Are medical school loans too complicated for doctors to understand?

May 19, 2012 9:55 PM

How would a doctor fresh out of residency figure out how to manage her new income and address her med school loans?

My friend is due to finish her residency this summer, and she's trying to make plans about paying off her medical school loans. She's got 8 years of medical training under her belt, but she can't seem to figure out her own finances. Furthermore, advice so far has been anecdotal, absent or conflicting. How can my friend figure out what to do?

Here are the particulars:

She will be completing her residency in family medicine at a public hospital, and plans to continue working there. Her medical school loans are large and include private and federal loans (some of them are "direct"). As of July, her salary will approximately double. Aside from the educational loans, she has no other debt.

She is worried, quite justifiably I think, that her financial situation (set of loans, participation in loan-reducing programs/incentives, etc) is arranged very sub-optimally and could result in paying much more interest than necessary over the coming years and decades.

One of her colleagues recommended consolidating her loans under the Special Direct Consolidation Loan Program, but she was instructed that this only applies to federal loans.

Another colleague recommended Public Service Loan Forgiveness, but that requires her to consolidate into Federal Direct Loans.

Her medical school and her residency program have not given her any advice. Additionally, past alumni have not been helpful because the loans and loan repayment plans seem to change on a short timescale (both of the programs that she's looked into only started in January of this year).

She's been really stressed about this. Financial advisors seem expensive and somehow inappropriate (since it's debt, not capital, that she is trying to manage). There are some services aimed at people in her situation, but it's hard to know if they are the right people to ask.

So the questions for the hive mind are:
What's the best plan for paying back (big) student loans?
How does one find out about his or her options for loan repayment? (Particularly in the context of working in primary care and/or public service.)
Does my friend need to hire a financial advisor? How would she find one that understands the ins and outs of debt from student loans?

posted by emmykm to Work & Money (8 answers total)

I'm using GL Advisor, on the advice of several friends who graduated last year. I heard fantastic things about them, and have already gotten my assessment. My current plan (with about $300K in debt - yay!) is to use the Special Direct consolidation for the loans that it applies to, and consolidating my other loans. From there, I'll be able to participate in income-based repayment (probably not an option if your friend is goign to be an attending). They basically look at your loans and compile the paperwork for your review. I figure that I'll use them for the first year of residency, at least, so that I can get myself in the right repayment programs. If I feel like I'm getting enough utility out of the service, I'll keep using them. They'll also do your taxes as part of the $450 fee.

Regarding the Public Service Loan Forgiveness, there is a form that she should submit so that she gets credit for the payments she makes in case the government decides to bar physicians from being able to participate in forgiveness. If they do, she should be able to get grandfathered in.
posted by honeybee413 at 10:48 PM on May 19, 2012

Consolidation of loans (combining multiple loans with different interest rates and payment plan options into a single loan with a weighted average interest rate and a single payment plan) is in most people's best interest these days, although it's important to note that whether it's a good idea depends on the interest rates of the loans being consolidated. Most med student have the majority of their loans as federal loans with private loans being only supplemental, so she'd likely be able to consolidate most of her loans through the federal program.

I am not as familiar with the Public Service Loan Forgiveness Program, since it started up after I graduated from medical school, but I did note on their website that your repayment plan must be an income-based or income contingent plan, and if not, must be a 10 year standard repayment plan. As they point out, since 120 payments must be made on the loans before the loan forgiveness kicks in, that's 10 years worth of payments and if you're on the 10 year plan, your loans should be paid off in full at that point and there would be no remainder to forgive. In other words, it's pointless to be a part of the program unless you're able to extend your repayment plan beyond 10 years. Just to be clear. If she is able to do this and plans to work at a qualifying institution for the next 10 years, it seems like a no brainer to apply for it.

Yes, I do think a financial advisor is a good idea for your friend, and not just because of the loans situation. There are a lot of tax implications related to a significant increase in income such as the one you get when you graduate from residency, and also she needs to ensure that she is maximizing her retirement savings at her new job. I recommend using a fee-only financial planner, rather than a financial advisor who gets paid commissions based on products they sell you. These people are more likely to have her best interests at the forefront.

I would also just like to say to your friend, from one doctor to another, that what's really going to make the difference in her financial future is not going to be the loans, although it's good to be careful about them and make sure she's doing the best she can with them - the biggest factor she should be concerned with is lifestyle inflation (i.e. her house, her car/s, her kids schools, her clothing/stuff, etc). Falling victim to lifestyle inflation happens to many physicians, who, as you rightly point out, have no training in how to deal with finances. There are physicians making huge salaries out there who are living paycheck to paycheck or not saving anything for retirement. I knew people who used private loans to buy flat screen TVs in medical school. That is how dumb we can be. I strongly recommend that she read some of the many fine personal finance blogs out there that are giving fantastic advice out for free daily, many of which feature articles on student loans and loan repayment in general and how to knock out your debt as quickly as possible. Please feel free to PM me with any other questions.
posted by treehorn+bunny at 1:01 AM on May 20, 2012 [3 favorites]

I recently met with a Certified Financial Planner to deal with similar issues. Part of their certification is ethics training, meaning they are actually obligated to provide advice that is actually in the best interest to their clients. My CFP is an employee of my credit union, so the service was free to me as a credit union member. The whole experience has been very useful and empowering, and I would highly recommend it.
posted by hydropsyche at 5:47 AM on May 20, 2012

If she needs a complete intro-to-personal-finances, Try this.

If she just wants some tips on "what next", if young and healthy, she should focus on paying off her debts ASAP (in order of highest interest first). The joke they call "interest" on short-term personal savings doesn't even keep pace with inflation, so don't bother saving anything substantial (more than a few months' expenses) until after she retires her debt

That said, anything she can save pre-tax counts as the major exception to that - She should max out her 401k and HSA contributions right from the start.

Also, although debt consolidation might count as a good idea, she needs to understand that different types of loans have vastly different terms - For example, while you can't discharge student loans in a bankruptcy, the penalties of defaulting on them amount to "you will receive nastygrams forever but not much else", and they don't affect your credit anywhere near as bad as defaulting on a "real" loan.
posted by pla at 6:09 AM on May 20, 2012

I cannot handle anything fancy. When I graduated with all my loans, my sister sat me down and helped me work out an Allocated Spending Plan (aka a budget).

There's even a handy-dandy Google doc here.

Basically, she just needs to plug in her expenses, including the minimum payments on all her loans. The number at the bottom is what she has left over. Ideally, she can use this to punch up the payment on whichever loan as the highest interest rate (or however she wants to snowball her debt).

I've talked to financial planners but at this point in my career and my debt load, I can't really justify finding extra money to pay them to tell me to get a budget and snowball my debt. It's all daunting to start making real money and finding out how to manage it. I really recommend this approach so that she get her head around the nuts and bolts of it to appreciate her new responsibilities. It's slot going, but it's working for me.
posted by mibo at 6:14 AM on May 20, 2012

Managing her loans, as you correctly assess, is difficult because the programs change frequently and because depending on where she works there may be additional loan repayment programs (like the National Health Services Corps or similar state programs) available to her. This may very well be something she could use some professional help with. I work in a hospital system in a low-income area and there are 3 teaching clinics in my specialty. 2 of them are eligible for NHSC funds; the third is not for complicated administrative reasons. However it is eligible for loan repayment through a state program, which is utterly Byzantine in its requirements and has a website that looks like it was designed by simply scanning the contents of a file cabinet and posting them online at random. I know more than one person who simply gave up on it. So this stuff is confusing, highly local, and might very well warrant some professional level advice.

My suggestion to her would be to spend an afternoon looking into the various loan repayment programs out there and seeing which ones she might be eligible for, and then looking at the various consolidation options and then if she's still confused thinking about paying someone to help her.
posted by The Elusive Architeuthis at 7:59 AM on May 20, 2012

I just wanted to point out that I was recommending a Certified Financial Planner who, like mine, works for a credit union and whose services are free to members. I was not recommending that emmykim's friend pay someone. The nice thing about this service is that they will do a lot of the research for her that folks are recommending she do, and if one is overwhelmed by financial stuff, having someone whose job it is to do the research can be very helpful.
posted by hydropsyche at 11:18 AM on May 20, 2012

Response by poster: Thanks everyone (from me and my friend)!
posted by emmykm at 8:24 AM on May 21, 2012