The average medical school student graduates with medical school debt of more than $183,000. Over ten years, at an average rate of 6% interest, this debt can total upwards of $295,000. Add this debt to the costs of malpractice insurance and running a private medical practice, not to speak of the cost of living and any outstanding undergraduate debt. Factor in the decline in medical reimbursements and you can see that medical school debt can be quite a burden for a physician just starting out. The Association of American Medical Colleges (AAMC) reports the average starting salary for a first-year resident was just over $52,000 a year in 2015.
Paying down this kind of debt can be difficult, but not impossible. There are several options for you to save money and make a dent in your student debt load. To pay down debt quickly and efficiently, here are some practical steps that medical professionals can take.
Use Your Signing Bonus to Make a Lump Sum Payment
Making a lump sum payment on student loan principal is a highly effective strategy for immediately reducing interest on the loan. Physicians can negotiate a signing bonus into their employment contract. According to Modern Medicine Network, signing bonuses are becoming standard practice given the current shortage of physicians. Bonuses can be anywhere from $20,000 to as high as $200,000 in special cases, according to Dallas-based Medicus Firm Signing bonuses have gone to 74-88% of physicians, with most physicians receiving a five-figure bonus. If you can negotiate a large signing bonus, using it can go a long way to knocking down your overall student loan debt and the interest you will owe over time.
Example: Applying a $25,000 bonus to a $183,000 loan principle can reduce interest paid over time by $19,200.
Think About Refinancing Your Student Loan
Physicians who have good credit and a secure job should consider the savings benefits of refinancing student loan debt. Benefits of refinancing include lower monthly payments, savings on interest payments and paying off your student loan debt faster. Also, any co-signee can be removed once the loan is with a new lender. Refinancing only makes sense if the interest rate offered is much lower than your student loan interest rate because it can amount to significant savings over the life of the loan. You’ll lose the benefits of your federal student loans, like the ability to defer payments if for some reason, you find yourself without employment. You would also not be eligible for Loan Forgiveness or for Income-Based Repayment plans.
Example: Refinancing a $183,000 loan from a 6% federal loan to a 2.5% private loan can amount to savings of more than $68,000 in interest fees over 10 years.
Switch to a Manageable Payment Plan
Repayment programs are an ideal option for physicians who don’t make a lot of money and carry a large amount of debt. A monthly payment of over $2000 a month can be quite a stretch for a new physician. The programs allow loan payments to remain in proportion to discretionary income. Payment options such as Income Based Repayment (IBR) or the Pay As You Earn (PAYE) are popular because they help keep monthly payments affordable. Under PAYE, monthly payments for first year resident could be as low as $290 a month, according to the AAMC.
There are four federal income based repayment plans: Income Based Repayment (payments capped at 10-15% of your discretionary income), Income Contingent Repayment (partial financial hardship assistance if the loan payments exceed 15% of discretionary income), Pay as Your Earn (limits payments to 10% of discretionary income if you qualify), and Revised Pay as you Earn (like ICR, plus eligible for undergraduate loan forgiveness after 20 years of eligible payments). Having a more manageable repayment plan can be welcome relief to a new physician making a modest income.
Note: Under the REPAYE plan, any interest not covered by your monthly payment on subsidized loans will be paid by the Department of Education for up to three years.
Consider Working in an Underserved Community
There are several programs on the state and federal level that provide loan forgiveness. Most require working in a Health Shortage Area (areas with underserved populations or where healthcare is inaccessible). Georgia Physician Loan Repayment Program, for example, sends physicians to underserved communities, repaying up to $25,000 a year for a maximum of four years. The Health Professions Loan Repayment Program in California grants physicians up to $50,000 for a two-year commitment of service in a medically underserved area (MUA).
The Public Service Loan Forgiveness Program offers federal loan forgiveness to physicians who qualify. The areas in need of medical care are usually economically depressed, under-resourced regions or areas that are undesirable to live in. But if you qualify and have the patience and compassion to commit your time to an area in desperate need you will be rewarded with more than a significantly reduced debt load. (Be aware that many not-for-profit organizations employ physicians through for profit physician organizations, making a physician ineligible for loan forgiveness.)
Example: Under a Loan Forgiveness Program, forgiveness of a $183,000 can be as much as $276,000 for an income based repayment (IBR) plan or as much as $281,000 for a pay as you earn (PAYE) repayment plan over 10 years.
Paying down medical student loan debt can be a challenging task. The good news is that physicians are currently in such high demand that there are numerous options available to help make paying down student loan debt a reality. For a comprehensive guide to your student loan debt reduction options, StudentLoanHero.com is a great resource to start your search.