Doctors can save a bunch of money paying back their medical school student loans whether they work for a university hospital, university-affiliated practice or even a private practice.
We’ve worked with hundreds of doctors here at Student Loan Planner. Many owe more than $300,000 in medical school student debt. Based on our experience, we’ll show how doctors can save the most money paying back their medical school loans.
In this guide, we’ll cover scenarios of doctors who go for public service loan forgiveness (PSLF) or taxable loan forgiveness as well as those who decide to pay back their loans aggressively.
We’ll also show you how to save even more money paying back medical school student loans while in residency.
The 3 best options for doctors to save money paying back their medical school student loans
We’ve done more than 1,800 consults and consulted on over $470,000,000 in loans. In our experience, we’ve found three overall approaches that save people the most money paying back their student loans.
- PSLF: This is one of the most powerful forgiveness programs. It’s available for people who have Direct student loans and who work full time for a nonprofit or government employer for at least 10 years. With PSLF, doctors should keep their payments as low as possible, save on the side and stay on track.
- Taxable loan forgiveness using an income-driven repayment (IDR) plan: For households that owe more than two times their income in student loans (e.g., doctors who owe $400,000 and earn $200,000 or less), selecting an IDR plan like Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE) for 20 to 25 years could be the best option. In the end, the remaining loan balance is forgiven, though taxes will be owed on the forgiven amount. The idea is to keep student loan payments as low as possible while saving for the tax bomb. This lets you work toward other financial goals along the way.
- Aggressive repayment in combination with other available loan forgiveness programs: For doctors who are ineligible for PSLF and who owe 1.5 times their income in student loans or less (e.g., owe $300,000 or less and make $200,000), their best bet could be to throw everything into paying off the debt as quickly as possible. The goal is to pay as little interest as possible and to eliminate the debt in 10 years or less — hopefully much less. This may also include refinancing to get a lower interest rate.
PSLF for medical school student loans done right
According to the Bureau of Labor Statistics, about half of all doctors work in a hospital, in academia or for the government. That means that half could be eligible for PSLF.
How do you know if you’re eligible? Here are the three primary criteria:
- Have Direct Federal Student Loans: The Direct Loan Program was launched in 2010, so most federal loans issued after that should be Direct. But it’s still important to check. The fastest way to see if your loans are Direct is to log in to the NSLDS website and see the breakdown of your federal loans. Any Federal Family Education Loans (FFEL) are not Direct and are thus not eligible for PSLF. These may require consolidation. (It’s free to consolidate your loans, so don’t pay anyone to do it for you!)
- Be on an IDR plan: Here’s more information on the different IDR options available.
- Work full-time for a nonprofit or government employer: This can also be accomplished if you have two or more part-time jobs with qualifying employers totaling at least 30 hours a week.
How doctors can save even more money with PSLF
The ultimate goal when going for PSLF is to pay as little as possible and to maximize loan forgiveness.
- Select the repayment plan that requires the lowest monthly payment, even if this means your loan balance will grow. Typically, this is either PAYE or REPAYE, since the payments are 10 percent of your discretionary income. Occasionally, the best plan could be Income-Based Repayment (IBR) for doctors who are married and aren’t eligible for PAYE.
- Lower your Adjusted Gross Income (AGI) by maxing out pretax retirement plans. This includes 403(b), 457, 401(a) and health savings accounts (HSA). If you have a spouse whose income is factored in to calculate your payment, he or she should max out pretax retirement as well.
- Do not make extra payments toward your loans. This is a huge mistake. Any extra payment will be money that goes into the oblivion as any unpaid balance will be forgiven anyway.
Doctors would be better off saving aggressively on the side rather than making extra payments on their loans. If you see PSLF through, you get to keep the extra money in your pocket instead of losing it. This also acts as defense should there be any changes to the PSLF program or to your career path. You’ll have a chunk of money to throw at the loans if needs be.
After 120 qualifying monthly payments, you can apply to have the remaining loan balance forgiven tax-free. These payments don’t have to be consecutive.
We suggest filing the employment certification form (ECF) at least once a year and then checking each loan to make sure you’ve received your credit toward PSLF. For people who are a few years in but haven’t sent in their ECF yet, do so immediately so you can get an accurate count of credit toward PSLF.
Taxable medical school student loan forgiveness for doctors using IDR
Doctors who aren’t eligible for PSLF still have a loan forgiveness option paying back their student loans. This strategy works well for doctors who owe more than two times their income in student loans.
Here are the steps to follow:
- Select an IDR plan that will keep your payments as low as possible.
- Do what you can to lower your AGI by contributing to pretax retirement accounts and an HSA if you have one available.
- Don’t make any extra payments toward your loan.
There are two major differences between PSLF and taxable loan forgiveness:
- Payments span from 20 to 25 years instead of 10 years.
- The amount of loans forgiven will be treated as income in the year it’s forgiven, so you’ll owe taxes. We call this the “tax bomb.”
First, let’s explore why keeping student loan payments as low as possible and maximizing the amount forgiven makes sense.
For example, let’s say Amanda has $380,000 in student loans at a 6.8% interest rate. She’s earning $175,000 working in a private practice as a pediatrician. Her income is projected to increase at 3 percent each year.
She’s not eligible for PSLF or PAYE, so she’s choosing between REPAYE (payments based upon 10 percent of her discretionary income) or IBR (payments would be 15 percent of discretionary income). Both are 25 year programs with taxable loan forgiveness at the end.
Let’s project that the forgiven balance will be taxed at 40 percent in the 25th year.
REPAYE is the clear winner.
Amanda is projected to save more than $270,000 in payments over the next 25 years. She can put that money toward her other financial goals, like buying a house or saving for retirement, instead of using it for her loans.
Her loan balance will be much higher on REPAYE, so she’ll owe about $125,000 more in taxes. This may seem like a big number, but she has 25 years to save up. This would work out to saving $318 per month in an account that could potentially earn 5% interest annualized over the next 25 years. Not too bad.
When you add it all up, REPAYE is projecting to save Amanda nearly $146,000 out of pocket vs IBR. That’s almost real money.
IDR versus refinancing
Why a doctor would choose taxable loan forgiveness over paying off their student loans in full?
Let’s say Blake has the same income and loan characteristics as Amanda. and is deciding between PAYE (20 years of payments based upon 10 percent of his discretionary income) and refinancing to a 20-year loan at 5.75% interest. Refinancing his loans rather than keeping them in the federal program would lower his interest by more than 1%.
You’d think this would save him money, but —
— it doesn’t, not by a long shot.
PAYE still wins. Both PAYE and refinancing would have him debt free in 20 years. But paying off his loans in full by refinancing is projected to cost him $71,000 more out of pocket than PAYE.
The bottom line is loan forgiveness, even when it’s taxable, is still a great benefit for those ineligible for PSLF.
What about saving for the tax bomb on IDR?
Doctors should save for the tax bomb on top of their student loan payments. Such a large number owed may seem daunting, but it’s actually fairly manageable.
Let’s say Blake is saving in an investment account projected to earn 5% annually for the next 20 years.
If he put $552 into that account each month, it’s projected to grow to $190,469 in 20 years — when the tax bomb would be due.
Saving for the tax bomb would also save Blake money. The taxes owed is projected to be $190,469. But if he saves $552 per month for 20 years, that only ends up costing him $132,480 because he’d get projected investment growth of $57,989. That means he’d spend $57,989 less paying the tax bomb from savings than if he tries to pull the money together last minute when he gets the tax bill in 20 years.
It may seem counterintuitive, but taxable loan forgiveness using an IDR plan, where the medical school loans actually grow, could end up saving money compared to refinancing and paying off the loans in full.
How to attack medical school loan repayment in residency
It’s critical for doctors to start loan repayment while in residency rather than use deferment or forbearance.
I’ll lay out two common IDR scenarios. The first is for doctors who are going for PSLF. The second will be for doctors who will be working in private practice.
Sarah has $325,000 in medical school student loans at 6.8% interest and is going for PSLF. She starts in residency making $60,000 with $2,000 raises each year. She’ll make $240,000 when she becomes an attending physician in three years with 3 percent raises each year.
Here’s the difference if she selects PAYE starting right after graduating from medical school and gets credit toward PSLF versus starting after completing residency:
Sarah could save $123,880 paying back her loans over 10 years if she starts medical school loan repayment while in residency rather than when she becomes an attending physician. That’s huge!
How? She can get three years of credit toward PSLF when her IDR is based on a much lower salary while in residency instead of having all of her payments based upon her attending physician salary.
Now let’s take a look at Michael, who plans to join a private practice and not pursue PSLF. He also has $325,000 in medical school student loans at 6.8% interest.
If he refinances his loans down to 5.5% or a 10-year term, he’d be on the hook to pay $3,527 per month. That’s not going to happen on the $60,000 resident salary. So he decides to defer paying back his loans until he becomes an attending physician.
The problem with not paying on a $325,000 loan with a 6.8% rate is that it will accrue $66,300 in interest over those three years. This means he’ll have to refinance $391,300 after his residency is over.
What if he chose REPAYE instead and got the interest subsidy? He’d be projected to make payments totaling $5,374 versus $0 in deferment. But he would only accrue $30,463 instead of $66,300.
When you look at total cost to repay the loan under REPAYE rather than deferring it, REPAYE while in residency could save Michael $42,421.
How to save the most money paying back medical school student loans
I’ve laid out different scenarios for doctors to pay back their loans, but your situation is unique.
There’s a ton of money at stake when we’re talking about paying back six-figure student loan debt. So it makes sense for an expert to review your specific situation while taking family size, career path, household income and financial goals into consideration.
By the end of a consult with us, you’ll understand the path that will save you the most money paying back your loans. You’ll also gain the clarity you need to feel in control.
I’ve worked with many doctors, and I’d love to help you to finally feel confident about how you’re handling your student loans and to save as much money as possible.