The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: ethilo on March 29, 2013, 11:21:15 AM
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Hey all,
I have a challenge for you money managers out there:
I am currently a 3rd year medical student, thinking about how to best take down my anticipated $230,000 loan debt when I graduate. The APR is a fixed 7.5%. When I graduate, I will immediately go into residency training and start earning a salary and have to start paying back loan debt. I will have a salary of ~$47,000 which gradually increases to about ~$52,000 after 4 years before taxes. Once out of training, the salary shoots up to anywhere from $150,000 - $250,000. At this point I'll have to pay for malpractice insurance which I'm anticipating will be ~$20-40,000 a year and continue to pay off loans.
Factors about how I live now:
- Single, male, 26 year old, no pets
- Right now I can live comfortably on around $17,000/year including a rent of $800, If I act fairly mustachian and could potentially survive on $15,000. I can safely assume being able to save ~50% of my take-home salary in residency if nothing changes.
- Who knows if I get hitched during residency. That could change a lot...
A few options exist:
- Pay loans with the standard minimum repayment of 7.5% of the loan, annually (~$1400/mo).
- Claim "hardship forbearance" where you can opt to pay no payments on loans during residency training, yet continue to accrue interest.
- "Income based repayment plan: Since 7.5% minimum loan payments are pretty stuff for residency salaries ($1400/mo repayment equals about 35% of pre-tax take-home salary), they have an option to repay it at 10% of your salary instead, which drops minimum monthly payments down to ~$5,000/year for residency, but at the cost of it being higher when an attending (like $20,000/year). APR remains unchanged this whole time, so you accrue more interest in residency than in the a standard payment method if you are paying minimum payments with both methods.
- The student loan forgiveness plan: If you make ALL minimum monthly payments on time for 10 years straight starting at the beginning of residency (whether it be standard payment or with IBR method), you can wipe your remaining loans completely away. Rules: you must make ALL payments on time. You must work in a 501c nonprofit hospital for those 10 years (almost all academic medical centers).
- 0% down-payment on a home for first-time physician home-buyers (I guess it's because MDs have a good track record?). There is an option in a lot of states/banks I'm looking at where physicians can purchase their first home with 0% down payment to the bank. That would certainly make me have a lot more debt...
Major strategies:
- One potential strategy is to do IBR, stay in a longer residency/fellowship (for ~8 years) so you keep your income low and thus loan payments low, then work the remaining 2 years at an academic hospital at lower attending's salary (leaning towards $150k) until the loans are wiped away, THEN switch into private practice where you make a larger salary.
- Another strategy is to do a short residency (4 years) using IBR, go right into private practice where salaries are going to be much higher than at academic institutions (leaning more towards the $250k), and then start paying that debt off as fast as possible.
- Another might be a short residency with standard loan repayment, then pay it off slowly over a long time and investing money primarily in things that have a higher rate of return than the rate of loss from the loan (7.5%).
No, I will not sue you for your ideas, I do not represent any financial organizations, I have no relationships to disclose. This is simply a fun exercise that I can do on my own but I thought you all might appreciate the mental exercise too and I'd love to hear some ideas.
Thanks!
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At 7.5% paying down the debt should be the priority. I would do the four years at IBR then go private. The key here is keeping your cost of living low even as your pay increases significantly.
I'd also pay more than the minimum even when on a low salary.
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Ethilo,
I'm a pediatrician 2 years out of residency. I'm still working on tackling my student loans, but I'm way ahead of most of my co-workers and med school friends. Here's my advice:
1) Absolutely do not choose your specialty based on salary/length of training. Medicine is way too much work and too much liability to be stuck in a field you hate. I know people who chose fields based on income potential and none of them are very happy.
2) Live as inexpensively as possible: during school, residency, and after training. In med school my rent was $250/month, in residency $375 per month, and now $500/month. Roommates make life so much cheaper! Seriously think about having a roommate esp 4th year and residency when you are never home anyways.
3) If you can, avoid taking out the maximum allowable for student loans. They allow a ridiculously large amount for living expenses.
4) Consider cost of living for the area when looking at residency options, especially since most programs have similar salaries. Omaha is much cheaper to live in than NYC.
5) If you are doing primary care and enjoy caring for underserved populations, look at federally funded community health centers. I have some friends who work at one and almost all of their loans will be forgiven in less than 5 years.
6) Pay as much as possible during residency. 7.5% adds up quickly.
7) Be careful--it's difficult to know if loan forgiveness will exist in it's present form in 10 years or if academic medicine would make you happy. Keep your options open.
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Are these government loans? The only way you can get 10 yr forgiveness from a gov't loan is if you go into public sector or nonprofit work. Otherwise, forgiveness is only available for IBR, and is after 25 years, at which point you will have to pay income taxes on the portion of the principle forgiven. Also, once you are making 150k+, you will likely no longer qualify for IBR...
If it's not the federal program, you will likely still need to pay taxes on the forgiven portion of the loan (barring the passage of legislation to forgive that as well... it's been proposed several times).
Having said all that, I think you need to ask yourself several things:
-can I afford to make the standard payment?
-Am I OK with the ethics of paying less than I can afford?
-Do I really want this loan hanging around my neck any longer than absolutely necessary?
If I were to go into repayment tomorrow, on my current salary, I would have to enroll in the IBR (I expect to be making more when I actually start paying). But I could afford to pay more than what that payment would be, and I would most likely do so, because I personally feel that if I agreed to repay something, I should make every effort to do so. I'm also not particularly confident that the rules won't change some time in the next 25 years, and I really don't like debt. You may feel differently.
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I guess I don't understand why you think this is a problem.
Continue living on $15-20,000 a year. Pay the rest on the loans, maximizing the payment.
Once you are in private practice, continue living on $20-30,000 a year. Pay the rest on the loans.
The loan balance will melt away at a $150,000 a year salary. In a few years it will be gone.
Continue living on $30-40,000 a year once the loans are paid off and pay off your house.
If you don't screw up on who you marry, you'll be financially independent in no time.
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Actually with Public Service Loan Forgiveness, you aren't on the hook for taxes. The only trouble you might run into with that scenario is not qualifying for IBR once your salary goes up. In that case. You'd be put on an accelerated payment plan to finish paying the loans within the remainder of your original ten year term.
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Actually with Public Service Loan Forgiveness, you aren't on the hook for taxes. The only trouble you might run into with that scenario is not qualifying for IBR once your salary goes up. In that case. You'd be put on an accelerated payment plan to finish paying the loans within the remainder of your original ten year term.
Yeah, I said 'otherwise' to indicate that the 25 year payment and taxes were both features of non-PSLF. I guess I could've been more clear. I think the bigger challenge is the salary increase, though. If you 'outgrow' IBR, they'll make you pay more than your normal payment in order to get it paid off more quickly. With the added interest accrued, it ends up costing more in the long run- and at seven and a half points, that's costing more in inflation-adjusted dollars. Unless you're confident you'll qualify for IBR the whole time, or truly can't afford the regular payments when you start out, it's not the advantage it seems to be.
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From what I understand, with ibr, no interest accrues the first three years as the govt pays the difference.
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yeah, I don't know the exact amount of time, but 3 years sounds about right. OP was talking about a minimum of 8 years, though.
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One potential strategy is to do IBR, stay in a longer residency/fellowship (for ~8 years) so you keep your income low and thus loan payments low, then work the remaining 2 years at an academic hospital at lower attending's salary (leaning towards $150k) until the loans are wiped away, THEN switch into private practice where you make a larger salary.
Giving up a higher salary just for the student loan forgiveness is almost never a good idea. The amount you will forego in lost wages generally beats the loan forgiveness by MILES. Those programs are great for people who wanted to go into those particular fields already, and who never planned on making much.
If I were in your shoes, I would take IBR now, but try to pay as much extra as possible while in residency. That gives you some flexibility, but at 7.5% you won't want to let any capitalized interest accrue if you can possibly avoid it. Like Lark said, choose your path based on what you actually want to do, then adjust your repayment method accordingly. Don't deliberately choose your path to make less money (or more) if it isn't actually a specialty you want to be in. In addition to the GOBS of money you are spending to become a doctor, you are also giving up years and years of your life for it. It would be tragic if, after all that, you went into a field you hated just for money.
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From what I understand, with ibr, no interest accrues the first three years as the govt pays the difference.
The gov't will pay the difference between your payment and the interest accrual on the subsidized portion of your loans. Grad school loans are unsubsidized, so you'd still be on the hook for the interest on those.
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My grad school loans are subsidized. I'm sure because I only have grad school loans.
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One thing I just learned about IBR is that interest only accrues on the original principle and does not compound. From IBRinfo.org:
If your reduced payment under IBR does not cover the interest on your loans, the government will pay that interest on your Subsidized Stafford Loans during your first three years in IBR. After three years, and for all other loan types, the interest will accrue but not compound. That means it will be added to your principal, but interest will continue to accrue only on the original principal amount. Anything you still owe after 25 years of qualifying payments will be forgiven.
Something to think about...
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My grad school loans are subsidized. I'm sure because I only have grad school loans.
Yup. I was thinking of Grad Plus loans. Of course, they did end subsidized loans for grad school in 2012.
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My grad school loans are subsidized. I'm sure because I only have grad school loans.
When did you take them out?
OP is still in school, and appears to be taking out pretty close to the max in loans. So through 2012, at least a portion of the loans will be unsubsidized, and as of this school year, there is no such thing as a subsidized grad loan.
I did some math last night as related to this post... the long and the short of it is that if the OP could come up with the equivalent of the standard 25-year payment, pay the IBR payment, and invest the difference for 8 years getting average returns, they would end up paying an extra $110k over the life of the loan, but their investment would yield over 360k (both figures in real dollars, not inflation-adjusted). So from a pure investment standpoint, it might actually make sense. Still, that is a massive amount of loans, and I personally wouldn't want that much hanging over my head any longer than necessary.
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My grad school loans are subsidized. I'm sure because I only have grad school loans.
When did you take them out?
OP is still in school, and appears to be taking out pretty close to the max in loans. So through 2012, at least a portion of the loans will be unsubsidized, and as of this school year, there is no such thing as a subsidized grad loan.
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Mine were (quite) some time ago, and I didn't know about the change.
Not sure what I think about that, actually. There are probably too many loans out there for everyone's good, including borrowers, but if we're going to subsidize, why not subsidize the ones for the folks most likely to be able to pay them back?
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It's true, as of 2012, I no longer got subsidized student loans. However before that, they would only subsidize something like $7k of my $60k-worth of loans each year so it wasn't like I was missing much but not having subsidized loans anymore, it's just basically accruing interest for an extra 2 years which in hindsight is really not that big of a difference.
I feel terrible having to take out as much loans as I have been, but I go to an expensive school (Wake Forest University, currently $47k per year) and it was the only school I got into. I'm from WA and the only state school is UW which is very tough to get into. Would have made the loans a heckuva lot more manageable. Not a lot of scholarships out there for white males from a middle class family...
Anyway, I thought of this as more of a fun interesting money game than anything else. I do not plan to choose my specialty solely based on the money because I know any of the areas I'm considering I'll have more than enough. Nevertheless it's fun strategizing early!