Author Topic: Graduating medical student in need of some advice  (Read 7739 times)

brokeresident

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Graduating medical student in need of some advice
« on: May 09, 2013, 12:23:51 PM »
Hi everyone,

I came across this forum after having read some of Mr. Money Mustache's blog entries.

I'm a medical student who is graduating in a couple weeks and will be starting pediatric residency in June. I have amassed around $300k of student loan debt, with interest rates ranging from 6.8-7.9%. It's a huge debt burden, and I plan on participating in the Public Service Loan Forgiveness Program with an income-based repayment plan. Basically after I make 120 qualifying payments, my remaining loan balance is forgiven.

I guess why I come to you guys is to see how I should approach allocating my income ($51,000 approx. for the year) that isn't going towards living expenses. I plan to save 20% of my income, max out a Roth IRA as well as participate in my residency program's 403b, which matches 2% after my first year of training. My loans don't enter repayment until December, and because this is an income-based repayment plan (which bases payment amounts on previous year's income, of which I had none), I essentially will be making qualifying payments of "$0" for at least a few months. In the meantime I want to tackle interest on those loans so it doesn't capitalize. The order in which I thought I'd allocate funds is: 1) Roth IRA, 2) loan interest, 3) 403b.

I appreciate any of your help, and maybe if there are some other medical professionals on this site they can provide their words of wisdom.

hoodedfalcon

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Re: Graduating medical student in need of some advice
« Reply #1 on: May 09, 2013, 12:36:06 PM »
Congratulations on your graduation and your residency!

I am guessing all of your loans are federal? If so, great. This is just a thought, but if you are planning on PSLF I am assuming that means you have crunched the numbers with your expected income over the next ten years, and you have figured that some amount of the debt will be forgiven? My understanding is that once you are on IBR, you are always on it, even if your partial financial hardship discontinues (your income goes up), and therefore you would qualify for PSLF after 120 payments even if your payments were not based on the financial hardship anymore. In other words, I am not sure it is necessary for you to pay the accrued interest in the interim, simply because with PSLF, it is actually in your best interest financially to pay as little as possible. I know that is very uncomfortable for a lot of people to do, because there are no guarantees with anything, and you don't want to be kicking yourself 8 years down the road. Anyway, just a thought.

brokeresident

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Re: Graduating medical student in need of some advice
« Reply #2 on: May 09, 2013, 02:10:23 PM »
Congratulations on your graduation and your residency!

I am guessing all of your loans are federal? If so, great. This is just a thought, but if you are planning on PSLF I am assuming that means you have crunched the numbers with your expected income over the next ten years, and you have figured that some amount of the debt will be forgiven? My understanding is that once you are on IBR, you are always on it, even if your partial financial hardship discontinues (your income goes up), and therefore you would qualify for PSLF after 120 payments even if your payments were not based on the financial hardship anymore. In other words, I am not sure it is necessary for you to pay the accrued interest in the interim, simply because with PSLF, it is actually in your best interest financially to pay as little as possible. I know that is very uncomfortable for a lot of people to do, because there are no guarantees with anything, and you don't want to be kicking yourself 8 years down the road. Anyway, just a thought.

That's probably my biggest fear. You need to apply to IBR every year, but then there's also a form to fill out every year by you and your employer called the Public Service Employment Certification Form. Also this does is verify you have been working in a qualifying organization and how many loan payments you have made; it doesn't technically say you are enrolled in PSLF. After the 10 years/120 payments you can then claim the benefit because you have these forms to look back on. My worry is that the first beneficiaries of the PSLF program haven't gone through yet (the program is less than 10 years old), and that if the government decides to do away with it they may not grandfather in those of us who have already been working towards qualifying.

hoodedfalcon

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Re: Graduating medical student in need of some advice
« Reply #3 on: May 09, 2013, 03:28:14 PM »
I really hope that PSLF sticks around. I am three years in myself, and I am counting on it. In fact, my IBR payment amount basically covers interest only. The principal hasn't gone down a penny. So, counting on it is an understatement. Maybe it would make you feel better if you invested the amount you would pay in accrued interest, and then if everything disappears you will have some protection, and if it doesn't (fingers crossed) you have a tidy little sum of money in the end?

EMP

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Re: Graduating medical student in need of some advice
« Reply #4 on: May 09, 2013, 03:40:26 PM »
As long as you keep up with your qualifications for IBR and don't use any forbearance time, the interest is calculated separately and doesn't capitalize. 

Mazzinator

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Re: Graduating medical student in need of some advice
« Reply #5 on: May 09, 2013, 07:19:38 PM »
Quote
Q15 What happens if my income increases so much that I no longer have a “partial financial hardship” as described in Q&A #4 above? Do I then lose eligibility to repay under IBR?
A15 If your IBR payment amount increases to the point where it is more than the monthly amount you would be required to repay under a 10-year Standard Repayment Plan, you would no longer be considered to have a “partial financial hardship.” In this situation, you may remain on the IBR Plan (to take advantage of some of the other IBR benefits, as described in Q&A #2), but your monthly payment will no longer be based on your income. Instead, you will be required to pay the amount you would have been required to pay under a 10-year Standard Repayment Plan based on the amount of your eligible loans that were outstanding when you began repaying under IBR. Your repayment period based on this recalculated amount may be more than 10 years. [January 5, 2010]

Quote
Q36
You are responsible for paying all of the interest that accrues on your unsubsidized loans, as well as all of the interest that accrues on your subsidized loans after the end of the 3-year interest subsidy period. Interest that is not covered by your monthly payment will continue to accumulate and will be capitalized (added to your loan principal balance) when you are determined to no longer have a “partial financial hardship,” or if you leave the IBR Plan.

http://studentaid.ed.gov/sites/default/files/income-based-repayment-common-questions.pdf

Hey, just wanted to give you a heads up. This is from the gov "official" docs.

Just trying to help!!

Mazzinator

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Re: Graduating medical student in need of some advice
« Reply #6 on: May 09, 2013, 07:27:46 PM »
Also, the payment amount is based on your AGI, so it would benefit you to max out your 401k (or ~)

Good luck!!

brokeresident

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Re: Graduating medical student in need of some advice
« Reply #7 on: May 09, 2013, 09:25:30 PM »
So max out Roth IRA, 403b, THEN IBR payments +/- paying down interest on top of that?

brokeresident

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Re: Graduating medical student in need of some advice
« Reply #8 on: May 09, 2013, 09:32:07 PM »
Quote
Q15 What happens if my income increases so much that I no longer have a “partial financial hardship” as described in Q&A #4 above? Do I then lose eligibility to repay under IBR?
A15 If your IBR payment amount increases to the point where it is more than the monthly amount you would be required to repay under a 10-year Standard Repayment Plan, you would no longer be considered to have a “partial financial hardship.” In this situation, you may remain on the IBR Plan (to take advantage of some of the other IBR benefits, as described in Q&A #2), but your monthly payment will no longer be based on your income. Instead, you will be required to pay the amount you would have been required to pay under a 10-year Standard Repayment Plan based on the amount of your eligible loans that were outstanding when you began repaying under IBR. Your repayment period based on this recalculated amount may be more than 10 years. [January 5, 2010]

Quote
Q36
You are responsible for paying all of the interest that accrues on your unsubsidized loans, as well as all of the interest that accrues on your subsidized loans after the end of the 3-year interest subsidy period. Interest that is not covered by your monthly payment will continue to accumulate and will be capitalized (added to your loan principal balance) when you are determined to no longer have a “partial financial hardship,” or if you leave the IBR Plan.

http://studentaid.ed.gov/sites/default/files/income-based-repayment-common-questions.pdf

Hey, just wanted to give you a heads up. This is from the gov "official" docs.

Just trying to help!!

Yep, I knew about that. It wouldn't make since if your IBR calculated monthly payments came out to be greater than what you would pay under the standard plan. I think I remember if you decide to stay on the IBR in that situation you can still be considered for PSLF.

Rebecca Stapler

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Re: Graduating medical student in need of some advice
« Reply #9 on: May 10, 2013, 07:35:24 AM »
In terms of calculating your IBR payments, I highly recommend the calculator at http://www.ibrinfo.org/calculator.php

Fiddle around with it and calculate the impact of your 403(b) or traditional IRA contributions. IBR considers your AGI, and 403(b) and traditional IRA contributions are pre-tax, so they lower your AGI and therefore your IBR payments. If you have the $$ to make retirement contributions, you might want to go for a plan that will reduce your AGI while you're on IBR -- but balance that against the benefits of contributing to a Roth (given your low tax bracket now, the benefit of contributing after-tax to your Roth might outweigh the benefit of reducing your payment by $25/month).

I agree that allowing the interest to capitalize at the end of your grace period isn't a terrible idea if you know (a) that you will be working FT for a qualifying agency/non-profit and (b) your AGI will never exceed the max allowed to qualify for IBR. On (b), you can calculate your max AGI if you play around with the IBR calculator, using the same loan info by changing your income. Keep in mind that it's your AGI, so you can ostensibly make more than it's going into your 403(b). Also, if you have children or a spouse (and file jointly), that will impact your repayment amount until IBR. Also re: (b), if at some point you don't qualify for IBR but it makes sense to continue on the PSLF track, then you can switch to a 10-year standard repayment amount and that will count towards PSLF. That payment is calculated using the amount of debt you graduated with, not the amount you carry when you switch.

Because your IBR payments will be $0 for the first year, if you will be working in qualifying employment, I recommend consolidating and going on IBR ASAP. That way, you will not waste any of those qualifying months. Also, your payments next year will be based on your 2013 taxes, in which your AGI reflects only 6 months or so of your salary (so, lower IBR payments for your second year as well).

The other reason to start the consolidation / IBR process ASAP after graduating is that it takes a long time. I would except 3 months for the consolidation and then they will screw up your IBR application so you will have to re-apply for IBR. In fact, I would just not apply for IBR when you consolidate because the loan servicer won't get the paperwork and will put you on standard anyway. So you might as well wait until your loan is assigned a servicer to apply for IBR, so you know where to send the IBR paperwork.

brokeresident

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Re: Graduating medical student in need of some advice
« Reply #10 on: May 10, 2013, 02:44:38 PM »
In terms of calculating your IBR payments, I highly recommend the calculator at http://www.ibrinfo.org/calculator.php

Fiddle around with it and calculate the impact of your 403(b) or traditional IRA contributions. IBR considers your AGI, and 403(b) and traditional IRA contributions are pre-tax, so they lower your AGI and therefore your IBR payments. If you have the $$ to make retirement contributions, you might want to go for a plan that will reduce your AGI while you're on IBR -- but balance that against the benefits of contributing to a Roth (given your low tax bracket now, the benefit of contributing after-tax to your Roth might outweigh the benefit of reducing your payment by $25/month).

I agree that allowing the interest to capitalize at the end of your grace period isn't a terrible idea if you know (a) that you will be working FT for a qualifying agency/non-profit and (b) your AGI will never exceed the max allowed to qualify for IBR. On (b), you can calculate your max AGI if you play around with the IBR calculator, using the same loan info by changing your income. Keep in mind that it's your AGI, so you can ostensibly make more than it's going into your 403(b). Also, if you have children or a spouse (and file jointly), that will impact your repayment amount until IBR. Also re: (b), if at some point you don't qualify for IBR but it makes sense to continue on the PSLF track, then you can switch to a 10-year standard repayment amount and that will count towards PSLF. That payment is calculated using the amount of debt you graduated with, not the amount you carry when you switch.

Because your IBR payments will be $0 for the first year, if you will be working in qualifying employment, I recommend consolidating and going on IBR ASAP. That way, you will not waste any of those qualifying months. Also, your payments next year will be based on your 2013 taxes, in which your AGI reflects only 6 months or so of your salary (so, lower IBR payments for your second year as well).

The other reason to start the consolidation / IBR process ASAP after graduating is that it takes a long time. I would except 3 months for the consolidation and then they will screw up your IBR application so you will have to re-apply for IBR. In fact, I would just not apply for IBR when you consolidate because the loan servicer won't get the paperwork and will put you on standard anyway. So you might as well wait until your loan is assigned a servicer to apply for IBR, so you know where to send the IBR paperwork.

Based on what you're saying, it almost behooves me to maximize my Roth and 403(b) contributions correct?

Fortunately for me Direct Loan is my only loan service provider so I don't need to consolidate. I've already submitted an application to get put on IBR and that's pending.

lark

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Re: Graduating medical student in need of some advice
« Reply #11 on: May 10, 2013, 06:35:39 PM »
Yay for pediatricians! I'm a pediatric hospitalist a couple years out of residency. Are you planning on a fellowship/academic career tract or are you interested in general peds? If you are planning on fellowship, IBR and loan forgiveness should work great because you'll already have 6/10 years at a relatively low salary and most pediatric specialists are employed by non-profits. If you are interested in general peds, look at federally funded community health center positions. Community health centers in Colorado will forgive up to $50,000/year in some cases and they have great vacation/benefits packages.
Either way during residency work to minimize living expenses as much as possible and at a minimum max out your Roth every year. Maxing out the 403b/401K becomes much more important post residency to minimize your tax burden and lower your loan payment amount.
Enjoy your last bit of free time and good luck with residency!

brokeresident

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Re: Graduating medical student in need of some advice
« Reply #12 on: May 11, 2013, 08:44:06 AM »
Yay for pediatricians! I'm a pediatric hospitalist a couple years out of residency. Are you planning on a fellowship/academic career tract or are you interested in general peds? If you are planning on fellowship, IBR and loan forgiveness should work great because you'll already have 6/10 years at a relatively low salary and most pediatric specialists are employed by non-profits. If you are interested in general peds, look at federally funded community health center positions. Community health centers in Colorado will forgive up to $50,000/year in some cases and they have great vacation/benefits packages.
Either way during residency work to minimize living expenses as much as possible and at a minimum max out your Roth every year. Maxing out the 403b/401K becomes much more important post residency to minimize your tax burden and lower your loan payment amount.
Enjoy your last bit of free time and good luck with residency!

Glad to see a pediatrician on MMM! I do plan on specializing in neonatology or pediatric intensive care (I love the ICU), so the PSLF program appeals to me with the 6/10 years covered.

Aside from having minimal living expenses and maximizing the Roth during residency, any other advice? For some reason my hospital doesn't match in its 403b until after intern year, so I'm debating if I should contribute to it this year and, if so, how much.

Hamster

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Re: Graduating medical student in need of some advice
« Reply #13 on: May 11, 2013, 09:34:08 AM »
If you can afford to fund the 403b, you should still do so (I would personally suggest a few months' emergency fund set aside first). The 403b is tax-advantaged, and it reduces your AGI, which will reduce your monthly payments on the IBR. Also, beginning retirement savings aggressively during residency allows more time for compounding in the more traditional (>59 year old retirement age) retirement accounts. Depending on fellowship training, we don't really start earning until most people with just a bachelor's are 7-11 years into their careers... at the age when MMM was retiring :-)

The Roth won't reduce your AGI, so won't help reduce your loan payments, but it has so many other advantages I would probably fund it first.

mushroom

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Re: Graduating medical student in need of some advice
« Reply #14 on: May 11, 2013, 10:03:10 AM »
Welcome to the forums! There are a few pediatricians (me included) that hang out around here.

I like www.whitecoatinvestor.com for PF advice geared towards doctors.

But honestly, just thinking about your finances and not throwing around money everywhere on the expectation of a high salary later (or even once you have it) will get you really far. There's a doc in my group who doesn't even contribute to the 401K even though it has a 3% match, which seems insane to me. Don't forget that we do get a late start as Hamster said, plus usually a nice debt burden.

I paid off my loans by the end of residency because I took a break after residency to travel the world with my husband for a year and I didn't want to deal with student loan payments/interest accumulating. I wasn't sure that I would go somewhere with a loan forgiveness program. Of course after coming back I now work at an FQHC center and am now kicking myself a bit...plus I looked at another non-FQHC job that offered a generous loan repayment program even with a high salary so there are definitely places like that out there.

lark

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Re: Graduating medical student in need of some advice
« Reply #15 on: May 11, 2013, 10:03:38 AM »
I'm not using PSLF (my student loans weren't that bad $115k @ 3.375%--goal is to pay off 45k this year), but my cousin is a physical therapist with $250k+ in loans. And the big question is will the PSLF program still exist in 10yrs? I told her to think about saving what she would be paying in payments or interest and investing it in an index fund. If the program no longer exists, she won't be as far behind in repayment. On the other hand, if the program stays around she'll have a huge boost to her 'stache.
I'm not sure I would put a lot of money in the 403b in residency/fellowship, probably just enough to qualify for the match. BTW it's pretty awesome that your hospital matches for residents, mine didn't. Now that I'm out of training I max out my 401k for tax purposes.
What's your living arrangement for next year? I saved a ton of money (and time) in residency by only living a couple miles from the hospital and by having a roommate. Actually, I still have a roommate (she's an ER nurse who works nights and is never home and pays half my mortgage!)
The easiest way to avoid lifestyle inflation is to hang out with people other than doctors. Doctors complain about only making $51k/yr during residency. And then complain about only making $150k or $250k or $350k after. But most of my friends are teachers, engineers, physical therapists and somehow they manage to survive on less than $100k AND live a good life. If I spend too much time with my med school friends, it's easy to get discontent and start complaining about how underpaid I am as a pediatrician instead of thinking about how much more I love my job than my friends who are already becoming bitter about medicine.

Spork

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Re: Graduating medical student in need of some advice
« Reply #16 on: May 11, 2013, 10:25:09 AM »
The easiest way to avoid lifestyle inflation is to hang out with people other than doctors. Doctors complain about only making $51k/yr during residency. And then complain about only making $150k or $250k or $350k after.

Amen.  A very close friend of mine made $25 a month during residency (working 48 hour shifts).  Yes, there's been some inflation since then, but even if you account for that, it comes to abut $2400/year in today's dollars.  To this day he drives a beater 1984 Chevy, even though he could afford to drive pretty much anything he wants.  Just don't get caught up in the lifestyle.

brokeresident

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Re: Graduating medical student in need of some advice
« Reply #17 on: May 11, 2013, 07:01:21 PM »
I'm not using PSLF (my student loans weren't that bad $115k @ 3.375%--goal is to pay off 45k this year), but my cousin is a physical therapist with $250k+ in loans. And the big question is will the PSLF program still exist in 10yrs? I told her to think about saving what she would be paying in payments or interest and investing it in an index fund. If the program no longer exists, she won't be as far behind in repayment. On the other hand, if the program stays around she'll have a huge boost to her 'stache.
I'm not sure I would put a lot of money in the 403b in residency/fellowship, probably just enough to qualify for the match. BTW it's pretty awesome that your hospital matches for residents, mine didn't. Now that I'm out of training I max out my 401k for tax purposes.
What's your living arrangement for next year? I saved a ton of money (and time) in residency by only living a couple miles from the hospital and by having a roommate. Actually, I still have a roommate (she's an ER nurse who works nights and is never home and pays half my mortgage!)
The easiest way to avoid lifestyle inflation is to hang out with people other than doctors. Doctors complain about only making $51k/yr during residency. And then complain about only making $150k or $250k or $350k after. But most of my friends are teachers, engineers, physical therapists and somehow they manage to survive on less than $100k AND live a good life. If I spend too much time with my med school friends, it's easy to get discontent and start complaining about how underpaid I am as a pediatrician instead of thinking about how much more I love my job than my friends who are already becoming bitter about medicine.

My fiancee and I are living together in an apartment. She's going back for her master's degree and we're splitting living expenses pretty much 50/50. I agree with you about hanging out with people other than doctors. I'm going to be doing residency in the same city where I was for college and medical school, so a lot of our friends are still finding their way or have lower income jobs.

Abe

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Re: Graduating medical student in need of some advice
« Reply #18 on: May 11, 2013, 09:43:57 PM »
My wife and I are residents, and agree with your assessment of avoiding the bitterness that seems to fester in medicine.  Even now, we make more money than we could possibly want to spend.  We moved from a fairly rural area to a big city, and I think people conflate "amenities" with "necessities".   I'd much rather spend $0 going to a park or lake than throw away money at a club or fancy restaurant. 
I agree with putting in money to get a match from your program (our programs don't do this). Beyond that, open an IRA with which to invest in low-cost index funds (i.e. Vanguard funds with expense ratio of 0.17% instead of 1% or more in retirement programs).

Rebecca Stapler

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Re: Graduating medical student in need of some advice
« Reply #19 on: May 15, 2013, 08:58:30 PM »
In terms of calculating your IBR payments, I highly recommend the calculator at http://www.ibrinfo.org/calculator.php

Fiddle around with it and calculate the impact of your 403(b) or traditional IRA contributions. IBR considers your AGI, and 403(b) and traditional IRA contributions are pre-tax, so they lower your AGI and therefore your IBR payments. If you have the $$ to make retirement contributions, you might want to go for a plan that will reduce your AGI while you're on IBR -- but balance that against the benefits of contributing to a Roth (given your low tax bracket now, the benefit of contributing after-tax to your Roth might outweigh the benefit of reducing your payment by $25/month).

I agree that allowing the interest to capitalize at the end of your grace period isn't a terrible idea if you know (a) that you will be working FT for a qualifying agency/non-profit and (b) your AGI will never exceed the max allowed to qualify for IBR. On (b), you can calculate your max AGI if you play around with the IBR calculator, using the same loan info by changing your income. Keep in mind that it's your AGI, so you can ostensibly make more than it's going into your 403(b). Also, if you have children or a spouse (and file jointly), that will impact your repayment amount until IBR. Also re: (b), if at some point you don't qualify for IBR but it makes sense to continue on the PSLF track, then you can switch to a 10-year standard repayment amount and that will count towards PSLF. That payment is calculated using the amount of debt you graduated with, not the amount you carry when you switch.


Based on what you're saying, it almost behooves me to maximize my Roth and 403(b) contributions correct?

Fortunately for me Direct Loan is my only loan service provider so I don't need to consolidate. I've already submitted an application to get put on IBR and that's pending.
No, contributions to a Roth don't reduce your AGI (they are after tax contributions), so they won't lower your IBR payments. Here is the calculation I would do:
Difference between IBR payment based on your AGI with 403(b) and Traditional IRA contributions and IBR payment without those contributions, multiplied by 10 years
versus
Difference between value of Roth IRA and Traditional IRA at retirement.

That's how I would decide between contributing to a Roth v Traditional