Budgeting to Pay Off Medical School Debt

Are you a resident, fellow, or new attending with significant student loan debt weighing on your finances? If so, you're not alone. According to the Association of American Medical Colleges (AAMC), about 75 percent of medical students take on debt to pay for their education. The median debt level among these students upon graduation was $200,000 in 2018.

That's a pretty daunting number, but financial professionals say it doesn't have to be. We spoke with two experts in physician finance who shared their budgeting strategies for anyone who wants to tackle medical school debt head on—even though it might seem challenging to do so while earning a lower salary.

"Medical school costs are disproportionate to how much residents earn now," says Ryan Inman, financial planner for physicians at Physician Wealth Services and host of Financial Residency, a financial literacy podcast for residents, attendings, and their spouses. "It might take $300,000 to go to med school, but your first three to six years out, you may only make $50,000 to $60,000."

"It's hard for residents to save money," adds Nathan Reineke, planning technician and student loan specialist at Physician Family Financial Advisors. "They aren't focused on that part of their life and think they'll just deal with it later. But a paradigm shift is needed. The best time to get on top of those student loans is during residency. They don't need to wait until they get a bigger income."

Paying Medical School Debt as a Resident

First, Inman urges residents to banish any shame they may feel about their student loan debt. "Look at medical school debt like a business loan," he advises. "You had to take out a loan in order to secure the future income stream. That's totally fine. In fact, our average client has $285,000 in student loans. We only have a handful without any type of student debt."

Second, Reineke advises signing up for one of the U.S. Department of Education's income-driven repayment plans, whether you choose the REPAYE, PAYE, IBR, or ICR Plan. This will make student loan repayment more affordable during your residency, and the sign-up process can be completed online or through submitting the appropriate form to your student loan servicer.

"If you eventually want to pursue student loan forgiveness, you have to be on one of these plans," Reineke adds. "The paperwork specifically states that it's an Income-Driven Repayment (IDR) Plan Request. You cannot choose deferment, or any other plan offered by a servicer, if you want to qualify for the Public Service Loan Forgiveness Program (PSLF)."

Only Federal Direct Loans qualify for PSLF, so if you received some of your medical school loans through another loan program, such as the Federal Family Education Loan or Federal Perkins Loan programs, you will need to consolidate them into a Direct Consolidation Loan.

Finally, don't wait until your fellowship or first attending position to set up a budget. "As soon as you say 'budget,' everyone wants to tune out," Inman chuckles, "But a budget can actually give you independence if you do it appropriately."

He suggests that you start by simply tracking your incoming pay and outgoing expenses for at least three months. "Just get in the habit of looking at it," Inman explains. "You can start making changes later, like paying yourself first. Make sure 25 percent of your take-home pay is going to add a positive to your net worth, whether that's your debt paydown or savings in an IRA. You need to pay yourself first out of every paycheck. This can be tough as a resident, but it will get easier as your career progresses."

Inman notes that fixed expenses, including rent or mortgage payments and student loan payments, should comprise no more than 50 percent of your take-home pay. "That means you have 25 percent left for variable expenses like going out to eat, entertainment, and things like that," he adds.

Paying Medical School Debt as a Fellow

If you choose to pursue a subspecialty after your residency, your income may go up as a Fellow. If it does, Reineke suggests continuing to live on your residency budget so you can put more money towards paying down your medical school debt. "Most people hate hearing that," he notes. "They've sacrificed a ton for many years, and they don't want to sacrifice any longer. The problem is that if they don't, they won't have the kind of life they'd like to have later on."

If you're planning to pursue PSLF, you need to stay on the income-driven repayment program you signed up for as a resident. However, if you are not interested in working for a tax-exempt nonprofit or public institution, or in an area that is underserved or has a high need for medical professionals, it may make sense for you to refinance your medical school debt now to secure a lower interest rate.

"There are plenty of companies out there refinancing medical school debt at good rates," Inman says. "Run your rate at all of them to find the best deal—doing so won't hurt your credit score. In our current environment, you want to look for a fixed rate. And remember, the shorter the length of the loan, the lower the rate you'll be offered."

Paying Medical School Debt as an Attending

If you're still on an income-driven repayment plan, you can expect your monthly student loan payments to go up significantly as your income increases with your first physician job post-training. However, Reineke notes that you'll need to stay the course if you still want to pursue PSLF. "The second you refinance out of government loans, you lose all eligibility," he says.

If you're not working in a position that qualifies for PSLF and you haven't yet refinanced your medical school debt, the experts say you should definitely do so now. "If you don't refinance, you're just giving away money," Reineke explains. "For example, if you refinance $400,000 in loans from the government's rate of about 6.8 percent into a 4 percent loan, and just make normal payments for ten years, you will save $75,000 in interest."

Inman adds that you can save even more if you trim your variable expenses and put the difference towards paying down your medical debt at a faster rate. But before you decide that belt-tightening is not for you, know that you don't have to do so in a way that makes you unhappy.

"When working with our clients, we break out their variable expenses and then ask them to rank those expenses in order of the happiness they bring," Inman explains. "For example, does cable TV make you happier than your Amazon purchases? Does dining out make you happier than buying things on Amazon? Let's say you spend $700 on dining out. Would you be just as happy if you spent $500 on dining out and put the other $200 towards your student debt? Every extra bit makes a difference."

Article Originally Published on ACOG Career Connection