!” Well, unfortunately it is not that simple and we just can’t write an order to make this one go away. It is an unfortunate reality that many young physicians face coming out of medical school and one that needs a very detailed plan to navigate through. For this episode we speak to Josh Lantz, CRPC® / Chief Investment Officer, Financial Advisor, at MD Financial Advisors.
About Mr. Lantz:
Josh Lantz, CRPC is a financial advisor at MD Financial a firm who helps physicians and dentists all across the country build and keep more of their wealth. Given their unique clientele, Josh has helped hundreds of doctors get out of debts, plan for their futures, and build and keep more of their hard earned wealth.
Quick Summary:
Two things that are key to understand as you approach your student loans:
Know your career goals as they can determine best way to tackle your student debt
Your employer is a huge factor in determining how you tackle your debts
Public Student Loan Forgiveness Programs (PSLF):
PSLF – forgiveness on federal direct student loans (Not all federal loans apply – must review your student loan profile) if physican works in a not for profit for 10 years. PSLF applies on if you are working at a for profit insitutation and then opt into (1) pay as you earn, repay or income based repayment (IBR). Need to determine which program you are eligible for and your personal circumstances – where you work, projected income, family responsibilities etc.
Pay as you earn – Program is called PAYE for short. You pay 10% of discretionary income. For all three programs the way the government defines discretionary income is your Adjusted Gross Income on your Tax return minus the Poverty limit (found here: https://aspe.hhs.gov/poverty-research) times 150%. PAYE is generally the best of the three programs. You can generally file separately if you’re married to single out your income and you generally have a payment cap where your payment never goes higher than your ten year standard repayment based on your loan balance when you entered into the program.
Repay – It’s called Revised Pay As You Earn or REPAYE for short. It’s very similar to PAYE in that they are both 10% of discretionary income formulas. The difference is REPAYE has a better subsidy on unpaid interest, REPAYE doesn’t have a payment cap, and you can’t split your incomes by filing separately with REPAYE. It will consider your entire household’s income. Therefore, REPAYE works well for lower income doctors or doctors where their spouse doesn’t earn much income.
IBR – Income Based Repayment or IBR for short might not be as desirable. However, it depends. Some borrowers aren’t given the option to do PAYE. Everyone could choose REPAYE however REPAYE doesn’t have a payment cap. IBR still allows you to file separately and it has a payment cap where REPAYE doesn’t allow either.
Need to make 120 payments toward the PSLF program but do not need to be continuous
Once the 120 payment is made you need to apply for the forgiveness and if approved the government pays out the remaining debt
The forgiveness is tax free for the PSLF
Each year need to complete a certification process to remain enrolled in the program
Program began in 2007 and some borrowers have received forgiveness in 2017 & 2018
Benefits: don’t need to start a large payment while in training. Your payment will increase as you become an attending. In Pay as you earn/IBR the payment will not go any higher than your standard 10 year repayment (pay the equivalent of a 10 year payment)
often can save over $100,000
When debts are forgiven can be considered “phantom income” and therefor taxable however for the current laws involving PSLF it is written such that you do not need to pay taxes on the payoff amount
Your type of repayment program depends on what you are eligible for and anticipate future events help you decide which repayment option is best for you:
pay as you earn tends to be the best as keeps payments the smallest and can file tax return separately from partner if you are eligible
everyone is eligible for repay: cons– can’t file tax returns separately from spouse/doesn’t have a payment cap. pros – can be good if in academic environment and salary lower as 10% cap
IBR – payment cap highest of the 3 at 15%
In certain circumstances can switch between repayment options when you have a paritial financial hardship - income based and applies to pay as you earn/IBR; not need for repay) however trips captilization -a process in which accrued interest applies to the principal
** Private student loans are not eligible and need to be dealt with separately from PSLF.
IN general if in your training and not sure where you are going to end up really no downside to enroll in one of the PSLF programs you get credit for those payments and changes can be made later depending on your life circumstances.
Situations where the PSLF may not apply to you:
1. Lower student loan balances ($150,000 or less) may make more sense to refinance
2. Know that you are going to be with a “for profit” employer
LESSON: Plan early – when in med school be aware of what types of loans you are taking out and what you are eligible for. Try to obtain as much in direct loans as possible to say significant money later on however be aware that there are loan limits
LESSON – Shop your loans around – any time need to refinance be sure to look around for the best rates.
LESSON – shorter terms usually care the lower the interest rates and longer terms are offered at longer interest rates. Pick the term that makes the best sense for you. When considering this try your best to anticipate future cost of living to be sure you can afford your new payment.
LESSON – if you refinance then you can no longer go back to the PSLF program
RECOMMENDATION – a side account that holds what your typical repayment amount would be less your current PSLF payment. This allows protection if account/circumstances changes as you would have the necessary funds available to you to avoid a financial catastrophe.
i.e. if you currently pay $700/month on your PSLF payment however if you were in a standard 10 year repayment program your payment would be $3000/month we recommend that you take the additional $2300/month and invest in a side account (One that you can even invest)
RECOMMENDATION: be sure to track your own payments. If your # payments are different from what the government is giving your credit for follow up with an appeal. The appeals process is rather arduous and don’t expect that it will come back in your favor.