Student debt: what does the math actually say?

[Skarl]

On these forums, there is much discussion about the burdens of student debt, especially in regards to choosing a medical school. But at the same time, there is not proportional discussion about what repaying/living with debt/loans actually means in a financial and practical sense. Therefore, I thought it would be helpful to start a discussion about how loan repayments actually work, what the timeline of repayment is for most physicians, and what students should think about in order to set themselves up for financial success.

For example: suppose a student takes out ~200k in loans and pursues a 4-year residency for an end attending salary of $300k. What does repayment/net balance actually look like...

• During medical school: I know that interest accumulates, but does not capitalize. So after 4 years, with the current interest rate of 4.3%, 200k becomes...? What does the math for this look like? Is this correct: (0.043/365) x 200,000 x 365 x 4 = 34,400 + 200,000 = $234,400 by graduation? Probably could be lower if you borrow by-semester--let's say 25k per semester:
  • (0.043/365) x 25,000 x 182.5 = 537.5
  • (0.043/365) x 50,000 x 182.5 = 1075
  • (0.043/365) x 75,000 x 182.5 = 1612.5
  • (0.043/365) x 100,000 x 182.5 = 2150
  • (0.043/365) x 125,000 x 182.5 = 2687.5
  • (0.043/365) x 150,000 x 182.5 = 3225
  • (0.043/365) x 175,000 x 182.5 = 3762.5
  • (0.043/365) x 200,000 x 182.5 = 4300
  • Total = 19350 + 200,000 = $219,350
• During residency: With a resident's salary, it would probably just be paying off the interest each month? Again what does the math look like? I know your interest will now be compounded into your principal monthly.
• Once an attending: Why do physicians enter 10+ year payment plans? Wouldn't it be better to pay off loans as quickly as possible in the first 2-3 years by living below your means and ultimately pay less overall?

Thanks!

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[deleted889094]

You should check out White Coat Investor.

 

[Skarl]

You should check out White Coat Investor.

I have the book, but it doesn't really address my question. I just want to understand the math behind my loans. The book seems to focus more on financial guidelines/tips for physicians. I certainly plan to read it later down the line in my career, but those topics are not as relevant for me right now.

 

[Flodaddy]

Use the AAMC's loan calculator or find other loan calculators to see what your loans will look like and the estimated monthly repayment. The math gets complicated.

The best option depends on your loan balance, specialty, age, and other expenses. Anyone with a high balance should pay it off quickly while also prioritizing retirements funds. There is nothing you should be doing as a med student besides keeping your debt low.

 

[Skarl]

Use the AAMC's loan calculator or find other loan calculators to see what your loans will look like and the estimated monthly repayment. The math gets complicated.

The best option depends on your loan balance, specialty, age, and other expenses. Anyone with a high balance should pay it off quickly while also prioritizing retirements funds. There is nothing you should be doing as a med student besides keeping your debt low.

Thanks for the advice. I'm curious as to what you mean by the math gets complicated... would interest during residency not just be performing the same calculation as I did above, but with the interest compounded into your principal?

Also AAMC's calculator seems to assume I enter a repayment plan. Again, why would I want to do this when I can pay off my loans in 2-3 years post-residency?

 

[Oatmealraisin4me]

Thanks for the advice. I'm curious as to what you mean by the math gets complicated... would interest during residency not just be performing the same calculation as I did above, but with the interest compounded into your principal?

Also AAMC's calculator seems to assume I enter a repayment plan. Again, why would I want to do this when I can pay off my loans in 2-3 years post-residency?

You can always “overpay” your monthly loan payment. As you mentioned earlier, with federal loans you are looking at a 10 year repayment plan- but that just breaks your loan up into that conceivable plan. If you want to pay them off in 2-3 years post residency, go for it! Nothing stopping you.

Also, to help you a bit with your math because I’ve done the math also (with your exact numbers), on an income based repayment plan, as a resident you’d probably be paying around 300/month. Assuming your 219k debt is accruing at 4.3% a year, that’s an increase in interest of about 9400. Therefore, during residency, your payments won’t even be enough to cover the interest accrual (assuming you stick to the required payment). I’ve taken this into consideration in my own calculations.

I’m also not assuming a 4.3% for the next four years (this is a record low because of the current economy; I don’t know what the future holds, but I’ve made my calculations assuming interest rates bounce back to 6.3% next year)

 

[Flodaddy]

Thanks for the advice. I'm curious as to what you mean by the math gets complicated... would interest during residency not just be performing the same calculation as I did above, but with the interest compounded into your principal?

Also AAMC's calculator seems to assume I enter a repayment plan. Again, why would I want to do this when I can pay off my loans in 2-3 years post-residency?

You choose repayment plans during residency and your loan balance will continue to grow, unless you have low balance. It all depends on your repayment plan how much interest will accrue during residency. You need to choose a repayment plan and you likely won't be able to stay on the standard 10 year plan if you have over $200K

Where did you read that interest compounds? How to Calculate Student Loan Interest "The calculation above shows how to figure out interest payments based on what’s known as a simple daily interest formula; this is the way the U.S. Department of Education does it on federal student loans. With this method, you pay interest as a percentage of the principal balance only." Student Loan Interest Calculator: Step-by-Step Instructions — NerdWallet

Interest capitalizes when you enter repayment. In your example, your new yearly interest in residency is $219K*0.043. They use $219K instead of $200K to calculate the interest because the accrued interest was capitalized. Interest does not compound and only capitalizes again if you miss payments, refinance, switch repayment plans, or consolidate your loans

 

[Skarl]

You choose repayment plans during residency and your loan balance will continue to grow, unless you have low balance. It all depends on your repayment plan how much interest will accrue during residency. You need to choose a repayment plan and you likely won't be able to stay on the standard 10 year plan if you have over $200K

Where did you read that interest compounds? How to Calculate Student Loan Interest "The calculation above shows how to figure out interest payments based on what’s known as a simple daily interest formula; this is the way the U.S. Department of Education does it on federal student loans. With this method, you pay interest as a percentage of the principal balance only." Student Loan Interest Calculator: Step-by-Step Instructions — NerdWallet

Interest capitalizes when you enter repayment. In your example, your new yearly interest in residency is $219K*0.043. They use $219K instead of $200K to calculate the interest because the accrued interest was capitalized. Interest does not compound and only capitalizes again if you miss payments, refinance, switch repayment plans, or consolidate your loans

Thank you so much for providing those resources and explaining. I actually did not understand that interest does not compound but merely capitalizes one time after graduation. This is one reason I wanted to start this thread... I think it's ridiculous that some med students (myself included) go into thousand of debt without even understanding the basics of what that will entail.

You can always “overpay” your monthly loan payment. As you mentioned earlier, with federal loans you are looking at a 10 year repayment plan- but that just breaks your loan up into that conceivable plan. If you want to pay them off in 2-3 years post residency, go for it! Nothing stopping you.

Also, to help you a bit with your math because I’ve done the math also (with your exact numbers), on an income based repayment plan, as a resident you’d probably be paying around 300/month. Assuming your 219k debt is accruing at 4.3% a year, that’s an increase in interest of about 9400. Therefore, during residency, your payments won’t even be enough to cover the interest accrual (assuming you stick to the required payment). I’ve taken this into consideration in my own calculations.

I’m also not assuming a 4.3% for the next four years (this is a record low because of the current economy; I don’t know what the future holds, but I’ve made my calculations assuming interest rates bounce back to 6.3% next year)

Thanks so much! Would you mind sharing your own calculations with me, seeing as we used the same numbers?

So then the reason to enter an income based repayment plan is to not go broke spending ~1/7 of your gross annual income on interest payments yes? And the total amount paid will be reduced because either way your principal is not going down. Or would the amount of interest you "don't" pay (because your income qualifies you for a lower amount) get added to your loan balance, as Flodaddy suggested? And how does this interact with re-financing after medical school graduation (probably depends on if going for PSLF)?

 

[proudofmykids]

Putting into perspective with $300 income. Some loose assumptions...
Federal and state tax let’s say combine for 33% after deductions
300k
-25k. (401k contribution tax free)
-91.7k taxes
————-
183k net
-loan repayment (@6% expect ~$13.3 repayment per year per 100k debt at start of 10yr term)
-33k for 250k debt
—————-
150k net living income
=$12,500 per month

med students should feel fortunate to only have to borrow $200k these days.

 

[Skarl]

Putting into perspective with $300 income. Some loose assumptions...
Federal and state tax let’s say combine for 33% after deductions
300k
-25k. (401k contribution tax free)
-91.7k taxes
————-
183k net
-loan repayment (@6% expect ~$13.3 repayment per year per 100k debt at start of 10yr term)
-33k for 250k debt
—————-
150k net living income
=$12,500 per month

med students should feel fortunate to only have to borrow $200k these days.

That's a helpful napkin calculation. Any clue why pay debts for 10 yrs vs. taking more aggressive short-term approach?

 

[deleted994889]

Interest remains uncapitalized during school, during grace, and during deferment. Federal plans and most private plans will allow at least 3 years of deferment for residency so interest won't compound until after. If you stick to federal IDR plans (but not standard or graduated), interest will also remain uncapitalized. There is a one-time capitalization when you start repayment, then remains uncapitalized unless you leave the plan.

All schools' finaid offices never include interest in COA. It's possible the student debt numbers they publish also don't include interest.

Given that the Fed plans to hold their rates at 0% until the economy recovers (and I don't think we've even seen the full extent of COVID's damage yet), it is unlikely federal student loan rates will increase next year. I think they will drop again.

Remember there are origination fees on all loans (there may be some private loans without). Also remember that there are annual and lifetime limits on Direct Unsub Loans:

Direct	Lifetime Aggregate (includes undergrad subsidized and unsubsidized loans)
42,722.00 (10 month academic year, most M1s)	224,000.00
44,944.00 (11 month academic year, most M2s and M4s)
47,167.00 (12 month academic year, most M3s)

A total loan balance of 200,000k after 4 years will be part Direct Unsub, part GradPlus. The total interest will just be a weighted average of their proportions.

Standard 10 year repayment is generally inferior to private refinancing and federal IDR. If you have small debt, choose private refinancing and pay off quickly. If you have big debt, choose federal IDR and take advantage of loan forgiveness. Even specialists can benefit from federal IDR if their debt is high enough. You just have to run the numbers to see what's best. Why do some (maybe many) physicians choose standard or graduated plans, or complete long private terms? Because they are smart in science, not finances. In that way, they are just normal people.

REPAYE has an interest subsidy. Other IDR plans like PAYE and IBR don't. REPAYE is a good choice for people who will refinance after residency.

Aggressive repayment will minimize your debt but requires a lot of discipline. For people with big debt, federal IDR is usually the mathematically favorable path. Also, having more money on hand has value too. That said, not everyone likes holding on to debt for 20 years so paying quickly will work better for those who hate debt. Plus, you can never go wrong with paying off ASAP. Either way, choosing a longer term is good because it allows you the flexibility to pay where you can and not when you have other commitments; if you choose a short term right out of the gate, you will always have to pay it even if something comes up, say a surprise child. In fact, a federal IDR plan might actually work better for aggressive repayment since interest isn't compounding. I'll run the numbers another time.

Check out my (very long) write-up here. It has the old interest rates and is geared toward big debtors, but hopefully it illustrates some number breakdowns.

WCI is a great resource. I disagree with him about federal IDR, but his advice is very sound.

 

[Skarl]

Interest remains uncapitalized during school, during grace, and during deferment. Federal plans and most private plans will allow at least 3 years of deferment for residency so interest won't compound until after. If you stick to federal IDR plans (but not standard or graduated), interest will also remain uncapitalized; it capitalizes one-time when you start repayment, then remains uncapitalized unless you leave the plan.

All schools' finaid offices never include interest in COA. It's possible the student debt numbers they publish also don't include interest.

Given that the Fed plans to hold their rates at 0% until the economy recovers (and I don't think we've even seen the full extent of COVID's damage yet), it is unlikely federal student loan rates will increase next year. I think they will drop again.

Remember there are origination fees on all loans (though there might be some private loans without). Also remember that there are annual and lifetime limits on Direct Unsub Loans:

Direct	Lifetime Aggregate (includes undergrad subsidized and unsubsidized loans)
42,722.00 (10 month academic year, most M1s)	224,000.00
44,944.00 (11 month academic year, most M2s and M4s)
47,167.00 (10 month academic year, most M3s)

A total loan balance of 200,000k after 4 years will be part Direct Unsub, part GradPlus. The total interest will just be a weighted average of their proportions.

Standard 10 year repayment is generally inferior to private refinancing and federal IDR. If you have small debt, choose private refinancing and pay off quickly. If you have big debt, choose federal IDR and take advantage of loan forgiveness. Even specialists can benefit from federal IDR if their debt is high enough. You just have to run the numbers to see what's best. Why do some (maybe many) physicians choose standard or graduated plans, or complete long private terms? Because they are smart in science, not finances. In that way, they are just normal people.

REPAYE has an interest subsidy. Other IDR plans like PAYE and IBR don't. REPAYE is a good choice for people who will refinance after residency.

Aggressive repayment will minimize your debt but requires a lot of discipline. For people with big debt, federal IDR is usually the mathematically favorable path. Also, having more money on hand has value too. That said, not everyone likes holding on to debt for 20 years so paying quickly will work better for those who hate debt. Either way, choosing a longer term is good because it allows you the flexibility to pay where you can and not when you have other commitments; if you choose a short term right out of the gate, you will always have to pay it even if something comes up, say a surprise child. In fact, a federal IDR plan might actually work better for aggressive repayment since interest isn't compounding. I'll run the numbers another time.

Check out my (very long) write-up here. It has the old interest rates and is geared toward big debtors, but hopefully it illustrates some number breakdowns.

WCI is a great resource. I disagree with him about federal IDR, but his advice is very sound.

Hey thanks for the comprehensive response. It was very helpful! Some personal points:

1. I've rounded my own student loan total (which would be low enough to be completely covered by direct unsubsidized loans) for ease of calculation. The actual amount is closer to 160-170k (principal). Same thing for origination fees, which would add some thousands but ultimately be a similar net balance.
2. Very pleased to hear your assessment of student loan interest rates, and of long-term payment plans. Makes a lot more sense now. I'm curious as to your thoughts re. federal IDR? (How do you and WCI differ?) You seem like you really know your finances, which is awesome!

BTW your other post is amazing. I remember seeing that before and thought I'd bookmarked it, but couldn't find it. Really glad you linked it here for reference.

 

[Oatmealraisin4me]

Thank you so much for providing those resources and explaining. I actually did not understand that interest does not compound but merely capitalizes one time after graduation. This is one reason I wanted to start this thread... I think it's ridiculous that some med students (myself included) go into thousand of debt without even understanding the basics of what that will entail.



Thanks so much! Would you mind sharing your own calculations with me, seeing as we used the same numbers?

So then the reason to enter an income based repayment plan is to not go broke spending ~1/7 of your gross annual income on interest payments yes? And the total amount paid will be reduced because either way your principal is not going down. Or would the amount of interest you "don't" pay (because your income qualifies you for a lower amount) get added to your loan balance, as Flodaddy suggested? And how does this interact with re-financing after medical school graduation (probably depends on if going for PSLF)?

yeah of course! Feel free to PM me and we can compare numbers.

so for residency, the amount of interest you wouldn’t be paying would be added to your loan balance, thereby making your loan bigger. In other words, you’re almost guaranteed to finish residency with even more debt. Once you finish residency though and are making larger payments, you will eventually start tackling the principal

 

[EdgeTrimmer]

That's a helpful napkin calculation. Any clue why pay debts for 10 yrs vs. taking more aggressive short-term approach?

TO pay aggressively you (and your spouse) have to maintain rice and beans lifestyle which is not easy.

 

[Mad Jack]

TO pay aggressively you (and your spouse) have to maintain rice and beans lifestyle which is not easy.

Paying 100k toward your loans annually when you're making 350k is hardly going to land you in rice and beans territory, and even on 300k is easily doable outside of all but the most expensive cities.

 

[Mad Jack]

Interest remains uncapitalized during school, during grace, and during deferment. Federal plans and most private plans will allow at least 3 years of deferment for residency so interest won't compound until after. If you stick to federal IDR plans (but not standard or graduated), interest will also remain uncapitalized. There is a one-time capitalization when you start repayment, then remains uncapitalized unless you leave the plan.

All schools' finaid offices never include interest in COA. It's possible the student debt numbers they publish also don't include interest.

Given that the Fed plans to hold their rates at 0% until the economy recovers (and I don't think we've even seen the full extent of COVID's damage yet), it is unlikely federal student loan rates will increase next year. I think they will drop again.

Remember there are origination fees on all loans (there may be some private loans without). Also remember that there are annual and lifetime limits on Direct Unsub Loans:

Direct	Lifetime Aggregate (includes undergrad subsidized and unsubsidized loans)
42,722.00 (10 month academic year, most M1s)	224,000.00
44,944.00 (11 month academic year, most M2s and M4s)
47,167.00 (12 month academic year, most M3s)

A total loan balance of 200,000k after 4 years will be part Direct Unsub, part GradPlus. The total interest will just be a weighted average of their proportions.

Standard 10 year repayment is generally inferior to private refinancing and federal IDR. If you have small debt, choose private refinancing and pay off quickly. If you have big debt, choose federal IDR and take advantage of loan forgiveness. Even specialists can benefit from federal IDR if their debt is high enough. You just have to run the numbers to see what's best. Why do some (maybe many) physicians choose standard or graduated plans, or complete long private terms? Because they are smart in science, not finances. In that way, they are just normal people.

REPAYE has an interest subsidy. Other IDR plans like PAYE and IBR don't. REPAYE is a good choice for people who will refinance after residency.

Aggressive repayment will minimize your debt but requires a lot of discipline. For people with big debt, federal IDR is usually the mathematically favorable path. Also, having more money on hand has value too. That said, not everyone likes holding on to debt for 20 years so paying quickly will work better for those who hate debt. Plus, you can never go wrong with paying off ASAP. Either way, choosing a longer term is good because it allows you the flexibility to pay where you can and not when you have other commitments; if you choose a short term right out of the gate, you will always have to pay it even if something comes up, say a surprise child. In fact, a federal IDR plan might actually work better for aggressive repayment since interest isn't compounding. I'll run the numbers another time.

Check out my (very long) write-up here. It has the old interest rates and is geared toward big debtors, but hopefully it illustrates some number breakdowns.

WCI is a great resource. I disagree with him about federal IDR, but his advice is very sound.

Also have to be careful about choosing to defer, as deferral doesn't give you the halved interest of REPAYE and the full interest you accrue will be compounded at the close of your deferral

 

[EdgeTrimmer]

Paying 100k toward your loans annually when you're making 350k is hardly going to land you in rice and beans territory, and even on 300k is easily doable outside of all but the most expensive cities.

very few specialities pay $350K during first year and even if they pay $300K, after taxes and 401K it's around $150K. So to pay $100K annually you have to live on $4K monthly expenses. That means living in an apartment, no new cars and no expensive vacations. It's doable but how many are willing to do it?

 

[Flodaddy]

That's a helpful napkin calculation. Any clue why pay debts for 10 yrs vs. taking more aggressive short-term approach?

The short term approach can take 10 years. It will take 4-5 years of aggressive payment after 6 years of residency/fellowship to pay off my loan.

 

[Mad Jack]

very few specialities pay $350K during first year and even if they pay $300K, after taxes and 401K it's around $150K. So to pay $100K annually you have to live on $4K monthly expenses. That means living in an apartment, no new cars and no expensive vacations. It's doable but how many are willing to do it?

Except you are wrong. Here is a result from CT, calculated as married, three deductions, 19k into 401k, and average cost health insurance (2080/year, though even if you double this it hardly affects the numbers).

That leaves you with over 8k a month post tax. I picked CT since it's a fairly high income tax state, but YMMV. Hardly rice and beans wages.

 

[Skarl]

very few specialities pay $350K during first year and even if they pay $300K, after taxes and 401K it's around $150K. So to pay $100K annually you have to live on $4K monthly expenses. That means living in an apartment, no new cars and no expensive vacations. It's doable but how many are willing to do it?

www.imgur.com/gallery/ZQo6aKo

Median compensation of different specialties seem to show lots clear 300-350k gross income

 

[Davidfromcali]

www.imgur.com/gallery/ZQo6aKo

Median compensation of different specialties seem to show lots clear 300-350k gross income

I’m sure that data takes into account those who are in mid-late career. Likely that you wouldn’t hit that median in your first year out of res unless you end up working as an employee at a place like Kaiser

 

[Skarl]

I’m sure that data takes into account those who are in mid-late career. Likely that you wouldn’t hit that median in your first year out of res unless you end up working as an employee at a place like Kaiser

That's a really good point I hadn't thought of! I found this data on starting salaries (first year out of residency) by specialty, and it seems you're right re. only a few specialties clearing $300k year 1 (Cardio, Derm, Ortho, Neurosurgery, Pulm, Uro): http://www.alphamedicalgroup.org/webportal/cmsAdmin/uploads/Starting-salary-survey.pdf

I'm curious about loan forgiveness benefits. Is that usually reserved for non-profit employers or do some private employers offer this?

 

[AnonymousDoctorGuyPerson]

I'm starting med school with ~200k debt and so my strategy is ignoring it so I dont wake up in a cold sweat every night.

That's healthy right?

 

[Skarl]

I'm starting med school with ~200k debt and so my strategy is ignoring it so I dont wake up in a cold sweat every night.

That's healthy right?

I know you are probably half joking but I feel like this mindset is pretty common among med students. We're never taught to think about finances or money, and it ends up hurting us as physicians who are not financially literate. Knowledge is power.

 

[AnonymousDoctorGuyPerson]

I know you are probably half joking but I feel like this mindset is pretty common among med students. We're never taught to think about finances or money, and it ends up hurting us as physicians who are not financially literate. Knowledge is power.

Yeah I've been planning to use this quarantine to become more financially literate (and paying down loans while interest is frozen), listening/reading to WCI and the like but then I find it stresses me out thinking about my pre-existing debt burden and I stop. For some reason it's made worse by seeing all the people around me who end up graduating from med school with less debt than I had before even starting. I know I shouldnt be comparing myself to others, I really gotta slap my face and get over that haha.

If you anyone has any tips with dealing with all that feel free to lay em on me

 

[Shotapp]

I know you are probably half joking but I feel like this mindset is pretty common among med students. We're never taught to think about finances or money, and it ends up hurting us as physicians who are not financially literate. Knowledge is power.

What books or websites would you recommend to get up to speed?

Thanks!

 

[Mad Jack]

I’m sure that data takes into account those who are in mid-late career. Likely that you wouldn’t hit that median in your first year out of res unless you end up working as an employee at a place like Kaiser

Most employed jobs don't strongly differentiate based on career length. Productivity matters infinitely more than seniority, only in the surgical fields and fields dominated by small partnerships will income be substantially lower right out of the gate

 

[Skarl]

What books or websites would you recommend to get up to speed?

Thanks!

Hey man I'm not any more experienced than yourself at this stage. Just trying to learn from all the knowledgable people that have contributed to this thread!

But if you still want my advice, I'd at least know the basics of what your student loan mean (how is your interest calculated/can you do the math yourself, what is an origination fee, how does the grace period work etc.) The official student aid gov website is a good place to start. And from there, you can look into pros/cons of different options you can take at the start of residency (refinance vs. PAYE/REPAYE vs. PSLF etc.), as well as what payment would look like once you're an attending (the above example with retirement savings, taxes, etc. expenses is a great start). No better place than Google for this honestly (others have recommended White Coat Investor). This all might feel premature and your calculations will probably be off, but I think it helps to have a head start and you can always re-calculate come M4/before residency.

 

[deleted688779]

That's a helpful napkin calculation. Any clue why pay debts for 10 yrs vs. taking more aggressive short-term approach?

Imo for some it’s the problem of the golden handcuffs. More money, more problems. Rival Chad appeared with a Porsche (or Tesla if you’re in CA)! Now you gotta have a Porsche...or a Lambo why not?? And you need it now!

Of course this isn’t the case for everyone but I’m confident there’s a decent number of them.

 

[deleted994889]

Also have to be careful about choosing to defer, as deferral doesn't give you the halved interest of REPAYE and the full interest you accrue will be compounded at the close of your deferral

Very true. I think everyone should start repayment during residency.

I know you are probably half joking but I feel like this mindset is pretty common among med students. We're never taught to think about finances or money, and it ends up hurting us as physicians who are not financially literate. Knowledge is power.

Yeah I've been planning to use this quarantine to become more financially literate (and paying down loans while interest is frozen), listening/reading to WCI and the like but then I find it stresses me out thinking about my pre-existing debt burden and I stop. For some reason it's made worse by seeing all the people around me who end up graduating from med school with less debt than I had before even starting. I know I shouldnt be comparing myself to others, I really gotta slap my face and get over that haha.

If you anyone has any tips with dealing with all that feel free to lay em on me

Sadly, its common among all Americans. I wish personal finance was a mandatory class in high school. There's also this pesky taboo with talking about money. I'll try to have a good discussion with someone and their eyes glaze over or they get physically uncomfortable. It's a real shame because money management is the a skill that everyone needs. The info is all around us and free; don't rely on "certified" financial planners. We just gotta sit down and learn. It's hard and takes time just like any skill, but if you keep at it, you'll grow a little each day.

Resources:
I love the WCI. Dr. Dahle covers everything a doctor needs to know. He has a ton of info though, and some of it is more advanced than you'll need to know for awhile, so it can be overwhelming at first. The info is all kinda jumbled in there, but I still recommend it as the best place to start for now. Start small and take it slow. Slowly work your way through his posts and Google to supplement along the way.

Just like medicine. Start with the fundamentals.
1. Accounting aka "how to save"- This is the most important step. No factor will have as strong effect on your financial well being as your savings rate. Learn how to track all your funds. I mean, all of them. Know how much you have spent on food vs gas vs clothes, know much money have in your in your checking/savings accounts at all times, how much balance is on your credit card(s), how much you made last month. Learn how to use Excel and create spreadsheets and log in all your cash flows. Then learn how to build a budget and saving instead of spending (trust me, you can live without that brand new iPhone 50). Also learn the basics of income tax, nothing complicated for now.
2. Financing aka "how to borrow"- Start using a credit card like a debit card: never charge if you can't pay it off right away. Start eliminating credit card debt. Learn each component of loans: principle, interest, terms, payments. Learn how to crunch numbers and calculate present and future values of both lump sums and regular payments. Mastering the ins and outs of student loans is a great way to learn all the terms and how to do calculations.

I think these two are the foundations of financial well-being. Investing and tax strategy are secondary. I'm actually starting a blog because I think people could use a more step-by-step breakdown of the fundamentals. Progress has been slow, and there is a ton of info, but I'm working hard. Stay tuned!

 

[jhmmd]

No one can answer this for you. To put it simply, you can live frugally and pay off your loans in 2-3 years, or live large and pay them off in ~10 years. Make sure to open an IRA, save for retirement, save for a rainy day, etc.

 

[bananafish94]

It's a challenging topic because the best plan for any given person is so individualized. If you're an EM resident, for example, who's going to be making the big bucks after 3 years and you have a relatively low debt burden, doing REPAYE for 25 years probably doesn't really make sense. What if you have a ton of loans and you're doing 7-8 years of training on a resident/fellow salary before you're making attending money? How much money are you going to have to pay it down during your training? Do you have a family? Do you live in a high or low COL region? Are your programs eligible for PSLF? Overall there are so many factors that might influence loan repayment that the best strategy in my opinion is to educate yourself as much as possible as it comes to the different options you will have and figure out what will work for you given your individual situation and personal and professional goals.

 

[proudofmykids]

That's a really good point I hadn't thought of! I found this data on starting salaries (first year out of residency) by specialty, and it seems you're right re. only a few specialties clearing $300k year 1 (Cardio, Derm, Ortho, Neurosurgery, Pulm, Uro): http://www.alphamedicalgroup.org/webportal/cmsAdmin/uploads/Starting-salary-survey.pdf

I'm curious about loan forgiveness benefits. Is that usually reserved for non-profit employers or do some private employers offer this?

There is an extensive Meritt Hawkins annual report on physician salary and demand by specialty. It specifically addresses starting physician salary versus cumulative median salary reports. Supply of new physicians is barely or even missing the actual demand (specialty dependent) due to retiring and aging of current practicing physicians. So yes, those tables are supposed to represent starting salaries which are equal to current median salaries andand coaling in the report that you can google.

Must about all loans allow for early penalty-free Repayment. So if you want to accelerate payments you can do so at your own discretion. You can see my back of the envelop math matches very well the more detailed additional posts.

OP and I used $300k income and $250k total debt after residency.
He can more than halve the payback period by doubling annual debt service from 33k to 66k if desired. This would leave about $120k net annual funds to live in and save while retaining the option to skip accelerated payments if additional $33k annual funds needed.

 

[proudofmykids]

Except you are wrong. Here is a result from CT, calculated as married, three deductions, 19k into 401k, and average cost health insurance (2080/year, though even if you double this it hardly affects the numbers).
View attachment 307293
That leaves you with over 8k a month post tax. I picked CT since it's a fairly high income tax state, but YMMV. Hardly rice and beans wages.

How do you go from $198k Net, to $96k (8/mo)?
It wouldn’t be recommended (see my above post for math), to pay $100k per year on debt service requiring $33k/yr at this $300k income level just to payoff in a little over two years which would be too restricting on lifestyle.

By the way, I think $2080 is more similar to monthly Health Insurance cost, not Annual for family of 3.

 

[proudofmykids]

It's a challenging topic because the best plan for any given person is so individualized. If you're an EM resident, for example, who's going to be making the big bucks after 3 years and you have a relatively low debt burden, doing REPAYE for 25 years probably doesn't really make sense. What if you have a ton of loans and you're doing 7-8 years of training on a resident/fellow salary before you're making attending money? How much money are you going to have to pay it down during your training? Do you have a family? Do you live in a high or low COL region? Are your programs eligible for PSLF? Overall there are so many factors that might influence loan repayment that the best strategy in my opinion is to educate yourself as much as possible as it comes to the different options you will have and figure out what will work for you given your individual situation and personal and professional goals.

The REPAYE is ideal for the time during residency since you’ll receive subsidized (1/2) interest. It would be prudent to reevaluate each year after residency for most non-primary care specialty level income where it would be unlikely to hit loan forgiveness after 25 years. Using the $300k income example, even at $500 debt, after ten year term loan, total payment would be $660k, versus $750k after 25 yrs of 10% IBR payments. More advantageous private loans would save even more on the ten year term loan estimate used.

 

[Flodaddy]

That's a really good point I hadn't thought of! I found this data on starting salaries (first year out of residency) by specialty, and it seems you're right re. only a few specialties clearing $300k year 1 (Cardio, Derm, Ortho, Neurosurgery, Pulm, Uro): http://www.alphamedicalgroup.org/webportal/cmsAdmin/uploads/Starting-salary-survey.pdf

I'm curious about loan forgiveness benefits. Is that usually reserved for non-profit employers or do some private employers offer this?

Physician Starting Salaries by Specialty: 2019 vs. 2018 | Merritt Hawkins You'll find different numbers with different sources. I used $200-250k as my estimate when I was in med school because I'd rather overestimate how long it would take to pay off than underestimate. Now I'm in one of those five specialties you listed, so I've adjusted my numbers.

 

[Mad Jack]

How do you go from $198k Net, to $96k (8/mo)?
It wouldn’t be recommended (see my above post for math), to pay $100k per year on debt service requiring $33k/yr at this $300k income level just to payoff in a little over two years which would be too restricting on lifestyle.

By the way, I think $2080 is more similar to monthly Health Insurance cost, not Annual for family of 3.

Some of us would prefer to be done with the debt for emotional, rather than financial, reasons. I was specifically responding to a guy that had said he couldn't afford to pay 100k a year because there'd be less than 50k left, which is nonsense. Even paying family health insurance you're still only looking at about 3.5k less income, still plenty to live off of in all but the most expensive cities. And if your spouse works, well, than you've got more money still.

I have over 400k in debt, personally, so I'm going to be paying 100k a year until it's down to a reasonable level then 50k a year thereafter.

 

[Tenk]

You don’t make enough money in residency to pay off the interest of 200k+ loans. I think I had ~270k and made income based repayments but by the end of my three year residency it had grown to about 330k. More important than paying off loans in residency is maximizing 401k and other tax sheltered retirement accounts.

You can view loans as a form of investment with no risk and no capital gains tax. Most physicians who pay off loans aggressively refinance as an attending. Right now there are historically low interest rates out there. I saw someone with a variable of 0.25% (yes, less than 1%) and another person with a fixed around 2%.

I refinanced after residency to about 4% 5 year fixed then paid it off in under three years. I hate debt though and am happy with my decision.

In terms of actual math, the best thing to do would be refinance to as low a rate as possible, make minimum payments, live in a cardboardand invest all the money you make. Of course you won’t do that. You’ll buy things like a house and toys. It’s fine. What’s more important than following specific numbers is having a PLAN and sticking to it. Whether that plan is paying off loans in 3 years or 10 years, you make a financial plan and you stick with it.

The answer is 42. Now figure out the question.

 

[jhmmd]

In terms of actual math, the best thing to do would be refinance to as low a rate as possible, make minimum payments, live in a cardboardand invest all the money you make. Of course you won’t do that. You’ll buy things like a house and toys. It’s fine. What’s more important than following specific numbers is having a PLAN and sticking to it. Whether that plan is paying off loans in 3 years or 10 years, you make a financial plan and you stick with it.

Agree with this; OP lots of things can happen and if you pay off your debt right away you'll be better prepared for the future, but take this w/a grain of salt as everyone's situation is unique

 

[deleted889094]

I have the book, but it doesn't really address my question. I just want to understand the math behind my loans. The book seems to focus more on financial guidelines/tips for physicians. I certainly plan to read it later down the line in my career, but those topics are not as relevant for me right now.

He does address the question of when to pay off loans vs invest in retirement and some other things. The website will have answers to some of your questions. As for the math-centric ones, you might get even better answers asking on a finance subreddit.

 

[Skarl]

You don’t make enough money in residency to pay off the interest of 200k+ loans. I think I had ~270k and made income based repayments but by the end of my three year residency it had grown to about 330k. More important than paying off loans in residency is maximizing 401k and other tax sheltered retirement accounts.

You can view loans as a form of investment with no risk and no capital gains tax. Most physicians who pay off loans aggressively refinance as an attending. Right now there are historically low interest rates out there. I saw someone with a variable of 0.25% (yes, less than 1%) and another person with a fixed around 2%.

I refinanced after residency to about 4% 5 year fixed then paid it off in under three years. I hate debt though and am happy with my decision.

In terms of actual math, the best thing to do would be refinance to as low a rate as possible, make minimum payments, live in a cardboardand invest all the money you make. Of course you won’t do that. You’ll buy things like a house and toys. It’s fine. What’s more important than following specific numbers is having a PLAN and sticking to it. Whether that plan is paying off loans in 3 years or 10 years, you make a financial plan and you stick with it.

The answer is 42. Now figure out the question.

Thank you that was very helpful. Just out of curiosity, why did you not refinance straight out of medical school? Were you keeping the option of PSLF open?

 

[Tenk]

Thank you that was very helpful. Just out of curiosity, why did you not refinance straight out of medical school? Were you keeping the option of PSLF open?

Because then I’d have to pay $5,000/month payments which I couldn’t afford.

 

[Skarl]

Because then I’d have to pay $5,000/month payments which I couldn’t afford.

Tenk,

My apologies in advance for my lack of experience, but let’s say you have 200k loans after undergrad + 20k interest which gets compounded. Let’s say you refinance to an interest rate of 4%. 220000 * 0.04 = 8800 a year in interest, no? Or is it that refinancing carries with it an implicit timeline where you have to pay off all your total balance?

 

[jhmmd]

Tenk,

My apologies in advance for my lack of experience, but let’s say you have 200k loans after undergrad + 20k interest which gets compounded. Let’s say you refinance to an interest rate of 4%. 220000 * 0.04 = 8800 a year in interest, no? Or is it that refinancing carries with it an implicitly timeline where you have to pay off all your total balance?

There's no such thing as a free lunch. If you refinance, you'll eventually have to pay back the money you borrowed--like a credit card. There's no way you can "refinance w/out ever paying off the loan you took out in the first place + interest." That's the long and short of it.

 

[AnonymousDoctorGuyPerson]

There's no such thing as a free lunch. If you refinance, you'll eventually have to pay it back--like a credit card. There's no way you can "refinance w/out ever paying off the loan you took out in the first place + interest." That's the long and short of it.

Well, unless you die.

Not be macabre haha

 

[Skarl]

There's no such thing as a free lunch. If you refinance, you'll eventually have to pay back the money you borrowed--like a credit card. There's no way you can "refinance w/out ever paying off the loan you took out in the first place + interest." That's the long and short of it.

While I believe you, I think that contradicts this flowchart I found from WCI:

https://www.whitecoatinvestor.com/wp-content/uploads/2018/11/Screen-Shot-2018-11-03-at-3.06.44-PM.png

From this blog post: Ultimate Guide to Student Loan Debt Management for Doctors - The White Coat Investor - Investing & Personal Finance for Doctors

It looks like he recommends if not going for PSLF, you should refinance at start of residency, and then again once you are an attending. Do you mind explaining?

 

[proudofmykids]

Does anyone know why the PSFL appears to not be likely outcomes for long residency / fellowship specialties?
Many hospital residencies are non profit as well as hospital based attending positions, so for a competitive specialty that might have 7 or 8 years of residency and fellowship, wouldn’t it leave only three years of payment for PSFL assume borrower was on REPAYE or paye program from start of residency?

 

[Tenk]

Tenk,

My apologies in advance for my lack of experience, but let’s say you have 200k loans after undergrad + 20k interest which gets compounded. Let’s say you refinance to an interest rate of 4%. 220000 * 0.04 = 8800 a year in interest, no? Or is it that refinancing carries with it an implicit timeline where you have to pay off all your total balance?

Interest is accrued as you go. Most loans you can pay off early without penalty. Any extra payments go to principal.

 

[Skarl]

Interest is accrued as you go. Most loans you can pay off early without penalty. Any extra payments go to principal.

So why would you have to make 5k per month payments during residency? That seems to far exceed what monthly interest would be on 270k principal (270000 * 0.068 / 12). Can you not just pay enough to cover interest, and if so would it not be more beneficial to refinance for a lower interest rate so that amount is lower?

 

[Tenk]

So why would you have to make 5k per month payments during residency? That seems to far exceed what monthly interest would be on 270k principal (270000 * 0.068 / 12). Can you not just pay enough to cover interest, and if so would it not be more beneficial to refinance for a lower interest rate so that amount is lower?

When you refinance, you schedule to pay it off over x number of years, (ie 3,5,7,10,etc). Payments are calculated based off that. If you don’t refinance and keep them government loans you’re looking at almost $20,000 a year of interest. This can also compound depending on the loan type. You can not afford that as a resident. Pgy-1 I made like 44k. My take home was like 1.5k every 2 weeks after taxes, etc. That had to pay rent, food, everything.