From my experience, almost every single physician graduates from residency or fellowship with a significant amount of student loans. In our case, Christy graduated with well over $100,000 of student loans. Fortunately, her interest rate is around 2% and so it is very low on our priority list. For many others, the interest rate is more like 5-6%, and if the physician has private loans, then the rate can be even higher. If you have high interest student loan debt, then here are some student loan repayment options to consider:
- Physician employers are increasingly offering student loan repayment as a benefit. Unfortunately, it is taxed the same as salary, and if your student loans are at a very low interest rate, then you may prefer additional salary compared to student loan repayment. Some employers want to keep their salary at a certain amount, for precedent purposes in relation to other employees and future employees as well as for compliance purposes, but they may be willing to offer student loan repayment to help hire or retain an employee.
- There are some state and federal payment/forgiveness programs. I may research all of the different state programs in a future article, but the National Health Service Corps has loan repayment programs that are tax-free if you work in high-need, underserved areas. Some require a two-year commitment but then will pay even more if you stay longer than two years. There is also a Public Service Loan Forgiveness program if you work at certain charities or the government for at least ten years.
- For your government loans but generally not private loans, there are some income-based repayment options. Most physicians may earn too much for these programs, but some may qualify, especially if they have very large student loan balances. Under these plans, the physician has to pay a certain percent of her discretionary income (10-15% depending on the program) and any amounts remaining at the end of the payment period (20-25 years) are forgiven. You will often see the terms PAYE (pay as you earn) and RePAYE (revised pay as your earn) for these plans. White Coat Investor has a great article on this topic if you want to read further.
- Refinancing your student loans, especially if you have a high interest rate and none of the other options are available. Generally, you do not want to convert government loans to private loans, because then you lose some of the options described above as well as some protections, including those for physicians who become disabled. For private loans, however, it is worth shopping rates from time to time, including your local bank and online banks such as SoFi. Be careful with variable rate loans unless you are confident that you are going to be able to pay the loan off before the rate can rise significantly.
- Consider family help. If you have high interest rate student loans and no other good avenues for repayment, and if your parents have the means, then consider having them loan you the money to pay off your student loans. You would want to document the loan in a binding contract describing the terms of the loan, such as the monthly payment, interest rate, number of months, prepayment permitted without penalty, etc. Also, your parents will have to report the interest income on the loan. The loan will help reduce mom and dad’s estate, if that is a concern, and they can forgive the loan fairly rapidly without federal tax consequences through the use of annual gifts under the gift tax exclusion amount of $14,000 per donor to each donee.
- Keep an eye on pending state and federal legislation. Many different avenues are being pursued to help with the student loan crises. One option includes a employer plan much like a 401(k) in which the employer makes certain payments into the plan, and the employee can also contribute, with the money going towards student loan payment and being excluded from income. Most young physicians have 20 or more years left on their student loans, so it is very possible that something beneficial will be enacted while we are still making payments.
Before you take any drastic measures with your student loans, please consider consulting an independent, fee-only adviser who is familiar with the different options and will review those with you as part of your other debts and your overall financial plan.