Beau Hill
October 4, 2019

THIS POST IS WRITTEN BY BEAU HILL. BEAU IS A FINANCIAL PLANNER AND HAS WORKED IN THE FINANCIAL SERVICES INDUSTRY SINCE 2013. THIS ROLE HAS PROVIDED HIM THE ABILITY TO MAKE A POSITIVE IMPACT ON THE LIVES OF HIS CLIENTS. BEAU COMES FROM A LONG LINE OF PHYSICIANS WHICH PROVIDES AN INVALUABLE PERSPECTIVE FOR HIS CLIENTS WHO ARE PHYSICIANS.

When working with physicians and dentists, the subject of student loans is all but guaranteed to arise. Let’s face it, student loans come with the territory. According to the American Medical Association, “More than 70% of physicians under the age of 40 deal with student loan debt.” [i] To many of these physicians it is the proverbial 500-pound gorilla dragging down their financial future. This can be especially true for young doctors and dentists just starting their career. Student Loans are especially real to me and my family because my wife has graduate school loans. It has been my experience that utilizing the income-based repayment options that the government provides can be a very useful and beneficial way to pay off student loans. Take my wife’s scenario: she had 17 years left paying an extended 20-year repayment at $230 a month. Once we were able to analyze her options, we decided to enter into the “Pay As You Earn (PAYE)” income-based option. Her new payment based off her income is $48.00 a month.

DO I QUALIFY FOR INCOME-BASED REPAYMENT?

You might say, “That’s great, but I am about to go into practice and make $300,000, and there is no way that I would be able to qualify for income-based repayment.” But that is where you may be surprised.
The example below shows a real 3rd year resident with around $400,000 in student loans. Based off his loans and his projected starting salary of $300,000, he would qualify for income-based repayment.
Here is a chart with all his different repayment options.  You can see the listed options have an average monthly payment and projected total amounts that will be paid on the loan.
If he opts to go with the REPAYE option, his average monthly payment would be $2,300 (over a 20-year period) and he would pay a total of $551,916, which is only $3,036 less than if he chooses the 10-year repayment option. So essentially, he would pay the same amount over 20 years as he would over the 10-year fixed option, and he also realized an additional $2,274 a month in cash flow.
However, it is important to note that the forgiven amount is treated as earned income in the year that the loan is discharged for tax purposes. So, in this case, at a 30% tax bracket on the $350,763 forgiven amount, he would owe 105,228.90 in taxes that year.
Well that stinks, right? But do you remember the additional $2,274 a month we have in cash flow? What if he invested that amount over a 10-year period and then let it grow for an additional 10 years when his taxes were due? Assuming he could get an average rate of return of 6%, he would have $682,775 available to pay the taxes.
So, let’s think about what he did over this 20-year period: he paid a total of $657,144.90 to his loans, and he invested $272,880 which grew to $682,775 in the 20th year. So, if he subtracts the total he put in ($930,024) from the amount his investment grew ($682,775), he only “paid” $247,249 on a $400,000 loan. And if you take that investment out to his retirement age 65, he has $1,467,171. By investing the freed up cash flow that he received by choosing an income-based repayment option, he was able to vastly improve his situation over time.
Some debt repayment programs offer 20-year payment options and others offer 25. Here is a useful chart that offers a brief explanation of what is needed to qualify for the various programs [iii]:

DO I QUALIFY FOR PSLF?

Many physicians would rather expedite the student loan repayment process by taking advantage of Public Service Loan Forgiveness (PSLF), which will discharge your loan after 10 years instead of 20. There are a couple of things to know about PSLF:
First, over 75% of hospital systems in our country are non-profit. [ii] When you work for a non-profit, you qualify for PSLF, The physician in our example had a contract to work at a private clinic and therefore did not qualify. If he had, the total amount paid would have been less, and the amount forgiven would have been greater.
Second, student loan debt forgiven under PSLF is not considered taxable income, whereas the debt forgiven through 20-year programs often is. [iii]
Third, with PSLF, you could exit med school, enter residency, and start making income-based repayments on your resident income after your first check, which would start your 10-year “clock.” So, you would make payments based off your lower resident salary for 3 years, and then if you worked for a non-profit hospital, you would only pay for 7 years based off your practicing physician income, saving you additional money in the long term.

WHAT'S BEST FOR ME?

Every situation is unique, and this option may not work for everyone. But, as Francis Bacon said, “knowledge is power.” By knowing what all your options are, you can make decisions today that could positively affect your long term financial success.

[i] https://www.ama-assn.org/education/manage-medical-student-loans

[ii] https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service

[iii] https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/questions

CRN202004-230091

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