New physicians borrow on average over $200,000 to pay for the extensive training required to secure a DO or an MD after their names. When they graduate, they have many options for repaying that debt, as we explained in a previous article on federal student loan repayment options.
The repayment strategy a new physician chooses will affect their finances for the rest of their lives. After extensively researching different options, including private loan refinancing, which we will discuss more in detail later, we settled on two repayment strategies that we think will work best for the majority of residents.
1. If you’re pursuing an academic career or planning to work for a 501(c)(3) organization that qualifies for Public Service Loan Forgiveness (PSLF): You’ll want to go for PSLF.
In this case, the most important thing is to get into the Revised Pay-As-You-Earn (REPAYE) plan as soon as possible if you are single, and either REPAYE or Pay-As-You-Earn (PAYE) if you are married to an income-earning spouse. Take advantage of the interest subsidy and pay the minimum monthly payments.
Stay in REPAYE throughout residency and fellowship, then switch to Income-Based Repayment two months before you graduate and start working to take advantage of the capped maximum payment. Continue to work for a nonprofit institution; once you have made 120 payments, have the remainder of your loan balance forgiven.
Hint: Skip the mandatory six-month “grace period” for entering PSLF by consolidating your loans. Upon approval, you can start making those first 12 qualifying payments based on last year’s income as a medical student. For many of you, that will be $0 a month.
2. If you’re going into private practice: Once you start residency, look at private refinancing. If the rate is better than what you would get with REPAYE, then refinance, if not, then just enter REPAYE for the duration of residency and get the interest subsidy. After you graduate, refinance privately with whoever will offer you the lowest interest rate, then aggressively pay your loans off with your salary.
More on private loan refinancing
In a previous article, we covered federal student loan repayment plans. An alternative to choosing one of these plans is to refinance your federal student loans with a private lender for a lower interest rate. If you qualify, you can refinance private loans as well. Here are the pros and cons:
Pros: You could save money! The lower interest rate could cut your total payment down by tens of thousands of dollars over the life of the loan.
Cons: Not all lenders will refinance residents. Two that we know of who will include Darien Rowayton Bank (DRB) and Link Capital. DRB offers no capitalization of interest and $100 a month payments during residency. Link Capital offers $75 monthly payments for certain residents.
You may not be offered a great rate if your credit history is less than stellar and/or your income is low. That being said, even if the rates that you are offered as a resident are not worth refinancing for, once you become an attending that may change.
You may not get as good a deal as you thought if you opt for a “teaser” low interest rate that is flexible. Variable rates that are attractively low now could become a real pain—or even unsustainable—in later years of repayment. For this reason, a variable-rate loan is best if it is a short duration (five years or hopefully less) rather than 10 years or longer. Make sure to check the variable rate cap and calculate whether you can afford it.
About the authors: Jesse Richards, DO, is a first-year internal medicine resident at the University of Kansas in Kansas City, Kansas. Caleb Scheckel, DO, is a first-year internal medicine resident at the Mayo Clinic in Scottsdale, Arizona. Both physicians have large federal student loan debt burdens and have spent many hours researching the various repayment options as well as other ways to handle medical student debt. They wanted to share what they learned with others.