I'm About to Complete Residency: What do I do about my student loans now?
Do I really need to keep living like a resident?
Some time ago I was giving a student loan presentation to a small group of medical students. I recall the finance club president telling me that he didn’t think the advice to “live like a resident” was really all that helpful.
If you graduated from residency a few years ago, or are a resident about to complete your training, you’ve probably heard the advice to keep “living like a resident” so many times that just the sound of those words make you cringe.
While I think the advice is well-intentioned, I’m not sure one actually needs to continue living like a resident in order to achieve their long-term goals.
In fact, I would encourage you to give yourself a much needed raise. If you’re making $60,000 as a resident, the type of raise I’m talking about doesn’t mean you start spending $199,000 of your $200,000 salary (although I’m sure you see people do that all the time). Instead, let’s say you increase your “salary” from $60,000 to $72,000 (a $1,000 per month increase). That growth in available spending money will likely feel like a huge raise. But it also leaves a substantial sum of your attending salary to put towards other important goals such as paying off loans, saving for retirement, beginning college savings for your children, and building up a down payment on your dream home.
The fact of the matter is that most of us are accustomed to spending what we earn. We’re creatures of habit. So that first paycheck that you make as an attending is a very important one. If you decide to increase your standard of living to your new paycheck, you’ll be a high spender, but will have a very difficult time building wealth. Alternatively, if you begin life as an attending with a robust plan for achieving your financial goals, you can still enjoy thousands of dollars in increased “salary” while responsibly planning for the future.
What if I’m about to complete residency and am still planning on Public Service Loan Forgiveness?
First of all, make sure that you will still meet the qualifications to receive Public Service Loan Forgiveness (PSLF). You can navigate here to review those.
If you’re going for PSLF and are currently in the Revised Pay As You Earn (REPAYE) income-driven repayment program, you should consider switching to Pay As You Earn (PAYE) at the end of residency in order to benefit from the repayment cap when your salary increases. Under PAYE, monthly payments are 10% of your discretionary income, but will never be more than what your payment would be under the 10-year Standard Repayment Plan. Under REPAYE, there is no cap and your monthly payments are always 10% of your discretionary income.
In order to benefit from the repayment cap in PAYE, you need to switch to the plan while you still qualify. First, you can only qualify if the payment you would make under PAYE is less than what you would pay under the 10-year Standard Repayment Plan. Lest you think this was simple, PAYE also requires that you are a “new borrower” in order to qualify.
Being a “new borrower” means that you didn’t have any outstanding balance on Direct or Federal Family Education Loans (FFEL) when you received a Direct or FFEL loan on or after October 1, 2007. The definition also requires that you received a Direct Loan on or after October 1, 2011.
All of this discussion really boils down to the fact that if you’re going for PSLF you want to reduce payments as much as possible in order to maximize forgiveness.
Additionally, make sure that you certify every year and document everything so that you build a case for why you qualify for PSLF (as well as verify that you actually do). You don’t want to find yourself like that vast majority of PSLF applicants last year who were denied forgiveness due to not meeting the requirements, or inaccurately filling out the PSLF application form.
I’ve mentioned previously that finance bloggers for physicians sometimes recommend saving into a side fund in case PSLF goes by the wayside, or you change your mind and decide not to seek forgiveness after all.
A taxable account with a prudent investment strategy is what I would use if I were in your situation and worried about the reliability of the PSLF program.
What if I’m about to graduate residency and am not going for Public Service Loan Forgiveness?
In Financial Boot Camp, Dr. Dahle writes, “If you are not going to work for the government or a 501(c)3 after residency, you will generally want to refinance your loans at residency completion.” (68)
As always, individual circumstances should be accounted for, but refinancing your student loans right away can reduce your interest rate and save you money. In conjunction with a strong repayment plan, this can be an effective means for crushing your student loans.
Dr. Dahle continues, “[t]he ‘financial muscles’ you use to pay [your student loans] off quickly are the same exact ones you will use to build up a nest egg sufficient to support you for the rest of your life.” (65)
Some final thoughts.
Perhaps the student loans you or your spouse carry feel like the proverbial albatross around your neck. You may feel an immense burden and wonder if you’ll ever be free of it all. With some planning, discipline, and purposeful energy, you’ll be able to do it.
We haven’t discussed everything there is to student loan planning these last few weeks, but I do hope you have found a few ideas to help you achieve greater peace and purpose.
The content you just read is for informational purposes only. Yes, I’m a financial advisor, but this article really isn’t intended as advice for you specifically. Your unique circumstance needs to be taken into account, and the ideas presented here may not apply.
So, please make sure you do your due diligence BEFORE implementing anything. Due diligence may include hiring a qualified professional who understands your situation completely and can offer you personalized advice.