If you're like most new residents, you've got a pile of debt and a relatively low resident salary. Aside from signing a promissory note, you probably haven't thought much about your loans since you started school. The exit interview from medical school won't teach you anything about your debt. Your 6-month grace period starts ticking the day of graduation. It's time to get ready to make some decisions.
Before getting bogged down in whether to enter repayment, defer, or go into forbearance, you need to understand where your money comes from and where it goes on a monthly basis. Your debt may be a big number (ours is), but stop focusing on the total. What matters is cash flow or liquidity. This is basically your ability to pay your bills every month.
You will have fixed expenses such as your rent or mortgage, car payment, food, and utilities. According to one popular system, these fixed expenses should consume no more than 60% of your monthly income. Another rule of thumb is that your housing costs should consume no more than 25% (30% if you live in Boston, NYC, LA, San Francisco, etc), of your discretionary income. The remaining money should be evenly divided into retirement, long term savings, an "emergency fund," and your fun money. If you live in a high-cost city, that monthly salary of yours doesn't go very far.
If you choose to enter repayment, your loan payments should end up in the "fixed" category. We have some advice for how to keep those payments from destroying your budget. More on that soon.
Don't overlook this. Your car can break. Your basement can flood. Unexpected medical expenses, last minute plane ticket, doesn't much matter. You need a way to come up with cash in a pinch without raiding your long term savings, retirement account or investment account. Plus, you're an adult now, you shouldn't be relying on your parents. Set up an online account with a reputable bank that will pay you a decent interest rate (it's hard in today's interest rate climate, we know), and sock away 3-6 months worth of expenses. That's what the experts recommend. It may take you a while, but get started.
If you carry credit card (or other high cost debt), you must pay it down as quickly as possible. Deflect some money from the emergency fund and fun money categories and get rid of your credit card debt. The longer you keep it the more it costs you. You simply can't afford this on a resident's salary.
Like any financial plan, whether you repay your loans and the repayment program you choose is highly individual. Most of us cannot afford a financial advisor at this stage and, regardless, few of them understand the nuances of medical school loans and residency and just see you as "future doctor."
In the past, economic hardship deferment was widely available and utilized by most medical and surgical residents to defer their loan payments during residency. Unfortunately, recent changes in the law eliminated this option for most of us.
You don't have to start paying your loans back right away. If you don't wish to enter repayment, your options are forbearance, where payments are deferred but interest will accrue (and eventually capitalize) on your loans, and some form of deferment. Deferment is usually the better option, and there are several (albeit highly restrictive) ways to qualify.
Why should you consider repayment as a resident?
We were chatting with some of our co-residents about loans and realized that we were the only ones currently in repayment. When we asked why, they all mentioned some variation on, "I'm going to make more money once I'm an attending...I can just pay it off then."
That's true. But for many of us, there is a better way. It means a little more sacrifice now for a potentially large payout later.
There are a few options which may make sense for you: a federal consolidation loan, Income Based Repayment and Public Service Loan Forgiveness.
Income-Based Repayment (IBR)
IBR became available July 1, 2009, and can significantly reduce monthly payments for residents. IBR takes into account your resident salary and limits monthly payments to 15% of the resident’s discretionary income (defined as your Adjusted Gross Income - 150% of federal poverty limit for your family size). In addition to making your loan payments manageable, there is a federal subsidy which prevents additional interest from accruing on the subsidized portion of a resident's loans, for a maximum of three years. After 25 years of qualifying monthly payments, the balance of the loan is forgiven. Given the salary most physicians earn after graduating from residency, this is not a meaningful incentive, but the program is still worth consideration for its other benefits.President Obama has also introduced legislation recently which would lower payments to 10% of discretionary income and bring the forgiveness bar down to 20 years of repayment.Public Service Loan
Yes, even as a specialty surgeon, this program may save you significantly. This program forgives the outstanding balance on your eligible loans after making 120 qualifying monthly payments (10 years), so long as you are employed by a qualifying nonprofit hospital or university. Fortunately, most academic medical centers qualify. This means that if you complete a 6-year plastic surgery residency, a one year fellowship, and are employed for 3 years in a hospital-owned practice or full time at a university, the balance of your loans could be forgiven. This program is worth a serious look and is the reason we entered repayment as interns.
Federal Consolidation Loan
Through June 30, 2012, student borrowers with at least one commercially-held FFEL loan and at least one federally-held loan can consolidate the commercially-held FFEL loan(s) with the Direct Loan program. Borrowers who qualify for this consolidation program will receive up to a 0.5% interest rate reduction (0.25% off the current interest rate on your loan plus 0.25% for enrolling in their automated payment program). Additional information can be found here.