Savvy student loan repayment tips for physicians in training

Don’t ignore your loans — come up with a plan instead.

Refusing to open those pieces of mail from your student loan servicer? Trying not to look at that student loans bookmark on your browser? If so, you are not alone. This article is intended to offer those in training, who might be ignoring their student loans, some savvy tips to help you take charge and put you ahead of the curve when it comes to repayment strategies.

Change how you report your Income

When it comes to reporting income for any of the income driven student loan payment programs (i.e PAYE, REPAYE, IBR), many don’t realize that they have the option to choose if they want to use their most recent paystub or their most recent tax return. Since you have the option, you might as well make sure you submit the one that would be more advantageous to your situation. As an example, a client who is just starting residency and filed their taxes the year before (when they had no income) would benefit from showing their tax return as opposed to their pay stub to benefit from a whole year of zero-dollar payments. The option is there and so be sure to make the most of it.

Make Pre Tax Retirement Contributions

Since we can use tax returns to show your income, you can also benefit from making pre-tax retirement contributions. The loan servicers go based off of your Adjusted Gross Income (AGI) and so therefore, anything that comes out “pre tax” like a 401k contribution, employee benefits, etc, reduces your AGI and therefore your required student loan payment. Although making heaps of 401k contributions may be tough while in residency due to the income restraints, this could be a great way to reduce your required payment once you land that attending job and may be still going after the PSLF program.

File taxes Separately

If you are privileged to be married and have loans that qualify for the PAYE or IBR programs, you can also look to file your taxes separately. By filing separately, you are able to isolate your income for your student loan payment sake. If this is a direction that is looking favorable for you, be sure weigh the cost savings on your student loan payment against the cost of filing separately vs jointly. Outside of the additional cost of having to file two tax returns, you may also lose out of the Child Tax Credit and you will not be able to contribute to a Roth IRA if you make over $10,0000/yr. These are just a couple downsides to filing separately but be sure to consult a tax professional to make sure you don’t get into tax trouble down the line during an audit. For those of you on REPAYE, they force you to include your full household income regardless of how you file your taxes and so this strategy would not work for you here. Although you can change repayment programs, use caution when doing so as that will trigger what is called capitalization of your interest. This means that your interest will now be accruing interest… which is not ideal.

Take Advantage of Community Property States

One other opportunity that some clients can take advantage of if they are living in a community property state (only 9 out there) is the ability to cut their and their spouse’s income right down the middle. Since community property states treat marital income as completely joint, technically if you made 200k and your spouse made 50k, your combined income is 250k. This means that if you are filing your taxes separately, your income can also be reported right down the middle at $125k instead of the original $200k. You pair this with some retirement contributions, and you are now savings some serious money on a monthly basis.

Use REPAYE for the Interest Subsidy

As the default option for federal student loans, REPAYE if often overlooked as a savvy strategy to minimize interest accrual - especially for those looking to refinance right after training. Some clients may look to refinance with a private bank right out of medical school and pay a lower rate all the way through training, but the problem is that the full interest is still accruing. REPAYE forgives half of your unpaid interest and even more for some loan types. For example, if your loans are accruing $1000/mo during residency and your required payment is only $300, there is $700 of unpaid interest. If you are on REPAYE, they forgive half of that $700, or $350. Keep in mind that most residents that file their tax return the year before going into training will have a whole year of $0 payments, meaning they are getting $500/mo forgiven if their loans are accruing $1000/mo. This is effectively lowering your interest rate while you are paying less than the amount of interest that is accruing. This savings can be quite substantial over a 3-6yr period.

Go rural

Although this may not be many people’s first choice, there are some great loan forgiveness programs in various states for those who work at rural hospitals. Each state has various offerings for particular specialties in need around the state. These programs can offer some substantial loan repayment opportunities in exchange for your commitment to work in those approved hospitals for a period of time. These commitments typically range from 2-5yrs and can forgive loans up to $100k in some cases.

Work for the VA

The VA has arguably the best loan repayment retention program out there. They offer forgiveness of up to $200k of your private or federal loans spread evenly out over your first 5yrs working there. It is a reimbursement program and so they require that you show them that you made the payments but then they give you a tax-free refund for those payments at the end of the year. After the first year, many clients just use this refund as a pool to make the payments on their loans and then refill it with the refund each year for 5yrs. While they may not have the most competitive salaries, this is an enormous benefit that is not seen elsewhere.

Refinance for a Long Duration but Pay it Off Faster

Ever heard someone say that they were going to continue living like a resident for 3-5 more years after residency and pay off all their loans? This is very common, and these folks are usually talked into refinancing their loans at a low interest rate over a 5yr repayment term. Committing to pay the bank back several hundred thousand dollars of loans over a 5yr time frame is no joke and offers little flexibility for the inevitabilities that life may throw your way. If you are going to try to expedite your loan repayment and continue living like a resident, more power to you, but commit to yourself to do it and not to the bank. By refinancing for a 15-20yr time frame, this offers you a substantially higher amount of flexibility which is critical to a successful financial strategy over the long run. You might pay a higher interest rate, but if you pay it off sooner, you will not be accruing all of that interest anyways.

Final words of wisdom

All in all, student loans are never a fun conversation and usually a point of stress for most clients. With legislation changing, life changing, new opportunities coming your way, we all must accept some level of uncertainty when it comes to the best repayment strategy. Be sure to educate yourself on these topics and surround yourself with professionals who can have your back when you get busy with training. Trust but verify when it comes to advice given online or by colleagues and understand that your student loans cannot be planned based off rules of thumb. Myopic focus on your student loans can also blind you to many other things in life and in your finances and so be sure to lift your head up when working through plans for your loans. Remember, money is just a means of exchange. Not the goal.

Michael Foley, CFP®, CSLP®, is a comprehensive financial advisor at North Star Resource Group. Michael is accepting new clients and so feel free to click here to schedule a complimentary, no obligation initial consult or visit his website at https://www.northstarfinancial.com/advisors/michael-foley/.

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