You're in bed, tossing and turning. You can't sleep. You feel like you are in a financial prison, constrained by the shackles of debt and trying to still have fun and enjoy life, but every month is hard and you feel like you are just getting by.
Coming out of medical school, have you felt like you’ve suddenly jumped out of the frying pan and right into the fire?
It can be so overwhelming with all of your commitments—rounds, patient care, paperwork. You’re just trying to keep your head above the water!
Then to top it all off, maybe you have $150,000, $200,000, or even $300,000 in school debt. You wonder, how the heck am I going to dig out of this chasm of debt?
The good news is that physicians have many different options to lower or even totally eliminate all this debt and they can start pounding away at it while they are in residency, even though their income is relatively low.
If you have a lot of student debt, you may be eligible for several types of debt-reduction/debt forgiveness programs. The difficulty lies in choosing among them all. Here are a few factors that you may want to consider when looking over the possibilities:
Public Loan Forgiveness Program
If you work for a nonprofit or a government agency, consider the 10-Year Public Loan Forgiveness (PSLF) program, which offers many advantages. Sponsored by the federal government, it can cover virtually any field of practice.
Who? The major advantage of this plan is that ANY specialty could utilize the PSLF. It isn’t constrained to primary care physicians or specialties of particular need.
Requirements. Here’s how it works: While you are employed full-time for a public-service organization, you must make 120 on-time, full monthly payments. This includes residency and fellowship. Qualifying employment is any employment with a federal, state, or local government agency, or a nonprofit that has 501(c)3 status, as wells a certain nonprofits that are not 501(c)3s.
Think about this for a minute. This is just 7 years out of residency or maybe only 3, 4, or 5 years out of fellowship—and you can be debt-free! So, make sure you enroll AS EARLY AS POSSIBLE when you are in residency.
The Nitty-Gritty Payment Details. You don’t have to specify a particular loan because it can cover all of your federally backed loans, including Stafford, Perkins, and other programs. The benefits are currently not taxable, but this could change in the future. The federal government forgives your balance at the end of the 10-year program.
Find out whether the organization you’re working for is a nonprofit or a for-profit. Some nonprofit hospitals can have a for-profit subsidiary for tax reasons.
Tax Consequences. Currently, the ENTIRE debts that are forgiven are exempt from state and federal income taxes. When you consider that $200,000 is the taxable equivalent of $285,700 (assuming a 30% tax bracket), this is a huge potential benefit!
State Sponsored Debt Forgiveness Programs
Besides, PSLF, there are some really exciting opportunities offered in every state.
Make sure to check out state sponsored programs at: https://services.aamc.org/fed_loan_pub/.
As of the time of this writing (January 2015), there were over 71 different programs available across the country!
Here is an example of a current program in Minnesota…
Minnesota Urban Physician Loan Forgiveness Program
Who? Applicants are primary care medical residents, which include Family Practice, Obstetrics and Gynecology, Pediatrics, Internal Medicine, and Psychiatry. You would apply July 1 to December 1 while completing medical residency training.
Requirements. Following completion of the residency, the participant must plan to practice for at least 30 hours per week, for at least 45 weeks per year, for a minimum of 3 years in an underserved urban community.
The Nitty-Gritty Payment Details. The state will re-pay up to $25,000 per year of service, not to exceed $100,000 or the balance of the designated loan, whichever is less.
Tax Consequences. These payments are exempt from state and federal income taxes. $25,000 is the taxable equivalent of $35,700 (assuming a 30% tax bracket).
Time Commitment. You must serve at least 3 years or otherwise must repay plus interest what they paid towards your loan.
Here’s another example of another state forgiveness program…
Oregon Partnership State Loan Repayment (SLRP)
Who? Applicants are primary care medical physicians and psychologists (among other non-physician positions).
Requirements. Must be a US citizen. The application period is normally open during October and November each year and awards are made in December.
The Nitty-Gritty Payment Details. Qualifying providers can receive a maximum award of $35,000 per year or 25% of total debt, whichever is smaller.
Tax Consequences. These payments are exempt from state and federal income taxes. $35,000 is the taxable equivalent of $50,000 (assuming a 30% tax bracket).
Time Commitment. Commit to service obligation of at least 2 years. A one-year extension may be awarded for up to 3 additional years, for a maximum service obligation of 5 years.
Native American Forgiveness Programs
Besides working for a private non-profit practice or a larger public entity or HMO, some physicians may want to consider another alternative- working with Native American Tribes.
You can learn more by going to: www.ihs.gov/loanrepayment/
Who? Applicants are physicians specializing in obstetrics/gynecology, psychiatry, internal medicine, family medicine, and pediatrics.
Requirements. Must serve at a location on a reservation or other specified place by the Indian Health Service. A few quirks to be aware of: IHS utilizes a ranking system to address the goal of filling staff vacancies in Indian health programs when granting LRP awards. This system assigns priority consideration to Indian health program sites with the greatest staffing needs in specific health profession disciplines. Also, IHS gives priority to applications of American Indians and Alaska Natives and to individuals recruited through the efforts of Indian Tribes and Tribal or Indian organizations.
The Nitty-Gritty Payment Details. Physicians are eligible to receive up to $20,000 per year in health professions educational loan repayment when working for the IHS.
Tax Consequences. These payments are subject to state and federal income taxes. IHS will pay an additional 20% to the IRS to offset increased tax liability.
Time Commitment. A 2-year service commitment is required.
National Health Service Corps Loan Repayment Program
In addition to the state programs, there are various other granting national programs and opportunities. For example, the NHSC Loan Repayment program provides loan repayment assistance to licensed medical providers who serve in communities with limited access to health care.
There are both full-time and half-time options for service commitment. The dollar amount of assistance and length of service depend on participation in either the full- or half-time and on the need on the Health Professional Shortage Area (HPSA) score of the site.
Essentially, they are looking to fill physicians in “underserved” areas across the country. If you have one right in your area, this could be your ticket!
You can learn more about this program by going here: http://nhsc.hrsa.gov/loanrepayment/
Who? Selection is based on the staffing needs of the NHSC. For physicians, priority for selection will be given to those who have completed residencies in the following: family medicine, obstetrics/gynecology, pediatrics, psychiatry, geriatrics, or internal medicine.
Requirements. In exchange for loan repayment, participants are obligated to serve full-time upon completion of training at a designated NHSC-LRP site of their choice. US citizenship required.
The Nitty-Gritty Payment Details. Physicians may receive repayment of up to $50,000 in health professions educational loans (depending on site). Primary care providers working full-time at an NHSC-approved site with a HPSA score of 14 or above can receive up to $50,000 in loan repayment for committing to serve at site for at least 2 years.
Primary care providers working full-time at an NHSC-approved site with a HPSA score of 13 or below can receive up to $30,000 in loan repayment for committing to serve at the site for at least 2 years.
Tax Consequences. The loan repayments are exempt from gross income and employment taxes. These funds are not included as wages when determining benefits under the Social Security Act.
Time Commitment. It is a minimum of 2 years, but the physician could choose to stay longer. At the end of 2 years, Corps members can apply to continue their service and receive additional loan repayment. With continued service, providers may be able to pay off all their student loans!
Consider for a moment… could you utilize one of the programs we have discussed?
Also, one other topic this isn’t discussed enough, what if you could COMBINE two of these programs simultaneously?
For example, you could enroll in PSLF, work for a non-profit in an under-served area, and then at the SAME TIME, do a state forgiveness program for 2 or 3 or 4 years (whatever the minimum commitment is).
This could hedge the bet of the federal government taking away the punch bowl from the party. This way you have substantially less debt no matter what happens.
If, as a young physician, you focus on paying off your debts, save for a rainy day, live within your means and put money away for retirement, you can then do the things you’ve long dreamed of doing and be well down the road to financial independence.
He is also the author of 5 Steps to Get out of Debt for Physicians, The Insurance Guide for Doctors, The Tax Reduction Prescription, and his new book, The Freedom Formula for Physicians. He’s glad to answer any questions about debt-forgiveness programs. You can contact him at (800) 548-1820, at firstname.lastname@example.org, or visit his website at www.DoctorFreedomBook.com to get a copy of The Freedom Formula for Physicians.
Dave Denniston, Chartered Financial Analyst (CFA), is an author and authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with.