The Ultimate Guide for Paying Off Medical School Loans

As a pharmacist considering medical school, I often recommend you make sure your finances are in order before moving forward with this massive decision. One of the most frequent questions I receive often involves handling medical school tuition along with my pharmacy school loans. I am no stranger to pharmacy loans as I have personally accrued $150,000 in student loan burden prior to my medical school expenses. This article is designed to address your loan issues and introduce methods that can allow you to tackle your massive debt burden. Please don't let finances decide if you are going to go to medical school! This article will show you that there are ways to overcome this barrier and having knowledge of these strategies can take your mind off the issue.

The #1 reason that pharmacists and pharmacy students choose NOT to continue their education into medicine in my consulting experience is due to personal finance concerns. Let's dive in and see how you can take the initiative in your financial life, manage personal costs, and create a strategy for economic success!

As we know, college education costs have increased substantially within the past two decades, especially within the last 5 years. While I think we are certainly owed an explanation as you why their has been such considerable bloat in costs, our focus today is on minimizing your current and future debt!

Recent metrics suggest that the average pharmacy graduate will finish with approximately $170,000 in student loans. Tack on the potential for medical school loans and we are getting close to $400,000 in total loan debt. Sounds scary...but this isn't an unmanageable feat. especially with your potential for a much higher salary as a physician.

You may ask yourself, how could I ever tackle this massive loan burden? "The interest payments alone are the size of a mortgage nonpayment." Don't worry, we have your back!

Before we dive into the specifics, let's cover some general principles and set some ground rules. Your priority upon graduation should be to aggressively pay down the principal on your loans. While some financial advisors may argue for holding on to some debt and allocate your income to other investment vehicles (401K contributions, Roth IRA, etc.), I strongly believe that your dollar will go further by removing the dead weight. Your interest rate (assuming fixed) and interest payment deadlines are absolute, while financial gains from investments are speculative at best. Additionally, the faster you pay your loans off, the less you will owe at the end of the day! That means less wasted money going to banks or lending servicers.

Take a look at this simple example below. We utilized a mild 6.3% interest rate based on your assumed $170,000 in student loan burden. Depending on how fast you want to pay off your loans will dramatically influence how much interest is paid over time. Aggressively paying off your loans will shrink your principal balance faster, but you will also have much larger monthly payments to handle (potentially >$5,000/month). This may not be the perfect strategy for everyone but as physicians with a large paycheck and plenty of room for living expenses in our budget, it would be foolish to sit on these over the years. Sacrifices will have to be made early on but it will be worth it when you are debt free within a few years! The common saying from the White Coat Investor's author James Dahle, MD is that you should "Live like a resident."

Now I am not saying you should entirely neglect 401K contributions and other investment opportunities but it's important to make your student loans your primary concern. If your company offers a "match" you need to maximize your contribution, otherwise you are throwing away free money.

Upon graduation, avoid "splurging" on extensive cars, taking massive vacations, and please please please don't buy a massively overpriced home. These items, while nice, are liabilities that can add to your financial strain. For example, at the end of the month you will have a beefy $2,000-4,000/month student loan payment that needs to be addressed. Now add a car and mortgage payment and you can see how these kind of expenses can dry up any funds you have available. That new BMW may look nice in your driveway of your new home, but it may also make you 100% dependent on your job. What would you do if you lost your job? Would you have enough extra cash to generate an emergency fund? Unforeseen medical expenses, disability, or malpractice lawsuits can easily derail your fragile financial situation. Don't trap yourself in a financial coffin!

Note: I am a big advocate for realestate investing so please don't misconstrue my recommendations. I am suggesting that you avoid buying your dream home (at least initially) or a large property with a mortgage you can't afford. If you are adamant about purchasing a home, I'd recommend you consider an investment property or "house hacking." Without getting too off track, you essentially buy a duplex, live in one unit and rent out the other. Your renters next door end up paying your mortgage, allowing you to live for free while paying down the principal on your property.

Let's review what we've learned.

• Your pharmacy loans and medical school loans are your primary concern when you graduate.

• You should focus on paying them off as quickly and aggressively as possible. The faster you do this, the less money you have to pay in interest.

• Don't make your financial life harder by adding liabilities to your balance sheet. Avoid the luxury cars, or the overpriced mansion on the hill. Delay these indulgences while you get your financial affairs in order!

Now that we've covered some of the big "no-no's" for basic financial behavior, lets talk about managing your student loan burden.

1. Take inventory of your loans. This includes any loans from different private companies in addition to your federal loans. Sit down and figure out what you owe and write out the specific interest rates associated with each loan. For your federal loans, check out the Federal Student Loan Repayment Estimator for more personalized information. After logging in, you should be able to see your individual loans and each respective interest rate. You will also notice that your loans are subdivided into Grad Plus, Direct Subsidized, and Direct Unsubsidized. Also, don't forget to factor in personal loans you may have accepted from friends or family members that won't be directly accounted for in this step!

2. Consider consolidating your loans. Instead of paying off several individual loans with various interest rates, you may want to organize everything under one lender/servicer. You may also have the opportunity to get a better interest rate which will dramatically decrease your potential loan burden. This step should be taken with caution, as doing so may impact your ability to participate in loan forgiveness programs that are available for many federal loans. For example, let's say you have $50,000 in Private loans at a 8% interest rate and and $165,000 in Federal loans at a 7.2% interest rate. You may be tempted to consolidate and refinance these loans with another bank/lender if they offer you a juicy 4% interest rate. While that is an objectively better interest rate, you should sit down and crunch the numbers to see if it makes sense with the thousands of added dollars for "processing fees" and the impact on your forgiveness eligibility (more on this below).

For our aspiring physician pharmacists out there, if you do consolidate/refinance, your new lender may require immediate repayment (your monthly loan bill). Every bank is different but when I looked into this possibility for myself, I was unable to refinance one of my private loans because would have lost my deferment status. Imagine making those kind of payments while in medical school! Realistically, it's not a possibility, unless you are working double shifts at which point your grades/learning will suffer!

Consolidating and refinancing is practical for those with multiple private loan servicers who have higher interest rates. For example, let's say you have "Private Loan 1" at $60,000 and "Private Loan 2" at $25,000 each at a 6.9% interest rate. I would be reasonable to shop around and see if you can find a better interest rate and consolidate the loans for personal ease.

To see what forgiveness/repayment plans your federal loans are eligible for, you will need to log in to the same federal loan repayment estimator mentioned above and click on each individual loan. You should see the various programs listed below with either "green checkmarks" or "red X's" for each respective program.

3. Understand the General Repayment Strategies: These include "Tuition Reimbursement, Forgiveness, and Non-forgiveness."

A. Tuition Reimbursement: This is often a program/contract associated with your employer where they agree to pay-off a certain amount of your loans in exchange for your employment for a specific period of time. Also keep in mind that some may require you to make minimum loan payments to be eligible. There are typically federally-based plans and state-specific plans you can consider.

For example, a federal program such as "Veterans Health Administration - Education Debt Reduction Program (EDRP)" offers up to $200,000 in repayment over a 5-year period of time (not to exceed $40,000 per year).

A state-specific program from my home state New York, offers loan reimbursement to physicians who decide to work in addiction medicine for a 6-year period of time. This program is formally called the "Substance Use Disorder Treatment and Recovery Loan Repayment Program (STAR LRP)." Each state will have different options available to you that you can research for both physicians and pharmacists!

B. Loan Forgiveness: This is a particularly viable option for many physician pharmacists due to the added years of residency training that we must undergo. I'll explain more in a little bit but let's talk about the popular Public Service Loan Forgiveness (PSLF) program. In essence this program allows you to make income-based payments towards your loans for 120 months (10 years) and at the conclusion of your 10-year period, your remaining loan balance evaporates away (tax-free)! There are some key words that I want to pull out from that last sentence. First, "Income-based payments" are required. The benefit of continuing on with medical school after pharmacy is that you will likely have to complete a longer medical residency. During your residency training, you will make very little money comparatively to your attending salary and will therefore be making very small income-based payments to your loans. You are forced to pay no more than 15% of your discretionary income which can be lowered by decreasing your taxable income through traditional 401K contributions, etc..

For example, let's say you are a general surgery resident about to begin your training and plan to complete a fellowship in trauma surgery. You are anticipating to complete 5 years of residency and 2 years of fellowship under the same academic hospital system that is considered a "non-profit" organization. Your starting salary is $60,000 that only increases by $1,000-2,000 for each year of your training. Essentially you will make <$75,000 annually for the majority of your training. We will use a salary of $75,000 for simplicity, and assume you have $200,000 in federal loans at a 7% interest rate. We are also assuming that you are working in the continental US and are not married. Keep in mind that your Federal loans are eligible for PSLF (not private - make sure you haven't refinanced to a private company without crunching the numbers). Based on these metrics, your income-based payment is approximately $711/month. Not to shabby in my personal opinion!

With this in mind, you can see that your potential savings based on this model are $257,626 with the rest of your loan disappearing after the 10 year period! Now, before you get too excited, this model is slightly flawed because we have failed to account for your massive pay raise you will experience when you become an attending. With higher income, comes higher monthly payments. The average salary for a trauma surgeon is $424,000 which is much higher than your resident/fellowship salary by a wide margin. This will certainly decrease the amount of money you saved, but I still believe it will be financially worth it!

Other variables that I would like to point out include your decision to pursue a shorter residency or passion to open your own practice. If that's the case, this process may not be as lucrative as posited above! You may also notice several other confusing acronyms such as PAYE and REPAYE. Without getting too far off track, these have different specifications and include spousal income. PAYE considers spousal income regardless of your tax filing status, while REPAYE only considers it if you are jointly filing.

Calculate your own numbers via this Public Service Loan Forgiveness Calculator to see if this program makes sense for you!

The last feature we cover are the eligibility requirements for PSLF. In short, you need to be employed by a 501(c)(3) non-profit (fortunately most hospital systems hold this status), have eligible loans (federal - direct), make 120 on-time payments, provide proof of payments via the Employment Certification Form, then apply and receive tax-free forgiveness.

Okay this all sounds great, but tell me about the "cons."

• This is a federal program and is subject to changes based on presidential and congressional legislation amendments. In other words, it's hard to predict where the government will stand on expensive loan forgiveness programs over a prolonged (10 year) period of time.

• You need to stay on top of your payments and submit the appropriate forms annually providing proof of said payments. Your accounting skills will be tested and you need to keep records of EVERYTHING.

• The scariest feature is that you will likely see your loan principal INCREASE during your 10-year amortization. Your very low income based payments typically don't outpace your loan interest rate and you may end up owing even more based on sheer numbers. If you maintain the course and are accepted, this fact is inconsequential as the growth of the loan will disappear when the debt is forgiven. However, if you fall off the program, get rejected, or change employers (outside of a non-profit), your eligibility is at risk and you may be stuck with a much larger loan later in life.

• What happens if you have a massive career change or want to leave your non-profit employer? You will run into road-blocks with this program, essentially trapping you at a particular practice setting for 10 years. Your private practice dreams or entrepreneurial ambitions may have to wait until all the paperwork is settled.

Now that you understand the PSLF basics, I'd recommend you talk to other pharmacists and physicians who have taken this path and get their personal take on the process! This is an exceptionally complex topic that changes every year so do your due diligence and find out what's going to be the best for you!

Non-PSLF: This is a repayment vehicle that is available to pretty much anyone! You don't need to be employed by a non-profit/hospital system to enjoy some of the benefits. This route is very similar to PSLF except that most plans require 240 monthly payments (20 years) before getting some forgiveness. It's also important to note that the forgiveness you receive at the end of your period is considered taxable (unlike PSLF).

For example, if you receive $150,000 in forgiveness at the end of your repayment period and are in a 30% income-tax bracket, you will owe $45,000 in taxes the following year. YIKES! This is commonly referred to as a "tax-bomb" and individuals who elect to use this plan need to account for this inevitability. The benefits of this program are far fewer than PSLF but it can be useful for some by lowering their monthly loan payments, which frees up more cash to use for investment/retirement planning. Generally speaking the one population this option is particularly useful for is individuals with a high debt-to-income ratio (2:1). Fortunately, this is less common for physicians due to higher paying salaries making this program less important. I only provided it for completeness sake or for pharmacists who aren't considering a career in medicine!

C. Non-Forgiveness: Essentially, paying off your loans that aren't eligible for forgiveness (private loans, or friends/family). While there is no specific timeline for this process, I have already recommended that you take an aggressive approach to resolving this burden. Target your higher interest rate loans first and free up your future capital but removing the your financial leg-cuffs. This is also the best situation to consider refinancing your loans to improve your interest rate! Use this Refinance Calculator to simulate how much you can save based on a new interest rate.

As a future physician, you will have a rather large income comparatively to your pharmacy peers. Use this to your advantage and tackle your loans aggressively. Avoid the lifestyle bloat that affects so many physicians and set yourself up financially to achieve economic freedom.

4. Putting it all together. Review the chart below to summarize what we talked about today!

Additional Articles:

1. The Ultimate Guide to Pay Back Pharmacy School Loans

2. How Expensive is Medical School

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