Smart People with Big Debts

Robert DowdJanuary 31, 2020

College Planning

Having a national student loan balance over $1.6 trillion, multiple federal loan programs and payment options – you are not alone in feeling dazed and confused when it comes to repaying your student loans! This is especially true for physicians leaving school with extremely high debt balances, at times well into the six-figure range. The average student loan amount for an undergraduate degree is approximately $33,000 with an interest rate around 4.5%. All graduate students account for approximately 14% of enrollment, yet are responsible for 40% of the total debt accumulated. Medical students make up the majority of graduate debt (23%) with the approximate median balance from medical school reaching around $195,000 with an interest rate around 6.0%.

The average salary for a Primary Care Physician is approximately $223,000 (as of 2018), and average earnings for a Medical Specialist is $329,000 (as of 2018).  However, the educational and training path is rather lengthy. Depending on one’s specialization, it could take up to 10 years after achieving an undergraduate degree to get to full earning potential. Typically, once a student graduates from their undergrad program, they must pass the Medical College Admission Test (MCAT) before applying to a four-year medical program where, most likely, they would borrow more to cover educational expenses. The next phase is  a doctor’s internship, or residency, where the new physician would earn a lower salary for three to seven-years, depending on their specialization. If one were to sub-specialize, a fellowship would be the last step, which requires approximately one to three-years to complete.

If one were to go through medical school and pay on the traditional 10-year payment schedule, the payment would be approximately $2,500 a month. Residents can pay that amount while training but would be making around $60,000 as a resident, and that would make any type of standard of living unaffordable. Residents have the option to defer their loans by applying for a mandatory forbearance, which would allow them to make no payments until they completed the program. There is a catch to this option; once completed, all the interest that has accrued on their loans would capitalize and add to the principal balance. A seven-year residency would increase the loan balance by over $90,000 and the payment would increase to approximately $3,550 per month.

The federal government has different types of payment options not associated with the loan balance, and with these programs, traditional amortization would not come into play. These payment plans are based off a percentage, usually 10% – 15%, of the professional’s income for a given year. They are called Income-Driven Repayment (IDR) plans. These payment options are a great tool to utilize when a borrower has a large debt balance and a modest income. If a single individual making $60,000 during their residency enrolled in an IDR plan, instead of paying $2,500, they would pay approximately $344 per month. Once they completed the program and began receiving their full earning potential ($223,000), their payment would be around $1,702 per month. The majority of IDR plans are capped at the 10-year amortized payment, thus earning too much would not put them over or above the $2,500 per month payment.

There is another benefit of utilizing an IDR plan during residency; the payment will be eligible for Public Service Loan Forgiveness (PSLF), which allows a tax-free forgiveness of the balance of student loans upon completion of 120 cumulative payments. The borrower will have to be in the right type of payment program (IDR plans or traditional 10-year), the right type of loans (Federal Direct Loans), and the right employer (Government, 501(c)(3), Peace Corps, other non-profit organizations). If a student were to enroll into a seven-year residency and a three-year fellowship, essentially, they could pay their student loans off making $60,000 before their income dramatically increases to over $200,000.

Having a student loan plan is an important part of a financial plan. A goal must be set, and a strategy needs to be developed to help accomplish that goal. Paying the traditional 10-year payment indicated by the example above would cost the borrower approximately $300,750 in total (principal and interest). If that borrower were to be in a residency and fellowship for a total of 10 years, and they enrolled into an IDR plan, their total cost toward student loan repayment would be approximately $50,000. They would save over $250,000 in student loan payments and there would be no student loan debt after they completed their programs.

If you have or someone you know has questions about student loans, debt or debt management, please give us a call at 610-651-2777 – we can help!

Sample Medical School Costs:
University of Pennsylvania
Thomas Jefferson University
University of the Sciences
Drexel University
Temple University