THE BLOG

Dealing With Medical School Debt -- Refinance or Forgiveness?

05/14/2015 05:29 pm ET | Updated May 14, 2016

Of any graduate professionals, from vets to lawyers to engineers, doctors tend to accumulate the greatest levels of student debt--and by no small margin. Despite that, the solutions available to medical residents and fellows are poorly publicized, and can be less than adequate. Medical school students generally graduate with upwards of $200,000 in federal debt, and varying amounts of private student loan debt. So what really are the best options for doctors in training?

Average Federal loan interest rates for medical students tend to hover between 5.5% and 7.0%. On a typical repayment plan--say, the 10-year standard--a resident will struggle mightily to afford the monthly obligation ($2,000+) without some serious belt tightening. Thus, many ill-advised borrowers will take the easy, but costly, route of putting their loans into forbearance during training. Income-based repayment plans are also a feasible alternative and can reduce your payment in the short term, but taken alone, they do little to help you out over the life of your loans. While either of these choices are theoretically doable, there are a couple of alternative options which will dramatically lower the out of pocket cost required to retire this debt. The first one I'll discuss is a federal program known as Public Service Loan Forgiveness, or PSLF.

Loan Forgiveness
Public Service Loan Forgiveness is a dream come true for some doctors. It promises full forgiveness on your federal loans after 10-years of monthly repayment on an income-based plan, assuming that borrower has been working full time at a non-profit entity. The main appeal is that those 10-years could include residency and/or fellowship, meaning that low (generally $250-$500/month) payments based on a residency or fellowship salary would still help you in progressing towards the required 10-years. This makes PSLF particularly alluring for doctors with longer residencies or fellowships, and larger loans balances. The main hurdle with PSLF is in the name: "public service."

Most doctors will simply not qualify for the program, as it contains strict conditions for what constitutes public service. Physicians must keep in mind that while they may physically work in a non-profit facility, if their paycheck comes from a private group, they do not qualify. Generally, PSLF is a program most applicable to doctors who foresee careers in academia or plan on practicing in underserved areas. Secondly, as a federal loan program, it can be subject to change.

Student loan debt has been a politically charged issue in the last decade or so, and repayment schemes have been haphazardly proposed, changed, and discarded by Congress. Having been enacted in 2007, the future of PSLF is far from assured--no borrower has even received the 10 year forgiveness yet. The program's political livelihood is also in question, at least for doctors. It was originally conceived primarily as an option for undergraduate borrowers, and law makers likely never envisioned six-figure earning physicians qualifying for tax-payer funded forgiveness. The program has already seen several challenges: President Obama's budget for 2015 contained a proposal for capping the forgiveness amount at $57,500. The measure did not make it into the final budget, but is hardly a good omen for the future of the program. On the surface, PSLF is an amazing opportunity for residents or fellows to lower their payments in residency, and end up with a big chunk of forgiveness.

Unfortunately, only a relatively small set of doctors will likely wind up qualifying, and even those that do, need to be aware of the potentially serious uncertainties surrounding the program's future.

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Refinancing
The second option available to those with medical school debt, is to refinance the loans; same idea as refinancing a mortgage. To put it bluntly, interest rates on federal loans are not good. The possibility of being eligible for PSLF is the only real reason to even keep your loans with the federal government at all. Refinancing offers two benefits relative to keeping the loans: a lower interest and greater flexibility with repayment terms. Considering the typical size of a graduating medical student's loans, even a moderate reduction in interest rates can have disproportionate effects. The main hurdle for housestaff trying to refinance their loans has been the unfortunate truth, that very few institutions are willing to refinance $200,000 in loans for someone earning $40,000-$60,000. Sometimes close relatives may be willing to cosign, but by and large, up until now, refinancing has only been available to attending physicians who are earning six-figure incomes.

To remedy this situation, there are programs that have been launched dedicated to the unique financial circumstances of house officers. It allows a resident or fellow to refinance any amount of federal or private student loan debt (well, there is a minimum of $5,000), and pay only $100/month all through training. This offers borrowers seemingly the best of both worlds, as the monthly payment is substantially reduced, while also decreasing overall interest accrual. These $100 monthly payments last for the entire duration of training, plus the first 6-months as an attending physicians. At that point, the borrower will begin on whatever standard repayment term was selected when they initially refinanced (terms offered are 5, 10, 15, or 20 years). If you assume a $220,000 initial debt level, and a federal interest rate of 7.00%, a resident stands to save over $50,000 in interest costs by refinancing to a rate of 4.75%. To summarize, this amounts to an assuredly lower interest rate, a minimal monthly payment, and great deal more spare cash on hand during a time of relatively limited means.

So there you have it. Forbearing your loans through all of training is more of an "out of sight, out of mind" option, but can result in a dramatic snowballing as interest piles up. PSLF offers a very attractive potential savings route. And loan refinancing seems to be the best choice for anyone else. All things considered, if you're looking to optimize your repayment, it is difficult to imagine a situation where leaving your loans untouched through training is the best option.

Aryea Aranoff is the Chief Operating Officer at DRB Student Loan, a marketplace lender and FDIC-insured bank offering low rate student loan refinancing to working professionals and parents with PLUS loans. DRB Student Loan is a leader in this space offering some of the lowest rates in the country on its student loans. As of February 2015, DRB Student Loan expanded its student loan refinancing program to residents and fellows.

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