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We all know that physicians are put through the ringer before they are finally able to place that “M.D.” behind their names. Years and years of education and training, around-the-clock shifts, sleepless nights, and a general sacrifice of time and freedom – these are only part of the burden that the doctors of America face. The biggest burden, with arguably the most serious and lasting effects, is a financial one - the amount of debt that physicians accumulate.
The average cost for one year of medical school in the US is $35,932 for an in-state school, and upwards of $60,000 for out-of-state and private schools. What’s more, these figures don’t factor in books (which are incredibly expensive) or general necessities like food, housing and insurance. The result is that students graduating from med school have an average debt of $189,000. Even worse, a third of graduates have lingering debt from their undergraduate education, with an average balance of $25,000.
No big deal, because doctors make a lot of money, right? Wrong. Physicians in residency earn only about $50,000 a year. This paltry salary is barely enough to pay the rent, let alone start making payments toward student loan debt. Facing this conundrum, young physicians have limited options for dealing with a very real problem. Some docs find themselves with no choice but to enter forbearance over the 3-5, 6, 7, or more years of residency. This temporary “solution” to the problem (if you can call it that) can add as much as $40,000 in interest to the total outstanding debt balance.
So, what options are there, and how can physicians best position themselves to manage their debt efficiently?
Refinance
Almost any type of loan can be refinanced, and student loans are no different. Using the refinance approach, you can take out a new loan and use those funds to pay off the existing loans. While this seems counterproductive, the benefit is that it gives you the chance to amend your repayment schedule and most importantly, secure a more favorable interest rate. An adjustment to the interest rate can be hugely beneficial, considering that the types of loans extended to med students are sometimes charged at the highest rates – the Grad PLUS Loan rate was 7.0% in 2017-18. Assuming student loan debt of $189,000 with a 7% interest rate, the borrower ends up paying about $74,000 in interest alone. Therefore, refinancing down to a more manageable interest rate can literally save a borrower thousands of dollars.
Lump Sum Extra Payment
While receiving a windfall is not necessarily an option for all doctors, it is something to keep in mind. Today, the majority of physicians entering employment receive some form of signing bonus. Whether the bonus is $10,000 or $50,000, that extra money can make a significant difference to your outstanding debt. Of course, bonuses always come with strings attached. They generally require a physician to remain employed for a certain period of time before the bonus is fully “earned,” and they are of course taxed at a high rate (*see our previous blog post on Signing Bonuses). Nonetheless, applying the bonus (i.e. what you take home after taxes) as an extra payment to your student loan balance can save you thousands in interest.
Income-Based Repayment
Another option is utilizing an income-based repayment plan. There are different federal income-based repayment programs, which set your monthly payments based on your current salary and cost of living. Depending on eligibility and the various repayment structures available under a plan, these programs will help to quell the balance increase from added interest. While these programs can be better than entering forbearance, they are not the most efficient option, and will not be your fastest or cheapest approach to eliminating student loan debt.
Student Loan Forgiveness Programs
There are various programs around the country that will help pay off your student loan debt in exchange for a service commitment. These programs generally require you to work in a high-need, underserved area for a set number of years. Of course there is the trade-off to consider, including limits to your specialty, practice location and type of employer. Physicians can even explore repayment assistance programs offered by the military, regardless of whether they have served in the past or where they are in their career. Each branch of the military offers physicians the opportunity to enroll in service and receive student loan assistance in exchange. Lastly, there are many state-sponsored programs aimed to help physicians with their debt.
Employer Assistance
For some lucky physicians, their future employer will offer student loan repayment as an added incentive pursuant to their employment agreement. This extra perk is something usually offered by larger hospital systems (as opposed to private practices), and is more commonly available in “less attractive” geographic regions of the country. When offered, employers will typically set out an amount to be paid per month or year toward the physician’s outstanding balance, and will sometimes make the payments directly to the lender. As with signing bonuses, loan repayment usually has strings attached and will generally be conditioned on a certain length of employment. Considering the long-term benefit that could be achieved, physicians should consider asking for loan assistance pursuant to their employment agreement, particularly physicians in high-earning specialties and those who have multiple employment offers.
For questions regarding physician employment, including review, analysis and negotiation of your employment agreement, contact the attorney-agents of Lauth O’Neill today at 317-989-4833 or loneill@lauthoneill.com.
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