Nowadays, the default advice for graduating students in medical school financial aid offices is to consolidate their outstanding student loans with the federal government when they become residents. There are a few major reasons for doing so, the biggest being the potential for Public Service Loan Forgiveness (PSLF).
Doctors are perhaps the most prone of all occupations to making student loan mistakes. Especially if you’re planning to work for a not for profit hospital after training, you MUST understand student loans rules surrounding PSLF. If you or someone you know is a medical student, he or she could lose out on tens or even hundreds of thousands of dollars from the student loan mistakes doctors make in residency.
Mistake #1: Failure to Consolidate Med School Loans
Here’s the first of the student loan mistakes doctors make in residency. Consolidate all your loans into one direct loan with the federal government at the end of medical school. That way, all your debt will be eligible for the Public Service Loan Forgiveness program, and each year of residency counts towards the 10 years of payments needed in the program to reach tax free loan forgiveness. If you fail to consolidate until the end of residency, you might have missed the boat on the most generous loophole in existence for doctors today.
Most med school students have a slew of different loans when they graduate. You might have health student professional loans, Perkins loans, Stafford loans, direct loans, and more. As a general rule, the loans that have “direct” in the name are eligible for the PSLF program. The ones without this in the title are not eligible for the program.
Get Around the FFEL Ineligibility Problem by Consolidating them into Direct Loans
There’s a way around this though. You can take all your disparate loans and lump them together into one loan with the federal government. This is called direct consolidation. It’s basically what any financial aid officer will do when you express concern about your loans. It’s also what private loan advisory companies sometimes charge north of $1,500 to do when they don’t even give you advice about payoff options.
*Pro tip: Many ads on Facebook about student loan help are scams. Don’t hire a company to help you with your student loans unless they’re capable of modeling your debt to analyze different payoff strategies. Profit hungry firms just put you into a direct consolidation loan because it doesn’t prevent you from using a different strategy later, it’s easy, and it’s a one size fits all approach to what should be an individualized answer. Unfortunately, student loan scam companies take the huge payments they receive and apply them towards tricking new customers. If the “student debt relief” company cannot tell you the cost of choosing different repayment options, then they are likely running a scam.
Mistake #2: Failure to Submit the PSLF Employment Certification Form Annually
If you are close to graduating medical school or currently in residency, this PSLF form should be your best friend. Very few residents ever submit the form though. A common misconception among residents is that the PSLF program automatically results in loan forgiveness once you’re eligible. This idea is probably the most common of the PSLF mistakes. Nothing could be further from the truth. You have to apply after working for a not for profit institution for 10 years.
Unfortunately, a lot of doctors will be in for a rude awakening when they submit this form. Some folks will have loans they failed to consolidate as I warned with Mistake #1. In that case, all your loans without direct in the name aren’t even eligible for forgiveness. Others will have to deal with the horrible record keeping of loan servicers.
Our Personal Example Should Drive Home How Important Submitting the PSLF Form Really Is
Let me give you a personal example. My girlfriend submitted the PSLF certification form to the Department of Education. Her loans got transferred from NelNet to MyFedLoans, which is supposed to handle all PSLF cases. They returned her form with the shocking answer that she had only made 2 payments of the 120 required for PSLF. This answer is totally wrong and an example of extreme incompetence. She had made at least three years’ worth of payments during fellowship because she consolidated everything into a direct consolidation loan at the end of residency. However, since she only submitted the PSLF certification form at the end of her fellowship instead of during her first or second year of residency, their record keeping was completely screwed up.
The PSLF Paper Trail is a Beautiful Thing
So what do you get with submitting the PSLF certification form annually? You get a paper trail and proof that you’re progressing in the program. If you submit the form each year, despite moves between employers or chaos in the loan servicer industry, you will have proof that you made each payment. This is especially important with a loan servicer as bad as FedLoan Servicing. So begin as soon as you get your first couple paychecks in residency and submit the form to know exactly where you stand in regards to the PSLF program. Here’s a good guide from the blogger BenWhite on how to do this.
Mistake #3: Failure to Choose the Right Med School Loan Repayment Program
Here’s the truth. Choosing a repayment program is complicated. It depends on your life plans, goals, future income, and more. If you think your spouse will stay at home and not work, then REPAYE could be a great option as it includes both partners’ incomes in the payment calculation. With only one income, REPAYE might result in a lower monthly payment and total cost if your goal is PSLF tax-free loan forgiveness. If your income will be greater than $300,000 by year 7 of PSLF payments, you should stick with IBR or PAYE because these programs have a cap on the total monthly payments. REPAYE has no such cap.
Here’s the honest truth, your student financial aid officer is going to give you a one size fits all approach. He or she will not take into account your career, marriage, or life plans and input them into an excel spreadsheet to show the simulated cost of each different repayment option. If you know the ins and outs of the student loan repayment rules, you can select the plan that will result in the lowest costs to you.
Usually REPAYE is the Best Option Post Med School
REPAYE is a good plan if you’re going for PSLF, expect to become an attending after 7-8 years of residency / fellowship training, and your spouse has low or no income. IBR or PAYE is good if you expect a surge in income, your training period lasts 4-6 years, or your spouse has a high income. If that’s the case, then you should consider filing taxes separately. That way, the monthly payment is based on only your income instead of your spouse’s income too.
A Horror Story From Committing All the Student Loan Errors Above
I’d like you to meet Tim, a soon to be attending finishing up his five year residency program. He’s really excited about the new contract he signed with a major academic medical system. He has $200,000 in student loans with an interest rate of 6.8%. His contract stipulates a starting salary and bonus should be approximately $250,000 in the first year. Tim expects his salary will grow to about $300,000 over the next five years.
Unfortunately, Tim made all the student loan mistakes doctors make in residency. He never submitted the PSLF form, consolidated his loans, or checked to see if there was a better repayment plan than IBR. He decides to get serious about his student loan options now that he will be making a real income for the first time.
PSLF Pretty Much is Off the Table Now
Tim discovers that because he did not consolidate his old loans, the five years of IBR payments he made during residency do not count towards PSLF. His loan balance is higher than it would have been otherwise too because he never looked into other repayment plans. I will compare the cost of IBR and private refinancing with the PSLF program if Tim had not made the student loan mistakes doctors make in residency.
I’ll model his loans with the proprietary spreadsheet I use for my student loan consultation business. So to reiterate, Tim’s only options now are private refinancing and the IBR program. I’m only showing the cost of PSLF to expose how much money Tim left on the table.
Tim’s only option now is private refinancing. Looking at the cost of private refinancing versus PSLF, we see that Tim COST HIMSELF OVER $80,000 by not knowing student loan rules. If he had not made these mistakes, Tim would have been eligible for tax free loan forgiveness in five short years working for the academic medical system.
It’s Easy to Avoid the Student Loan Mistakes Doctors Make in Residency
If you are currently in medical school or starting residency, you can avoid these student loan mistakes just by reading this article. All you have to do is consolidate your loans within a year of starting residency. Then, file the PSLF employment certification form annually. Additionally, make sure you choose an intelligent repayment plan. Avoid the three common student loan mistakes I mentioned, and you’ll be ahead of 90% of other doctors.
I Can Help Save You Money on Med School Loans
My business model here at Student Loan Planner, LLC is providing people student loan advice. I only charge a one time fee to get help with your med school loans.
I perform a holistic loan analysis to see what your best available repayment options are to make the total cost of your medical education as low as possible.
Occasionally, It Makes Sense to Refinance Your Med School Loans
Usually residents want to get interest subsidies with REPAYE and prepare for PSLF.
Once you know for sure you’re going private practice, then it’s a good idea to refinance and pay back med school loans aggressively.
If you have a high income earning spouse, you want to lock in today’s relatively low interest rates, or you’re already an attending at a private practice, then refinancing could make a lot of sense.
Laurel Road below has a residency refinancing program. Sofi will refinance you in your last year of training. The other companies can all give you offers once you’re an attending.
If you’re unsure of whether you should refinance your med school loans, please hit the contact button and ask me. Otherwise, I’ll include the cashback bonuses I’ve got below that you could check out when you’re ready.