Calculated actual COA and very sad

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@Goro : Saying "you'll make it back as a doctor" is over-generalizing, especially if someone wanted to work in a lower-paying specialty (ID, pediatrics, etc.) and / or in academics. Plus, one always needs to account for the chance of not matching / etc.

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@Goro : Saying "you'll make it back as a doctor" is over-generalizing, especially if someone wanted to work in a lower-paying specialty (ID, pediatrics, etc.) and / or in academics. Plus, one always needs to account for the chance of not matching / etc.

I agree with the first half of your statement in that it might be too generic to claim that people shouldn't worry because they'll make it back as a doctor (especially considering that residencies and other postgraduate positions don't tend to pay well right away, leading to more interest accrual and capitalization of interest).

However, the chances of not matching (if you actually want to match) as a US medical student are so minimal that that isn't really something to consider in this equation. It should be brought up for poor-performing schools (like every Caribbean school), but not for anyone in the US.
 
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This illustrates why I think a year of employment would be a requirement for med school. Not picking on you, LG, but most pre-meds are clueless where money matters are concerned.

You'll make it back as a doctor.

Working during medical school is a recipe for failing out or having to repeat a year. I have seen this first hand....I had one student who thought that he could still maintain his old consulting job. Failed OMSI and had to repeat it.
I worked multiple jobs throughout high school and college and during the summers as well but never really dealt with being in a situation where I'd be in so much debt, which is why i was freaking out.

I was thinking of doing maybe 2 hr of online tutoring a week or something similar during med school. But if they dont allow even this then I guess I have no choice :/
 
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*Warning: this is a very long post and delves into finance*
TLDR:
-Federal IDR plans make large debts very manageable
-Choose lower monthly plans for flexibility
-Use REPAYE during residency if you think you're going to refinance
-Re-evaluate your financial situation at least every year


Now let's do some (serious) math~

As a resident- Part 1:
You graduate with $350,000 in federal loans and enter a 3 year FM residency. You get paid an average resident salary shown below.
Resident PayAfter taxPer month
PGY155,200.0043,686.003,640.50
PGY257,100.0044,870.003,739.17
PGY360,100.0046,741.003,895.08

As you can see, there isn't a ton of room to make large payments but still some. While in residency, you can make payments or postpone (grace period or deferment). During postponement, interest will still accrue but will not capitalize until after. If you can make payments, however small, doing so will help fight back some of the interest before it capitalizes. For now, we'll assume no payments were made to keep the calculations consistent. I'll talk more about making residency payments in Part 2.

As an attending:
You get an annual salary of $200,000 (conservative 2% raise per year) in California with the following breakdown:
SalaryAfter taxPer month
200,000.00132,101.00*11,008.42
Other states= +-$5,000 to after tax income. I chose CA since to make our estimates conservative. I think only New York is more heavily taxed, but it depends on your city too. You will probably get a signing bonus (average $32,692 for 2018-2019) that I left it out of my calculation.

You can choose A) private refinance, B) federal repayment, or a hybrid with federal for residency and private after that. For now, we'll look at the first two. I'll talk about the hybrid approach when I discuss residency repayment.

A) Private refinance (at the start of residency):
Refinance will consolidate all of your federal loans into private ones. You can refinance any time you want, but once you do, you permanently lose out on all federal repayment options. You can also refinance as many times as you like to secure the lowest rate possible; shop around at least once a year. There are usually cash bonuses for refinancing, ranging from $100 to $750 depending on your balance. There are also usually discounts on interest rates for things like auto pay. Below are the average rates for 2020:
(2020) Refinancing Fixed Rates
Available (in years)
Excellent
Credit
(750+)
Good
Credit
(700-750)
Average
Credit
(650+)
53.03%3.40%4.00%
73.50%3.90%4.25%
103.75%4.10%4.75%

Most people will have average credit so we'll use that to calculate the following payment schedules:
Term5 Years7 Years10 Years
Rate4.00%4.25%4.75%
Principal350,000.00350,000.00350,000.00
Interest charge each year (uncapitalized)14,000.0014,875.0016,625.00
Total balance after 3 year residency (interest capitalized)392,000.00394,625.00399,875.00
Monthly payment7,219.285,439.584,192.60
Total Payment433,156.80456,924.72503,112.00
Take home pay3,789.145,568.846,815.82

Choosing a 5YT will have you living like a resident for another 5 year. If you're looking to own a home, you'll have to save up longer or buy a more modest house (or use your signing bonus). You can still make it work, especially if you live in a low COL area. Living with debt for another 2-5 years will add a lot more spending money, but you will pay more in the long run. However, I mentioned in my last post, choosing a lower payment plan allows you the most flexibility. You have the ability to spend on things you need when you need and make aggressive payments when you can afford. You will probably end up paying a little bit more on the long run, but you'll have options not being tied down to a high monthly. You can even choose 15 and 20 year terms. No right answers here since it will depend on each person's preference and family needs, but I do recommend choosing a longer term and paying extra when you can.

B) Federal repayment:
Interest rates are higher than private, but monthly plans are more flexible and you gain access to loan forgiveness. Deferment/forbearance is also easier to get with federal loans if you hit hard times. Specifically, we'll look at income-driven plans (IDR) where your monthly payment is based on your taxable income (re-certified every year). After 20-25 years (or 240-300 months) of payments, the remaining balance of your loan will be forgiven. You will have to pay the tax on the forgiven amount though; it will add to your ordinary income for that year and taxed at your highest bracket. There are other federal plans, like the Standard 10 Year, but I won't discuss those since they are generally inferior (still look at them to see if they might work for you). Public Service Loan Forgiveness (PSLF) uses IDR repayment, but forgiveness is achieved after 10 years instead. We won't look at those, but if you qualify, they usually trump everything else

Sticking with federal loans during residency will give us a balance of $418,936 after residency:
Beg R1Beg R2Beg R3Attending
Direct Unsub179,777.00179,777.00179,777.00179,777.00
6.079% interest0.0010,928.6421,857.2932,785.93
Grad Plus170,223.00170,223.00170,223.00170,223.00
7.079% interest0.0012,050.0924,100.1736,150.26
Total Balance350,000.00372,978.73395,957.46418,936.19

Below is a breakdown of the most common IDR plans and their schedules. We'll use an average 6.579% interest for simplicity.
Total PaymentsRemaining Balance ForgivenTaxes DueTotal CostYear of RepaymentFirst Monthly PaymentLast monthly paymentTake home pay Year 1
REPAYE
(Revised Pay As You Earn 25 Year)
$572,300$435,120$174,048$746,3482045$1,511$2404$9,497‬
PAYE
(Pay As You Earn 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬
IBR
(Income Based Repayment 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬

There is another IDR plan called income-contingent repayment (ICR), but it's generally inferior for big debtors (still look at them to see if they might work for you). IDR plans will have a lower monthly payment to start then slowly increase as your salary increases. You will also need to save up for that tax bomb. The best way is to set aside a little every month in an account where it will grow some interest (and saving a small amount hurts a lot less than paying straight). Even with the tax bomb savings, monthly payments remain low for you to enjoy life.

But wait a sec, the total payments we make with these plans appear higher than private refinancing. Well, its a little more complicated than this because a dollar today is not the same as a dollar tomorrow, 5 years later, or 25 years later.

[Warning: it's about to get really technical and finance-y]

Money today is worth more than money tomorrow because you can put it to work and generate some return. If we are to compare apples to apples, we need to compare tomorrow's dollars in terms of today's dollars. In the most common sense, we can invest money today in some sort of financial vehicle so it grows according on the interest and term. If you put $100 in a 1% savings account in 2020, you will have $105.10 in 2025. So that a balance of $105.10 in 2025 has a present value of$100. Conversely, $105.10 in 2024 is not the same as $105.10 in 2025. We can't compare money in different time periods without converting them all into the money from the same time period. Think of it like inflation where we say $X in the past is worth $Y dollars today. But instead of converting past dollars into today dollars, we convert future dollars into today dollars.

The calculations gets pretty hairy when you're making regular payments. That's because each payment will be made in different time periods. If you make $100 every year for 5 years into a 1% savings account starting in 2020, the 2022 payment will be worth less than 2021 payment because the 2021 payment will have more time to grow. So we have to discount each years payment separately and add them together in order to find the present value of the total investment. Thank goodness we have Excel and calculators out there so we don't have to crunch the numbers for 20+ years of monthly payments. Hopefully I explained that well; there are articles and videos out there if I didn't.

So what does this mean for our student loans? Well if we want to really compare the costs of repayment plans, we should calculate the net present value (NPV) of all of their payments plus the NPV of the tax bomb. Aggressive repayment will reduce the face-value of total cost, but you are also losing out on investment opportunities. Plugging all of the conditions above with a conservative investment rate of 5%, we generate the following breakdown:
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$374,7202045$1,511-$2404$321
PAYE$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
IBR$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$393,8222025$7,219N/A
Private Refinancing
(7 Year Term)
$456,925N/AN/A$456,925$396,5912027$5,440N/A
Private Refinancing
(10 Year Term)
$503,112N/AN/A$503,112$407,9142030$4,193N/A

The NPV of PAYE and IBR have lower payments, including tax bomb savings, and still trump the private 5YT plan. Even an average FM physician graduating with a large amount of debt will have very manageable payments through federal IDR plans. The critical part of these calculations is your chosen investment rate because it affects both the NPV of the plan as well as the amount you will need to save up for the tax bomb. If you choose a lower investment rate, the NPV of all plans will increase. The key will be that longer repayment terms (IDR plans) will increase more dramatically than shorter ones i.e. private financing becomes more favorable with a lower returns. Because longer terms have more time to grow, a lower return will affect them more; it will also increase the monthly amount you will need save up for the tax bomb.

Let's say you instead choose put the excess money in a good 1% savings account.
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Loan Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$640,0312045$1,511-$2404$562
PAYE$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
IBR$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$424,6642025$7,219N/A
Private Refinancing (7 Year Term)$456,925N/AN/A$456,925$443,5752027$5,440N/A
Private Refinancing (10 Year Term)$503,112N/AN/A$503,112$481,2782030$4,193N/A

Now the cost of the our previous picks, PAYE and IBR, skyrockets past private options. Monthly payments stay the same (since they're based off income), but the amount you need to set aside increases. However, 1% is very, very bare-bones measure and creates a worst-case scenario. There are plenty of safe investment vehicles that generate more. We previously used a conservative 5%; the average 60/40 portfolio averaged about 8% over the last century. You can find savings accounts and CDs with 1.5%-2%. The break even point is around 2.25% which is realistically attainable.
*Investment returns fluctuate, but over the course of many years (10+), we can expect the return to be close to average.
*There are lots of good financial vehicles out there that are accessible to the average Joe/Jane. I recommend reading Burton Malkiel's A Random Walk Down Wall Street.

*VERY, VERY IMPORTANT: We use financial return as the measure of opportunity costs, but I want to stress that opportunity costs also include the utility we get from non-financial things. A house (which happens to produce financial returns too) generates utility: pride in having your own place, somewhere you can raise your family long term, etc. Likewise, a new car adds enjoyment, vacations add leisure and stress relief, and a college fund helps your children. All of these things generate very real returns of investment, even if we cannot assign them concrete values. And these intangibles have different value for different people i.e. house might generate 1%, 5%, or 20% for you. In this sense, even if you choose a higher cost plan, you may actually be coming out on top in your own way.

Again, even if we assume a low investment rate and higher total cost, IDR plans give you the option of making larger payments whenever you can afford. Federal plans, however, allow you additional flexibility. Deferment and forbearance are more forgiving if you hit hard times and can't make payments. If you go into these, the payments you make towards loan forgiveness are pause, not reset. In fact, because interest doesn't capitalize in IDR plans, it might make aggressive repayment even better: really low payments + low interest during times you can't commit a lot towards repayment. And if your situation ever changes (see factors below), you can refinance any time it becomes advantageous for you. Regardless of which plan you choose, you should be re-evaluating your situation at least every year.

Factors:
-Salary increases will increase your taxable income. Taxable income increases your monthly payment, increases total payments, and decreases tax forgiveness. The more your salary increases, the more private refinancing becomes favorable.
-Getting married will potentially increase your taxable income (see above). However, you will also gain more tax benefits that can decrease taxable income. The cumulative effect will depend on how much your partner makes and whether you file together or separately.
-Having kids will add tax benefits and decrease your taxable income.
-The larger your debt after school, the more favorable IDR becomes. Monthly payments will remain the same, but you will need to save a little more each money for a larger tax bomb.

As a residency- Part 2: *best practice*
Federal plans can offer lower total costs through loan forgiveness as well as plenty of flexibility with repayment, but they gain more interest during residency when our ability to pay is at its lowest. We want to make payments in order to fight back some of the interest before it capitalizes, but if we refinance right away for a lower interest rate, but then we lose out on flexibility and loan forgiveness.

The solution is REPAYE, one of the federal repayment plans. REPAYE may or may not be the best long-term strategy, but during residency it is the best option because it offers a low monthly payment plus an interest subsidy. Since your payment will be based off our resident income, its pretty low: $304 to $345 a month for our average resident. Under the subsidy, if your monthly loan payments do not cover all of the interest charge, Uncle Sam will pay 50% of the difference. With $350,000 in loans and average 6.579% interest, we would be charged $23,026.5 in interest per year or $1,918.88 per month. Since interest charge is larger than our monthly payment, the interest subsidy will be half of the difference: $‬807.44/month in our 1st year. Under REPAYE, instead of only paying off $3,648‬, we've paid off $13,337.28‬. Any amount you can afford to pay after that just adds on top. Talk about bang for your buck. Over 3 years, we will have paid off more that $40,000 just making minimum monthly payments.

*Edit: I got this wrong. The subsidy is a maximum. If you make extra payments, the subsidy is reduced by that amount until it's eliminated. In this case, I recommend making the minimum payments and saving up the excess to make a bigger payment after residency (or house, etc.). Also, if you get married, your combined AGI will be used to determine your monthly payment even if you file separately. PAYE and IBR you can file separately; you'll need to confirm with a tax professional (not CFPs) if filing separately is worth it. Also, if you leave any of the IDR plans, all unpaid interest will capitalize. If you're planing to refinance, that was going to happen anyways. But if you were sticking with federal IDR, you should pick one plan and stick to it.

REPAYE gives us all the flexibility of federal loans. As you finish residency, you have lots of options. If federal repayment after residency is the best option, you can stick to REPAYE or switch to PAYE or IBR. If private refinancing is better, you can do that too. (edit: see above) But wait, there's more! If you stick to any of the federal IDR plans, all of the payments you make during residency count towards loan forgiveness. So 17 years instead of 20 years. And as if that wasn't enough, putting money in tax-deferred accounts (401k, IRA, etc.) will also decrease your discretionary income, decrease your income taxes, decrease you monthly payments, and sock away money for retirement. Thank you, Uncle Sam.

Now before we start putting everything we can into repayment during residency, there are a couple of things that take precedence. Now that you've graduated med school (where no extra cash should be held on hand), establishing an emergency fund and retirement fund come first. The general rule of thumb is 3 to 6 months of living expenses in a savings account. Then make your minimum payment. You should also take advantage of all of the 401k matching your employer offers then max your ROTH while you are in a lower tax bracket. Setting up retirement funds early is imperative, and employer matching is free money that will go a very long way in the future. Anything after that can go towards additional loan payments. (edit: see above)

Edit: I didn't include the full analysis since my post was getting long but here it is. This is the payment schedule analysis if you stick completely with federal IDR and make payments during residency. This includes 3 years of paying as a resident followed by making $200K with 2% annual raises. Only thing that changes is that NPV of all go down, but PAYE is still the best. You would stick with PAYE through residency and pay until forgiveness. If you refinance, the calculation is simple: it's the usual interest rate + term but with a smaller starting balance.

Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Loan Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessFirst Monthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$494,913$379,264$151,706$646,619$308,7792045$304$280
PAYE$367,140$443,390$177,356$544,496$287,1182040$304$475
Standard 10 Year$478,591N/AN/A$478,591$388,0332030$3,988N/A
Private Refinancing (5 Year Term)$386,747N/AN/A$386,747$351,6272025$6,446N/A
-

As usual, living modestly during school is the best way to reduce debt. Stay disciplined during residency and make payments where you can. Med school debt can be very intimidating for us big debters, but federal plans will make them very manageable over time. Even for FM doctors with big debt, there's hope. If you choose a higher cost plan, you are still gaining real value in having more money in the present. There's no need to live like a hobo.

Thanks for reading. Whew.

Resources:
Federal repayment calculator
Student loan calculator <- It's a pretty useful tool. It doesn't include new IBR but if you check the federal loan simulator, IBR is generally the same as PAYE. Lots of good articles on their site too.

I have no affiliation with Student Loan Planner. Run the numbers yourself to see what works best for you; you may have unique circumstances. Hiring a planner may be a good idea.
 
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@PierreMD where do u recommend clueless premed students start to get a clue about med finance :)
 
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*Warning: this is a very long post and delves into finance*
TLDR:
-Federal IDR plans make large debts very manageable
-Choose lower monthly plans for flexibility
-Use REPAYE during residency
-Re-evaluate your financial situation at least every year


Now let's do some (serious) math~

As a resident- Part 1:
You graduate with $350,000 in federal loans and enter a 3 year FM residency. You get paid an average resident salary shown below.
Resident PayAfter taxPer month
PGY155,200.0043,686.003,640.50
PGY257,100.0044,870.003,739.17
PGY360,100.0046,741.003,895.08

As you can see, there isn't a ton of room to make large payments but still some. While in residency, you can make payments or postpone (grace period or deferment). During postponement, interest will still accrue but will not capitalize until after. If you can make payments, however small, doing so will help fight back some of the interest before it capitalizes. For now, we'll assume no payments were made to keep the calculations consistent. I'll talk more about making residency payments in Part 2.

As an attending:
You get an annual salary of $200,000 (conservative 2% raise per year) in California with the following breakdown:
SalaryAfter taxPer month
200,000.00132,101.00*11,008.42
Other states= +-$5,000 to after tax income. I chose CA since to make our estimates conservative. I think only New York is more heavily taxed, but it depends on your city too. You will probably get a signing bonus (average $32,692 for 2018-2019) that I left it out of my calculation.

You can choose A) private refinance, B) federal repayment, or a hybrid with federal for residency and private after that. For now, we'll look at the first two. I'll talk about the hybrid approach when I discuss residency repayment.

A) Private refinance (at the start of residency):
Refinance will consolidate all of your federal loans into private ones. You can refinance any time you want, but once you do, you permenantly lose out on all federal repayment options. You can also refinance as many times as you like to secure the lowest rate possible; shop around at least once a year. There are usually cash bonuses for refinancing, ranging from $100 to $750 depending on your balance. There are also usually discounts on interest rates for things like auto pay. Below are the average rates for 2020:
(2020) Refinancing Fixed Rates
Available (in years)
Excellent
Credit
(750+)
Good
Credit
(700-750)
Average
Credit
(650+)
53.03%3.40%4.00%
73.50%3.90%4.25%
103.75%4.10%4.75%

Most people will have average credit so we'll use that to calculate the following payment schedules:
Term5 Years7 Years10 Years
Rate4.00%4.25%4.75%
Principal350,000.00350,000.00350,000.00
Interest charge each year14,000.0014,875.0016,625.00
Total balance after 3 year residency392,000.00394,625.00399,875.00
Monthly payment7,219.285,439.584,192.60
Total Payment433,156.80456,924.72503,112.00
Take home pay3,789.145,568.846,815.82

Choosing a 5YT will have you living like a resident for another 5 year. If you're looking to own a home, you'll have to save up longer or buy a more modest house (or use your signing bonus). You can still make it work, especially if you live in a low COL area. Living with debt for another 2-5 years will add a lot more spending money, but you will pay more in the long run. However, I mentioned in my last post, choosing a lower payment plan allows you the most flexibility. You have the ability to spend on things you need when you need and make aggressive payments when you can afford. You will probably end up paying a little bit more on the long run, but you'll have options not being tied down to a high monthly. You can even choose 15 and 20 year terms. No right answers here since it will depend on each person's preference and family needs, but I do recommend having the flexibility.

B) Federal repayment:
Interest rates are higher than private, but monthly plans are more flexible and you gain access to loan forgiveness. Deferment/forbearance is also easier to get with federal loans if you hit hard times. Specifically, we'll look at income-driven plans (IDR) where your monthly payment is based on your taxable income (re-certified every year). After 20-25 years (or 240-300 months) of payments, the remaining balance of your loan will be forgiven. You will have to pay the tax on the forgiven amount though. There are other federal plans, like the Standard 10 Year, but I won't discuss those since they are generally inferior (still look at them to see if they might work for you). Public Service Loan Forgiveness (PSLF) uses IDR repayment, but forgiveness is achieved after 10 years instead. We won't look at those, but if you qualify, they usually trump everything else

Sticking with federal loans during residency will give us a balance of $418,936 after residency:
Beg R1Beg R2Beg R3Attending
Direct Unsub179,777.00179,777.00179,777.00179,777.00
6.079% interest0.0010,928.6421,857.2932,785.93
Grad Plus170,223.00170,223.00170,223.00170,223.00
7.079% interest0.0012,050.0924,100.1736,150.26
Total Balance350,000.00372,978.73395,957.46418,936.19

Below is a breakdown of the most common IDR plans and their schedules. We'll use an average 6.579% interest for simplicity.
Total PaymentsRemaining Balance ForgivenTaxes DueTotal CostYear of RepaymentFirst Monthly PaymentLast monthly paymentTake home pay Year 1
REPAYE
(Revised Pay As You Earn 25 Year)
$572,300$435,120$174,048$746,3482045$1,511$2404$9,497‬
PAYE
(Pay As You Earn 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬
IBR
(Income Based Repayment 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬

There is another IDR plan called income-contingent repayment (ICR), but it's generally inferior (still look at them to see if they might work for you). IDR plans will have a lower monthly payment to start then slowly increase as your salary increases. You will also need to save up for that tax bomb. The best way is to set aside a little every month in an account where it will grow some interest (and saving a small amount hurts a lot less than paying straight). Even with the tax bomb savings, monthly payments remain low for you to enjoy life.

But wait a sec, the total payments we make with these plans is higher than private refinancing. Well, its a little more complicated than this because a dollar today is not the same as a dollar tomorrow, 5 years later, or 25 years later.

[Warning: it's about to get really technical and finance-y]

Money today is worth more than money tomorrow because you can put it to work and generate some return. If we are to compare apples to apples, we need to compare tomorrow's dollars in terms of today's dollars. In the most common sense, we can invest money today in some sort of financial vehicle so it grows according on the interest and term. If you put $100 in a 1% savings account in 2020, you will have $105.10 in 2025. So that a balance of $105.10 in 2025 has a present value of$100. Conversely, $105.10 in 2024 is not the same as $105.10 in 2025. Think of it like inflation: we can't compare money in different time periods without converting them all into the money from the same time period.

It gets pretty hairy when you're making regular payments. That's because each payment will be made in different time periods. If you make $100 every year for 5 years into a 1% savings account starting in 2020, the 2022 payment will be worth less than 2021 payment because the 2021 payment will have more time to grow. So we have to discount each years payment separately and add them together in order to find the present value of the total investment. Thank goodness we have Excel and calculators out there so we don't have to crunch the numbers for 20 years of monthly payments. Hopefully I explained that well; there are articles and videos out there if I didn't.

So what does this mean for our student loans? Well if we want to really compare the costs of repayment plans, we should calculate the present value of all of their payments. Aggressive repayment will reduce the face-value of total cost, but you are also losing out on investment opportunities. Plugging all of the conditions above with a conservative investment rate of 5%, we generate the following breakdown:
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$374,7202045$1,511-$2404$321
PAYE$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
IBR$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$393,8222025$7,219N/A
Private Refinancing
(7 Year Term)
$456,925N/AN/A$456,925$396,5912027$5,440N/A
Private Refinancing
(10 Year Term)
$503,112N/AN/A$503,112$407,9142030$4,193N/A

The NPV of PAYE and IBR have lower payments, including tax bomb savings, and still trump the private 5YT plan. Even an average FM physician graduating with a large amount of debt will have very manageable payments through federal IDR plans. The critical part of these calculations is your chosen investment rate because it affects both the NPV of the plan as well as the amount you will need to save up for the tax bomb. If you choose a lower investment rate, the NPV of all plans will increase. The key will be that longer repayment terms (IDR plans) will increase more dramatically than shorter ones i.e. private financing becomes more favorable with a lower returns. Because longer terms have more time to grow, a lower return will affect them more; it will also increase the monthly amount you will need save up for the tax bomb.

Let's say you instead choose put the excess money in a good 1% savings account.
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Loan Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$640,0312045$1,511-$2404$562
PAYE$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
IBR$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$424,6642025$7,219N/A
Private Refinancing (7 Year Term)$456,925N/AN/A$456,925$443,5752027$5,440N/A
Private Refinancing (10 Year Term)$503,112N/AN/A$503,112$481,2782030$4,193N/A

Now the cost of the our previous picks, PAYE and IBR, skyrockets past private options. Monthly payments stay the same (since they're based off income), but the amount you need to set aside increases. However, 1% is very, very bare-bones measure and creates a worst-case scenario. There are plenty of safe investment vehicles that generate more. We previously used a conservative 5%; the average 60/40 portfolio averaged about 8% over the last century. You can find savings accounts and CDs with 1.5%-2%. The break even point is around 2.25% which is realistically attainable.
*Investment returns fluctuate, but over the course of many years (10+), we can expect the return to be close to average.
*There are lots of good financial vehicles out there that are accessible to the average Joe/Jane. I recommend reading Burton Malkiel's A Random Walk Down Wall Street.

*VERY, VERY IMPORTANT: We use financial return as the measure of opportunity costs, but I want to stress that opportunity costs also include the utility we get from non-financial things. A house (which happens to produce financial returns too) generates utility: pride in having your own place, somewhere you can raise your family long term, etc. Likewise, a new car adds enjoyment, vacations add leisure and stress relief, and a college fund helps your children. All of these things generate very real returns of investment, even if we cannot assign them concrete values. And these intangibles have different value for different people i.e. house might generate 1%, 5%, or 20% for you. In this sense, even if you choose a higher cost plan, you may actually be coming out on top in your own way.

Again, even if we assume a low investment rate and higher total cost, IDR plans give you the option of making larger payments whenever you can afford. Federal plans, however, allow you additional flexibility. Deferment and forbearance are more forgiving if you hit hard times and can't make payments. If you go into these, the payments you make towards loan forgiveness are pause, not reset. And if your situation ever changes (see factors below), you can refinance any time it becomes advantageous for you. Regardless of which plan you choose, you should be re-evaluating your situation at least every year.

Factors:
-Salary increases will increase your taxable income. Taxable income increases your monthly payment, increases total payments, and decreases tax forgiveness. The more your salary increases, the more private refinancing becomes favorable.
-Getting married will potentially increase your taxable income (see above). However, you will also gain more tax benefits that can decrease taxable income. The cumulative effect will depend on how much your partner makes and whether you file together or separately.
-Having kids will add tax benefits and decrease your taxable income.
-The larger your debt after school, the more favorable IDR becomes. Monthly payments will remain the same, but you will need to save a little more each money for a larger tax bomb.

As a residency- Part 2: *best practice*
Federal plans can offer lower total costs through loan forgiveness as well as plenty of flexibility with repayment, but they gain more interest during residency when our ability to pay is at its lowest. We want to make payments in order to fight back some of the interest before it capitalizes, but if we refinance right away for a lower interest rate, but then we lose out on flexibility and loan forgiveness.

The solution is REPAYE, one of the federal repayment plans. REPAYE may or may not be the best long-term strategy, but during residency it is the best option because it offers a low monthly payment plus an interest subsidy. Since your payment will be based off our resident income, its pretty low: $304 to $345 a month for our average resident. Under the subsidy, if your monthly loan payments do not cover all of the interest charge, Uncle Sam will pay 50% of the difference. With $350,000 in loans and average 6.579% interest, we would be charged $23,026.5 in interest per year or $1,918.88 per month. Since interest charge is larger than our monthly payment, the interest subsidy will be half of the difference: $‬807.44/month in our 1st year. Under REPAYE, instead of only paying off $3,648‬, we've paid off $13,337.28‬. Any amount you can afford to pay after that just adds on top. Talk about bang for your buck. Over 3 years, we will have paid off more that $40,000 just making minimum monthly payments.

REPAYE gives us all the flexibility of federal loans. As you finish residency, you have lots of options. If federal repayment after residency is the best option, you can stick to REPAYE or switch to PAYE or IBR. If private refinancing is better, you can do that too. But wait, there's more! If you stick to any of the federal IDR plans, all of the payments you make during residency count towards loan forgiveness. So 17 years instead of 20 years. Thank you, Uncle Sam.

Now before we start putting everything we can into repayment during residency, there are a couple of things that take precedence. Establishing an emergency fund and retirement fund come first. Having cash on hand is always a good idea. The general rule of thumb is 3 to 6 months of living expenses in a savings account. Then make your minimum payment. You should also take advantage of all of the 401k matching your employer offers. Setting up retirement funds early is imperative, and employer matching is free money that will go a very long way in the future. Anything after that can go towards additional loan payments.

-

As usual, living modestly during school is the best way to reduce debt. Stay disciplined during residency and make payments where you can. Med school debt can be very intimidating for us big debters, but federal plans will make them very manageable over time. Even for FM doctors with big debt, there's hope. If you choose a higher cost plan, you are still gaining real value in having more money in the present. There's no need to live like a hobo.

Thanks for reading. Whew.

Resources:
Federal repayment calculator
Student loan calculator <- It's a pretty useful tool. It doesn't include new IBR but if you check the federal loan simulator, IBR is generally the same as PAYE. Lots of good articles on their site too.

Disclaimers:
I have no affiliation with Student Loan Planner. Run the numbers yourself to see what works best for you; you may have unique circumstances. Hiring a planner may be a good idea.
I bow before your greatness
 
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*Warning: this is a very long post and delves into finance*
TLDR:
-Federal IDR plans make large debts very manageable
-Choose lower monthly plans for flexibility
-Use REPAYE during residency
-Re-evaluate your financial situation at least every year


Now let's do some (serious) math~

As a resident- Part 1:
You graduate with $350,000 in federal loans and enter a 3 year FM residency. You get paid an average resident salary shown below.
Resident PayAfter taxPer month
PGY155,200.0043,686.003,640.50
PGY257,100.0044,870.003,739.17
PGY360,100.0046,741.003,895.08

As you can see, there isn't a ton of room to make large payments but still some. While in residency, you can make payments or postpone (grace period or deferment). During postponement, interest will still accrue but will not capitalize until after. If you can make payments, however small, doing so will help fight back some of the interest before it capitalizes. For now, we'll assume no payments were made to keep the calculations consistent. I'll talk more about making residency payments in Part 2.

As an attending:
You get an annual salary of $200,000 (conservative 2% raise per year) in California with the following breakdown:
SalaryAfter taxPer month
200,000.00132,101.00*11,008.42
Other states= +-$5,000 to after tax income. I chose CA since to make our estimates conservative. I think only New York is more heavily taxed, but it depends on your city too. You will probably get a signing bonus (average $32,692 for 2018-2019) that I left it out of my calculation.

You can choose A) private refinance, B) federal repayment, or a hybrid with federal for residency and private after that. For now, we'll look at the first two. I'll talk about the hybrid approach when I discuss residency repayment.

A) Private refinance (at the start of residency):
Refinance will consolidate all of your federal loans into private ones. You can refinance any time you want, but once you do, you permenantly lose out on all federal repayment options. You can also refinance as many times as you like to secure the lowest rate possible; shop around at least once a year. There are usually cash bonuses for refinancing, ranging from $100 to $750 depending on your balance. There are also usually discounts on interest rates for things like auto pay. Below are the average rates for 2020:
(2020) Refinancing Fixed Rates
Available (in years)
Excellent
Credit
(750+)
Good
Credit
(700-750)
Average
Credit
(650+)
53.03%3.40%4.00%
73.50%3.90%4.25%
103.75%4.10%4.75%

Most people will have average credit so we'll use that to calculate the following payment schedules:
Term5 Years7 Years10 Years
Rate4.00%4.25%4.75%
Principal350,000.00350,000.00350,000.00
Interest charge each year14,000.0014,875.0016,625.00
Total balance after 3 year residency392,000.00394,625.00399,875.00
Monthly payment7,219.285,439.584,192.60
Total Payment433,156.80456,924.72503,112.00
Take home pay3,789.145,568.846,815.82

Choosing a 5YT will have you living like a resident for another 5 year. If you're looking to own a home, you'll have to save up longer or buy a more modest house (or use your signing bonus). You can still make it work, especially if you live in a low COL area. Living with debt for another 2-5 years will add a lot more spending money, but you will pay more in the long run. However, I mentioned in my last post, choosing a lower payment plan allows you the most flexibility. You have the ability to spend on things you need when you need and make aggressive payments when you can afford. You will probably end up paying a little bit more on the long run, but you'll have options not being tied down to a high monthly. You can even choose 15 and 20 year terms. No right answers here since it will depend on each person's preference and family needs, but I do recommend having the flexibility.

B) Federal repayment:
Interest rates are higher than private, but monthly plans are more flexible and you gain access to loan forgiveness. Deferment/forbearance is also easier to get with federal loans if you hit hard times. Specifically, we'll look at income-driven plans (IDR) where your monthly payment is based on your taxable income (re-certified every year). After 20-25 years (or 240-300 months) of payments, the remaining balance of your loan will be forgiven. You will have to pay the tax on the forgiven amount though. There are other federal plans, like the Standard 10 Year, but I won't discuss those since they are generally inferior (still look at them to see if they might work for you). Public Service Loan Forgiveness (PSLF) uses IDR repayment, but forgiveness is achieved after 10 years instead. We won't look at those, but if you qualify, they usually trump everything else

Sticking with federal loans during residency will give us a balance of $418,936 after residency:
Beg R1Beg R2Beg R3Attending
Direct Unsub179,777.00179,777.00179,777.00179,777.00
6.079% interest0.0010,928.6421,857.2932,785.93
Grad Plus170,223.00170,223.00170,223.00170,223.00
7.079% interest0.0012,050.0924,100.1736,150.26
Total Balance350,000.00372,978.73395,957.46418,936.19

Below is a breakdown of the most common IDR plans and their schedules. We'll use an average 6.579% interest for simplicity.
Total PaymentsRemaining Balance ForgivenTaxes DueTotal CostYear of RepaymentFirst Monthly PaymentLast monthly paymentTake home pay Year 1
REPAYE
(Revised Pay As You Earn 25 Year)
$572,300$435,120$174,048$746,3482045$1,511$2404$9,497‬
PAYE
(Pay As You Earn 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬
IBR
(Income Based Repayment 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬

There is another IDR plan called income-contingent repayment (ICR), but it's generally inferior (still look at them to see if they might work for you). IDR plans will have a lower monthly payment to start then slowly increase as your salary increases. You will also need to save up for that tax bomb. The best way is to set aside a little every month in an account where it will grow some interest (and saving a small amount hurts a lot less than paying straight). Even with the tax bomb savings, monthly payments remain low for you to enjoy life.

But wait a sec, the total payments we make with these plans is higher than private refinancing. Well, its a little more complicated than this because a dollar today is not the same as a dollar tomorrow, 5 years later, or 25 years later.

[Warning: it's about to get really technical and finance-y]

Money today is worth more than money tomorrow because you can put it to work and generate some return. If we are to compare apples to apples, we need to compare tomorrow's dollars in terms of today's dollars. In the most common sense, we can invest money today in some sort of financial vehicle so it grows according on the interest and term. If you put $100 in a 1% savings account in 2020, you will have $105.10 in 2025. So that a balance of $105.10 in 2025 has a present value of$100. Conversely, $105.10 in 2024 is not the same as $105.10 in 2025. Think of it like inflation: we can't compare money in different time periods without converting them all into the money from the same time period.

It gets pretty hairy when you're making regular payments. That's because each payment will be made in different time periods. If you make $100 every year for 5 years into a 1% savings account starting in 2020, the 2022 payment will be worth less than 2021 payment because the 2021 payment will have more time to grow. So we have to discount each years payment separately and add them together in order to find the present value of the total investment. Thank goodness we have Excel and calculators out there so we don't have to crunch the numbers for 20 years of monthly payments. Hopefully I explained that well; there are articles and videos out there if I didn't.

So what does this mean for our student loans? Well if we want to really compare the costs of repayment plans, we should calculate the present value of all of their payments. Aggressive repayment will reduce the face-value of total cost, but you are also losing out on investment opportunities. Plugging all of the conditions above with a conservative investment rate of 5%, we generate the following breakdown:
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$374,7202045$1,511-$2404$321
PAYE$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
IBR$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$393,8222025$7,219N/A
Private Refinancing
(7 Year Term)
$456,925N/AN/A$456,925$396,5912027$5,440N/A
Private Refinancing
(10 Year Term)
$503,112N/AN/A$503,112$407,9142030$4,193N/A

The NPV of PAYE and IBR have lower payments, including tax bomb savings, and still trump the private 5YT plan. Even an average FM physician graduating with a large amount of debt will have very manageable payments through federal IDR plans. The critical part of these calculations is your chosen investment rate because it affects both the NPV of the plan as well as the amount you will need to save up for the tax bomb. If you choose a lower investment rate, the NPV of all plans will increase. The key will be that longer repayment terms (IDR plans) will increase more dramatically than shorter ones i.e. private financing becomes more favorable with a lower returns. Because longer terms have more time to grow, a lower return will affect them more; it will also increase the monthly amount you will need save up for the tax bomb.

Let's say you instead choose put the excess money in a good 1% savings account.
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Loan Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$640,0312045$1,511-$2404$562
PAYE$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
IBR$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$424,6642025$7,219N/A
Private Refinancing (7 Year Term)$456,925N/AN/A$456,925$443,5752027$5,440N/A
Private Refinancing (10 Year Term)$503,112N/AN/A$503,112$481,2782030$4,193N/A

Now the cost of the our previous picks, PAYE and IBR, skyrockets past private options. Monthly payments stay the same (since they're based off income), but the amount you need to set aside increases. However, 1% is very, very bare-bones measure and creates a worst-case scenario. There are plenty of safe investment vehicles that generate more. We previously used a conservative 5%; the average 60/40 portfolio averaged about 8% over the last century. You can find savings accounts and CDs with 1.5%-2%. The break even point is around 2.25% which is realistically attainable.
*Investment returns fluctuate, but over the course of many years (10+), we can expect the return to be close to average.
*There are lots of good financial vehicles out there that are accessible to the average Joe/Jane. I recommend reading Burton Malkiel's A Random Walk Down Wall Street.

*VERY, VERY IMPORTANT: We use financial return as the measure of opportunity costs, but I want to stress that opportunity costs also include the utility we get from non-financial things. A house (which happens to produce financial returns too) generates utility: pride in having your own place, somewhere you can raise your family long term, etc. Likewise, a new car adds enjoyment, vacations add leisure and stress relief, and a college fund helps your children. All of these things generate very real returns of investment, even if we cannot assign them concrete values. And these intangibles have different value for different people i.e. house might generate 1%, 5%, or 20% for you. In this sense, even if you choose a higher cost plan, you may actually be coming out on top in your own way.

Again, even if we assume a low investment rate and higher total cost, IDR plans give you the option of making larger payments whenever you can afford. Federal plans, however, allow you additional flexibility. Deferment and forbearance are more forgiving if you hit hard times and can't make payments. If you go into these, the payments you make towards loan forgiveness are pause, not reset. And if your situation ever changes (see factors below), you can refinance any time it becomes advantageous for you. Regardless of which plan you choose, you should be re-evaluating your situation at least every year.

Factors:
-Salary increases will increase your taxable income. Taxable income increases your monthly payment, increases total payments, and decreases tax forgiveness. The more your salary increases, the more private refinancing becomes favorable.
-Getting married will potentially increase your taxable income (see above). However, you will also gain more tax benefits that can decrease taxable income. The cumulative effect will depend on how much your partner makes and whether you file together or separately.
-Having kids will add tax benefits and decrease your taxable income.
-The larger your debt after school, the more favorable IDR becomes. Monthly payments will remain the same, but you will need to save a little more each money for a larger tax bomb.

As a residency- Part 2: *best practice*
Federal plans can offer lower total costs through loan forgiveness as well as plenty of flexibility with repayment, but they gain more interest during residency when our ability to pay is at its lowest. We want to make payments in order to fight back some of the interest before it capitalizes, but if we refinance right away for a lower interest rate, but then we lose out on flexibility and loan forgiveness.

The solution is REPAYE, one of the federal repayment plans. REPAYE may or may not be the best long-term strategy, but during residency it is the best option because it offers a low monthly payment plus an interest subsidy. Since your payment will be based off our resident income, its pretty low: $304 to $345 a month for our average resident. Under the subsidy, if your monthly loan payments do not cover all of the interest charge, Uncle Sam will pay 50% of the difference. With $350,000 in loans and average 6.579% interest, we would be charged $23,026.5 in interest per year or $1,918.88 per month. Since interest charge is larger than our monthly payment, the interest subsidy will be half of the difference: $‬807.44/month in our 1st year. Under REPAYE, instead of only paying off $3,648‬, we've paid off $13,337.28‬. Any amount you can afford to pay after that just adds on top. Talk about bang for your buck. Over 3 years, we will have paid off more that $40,000 just making minimum monthly payments.

REPAYE gives us all the flexibility of federal loans. As you finish residency, you have lots of options. If federal repayment after residency is the best option, you can stick to REPAYE or switch to PAYE or IBR. If private refinancing is better, you can do that too. But wait, there's more! If you stick to any of the federal IDR plans, all of the payments you make during residency count towards loan forgiveness. So 17 years instead of 20 years. Thank you, Uncle Sam.

Now before we start putting everything we can into repayment during residency, there are a couple of things that take precedence. Establishing an emergency fund and retirement fund come first. Having cash on hand is always a good idea. The general rule of thumb is 3 to 6 months of living expenses in a savings account. Then make your minimum payment. You should also take advantage of all of the 401k matching your employer offers. Setting up retirement funds early is imperative, and employer matching is free money that will go a very long way in the future. Anything after that can go towards additional loan payments.

-

As usual, living modestly during school is the best way to reduce debt. Stay disciplined during residency and make payments where you can. Med school debt can be very intimidating for us big debters, but federal plans will make them very manageable over time. Even for FM doctors with big debt, there's hope. If you choose a higher cost plan, you are still gaining real value in having more money in the present. There's no need to live like a hobo.

Thanks for reading. Whew.

Resources:
Federal repayment calculator
Student loan calculator <- It's a pretty useful tool. It doesn't include new IBR but if you check the federal loan simulator, IBR is generally the same as PAYE. Lots of good articles on their site too.

Disclaimers:
I have no affiliation with Student Loan Planner. Run the numbers yourself to see what works best for you; you may have unique circumstances. Hiring a planner may be a good idea.
@PierreMD Wow this is freakin amazing. This is the most comprehensive post I’ve ever seen about this subject. I’m pretty financially literate and have good saving and investing habits, but I don’t even know if I completely understood this all. Will have to read many times over.... THANK YOU SO MUCH!!

I have a question which I hope doesn’t take too long to answer:
If one plans to make partial contributions to IRA during med school (with maybe leftover money from loans and from living frugally), and then switch to max yearly IRA contribution ($6000?) and max yearly 401k contribution ($19,500) at some point after school, which plan would be the best plan in your opinion? Using the same criteria you provided e.g family med, $350k of debt, high cost of living, etc. Maybe I’m oversimplifying... should one think more about paying those loans off rather than investing?
 
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*Warning: this is a very long post and delves into finance*
TLDR:
-Federal IDR plans make large debts very manageable
-Choose lower monthly plans for flexibility
-Use REPAYE during residency
-Re-evaluate your financial situation at least every year


Now let's do some (serious) math~

As a resident- Part 1:
You graduate with $350,000 in federal loans and enter a 3 year FM residency. You get paid an average resident salary shown below.
Resident PayAfter taxPer month
PGY155,200.0043,686.003,640.50
PGY257,100.0044,870.003,739.17
PGY360,100.0046,741.003,895.08

As you can see, there isn't a ton of room to make large payments but still some. While in residency, you can make payments or postpone (grace period or deferment). During postponement, interest will still accrue but will not capitalize until after. If you can make payments, however small, doing so will help fight back some of the interest before it capitalizes. For now, we'll assume no payments were made to keep the calculations consistent. I'll talk more about making residency payments in Part 2.

As an attending:
You get an annual salary of $200,000 (conservative 2% raise per year) in California with the following breakdown:
SalaryAfter taxPer month
200,000.00132,101.00*11,008.42
Other states= +-$5,000 to after tax income. I chose CA since to make our estimates conservative. I think only New York is more heavily taxed, but it depends on your city too. You will probably get a signing bonus (average $32,692 for 2018-2019) that I left it out of my calculation.

You can choose A) private refinance, B) federal repayment, or a hybrid with federal for residency and private after that. For now, we'll look at the first two. I'll talk about the hybrid approach when I discuss residency repayment.

A) Private refinance (at the start of residency):
Refinance will consolidate all of your federal loans into private ones. You can refinance any time you want, but once you do, you permenantly lose out on all federal repayment options. You can also refinance as many times as you like to secure the lowest rate possible; shop around at least once a year. There are usually cash bonuses for refinancing, ranging from $100 to $750 depending on your balance. There are also usually discounts on interest rates for things like auto pay. Below are the average rates for 2020:
(2020) Refinancing Fixed Rates
Available (in years)
Excellent
Credit
(750+)
Good
Credit
(700-750)
Average
Credit
(650+)
53.03%3.40%4.00%
73.50%3.90%4.25%
103.75%4.10%4.75%

Most people will have average credit so we'll use that to calculate the following payment schedules:
Term5 Years7 Years10 Years
Rate4.00%4.25%4.75%
Principal350,000.00350,000.00350,000.00
Interest charge each year14,000.0014,875.0016,625.00
Total balance after 3 year residency392,000.00394,625.00399,875.00
Monthly payment7,219.285,439.584,192.60
Total Payment433,156.80456,924.72503,112.00
Take home pay3,789.145,568.846,815.82

Choosing a 5YT will have you living like a resident for another 5 year. If you're looking to own a home, you'll have to save up longer or buy a more modest house (or use your signing bonus). You can still make it work, especially if you live in a low COL area. Living with debt for another 2-5 years will add a lot more spending money, but you will pay more in the long run. However, I mentioned in my last post, choosing a lower payment plan allows you the most flexibility. You have the ability to spend on things you need when you need and make aggressive payments when you can afford. You will probably end up paying a little bit more on the long run, but you'll have options not being tied down to a high monthly. You can even choose 15 and 20 year terms. No right answers here since it will depend on each person's preference and family needs, but I do recommend having the flexibility.

B) Federal repayment:
Interest rates are higher than private, but monthly plans are more flexible and you gain access to loan forgiveness. Deferment/forbearance is also easier to get with federal loans if you hit hard times. Specifically, we'll look at income-driven plans (IDR) where your monthly payment is based on your taxable income (re-certified every year). After 20-25 years (or 240-300 months) of payments, the remaining balance of your loan will be forgiven. You will have to pay the tax on the forgiven amount though. There are other federal plans, like the Standard 10 Year, but I won't discuss those since they are generally inferior (still look at them to see if they might work for you). Public Service Loan Forgiveness (PSLF) uses IDR repayment, but forgiveness is achieved after 10 years instead. We won't look at those, but if you qualify, they usually trump everything else

Sticking with federal loans during residency will give us a balance of $418,936 after residency:
Beg R1Beg R2Beg R3Attending
Direct Unsub179,777.00179,777.00179,777.00179,777.00
6.079% interest0.0010,928.6421,857.2932,785.93
Grad Plus170,223.00170,223.00170,223.00170,223.00
7.079% interest0.0012,050.0924,100.1736,150.26
Total Balance350,000.00372,978.73395,957.46418,936.19

Below is a breakdown of the most common IDR plans and their schedules. We'll use an average 6.579% interest for simplicity.
Total PaymentsRemaining Balance ForgivenTaxes DueTotal CostYear of RepaymentFirst Monthly PaymentLast monthly paymentTake home pay Year 1
REPAYE
(Revised Pay As You Earn 25 Year)
$572,300$435,120$174,048$746,3482045$1,511$2404$9,497‬
PAYE
(Pay As You Earn 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬
IBR
(Income Based Repayment 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬

There is another IDR plan called income-contingent repayment (ICR), but it's generally inferior (still look at them to see if they might work for you). IDR plans will have a lower monthly payment to start then slowly increase as your salary increases. You will also need to save up for that tax bomb. The best way is to set aside a little every month in an account where it will grow some interest (and saving a small amount hurts a lot less than paying straight). Even with the tax bomb savings, monthly payments remain low for you to enjoy life.

But wait a sec, the total payments we make with these plans is higher than private refinancing. Well, its a little more complicated than this because a dollar today is not the same as a dollar tomorrow, 5 years later, or 25 years later.

[Warning: it's about to get really technical and finance-y]

Money today is worth more than money tomorrow because you can put it to work and generate some return. If we are to compare apples to apples, we need to compare tomorrow's dollars in terms of today's dollars. In the most common sense, we can invest money today in some sort of financial vehicle so it grows according on the interest and term. If you put $100 in a 1% savings account in 2020, you will have $105.10 in 2025. So that a balance of $105.10 in 2025 has a present value of$100. Conversely, $105.10 in 2024 is not the same as $105.10 in 2025. Think of it like inflation: we can't compare money in different time periods without converting them all into the money from the same time period.

It gets pretty hairy when you're making regular payments. That's because each payment will be made in different time periods. If you make $100 every year for 5 years into a 1% savings account starting in 2020, the 2022 payment will be worth less than 2021 payment because the 2021 payment will have more time to grow. So we have to discount each years payment separately and add them together in order to find the present value of the total investment. Thank goodness we have Excel and calculators out there so we don't have to crunch the numbers for 20 years of monthly payments. Hopefully I explained that well; there are articles and videos out there if I didn't.

So what does this mean for our student loans? Well if we want to really compare the costs of repayment plans, we should calculate the present value of all of their payments. Aggressive repayment will reduce the face-value of total cost, but you are also losing out on investment opportunities. Plugging all of the conditions above with a conservative investment rate of 5%, we generate the following breakdown:
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$374,7202045$1,511-$2404$321
PAYE$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
IBR$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$393,8222025$7,219N/A
Private Refinancing
(7 Year Term)
$456,925N/AN/A$456,925$396,5912027$5,440N/A
Private Refinancing
(10 Year Term)
$503,112N/AN/A$503,112$407,9142030$4,193N/A

The NPV of PAYE and IBR have lower payments, including tax bomb savings, and still trump the private 5YT plan. Even an average FM physician graduating with a large amount of debt will have very manageable payments through federal IDR plans. The critical part of these calculations is your chosen investment rate because it affects both the NPV of the plan as well as the amount you will need to save up for the tax bomb. If you choose a lower investment rate, the NPV of all plans will increase. The key will be that longer repayment terms (IDR plans) will increase more dramatically than shorter ones i.e. private financing becomes more favorable with a lower returns. Because longer terms have more time to grow, a lower return will affect them more; it will also increase the monthly amount you will need save up for the tax bomb.

Let's say you instead choose put the excess money in a good 1% savings account.
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Loan Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$640,0312045$1,511-$2404$562
PAYE$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
IBR$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$424,6642025$7,219N/A
Private Refinancing (7 Year Term)$456,925N/AN/A$456,925$443,5752027$5,440N/A
Private Refinancing (10 Year Term)$503,112N/AN/A$503,112$481,2782030$4,193N/A

Now the cost of the our previous picks, PAYE and IBR, skyrockets past private options. Monthly payments stay the same (since they're based off income), but the amount you need to set aside increases. However, 1% is very, very bare-bones measure and creates a worst-case scenario. There are plenty of safe investment vehicles that generate more. We previously used a conservative 5%; the average 60/40 portfolio averaged about 8% over the last century. You can find savings accounts and CDs with 1.5%-2%. The break even point is around 2.25% which is realistically attainable.
*Investment returns fluctuate, but over the course of many years (10+), we can expect the return to be close to average.
*There are lots of good financial vehicles out there that are accessible to the average Joe/Jane. I recommend reading Burton Malkiel's A Random Walk Down Wall Street.

*VERY, VERY IMPORTANT: We use financial return as the measure of opportunity costs, but I want to stress that opportunity costs also include the utility we get from non-financial things. A house (which happens to produce financial returns too) generates utility: pride in having your own place, somewhere you can raise your family long term, etc. Likewise, a new car adds enjoyment, vacations add leisure and stress relief, and a college fund helps your children. All of these things generate very real returns of investment, even if we cannot assign them concrete values. And these intangibles have different value for different people i.e. house might generate 1%, 5%, or 20% for you. In this sense, even if you choose a higher cost plan, you may actually be coming out on top in your own way.

Again, even if we assume a low investment rate and higher total cost, IDR plans give you the option of making larger payments whenever you can afford. Federal plans, however, allow you additional flexibility. Deferment and forbearance are more forgiving if you hit hard times and can't make payments. If you go into these, the payments you make towards loan forgiveness are pause, not reset. And if your situation ever changes (see factors below), you can refinance any time it becomes advantageous for you. Regardless of which plan you choose, you should be re-evaluating your situation at least every year.

Factors:
-Salary increases will increase your taxable income. Taxable income increases your monthly payment, increases total payments, and decreases tax forgiveness. The more your salary increases, the more private refinancing becomes favorable.
-Getting married will potentially increase your taxable income (see above). However, you will also gain more tax benefits that can decrease taxable income. The cumulative effect will depend on how much your partner makes and whether you file together or separately.
-Having kids will add tax benefits and decrease your taxable income.
-The larger your debt after school, the more favorable IDR becomes. Monthly payments will remain the same, but you will need to save a little more each money for a larger tax bomb.

As a residency- Part 2: *best practice*
Federal plans can offer lower total costs through loan forgiveness as well as plenty of flexibility with repayment, but they gain more interest during residency when our ability to pay is at its lowest. We want to make payments in order to fight back some of the interest before it capitalizes, but if we refinance right away for a lower interest rate, but then we lose out on flexibility and loan forgiveness.

The solution is REPAYE, one of the federal repayment plans. REPAYE may or may not be the best long-term strategy, but during residency it is the best option because it offers a low monthly payment plus an interest subsidy. Since your payment will be based off our resident income, its pretty low: $304 to $345 a month for our average resident. Under the subsidy, if your monthly loan payments do not cover all of the interest charge, Uncle Sam will pay 50% of the difference. With $350,000 in loans and average 6.579% interest, we would be charged $23,026.5 in interest per year or $1,918.88 per month. Since interest charge is larger than our monthly payment, the interest subsidy will be half of the difference: $‬807.44/month in our 1st year. Under REPAYE, instead of only paying off $3,648‬, we've paid off $13,337.28‬. Any amount you can afford to pay after that just adds on top. Talk about bang for your buck. Over 3 years, we will have paid off more that $40,000 just making minimum monthly payments.

REPAYE gives us all the flexibility of federal loans. As you finish residency, you have lots of options. If federal repayment after residency is the best option, you can stick to REPAYE or switch to PAYE or IBR. If private refinancing is better, you can do that too. But wait, there's more! If you stick to any of the federal IDR plans, all of the payments you make during residency count towards loan forgiveness. So 17 years instead of 20 years. Thank you, Uncle Sam.

Now before we start putting everything we can into repayment during residency, there are a couple of things that take precedence. Establishing an emergency fund and retirement fund come first. Having cash on hand is always a good idea. The general rule of thumb is 3 to 6 months of living expenses in a savings account. Then make your minimum payment. You should also take advantage of all of the 401k matching your employer offers. Setting up retirement funds early is imperative, and employer matching is free money that will go a very long way in the future. Anything after that can go towards additional loan payments.

-

As usual, living modestly during school is the best way to reduce debt. Stay disciplined during residency and make payments where you can. Med school debt can be very intimidating for us big debters, but federal plans will make them very manageable over time. Even for FM doctors with big debt, there's hope. If you choose a higher cost plan, you are still gaining real value in having more money in the present. There's no need to live like a hobo.

Thanks for reading. Whew.

Resources:
Federal repayment calculator
Student loan calculator <- It's a pretty useful tool. It doesn't include new IBR but if you check the federal loan simulator, IBR is generally the same as PAYE. Lots of good articles on their site too.

Disclaimers:
I have no affiliation with Student Loan Planner. Run the numbers yourself to see what works best for you; you may have unique circumstances. Hiring a planner may be a good idea.
This took me over 45 minutes to read so I cant imagine how long it took you to write this all up thank you this is amazing.
That's a very interesting thing I never considered - early investments where your interest credit makes the interest on the loans sort of negligible. Also completely agree on the non-tangible benefits from having more spending money early on.

You say salary increases favor private refinancing options, but at the same time for federal IDR plans, resident years count towards loan forgiveness. So that brings up the situation where someone goes into a 7-8-year long surgery residency + fellowship and comes out as an attending making $300-400K. Here, the higher taxable income would increase monthly payments to nearly private refinancing options and so the private option makes more sense bc of its lower interest. But at the same time, because residency was so long, once you're out you only have 13 years remaining until all your loans are forgiven, so maybe the federal IDR may actually be a better option. This seems like a complicated situation with a lot of numbers involved so having a financial advisor may be best, but an interesting thing to think about.

The REPAYE during residency sounds amazing and I'd be be-fizzled to see why residents wouldn't choose that option assuming they have 200K+ in debt
 
*Warning: this is a very long post and delves into finance*
TLDR:
-Federal IDR plans make large debts very manageable
-Choose lower monthly plans for flexibility
-Use REPAYE during residency
-Re-evaluate your financial situation at least every year


Now let's do some (serious) math~

As a resident- Part 1:
You graduate with $350,000 in federal loans and enter a 3 year FM residency. You get paid an average resident salary shown below.
Resident PayAfter taxPer month
PGY155,200.0043,686.003,640.50
PGY257,100.0044,870.003,739.17
PGY360,100.0046,741.003,895.08

As you can see, there isn't a ton of room to make large payments but still some. While in residency, you can make payments or postpone (grace period or deferment). During postponement, interest will still accrue but will not capitalize until after. If you can make payments, however small, doing so will help fight back some of the interest before it capitalizes. For now, we'll assume no payments were made to keep the calculations consistent. I'll talk more about making residency payments in Part 2.

As an attending:
You get an annual salary of $200,000 (conservative 2% raise per year) in California with the following breakdown:
SalaryAfter taxPer month
200,000.00132,101.00*11,008.42
Other states= +-$5,000 to after tax income. I chose CA since to make our estimates conservative. I think only New York is more heavily taxed, but it depends on your city too. You will probably get a signing bonus (average $32,692 for 2018-2019) that I left it out of my calculation.

You can choose A) private refinance, B) federal repayment, or a hybrid with federal for residency and private after that. For now, we'll look at the first two. I'll talk about the hybrid approach when I discuss residency repayment.

A) Private refinance (at the start of residency):
Refinance will consolidate all of your federal loans into private ones. You can refinance any time you want, but once you do, you permenantly lose out on all federal repayment options. You can also refinance as many times as you like to secure the lowest rate possible; shop around at least once a year. There are usually cash bonuses for refinancing, ranging from $100 to $750 depending on your balance. There are also usually discounts on interest rates for things like auto pay. Below are the average rates for 2020:
(2020) Refinancing Fixed Rates
Available (in years)
Excellent
Credit
(750+)
Good
Credit
(700-750)
Average
Credit
(650+)
53.03%3.40%4.00%
73.50%3.90%4.25%
103.75%4.10%4.75%

Most people will have average credit so we'll use that to calculate the following payment schedules:
Term5 Years7 Years10 Years
Rate4.00%4.25%4.75%
Principal350,000.00350,000.00350,000.00
Interest charge each year14,000.0014,875.0016,625.00
Total balance after 3 year residency392,000.00394,625.00399,875.00
Monthly payment7,219.285,439.584,192.60
Total Payment433,156.80456,924.72503,112.00
Take home pay3,789.145,568.846,815.82

Choosing a 5YT will have you living like a resident for another 5 year. If you're looking to own a home, you'll have to save up longer or buy a more modest house (or use your signing bonus). You can still make it work, especially if you live in a low COL area. Living with debt for another 2-5 years will add a lot more spending money, but you will pay more in the long run. However, I mentioned in my last post, choosing a lower payment plan allows you the most flexibility. You have the ability to spend on things you need when you need and make aggressive payments when you can afford. You will probably end up paying a little bit more on the long run, but you'll have options not being tied down to a high monthly. You can even choose 15 and 20 year terms. No right answers here since it will depend on each person's preference and family needs, but I do recommend having the flexibility.

B) Federal repayment:
Interest rates are higher than private, but monthly plans are more flexible and you gain access to loan forgiveness. Deferment/forbearance is also easier to get with federal loans if you hit hard times. Specifically, we'll look at income-driven plans (IDR) where your monthly payment is based on your taxable income (re-certified every year). After 20-25 years (or 240-300 months) of payments, the remaining balance of your loan will be forgiven. You will have to pay the tax on the forgiven amount though. There are other federal plans, like the Standard 10 Year, but I won't discuss those since they are generally inferior (still look at them to see if they might work for you). Public Service Loan Forgiveness (PSLF) uses IDR repayment, but forgiveness is achieved after 10 years instead. We won't look at those, but if you qualify, they usually trump everything else

Sticking with federal loans during residency will give us a balance of $418,936 after residency:
Beg R1Beg R2Beg R3Attending
Direct Unsub179,777.00179,777.00179,777.00179,777.00
6.079% interest0.0010,928.6421,857.2932,785.93
Grad Plus170,223.00170,223.00170,223.00170,223.00
7.079% interest0.0012,050.0924,100.1736,150.26
Total Balance350,000.00372,978.73395,957.46418,936.19

Below is a breakdown of the most common IDR plans and their schedules. We'll use an average 6.579% interest for simplicity.
Total PaymentsRemaining Balance ForgivenTaxes DueTotal CostYear of RepaymentFirst Monthly PaymentLast monthly paymentTake home pay Year 1
REPAYE
(Revised Pay As You Earn 25 Year)
$572,300$435,120$174,048$746,3482045$1,511$2404$9,497‬
PAYE
(Pay As You Earn 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬
IBR
(Income Based Repayment 20 Year)
$435,606$534,650$213,860$649,4662040$1,511$2183$9,497‬

There is another IDR plan called income-contingent repayment (ICR), but it's generally inferior (still look at them to see if they might work for you). IDR plans will have a lower monthly payment to start then slowly increase as your salary increases. You will also need to save up for that tax bomb. The best way is to set aside a little every month in an account where it will grow some interest (and saving a small amount hurts a lot less than paying straight). Even with the tax bomb savings, monthly payments remain low for you to enjoy life.

But wait a sec, the total payments we make with these plans is higher than private refinancing. Well, its a little more complicated than this because a dollar today is not the same as a dollar tomorrow, 5 years later, or 25 years later.

[Warning: it's about to get really technical and finance-y]

Money today is worth more than money tomorrow because you can put it to work and generate some return. If we are to compare apples to apples, we need to compare tomorrow's dollars in terms of today's dollars. In the most common sense, we can invest money today in some sort of financial vehicle so it grows according on the interest and term. If you put $100 in a 1% savings account in 2020, you will have $105.10 in 2025. So that a balance of $105.10 in 2025 has a present value of$100. Conversely, $105.10 in 2024 is not the same as $105.10 in 2025. Think of it like inflation: we can't compare money in different time periods without converting them all into the money from the same time period.

It gets pretty hairy when you're making regular payments. That's because each payment will be made in different time periods. If you make $100 every year for 5 years into a 1% savings account starting in 2020, the 2022 payment will be worth less than 2021 payment because the 2021 payment will have more time to grow. So we have to discount each years payment separately and add them together in order to find the present value of the total investment. Thank goodness we have Excel and calculators out there so we don't have to crunch the numbers for 20 years of monthly payments. Hopefully I explained that well; there are articles and videos out there if I didn't.

So what does this mean for our student loans? Well if we want to really compare the costs of repayment plans, we should calculate the present value of all of their payments. Aggressive repayment will reduce the face-value of total cost, but you are also losing out on investment opportunities. Plugging all of the conditions above with a conservative investment rate of 5%, we generate the following breakdown:
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$374,7202045$1,511-$2404$321
PAYE$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
IBR$435,606$534,650$213,860$649,466$357,1702040$1,511-$2183$572
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$393,8222025$7,219N/A
Private Refinancing
(7 Year Term)
$456,925N/AN/A$456,925$396,5912027$5,440N/A
Private Refinancing
(10 Year Term)
$503,112N/AN/A$503,112$407,9142030$4,193N/A

The NPV of PAYE and IBR have lower payments, including tax bomb savings, and still trump the private 5YT plan. Even an average FM physician graduating with a large amount of debt will have very manageable payments through federal IDR plans. The critical part of these calculations is your chosen investment rate because it affects both the NPV of the plan as well as the amount you will need to save up for the tax bomb. If you choose a lower investment rate, the NPV of all plans will increase. The key will be that longer repayment terms (IDR plans) will increase more dramatically than shorter ones i.e. private financing becomes more favorable with a lower returns. Because longer terms have more time to grow, a lower return will affect them more; it will also increase the monthly amount you will need save up for the tax bomb.

Let's say you instead choose put the excess money in a good 1% savings account.
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Loan Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessMonthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$572,300$435,120$174,048$746,348$640,0312045$1,511-$2404$562
PAYE$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
IBR$435,606$534,650$213,860$649,466$569,7922040$1,511-$2183$886
Private Refinancing (5 Year Term)$433,157N/AN/A$433,157$424,6642025$7,219N/A
Private Refinancing (7 Year Term)$456,925N/AN/A$456,925$443,5752027$5,440N/A
Private Refinancing (10 Year Term)$503,112N/AN/A$503,112$481,2782030$4,193N/A

Now the cost of the our previous picks, PAYE and IBR, skyrockets past private options. Monthly payments stay the same (since they're based off income), but the amount you need to set aside increases. However, 1% is very, very bare-bones measure and creates a worst-case scenario. There are plenty of safe investment vehicles that generate more. We previously used a conservative 5%; the average 60/40 portfolio averaged about 8% over the last century. You can find savings accounts and CDs with 1.5%-2%. The break even point is around 2.25% which is realistically attainable.
*Investment returns fluctuate, but over the course of many years (10+), we can expect the return to be close to average.
*There are lots of good financial vehicles out there that are accessible to the average Joe/Jane. I recommend reading Burton Malkiel's A Random Walk Down Wall Street.

*VERY, VERY IMPORTANT: We use financial return as the measure of opportunity costs, but I want to stress that opportunity costs also include the utility we get from non-financial things. A house (which happens to produce financial returns too) generates utility: pride in having your own place, somewhere you can raise your family long term, etc. Likewise, a new car adds enjoyment, vacations add leisure and stress relief, and a college fund helps your children. All of these things generate very real returns of investment, even if we cannot assign them concrete values. And these intangibles have different value for different people i.e. house might generate 1%, 5%, or 20% for you. In this sense, even if you choose a higher cost plan, you may actually be coming out on top in your own way.

Again, even if we assume a low investment rate and higher total cost, IDR plans give you the option of making larger payments whenever you can afford. Federal plans, however, allow you additional flexibility. Deferment and forbearance are more forgiving if you hit hard times and can't make payments. If you go into these, the payments you make towards loan forgiveness are pause, not reset. And if your situation ever changes (see factors below), you can refinance any time it becomes advantageous for you. Regardless of which plan you choose, you should be re-evaluating your situation at least every year.

Factors:
-Salary increases will increase your taxable income. Taxable income increases your monthly payment, increases total payments, and decreases tax forgiveness. The more your salary increases, the more private refinancing becomes favorable.
-Getting married will potentially increase your taxable income (see above). However, you will also gain more tax benefits that can decrease taxable income. The cumulative effect will depend on how much your partner makes and whether you file together or separately.
-Having kids will add tax benefits and decrease your taxable income.
-The larger your debt after school, the more favorable IDR becomes. Monthly payments will remain the same, but you will need to save a little more each money for a larger tax bomb.

As a residency- Part 2: *best practice*
Federal plans can offer lower total costs through loan forgiveness as well as plenty of flexibility with repayment, but they gain more interest during residency when our ability to pay is at its lowest. We want to make payments in order to fight back some of the interest before it capitalizes, but if we refinance right away for a lower interest rate, but then we lose out on flexibility and loan forgiveness.

The solution is REPAYE, one of the federal repayment plans. REPAYE may or may not be the best long-term strategy, but during residency it is the best option because it offers a low monthly payment plus an interest subsidy. Since your payment will be based off our resident income, its pretty low: $304 to $345 a month for our average resident. Under the subsidy, if your monthly loan payments do not cover all of the interest charge, Uncle Sam will pay 50% of the difference. With $350,000 in loans and average 6.579% interest, we would be charged $23,026.5 in interest per year or $1,918.88 per month. Since interest charge is larger than our monthly payment, the interest subsidy will be half of the difference: $‬807.44/month in our 1st year. Under REPAYE, instead of only paying off $3,648‬, we've paid off $13,337.28‬. Any amount you can afford to pay after that just adds on top. Talk about bang for your buck. Over 3 years, we will have paid off more that $40,000 just making minimum monthly payments.

REPAYE gives us all the flexibility of federal loans. As you finish residency, you have lots of options. If federal repayment after residency is the best option, you can stick to REPAYE or switch to PAYE or IBR. If private refinancing is better, you can do that too. But wait, there's more! If you stick to any of the federal IDR plans, all of the payments you make during residency count towards loan forgiveness. So 17 years instead of 20 years. Thank you, Uncle Sam.

Now before we start putting everything we can into repayment during residency, there are a couple of things that take precedence. Establishing an emergency fund and retirement fund come first. Having cash on hand is always a good idea. The general rule of thumb is 3 to 6 months of living expenses in a savings account. Then make your minimum payment. You should also take advantage of all of the 401k matching your employer offers. Setting up retirement funds early is imperative, and employer matching is free money that will go a very long way in the future. Anything after that can go towards additional loan payments.

-

As usual, living modestly during school is the best way to reduce debt. Stay disciplined during residency and make payments where you can. Med school debt can be very intimidating for us big debters, but federal plans will make them very manageable over time. Even for FM doctors with big debt, there's hope. If you choose a higher cost plan, you are still gaining real value in having more money in the present. There's no need to live like a hobo.

Thanks for reading. Whew.

Resources:
Federal repayment calculator
Student loan calculator <- It's a pretty useful tool. It doesn't include new IBR but if you check the federal loan simulator, IBR is generally the same as PAYE. Lots of good articles on their site too.

Disclaimers:
I have no affiliation with Student Loan Planner. Run the numbers yourself to see what works best for you; you may have unique circumstances. Hiring a planner may be a good idea.
Great post.
I don’t recall the specifics, it I think the last time your referenced the Student Loan Calculator spreadsheet for loan repayment I played with it a bit. I seem to recall that it took your analysis that you show above a bit further, showing net worth over time. Tracking the Net-worth over time was the true way to find ideal payback term since it shows accumulation of additional savings etc. The parameter values that the user enters definitely affects which is the optimal choice.
 
Edits to my big post:
I was wrong about making additional interest payments during residency using REPAYE. The subsidy is a maximum. If you make extra payments, the subsidy is reduced by that amount until it's eliminated. In this case, I recommend making the minimum payments and saving up the excess to make a bigger payment after residency (or house, etc.). Also, if you get married, your combined AGI will be used to determine your monthly payment even if you file separately. PAYE and IBR you can file separately; you'll need to confirm with a profession if filing separately is worth it.

Also, if you leave REPAYE, all unpaid interest will capitalize. If you're planing to refinance, that was going to happen anyways. But if you were sticking with federal IDR, you should pick and stick with the one plan.

I didn't include the full analysis since my post was getting long but here it is. This is the payment schedule analysis if you stick completely with federal IDR and make payments during residency. This includes 3 years of paying as a resident followed by making $200K with 2% annual raises. Only thing that changes is that NPV of all go down, but PAYE is still the best. You would stick with PAYE through residency and pay until forgiveness. If you refinance, the calculation is simple: it's the usual interest rate + term but with a smaller starting balance.
Total Payments (Until Payoff or Forgiveness)Remaining Balance
(When Loans Are Forgiven)
Taxes Due (from user input)Total Cost of Loan PaybackCost of Loan Payback in 2020 Dollars, aka Net Present ValueYear of Total Repayment or ForgivenessFirst Monthly PaymentMonthly Tax Penalty Account Savings in Mutual Funds
REPAYE$494,913$379,264$151,706$646,619$308,7792045$304$280
PAYE$367,140$443,390$177,356$544,496$287,1182040$304$475
Standard 10 Year$478,591N/AN/A$478,591$388,0332030$3,988N/A
Private Refinancing (5 Year Term)$386,747N/AN/A$386,747$351,6272025$6,446N/A

@PierreMD where do u recommend clueless premed students start to get a clue about med finance :)

Lots of info on Student Loan Hero, White Coat Investor, Nerd Wallet, Student Loan Planner, The College Investor, and studentaid.gov. Studentaid.gov obviously has the most direct info but it's a lot denser and more technical. AAMC has their own resources as well. Like any skill, it takes time and some brain work, but you'll get the hang of it if you keep at it :)

I also think more people should be open to talking about money with their friends and families. It seems to be almost taboo, but it one of the most important things. The more we discuss, the more aware we become and, hopefully, make better decisions. I'm learning new things all the time from posting here (hence all my edits).

I bow before your greatness

I'm just a dude posting on an internet forum ;)

@PierreMD Wow this is freakin amazing. This is the most comprehensive post I’ve ever seen about this subject. I’m pretty financially literate and have good saving and investing habits, but I don’t even know if I completely understood this all. Will have to read many times over.... THANK YOU SO MUCH!!

I have a question which I hope doesn’t take too long to answer:
If one plans to make partial contributions to IRA during med school (with maybe leftover money from loans and from living frugally), and then switch to max yearly IRA contribution ($6000?) and max yearly 401k contribution ($19,500) at some point after school, which plan would be the best plan in your opinion? Using the same criteria you provided e.g family med, $350k of debt, high cost of living, etc. Maybe I’m oversimplifying... should one think more about paying those loans off rather than investing?

Coincidentally, I've thought about this myself. For IRAs/Roths, you need to have earned income. Check out this article about contributing without earned income. Allegedly, you can withdraw excess contributions before filing taxes to avoid the penalty. Its a hassle but assuming we do that, as big debtors, we will have maxed out our Direct Unsub loans so any incremental amount we take out will be as Grad PLUS with 7.079% interest and 4.236% origination. On the flip side, interest on the loans aren't compounding but your investment returns will be. If you plan on doing federal IDR, the amount you borrow will also be at a discount (a portion of it will be forgiven). Will your investment outperform that? That's up to how risk adverse you are, your outlook on the market, and your confidence in the investments you choose.

This took me over 45 minutes to read so I cant imagine how long it took you to write this all up thank you this is amazing.
That's a very interesting thing I never considered - early investments where your interest credit makes the interest on the loans sort of negligible. Also completely agree on the non-tangible benefits from having more spending money early on.

You say salary increases favor private refinancing options, but at the same time for federal IDR plans, resident years count towards loan forgiveness. So that brings up the situation where someone goes into a 7-8-year long surgery residency + fellowship and comes out as an attending making $300-400K. Here, the higher taxable income would increase monthly payments to nearly private refinancing options and so the private option makes more sense bc of its lower interest. But at the same time, because residency was so long, once you're out you only have 13 years remaining until all your loans are forgiven, so maybe the federal IDR may actually be a better option. This seems like a complicated situation with a lot of numbers involved so having a financial advisor may be best, but an interesting thing to think about.

The REPAYE during residency sounds amazing and I'd be be-fizzled to see why residents wouldn't choose that option assuming they have 200K+ in debt

It takes me quite awhile actually ahah. I wouldn't say investment makes interest negligible. It's more find out which has a stronger effect on total cost. Those with less debt will typically find aggressive repayment the better option. This analysis is for us big debtors.

When I mean salary increases, I mean raises you get while you're working or a salary bump when you change jobs. When it comes to specialists, it's different because their salary will rise larger than the interest can grow i.e. a $400,000 salary vs $200,000 is a 200% increase that your loan interest is unlikely to match. A large salary will also create a large monthly payment that will decrease the amount of loan forgiveness received. There are probably some specialists with MASSIVE debt that will find IDR beneficial, but I imagine most won't.
Edit: A general surgeon making $362,000 (average in 2019) will need to graduate med school with $385,000 or more for IDR to become worth it. Not many students will, but its a lower debt that I previously thought.
 
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