Student Loans

  • Financial Planning, Home Buying, Loans, Saving, Student Loans

    7 Reasons Why Physicians Shouldn’t Buy a House During Residency

    Model House with keys on a desk. Title: 7 Reasons Why Physicians Shouldn’t Buy a House During Residency

    When you start working as a resident it’s tempting to take the next step and buy a home. After all you’ve graduated from med school, haven’t you also graduated from apartment living to a place of your own? Maybe, but below are 7 reasons why physicians shouldn’t buy a house during residency.

    Residency is a relatively short, busy, and intense period where you continue to learn and develop skills you will hone for the rest of your career. Buying a home during this time can add an additional layer of stress and financial headaches.

    Owning a home is often more costly and time consuming than renting. If you are thinking of buying a home during your residency, read on for 7 reasons you should re-consider your decision.

    1. Residency Only Lasts 3-5 Years, Maybe a Few More With a Fellowship in the Same Place

    The longer you own a home, the greater the chance it will be a good investment. Which is a good reason not to buy a home when you only expect to live in it for 3-5 years.

    When you purchase a home, you can expect to pay 5% of the home’s value in closing costs. Then you can expect to pay roughly 10% in realtor fees and other expenses when you decide to sell. You’re also not building up much equity in the home. During the first few years of your mortgage the vast majority of your payments go towards the interest on the loan, and a tiny amount goes towards the principal.

    U.S. home prices have grown an average of 4.4% per year since 1991. Based on the average growth it’s hard to do much more than break even on a house when you own it for three years. Is that really worth the extra time and effort that comes with owning a home versus renting?

    2. You Don’t Have a Down Payment

    This might not seem like an issue, after all aren’t there special loans specifically designed for young docs that don’t have a down payment saved up? Why yes there are, they are called Physician Mortgage Loans, and while they do exist that doesn’t mean they are the best option.

    Buying a house is a big proposition. Saving up a down payment, even if it is only a small percentage, provides an indication that you are ready for this next step in your financial journey.

    Having a down payment can also protect you on the other side of your home purchase. By putting money down, you already have some equity in your home which can help if the market turns when you need to sell. As discussed above it is hard to break even when you own a house for a short amount of time. Equity provides a cushion when it’s time to sell and your house is worth the same or less than it was when you bought it.

    With a down payment you can choose between more loan options and save on fees like Private Mortgage Insurance (PMI is a lender fee required when you put less than 20% down). You can decide if a lower rate conventional mortgage or if a Physician Mortgage Loan with a slightly higher rate is a better fit. Without cash available for a down payment your options are much more limited.

    3. You Already Have One Mortgage (Student Loan Debt)

    It’s common for med students to graduate with $200k or more of student loans. Managing these loans can already be a stressful situation, before adding an additional mortgage payment to your budget.

    If you have a hefty chunk of student loan debt your available mortgage options are reduced, leaving you with Physician Mortgage Loans as pretty much your only choice.

    4. You Don’t Have Enough Time

    Residency is an extremely important part of your career. During this time is when you are learning, developing, making mistakes and growing within your specialty. All to set you up for success after residency.

    You may enjoy spending your free time in a home that you own, but realistically, how much time will you really have? Rather than spending it on home maintenance tasks, your free time would be better spent resting, recharging, and getting ready for your next shift.

    5. People Underestimate the Time and Costs Associated with Owning a Home

    As a resident you don’t have a ton of free time or extra cash, let alone extra hours to spend mowing a lawn and cleaning out gutters. What about that air conditioner that looks 30 years old and sounds like a rusted jet engine when it starts up? That’s your project to fix or pay to have repaired when it breaks.

    Homeowners can expect to spend between 1% to 4% of their home’s value in maintenance costs each year. These are expenses that you don’t have to worry about when renting. If your toilet breaks and floods your apartment you get to call your landlord to fix it. In your house, you are the one doing the repairs or more likely paying someone else to do it since you don’t have the time as a busy resident.

    6. You Won’t Want Your Residency House as an Attending

    When you finish residency and start receiving your attending paychecks, you’ll probably be ready for a new house. It’s a great idea to “live like a resident” for as long as you can to build a solid financial foundation, and staying with the same home is only possible if you don’t have to move after residency anyway.

    Now that you’re making more as an Attending it can be hard to resist the temptation to keep up with the Joneses. Lifestyle creep can set in, you need extra garage space for your new Tesla, and suddenly your cozy 3-bedroom resident house just doesn’t cut it anymore.

    7. You Can Rent a House

    If you are tired of living in a dorm or apartment, or you absolutely need a house with a yard for your Golden Retriever, you can always rent a house instead. By renting a house you get the benefits of a home without the headaches. It’s easier to budget, there’s less worry about unexpected maintenance costs, and you can move on hassle-free after residency.

    Sometimes buying a house can be the right decision. If you plan to be in the same place for Residency, Fellowship, and as an Attending then it might be the right choice for you. But for most situations the 7 reasons above are why most residents should rent instead.

  • Financial Planning, Student Loans

    The Physician’s Guide to Student Loans, Public Service Loan Forgiveness and More

    What You Need to Know About Student Loans

    Student loans, federal student loan forgiveness, and Public Service Loan Forgiveness are all hot topics these days, especially if you have as many loans as the typical resident. The average med school graduate owes $250,990 in total student loan debt. Yikes! That amount of debt is daunting no matter how much you expect your eventual salary to be.

    It hurts even more when you consider most docs will make around $65k during their years of residency. Understanding the different types of student loans you have and the payment/forgiveness programs you qualify for is crucial to managing your debt and building a solid plan to deal with it.

    Types of Student Loans

    There are two main types of student loans, Federal and private. Federal loans are made by the federal government and private loans are made by private banks or lenders. Federal loans can be consolidated into private loans. Private loans cannot be changed into federal loans so if you have federal loans and are considering consolidating them into a private loan you must be sure because there are no take-backs after you do.

    Federal Loans

    Federal student loans are loans made by the federal government to both undergraduate and graduate borrowers. There a couple different types of student loans: subsidized, unsubsidized, Perkins loans, FFEL loans. The type of federal student loans that you have can depend on your financial need, if you will use the loans for undergraduate or graduate schooling, or if you are a parent getting a loan for your child.

    The names of the types of loans don’t always make intuitive sense so be sure to do your homework on exactly what types of loans you have and which repayment plans those loans qualify for.

    Direct Loans

    The two broad types of federal direct loans are direct subsidized student loans, and direct unsubsidized student loans.

    Direct Subsidized Loans

    Direct subsidized student loans are offered to undergraduate students on the basis of need based on the information that you entered into your FAFSA. Subsidized loans are exactly that, they are subsidized by the federal government on your behalf. How this works is that the government pays the interest on these loans while you are in school (attending at least half-time), for the first six months after leaving school, and during a period of deferment where payments are postponed due to financial hardship.

    Direct Unsubsidized Loans

    Direct unsubsidized student loans are the other main type of direct student loan offered by the federal government, and they are available to both undergraduate and grad students. As unsubsidized loans they accrue interest as soon as you receive them.

    To determine whether or not you have direct loans you should visit the StudentAid.gov site and create an account using your Federal Student Aid ID. Using the site you will be able to see a summary of your federal loans and their type.

    Stafford Loans

    The term Stafford Loan may refer to a subsidized or unsubsidized Federal Stafford Loan that was made under the Federal Family Education Loan (FFEL) Program. This program has not operated since 2010, however some people and schools still use the term “Stafford Loans” when referring to direct subsidized or direct unsubsidized loans.

    Perkins Loans

    A Perkins loan is another type of subsidized federal loan that is made available to students that have demonstrated exceptional financial needs. The reason this isn’t considered a “Direct Loan” is that it is a loan made from the school and the borrower makes payments back to the school.

    Parent PLUS or Grad PLUS Loans

    PLUS loans are unsubsidized federal student loans made to parents of undergraduate dependent students which are known as Parent PLUS loans, or when made directly to graduate or professional students known as Grad PLUS loans.

    Direct Consolidation Loan

    With federal student loans you have the option to consolidate them into a Direct Consolidation Loan. There are pros and cons for making this decision. Certain federal loans don’t qualify for some of the federal repayment plans like REPAY or PSLF, while consolidated loans do.

    You may also lose some benefits and protections for certain loans with consolidation. After consolidation you have one loan with one interest rate that is the weighted average of your individual loans. Because you only have one loan now you lose out on the opportunity to pay off your loans individually with methods like:

    • Snowball method, where you focus on paying off your loan with the smallest balance first. Once that loan is gone you use the extra cashflow to pay off your next smallest loan, and repeat until they are all gone.
    • Avalanche method, where you pay off your loan with the highest interest rate first since it is costing you the most. Then when that loan is paid off you move to the next highest interest rate debt and repeat until finished.

    Private Loans

    Private loans are made by private banks or lenders and the details can vary widely. They generally cost much more than a federal loan, and are used when a borrower can’t access federal loans. The payments, interest, and terms and conditions on these loans can vary widely based on the borrower and institution. Interest also accrues on private loans while the student is still in school.

    *A note on refinancing*

    It’s important to remember that while you can refinance your federal student loans into a new private loan, you can’t reverse the process and change private loans into federal loans. You need to be mindful of this as you approach any sort of loan refinancing decision. You may have a good reason to refinance – such as getting a lower interest rate, or a lower payment – but you also lose out on the protections and repayment options that are available with federal student loans.

    Repayment Programs

    With Federal Student Loans there are many different payment programs, like IBR or PAYE, that you can use to manage your payments and repay your loans. Most of these plans forgive the remaining balance on your loan after 20 or 25 years of making payments, but the amount that is forgiven is treated as taxable income and you need to prepare for it.

    You can use one of these payment programs at the same time you are pursuing loan forgiveness under the Public Service Loan Forgiveness (PSLF) program, which exists in its own little category that we will explain more further down this article.

    Standard Repayment Plan, Graduated Repayment Plan, Extended Repayment Plan

    With these plans, monthly payments are calculated to pay off your entire loan balance over a period of 10 to 30 years. Payments are fixed under the standard plan, and can increase over time under the graduated and extended plans. These plans differ from the following plans we will discuss in that your income isn’t taken into account when calculating your monthly payment, and the plan is designed to pay off the entire loan balance by the end of the plan, i.e. there is no loan forgiveness as a part of these plans.

    Income Driven Repayment Plans

    There are several different Income Driven Repayment Plans. The plans vary on: eligibility depending on when you received and what types of loans you have, payback period length, payment amounts, and more. Your loan payment while in one of these plans is based on a percentage of your discretionary income, meaning it could change as your income and tax filing status changes.

    Each of these plans has a set repayment period and your loan balance at the end of the repayment period is forgiven, but remember that forgiven amount is taxable as income so you need to be prepared for the tax bill that comes with it.

    Income Contingent Repayment – ICR

    Payments are the lessor of 20% of your discretionary income or your payment under a 12-year fixed payment plan. The repayment period is 25 years. The ICR payment plan is rarely used.

    Income Driven Repayment – IBR

    There is an “old” IBR and a “new” IBR. There are slight differences and you can’t qualify for the new IBR if you had any loans prior to July 1, 2014.

    OLD: Payments are the lessor of 15% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 25 years. You must demonstrate a financial hardship to qualify.

    NEW: Payments are the lessor of 10% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 20 years.

    Pay As You Earn – PAYE

    Payments are the lessor of 10% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 20 years. You must demonstrate a financial hardship to qualify.

    Revised Pay As You Earn – REPAYE

    REPAYE is similar to PAYE but you may have higher payments than with PAYE. Payments are 10% of your discretionary income, even if it’s higher than the 10-year standard repayment plan payment. The repayment period is 20 years for undergraduate loans and 25 years for graduate or professional loans.

    NEW REPAYE

    An updated REPAYE plan was proposed as part of the federal student loan forgiveness announcement in 2022. This plan has not been finalized or approved yet, but we are including the highlights below and will update this post if things change.

    • Borrowers will use 225% of the federal poverty limit when calculating discretionary income, up from 150% used for current REPAYE.
    • Undergraduate student loan borrowers will calculate their payments as 5% of their discretionary income. Graduate loans will still use 10% of their discretionary income to calculate payments. Borrowers that have a mix of graduate and undergraduate loans will calculate payments based on a weighted average of their loans.
    • Married borrowers will be able to exclude their spouse’s income from their loan payment calculation by filing taxes Married Filing Separately (MFS).
    • A big change is that interest will no longer accrue in excess of a borrower’s calculated payment. This means that your loan balance will not continue to grow even if your calculated payment does not cover the entire monthly interest due on the loan. This means that borrowers seeking loan forgiveness will have a lower amount forgiven, and a lower tax bill due, at the end of the loan.

    Public Service Loan Forgiveness

    PSLF isn’t exactly a payment program. You can enroll in REPAYE or IBR or any of the other payment programs while you are pursuing PSLF. But it is a very important program that you need to know about because it could save you hundreds of thousands of dollars if you qualify. If you work in the public sector or for a qualifying nonprofit you can have your entire loan balance forgiven after 10 years (120 qualifying payments).

    The requirement for PSLF include:

    • Must work “full time” for a qualifying entity – these include public health, nonprofits, public school teachers, etc.
    • Must have federal direct loans (if your loans aren’t direct you may be able to consolidate them into federal direct loans).
    • Must make 120 qualifying payments – note the language isn’t 10 years of payments, but 120 qualifying payments.

    If you are pursuing PSLF you should definitely enroll in an income-driven repayment plan to reduce your monthly payments as much as possible and increase the amount that will ultimately be forgiven.

    Summing Up

    There are many factors to take into account when considering student loans and your best strategy to deal with them. Refinancing, consolidation, seeking loan forgiveness, choosing a particular income-driven repayment. All of these decisions come with consequences that are helpful to understand so you can make the optimal decision for your situation.

    Making a plan to deal with as much student loan debt as the typical med school grad has can feel daunting. Not creating a good plan to manage it can lead to serious problems with your finances in the future.

    There is a lot of helpful information on the federal student aid website about repayment plans and consolidation faqs. If you feel overwhelmed talking to a financial advisor with experience dealing with student loans can be a big help.