Dealing with Medical School Debt

Our second profile involves an M.D. we’ll call Amy (not her real name). Amy, who is not married, completed her residency in neurology eight years ago and works in a not-for-profit hospital. She has been making monthly payments on roughly $200,000 of medical school debt under an income-based repayment plan since she finished her residency, with the goal of obtaining loan forgiveness through a Public Service Loan Forgiveness (PSLF) program in two more years. For those who are not familiar with PSLF, after completing a residency a doctor who works full-time for a not-for-profit or public institution (many hospitals qualify) or in an under-served area with a high need for medical professionals, can obtain loan forgiveness on the remaining balance of federal student loans after making qualifying monthly payments for 10 years (PSLF-qualified work must continue for the entire period.) 

It has been widely publicized that, although many people apply for PSLF, few actually qualify because of the program’s many strict requirements – For example, a single missed payment or incomplete documentation will disqualify the applicant. Amy’s financial advisor at Gold Medal Waters has been helping her to stay on track, so she has never missed a payment. He also made sure Amy knew not to make any extra payments or reconsolidate her loans, as doing either would violate the PSLF rules and would force the ten-year clock to restart. Amy also makes sure the hospital files the necessary paperwork every year to maintain her compliance with the PSLF rules. 

goldmedalwaters.com

​

Amy’s earnings are now ramping up and she is thinking about getting married and buying a house. Her significant other also has student loan debt and is also making his payments under an income-based repayment plan. Amy’s financial advisor provided some unexpected counsel: Maybe don’t get married yet – consider waiting until Amy obtains her loan forgiveness. While the advice is certainly not romantic, the logic is compelling. Amy’s significant other has income that is quite a bit lower than hers. If they were to get married now, his loan payments under his income-based repayment plan would dramatically increase. That would leave less of their combined income available for other priorities, such as home buying. Combining incomes through marriage affects both income-based repayment plans and loan forgiveness programs, something Amy’s advisor knew but many people overlook.

 

Another issue her advisor addressed was that, like many doctors, Amy was a target for life insurance and annuity sales pitches. Since she is employed by a hospital that provides life insurance as a benefit and she does not have a spouse or dependents who rely on her income, her advisor pointed out that she didn’t need the extra life insurance policy purchased during her residency. However, Amy lacked adequate disability insurance. The Social Security Administration has reported that one in four of today’s 20-year-olds will become disabled before reaching retirement age.1 Disability insurance is especially important for physicians, given the physical requirements of the job. Amy’s advisor helped her shift into the right amount and type of coverage. 

​

He also showed Amy how getting into the habit of saving for retirement early, even just a small amount, could make a huge difference in her future. She now contributes to a Roth IRA using the “back-door” contribution strategy. Even though purchasing an annuity in residency may not have been the best choice for her situation and her advisor counseled her to wait another year until she is eligible to withdraw the money without penalty. In the meantime, Amy and her advisor will consider what to do with the annuity money; using it for a down payment on a home is one option.