Not all of our situations are the same so please weigh out your own situation before taking my advice as gospel, but that being said after you have done so, please do give the following some deep thought as I do want to save you some coin, especially when you’re a broke resident! I believe the loan repayment option I am about to outline for you is one of the best options available to us as future physicians who are currently in training and still making a resident’s salary. Enjoy the following, share, and please subscribe if you are interested in financial independence!
Congratulations on Graduation!!!
Ah, breathe a sigh of relief. You have graduated medical school, you have matched into your specialty and you are about to start residency. Breath in and relax… Wait what? Residency? Relax? Are you serious? We thought medical school was hard with all that we had to learn. Now we find out that all that learning amounts to all this responsibility! But don’t fret, medical school has taught us to be adaptable if nothing else. We have excelled in different rotations, worked all sorts of work schedules, pulled more all-nighters than most, and I won’t even mention the grit required in tackling the grueling months of studying for our 3 national board exams.
We are indeed mostly prepared, believe it or not, to deal with at least the stresses that residency will bring our way, but what we have not been prepared for is what we plan to do with our looming student debt. Don’t blame this one on your financial aid office, no, you have to do this work yourself, or at least you did until you stumbled across this post! I have done a lot of reading on this subject so you’re golden! Sit back and relax.
I will give you an outline and then go into detail, as these are some complicated topics. Truthfully, they really aren’t too complicated after you understand them (much like medicine), but they are scary nonetheless when first trying to figure them out. Right now, if it is June through December and you are fresh out of medical school and starting residency like me, you are not even worried about your loans most likely, you are still in that “6 month grace period”-correct? I don’t consider it much of a grace period honestly as your loans are still accruing interest this very moment.
What would you do if I told you that you could cut your interest in half and let the government forgive you for the other half of your interest starting ASAP? That grace period is costing you thousands of dollars when you could be starting to save money right now. Not only that, but you could also keep your interest halved all throughout your residency, i.e. I want to save you a number north of $20,000 over the next 3-4 years. Sound good to you? For me and my 4-year residency program that accounts for a total savings of $28,800 of interest that I won’t have to pay on my loans under my plan. Here is what I did.
A Simple Plan.
It really is a simple plan. By consolidating all of my federal loans with Fedloan servicing the day that I graduated medical school, I skipped out on my grace period and subsequently entered right into the REPAYE plan. Thereafter, I signed up for direct debit to shave off a little extra percentage of my interest for the rest of the term of my beefy loans. That’s all, but it actually has much bigger implications that you think and my reasoning behind it with more detail follows. It’s time to get savvy about being on top of your loans while in residency. If you are sold already on the idea then your to-do list follows.
*** Before you get too excited though I should tell you that if your spouse makes a good income then the REPAYE plan and all I have to say DOES NOT apply to you. You should consider the PAYE plan and file your taxes separately if not already doing so. The complicated thing about REPAYE is that it takes your spouses income into consideration when figuring out your payments amounts. If, however; you have no (working) spouse and are crazy broke and are looking to lower your interest rate like crazy then you are in luck, my friend!
- Consolidate your federal loans with Fedloan servicing ASAP. I think I consolidated my loans over the internet on my phone while in a parking lot somewhere random. An In-and-Out Burger I believe. It was that easy. In between a double-double and some animal fries I submitted my application to consolidate all of my federal student loans and washed it down with a coke. I had already researched all my options and I knew this was the best choice for me. I felt completely confident in doing it. Most likely it is the best option for you too, but the trip to in-and-out is optional.
- Sign up for REPAYE if you and your spouse don’t make a ton of money.
- Finally, sign up for direct debit. This takes additional .025 off of your interest rate and it is a no brainer.
Calling On Fedloan Servicing For Help.
You will find after a couple conversations with the representatives at Fedloans servicing that some know what they are talking about and are great, but many of them don’t. Call several times asking the same questions and chances are you are going to get different answers, unfortunately. It has happened to me plenty of times. Continue to call until you connect with someone who’s been working there for awhile and knows the ins and outs of these loan options, they are your friends and this stuff is super important to get right. Let us now talk numbers.
My Hypothetical Situation.
Let’s say I owe about $250,000 with an average interest rate of 5.8%. How much interest is that per month you ask? ($250,000)*(0.058) = $14,500 / 12 months = $1,208 per month of interest. Ouch, that’s a lot of money each month. Is there anything I can do to lower that crazy high-interest rate and subsequent interest payment? Yes, there is!
Forget the grace period, I am consolidating and jumping onto REPAYE so that the government is subsidizing me what I can’t pay monthly! With a monthly payment of $0 (since I only made grades and not dollars last year), the government will forgive half of my interest which is $604 and the remaining $604 will be added to my principle. I have effectively just taken my large 5.8% loans and cut them to a 2.9% loan AND with direct debit added onto my account, it is now 2.875% of an interest rate.
I have never had a loan interest rate so low! In fact, I am kinda jazzed about the prospects of starting to pay down my loans under this repayment plan while in residency! They ask for 10% of my discretionary income, which is equal to 10% of my Adjusted Gross Income. There are plenty of great ways to lower your AGI on your taxes to make this payment lower, but that’s another discussion for another time. Let’s talk consolidations and what it means.
In Residency Consolidation.
I was at 5.8% interest prior to consolidation and I am at 5.8% interest after consolidation, the only difference is now my loans have been bundled into two simple subsidized and unsubsidized loans. That is literally the only difference. Why did the government do this? Well, on the small amount of subsidized loans I have the government will subsidize 100% of that accruing interest on them for the first three years in my REPAYE plan. Thereafter they will subsidize 50% of the interest as they have been doing with my unsubsidized loans since day one of my REPAYE plan. When I get out of residency and start to make more money, my payments will go through the roof. I am not trying to pay down on loans for 20-25 years people, that just does not sit well with me. I want these things gone and I am not hoping the government will “forgive” me of them either.
After Residency Consolidation.
What I plan to do outside of residency after my income creeps is to not let my lifestyle do the same. I’ll shop around for some solid terms with a private lender to consolidate with and live for 3-5 years in the slums like a resident and get this monkey off my back! Okay, it won’t be the slums, but you won’t see me keeping up with the Joneses. It will feel so good to be debt free. I am thinking about these things now and I am making conscious decisions to start that process as a resident. You should be doing the same.
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