If you are like most resident physicians in the 21st century, you are in debt. A lot of debt. The average post-medical school debt is currently reported to be around $190,000. This only represents the “average” and can be a bit deceiving. A recent Medscape survey showed that 24% of residents reported a debt of $200,001-$300,000, while 23% reported an excess of $300,000 in student debt. Add 12 to 14 years of lost wages and no investment in retirement while in residency and fellowship, and the cost of a total medical education will run about one million dollars.

To be transparent and to provide example, I attended the University of Washington, and I received in-state tuition. A caveat to my story is that I had a small family, and this increased my costs significantly compared to my single counterparts. However, it put me about on par with my private school colleagues. I left for residency with a grand total student debt of $343,143.

A snap shot of where I am now: I entered a rural family practice residency, and I am exactly halfway done with a three-year program. I have paid about $250 per month towards my loans on an income based repayment plan. My current student debt: $371,894.

So, where did that extra $28,751, or 8% increase, come from in just 18 months? Capitalized interest. My interest rates on average are 6%. Because of this, I expect to leave residency and start my career as a rural primary care physician with around $400,000 of student debt, with an expected initial yearly income of about $200,000 per year.

Career and specialty choice aside, the debt accrued for physicians is very real. Obtaining accessible and accurate advice on what to do with that debt is, at best, disappointing. My goal for this article is to educate, provide adequate resources that can help alleviate stress, set you — the reader and colleague — up to be financially successful, and hopefully make you “money wise” when it comes to your early career. I am not a financial advisor, though I have spoken with many. I have sat through as many presentations possible and have become determined to address my debt and find the financial options that will best propel my family to a healthy and successful future.  

Things to Consider After Residency: The Numbers

Most residents just try to ignore their debt, and some do not even realize how much interest they have accrued since leaving medical school. It is worthwhile to look at your debt yearly, either through your servicer — likely Navient — or through the FAFSA Loan Repayment Calculator site. The latter is a good place to review your loans and simulate different repayment methods. Many will make the mistake of thinking that once they are no longer making resident wages, all their financial troubles will be over. Please think again. Loan payments, taxes and retirement are all inevitable and have to be included in your planning.

I will use myself as an example, and as stated above, I have a family, so keep in mind that my deductions are higher than most. My current tax rate that includes Social Security, FICA, Medicare and State, is around 4% of my salary. My student loan repayment, which is determined by my discretionary income, is about 5%. However, 18 months from now, my tax rate will be about 30%, and my student loan payment will start around 8%. For some of you, specifically those who are single and those on a standard repayment plan, these rates may be closer to 33% and 24%, respectively. You can and should estimate your federal withholding tax using this year’s IRS withholding calculator. I prefer the Paycheckcity calculator to estimate State, Social Security and Medicare. You can put in all kinds of different scenarios and have a good idea of what Uncle Sam will be taking once you are making an attending’s salary.

Additionally, most residents are not putting away for retirement. However, once you enter your career, you have to contribute to a retirement plan. To not do so would be financial suicide. Time is everything when it comes to retirement, unfortunately. If you were 25 years old when you started putting away money for retirement, then 15% of your income would be a good start. However, if you are like many residents and fellows, you won’t even start saving until your early to mid-30s. The bottom line is you will need to put away between 20-25% of your income if you want to retire around 67 years old and live an “average” life.

The AARP has a calculator that will help you estimate what you will need for retirement and allows you to simulate different circumstances. I highly recommend you use this as you are planning.

What does all this equate to on a day-to-day basis? Again, I will use myself as an example. I am expecting that about $116,000 of my yearly income in my first decade of practice will go to loans, taxes and retirement. And that’s if I pursue REPAY with the goal of public service loan forgiveness (PSLF), which I will discuss more in-depth below. If, however, I were to pay off my loans over a 10-year period on a standard repayment plan, without forgiveness, then $148,000 of my $200,000 salary is gone, minus interest and deductions. If you consider that the average U.S. mortgage payment is around $12,500 annually on a basic home, then this leaves me with $39,500 a year for living expenses and savings for my children. In Idaho, which is one of the cheapest places in the country to live, annual expenses for a family of five is close to $35,000. So, by these numbers and without additional income sources, I would make enough to live likely paycheck to paycheck for my first 10 years as an attending.

If at this point you are thinking to yourself, “Well, I entered a specialty that makes more than $200,000 per year, and I will be just fine,” then there are a few things for you to consider. For one, you likely spent twice as long in residency, thus accruing twice as much interest. Secondly, the more you make, the more you are taxed. Thirdly, if you are using an income-based repayment plan, your loan payment will be much higher, up to double or even triple depending on what you owe. I would again direct you to the FAFSA Loan Repayment Calculator to estimate how high your actual payment would be given different financial situations.

In summary, at least for the first 10 years of practice, you can plan for around 70% of your income accounted for before living costs and before health and disability insurance:

• 25% to retirement
• 30% to taxes and deductions
• 8-24% to student loans

Loan Repayment Programs

There are several state-, federal- and hospital-based loan repayment opportunities that you should be aware of during your transition to “attendinghood.” If you entered a primary care specialty and/or are working with the underserved, you have a few extra federal and state options. Typically, these offer between $25,000 and $35,000 per year for four years. Some will give you a lump sum; many will not. Some require you to work in a certain region; some may require you to relocate. So, read the fine print. Search your local Health and Welfare website for state programs, and make sure to ask the clinic or hospital you plan to work for if they are grant recipients. The National Health Service Core is another federal option, but requires a lot of red tape. Most hospitals will offer you loan repayment in addition to a signing bonus, so expect this when looking for that first job. This is when it is important to remember that you have negotiating power, that you are now a needed commodity and have a significant say in what you are worth.

A few words of caution concerning loan repayment:

1. Almost all of these types of funding are taxable, meaning you can use the money to pay down your loan, but you also just earned an extra dollar’s worth of income that will be added to your gross wages and taxed. Even if you never touched the money and a hospital paid it directly to the servicer, it will come back to you as a 1099-C. This can be a problem if your finances are tight because the taxes do not get taken out of the loan repayment. They come out of your salary on Tax Day. For example, say you took on a directorship where you make $50,000 a year in addition to your clinical day job. You would allocate roughly 30%, or $15,000, for taxes, and you would add the remaining $35,000 to your savings and retirement — or to that new car you always wanted. However, if you receive that $50,000 as a loan repayment, the full $50,000 goes towards your loans, but you still have to pay that $15,000 of taxes. This amount will come out of your yearly salary when you file taxes. You need to gauge if the decrease in loan/interest amount outweighs the subsequent taxes and decrease in pay. One caveat to this is insolvency. Insolvency is a tax situation, or loophole, when your liabilities (i.e. forgiven student loan debt) exceed your assets (i.e. the money in your savings account). Technically, one could be insolvent at the time of loan repayment and avoid taxation. However, if you are going to pursue this, assure that you have a good tax accountant advising you beforehand to avoid any fines or mishaps. See this informative article concerning insolvency on thecollegeinvestor.com.
2. If you are pursuing PSLF, then accepting loan repayment may or may not be financially sound. This is because PSLF is the only program where at the end of your 120-payment period, all remaining debt is forgiven, and that forgiven amount is not taxable. If you are making other commitments in order to receive loan repayment, that loan repayment is going towards an amount that would have otherwise been forgiven by the federal government. You would be essentially giving money away and possibly taking on more responsibilities then is required of you.
3. What if the loan repayment is paid in a lump sum to you and you can use it to pay your monthly loan payment? Then, aside from the taxes as mentioned above, this may be a worthwhile approach as it decreases your monthly payments and gives you more liquid cash from your paycheck to invest as you see fit.
4. Many of the loan repayment programs will only allow you to pay off your medical school loans and will not allow you to pay down undergraduate portions. Some repayments will only pay federal direct loans and not private loans. Hospitals usually will pay irrespective of source, however. Just make sure you clarify.
5. Lastly, consider this: if you can afford the taxes up front, a lump sum offer (say $100-$200k) at the beginning of residency or when you sign on to a hospital is much better than a sum paid over four years. Having the ability to pay off your highest interest rate loans early reduces your future debt accrual from interest and makes your payments all the more effective, as more will go to the principal.

Here I would like to make a plug for a financial advisor. These professionals can be priceless to your financial future. As you are becoming the known experts on medicine, you should recognize that financial advisors are the experts on money. Note, however, not all advisors are equal and some may have ulterior motives to make money off of your investments. That said, the majority of State Medical Associations provide these services free to residents and new physicians. In addition, they are better versed than most in the intricacies and unique circumstances physicians face. I would recommend starting at your States Medical Association or Society. The Physicians Foundation provides a comprehensive list and link to each state’s organization.

Consolidating and Payment Plans

If you plan to make full payments on your loan over a ten-year time frame without PSLF, consolidation may be a wise move. Especially if you have several interest rates greater than 6%. In this case, you would use either a direct federal consolidator or private consolidator. There are several to choose from; just find one that will fit your financial plan. And note that once you consolidate your federal loans, they are likely not eligible for PSLF.

Lastly, some of you may have chosen to consolidate to a primary care loan at graduation or during medical school. These are designed for primary care physicians and usually have a lower interest rate. Just know that they are similar to private loans, as they do not qualify for most forgiveness programs.

For those using federal loans, as noted above, go to the FAFSA Loan calculator site and see what your options for repayment are. If your spouse has loans, they can be added into the calculation. Every payment plan from Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE) to graduated payments has its place for each financial situation. Realize that the income-based repayment plans are designed for a 20-year pay off with lots of interest.

A word of caution concerning the “forgiveness” that is offered after 20 years of payments on some of the plans. For one, if you pay the minimum for 20 years, you are paying a lot of money to the federal government in interest. Secondly, that “forgiven” amount is taxable. For example, if I chose to do the PAYE plan for 20 years, I would end up paying 1.6 times what I had owed at graduation, my monthly payments would increase from $1,300 to $3,600 gradually, and after the remaining $236,000 was forgiven on year 20, I would be taxed for that year. In other words, I would be taxed on $436,000 even though I only made $200,000 in salary. As mentioned above, insolvency may be viable at this point, but would need to be weighed with all of your accrued assets at that time.

Public Service Loan Forgiveness

Public service loan forgiveness (PSLF) is a loan forgiveness program that was signed into law by President George W. Bush in 2007. This was done to encourage further education and a commitment to public service. Simply put, the program is designed for an individual to make 120 payments on an income-based repayment plan while employed by a qualifying organization, namely a non-profit or the government, at the end of which time the remaining student debt would be forgiven and that amount would not be taxed.

For many professionals who want to work with the underserved, and are likely faced with taking less pay to do so, this program makes a lot of financial sense. Of late, however, the program has been a hot topic in the news as the current administration has been attempting to make proposals to remove it from the fiscal budget. Of course, this would be proactive, and those who already took out their loans would still be eligible and this is written into your promissory note. However, as the first wave of applicants have started applying for forgiveness, the reality has been a bit disappointing. This year, 41,000 people applied for forgiveness, and only 206 were granted. That’s less than 1%. However, it is difficult to determine the statistics that were reported, whether those who were rejected were actually following the due process to be eligible or not.

All is not lost, but there will continue to be unknowns, and if you pursue PSLF, there is an element of risk. That said, there are a few things you can do to assure that you are setting yourself up for success.

Savingforcollege.com has made a phenomenal check list that you should print if you plan to pursue PSLF. Also, many of your questions can be answered on the Federal Student Aid website, but I will provide a summary of qualifications below.

Loans that qualify:

• Federal Direct Stafford Loans
• Federal Direct PLUS Loans
• Federal Direct Consolidation Loans; consolidation loans as long as they are in the Direct Loan program
• Borrowers with Federal Family Education Loan (FFEL) loans must switch to the Direct Loan program to get the benefit

Eligible Payment Plans:

• Revised Pay As You Earn Repayment Plan (REPAYE Plan). Note: this is usually the best plan for PSLF dollar for dollar.
• Pay As You Earn Repayment Plan (PAYE Plan)
• Income-Based Repayment Plan (IBR Plan)
• Income-Contingent Repayment Plan (ICR Plan)

Eligible payments:

• Payments in good standing (need 120) that were made after 2007 and while employed by an eligible employer.
• These do not need to be consecutive (i.e. you can work for a private practice for a time and then return to a non-profit).
• Payments made while the loans are in a deferment, grace period, forbearance or in default do not count.

Eligible employment:

• Government organizations at any level (federal, state, local, or tribal)
• Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code. To see if your organization is a 501(c)(3), you can do a quick search on the IRS tax exempt website to see their filing status.
• Other types of not-for-profit organizations that are not tax-exempt under Section 501(c)(3) of the Internal Revenue Code, if their primary purpose is to provide certain types of qualifying public services.
• Keep in mind that most residencies are 501(c)(3). Thus, if you are making a minimum payment, albeit zero, that is still a qualifying payment. That means you could come out of residency with three plus years already qualified.

To set yourself up for success:

• Follow the check list every year.
• Fill out and have your employer fill out the employment certification form every single year. They will then tell you if your payments/employment qualify and there are no surprises.
• If you have not filled out the employment certification forms but are ready to apply, then make sure all your qualifying employers fill out parts 1 and 2 of the PSLF application.
• Use the calculators and resources in this article and test out different scenarios so that you are informed and have realistic expectations once you are an attending.
• Get a financial advisor — they are worth their weight in gold.

Image credit: Piggy Bank With Coins Around by Jacob Edward licensed under CC BY 2.0.

Eric S. Donahue, MD (2 Posts)

Peer Reviewer Emeritus

University of Washington School of Medicine

Eric is a graduate of the University of Washington and a resident at the Family Medicine Residency of Idaho. Eric is also an editor for in-House.