Say goodbye to your med school debt

December 6, 1999

Solvency may be closer than you think. These strategies worked; they might do the trick for you, too.

Say goodbye to your med school debt

Solvency may be closer than you think. These strategiesworked; they might do the trick for you, too.

By Doreen Mangan, Senior Editor

When we spoke to FP Suzanne L. Hawkins in 1993, she was half seriouslyhoping a lucky lottery ticket might wipe out the $103,000 she still owedfor her medical education. That didn't happen, but her debt is now minuscule--lessthan $10,000--thanks to a US government loan-repayment program.

Hawkins is fortunate. Not all young doctors can shrug off their loansthat fast. Since Hawkins left medical school, debt management for youngphysicians has become more complex.

The average medical school debt has climbed 6 percent or more annuallyin recent years. The mean debt for 1999 graduates, including college debt,was nearly $91,000, compared with about $60,000 in 1993. At the same time,residents' stipends have been growing only 2 percent annually. This year'saverage is about $35,000, according to the Association of American MedicalColleges.

Moreover, some loans that once could be deferred for two years duringresidency no longer offer that benefit. That's especially tough for youngdoctors who, already strapped, may have to start repayment during theirtraining, unless they can get a hardship deferment. And while more practicesare dangling the debt-forgiveness carrot to lure young doctors, they'restill in the minority.

On the bright side, loan-repayment and consolidation options have increased.Programs such as the one offered by the National Health Service Corps haveupped their benefits. And, since last year, borrowers have been allowedto take tax deductions for part of their school-loan interest.

Here are some strategies to help you achieve solvency:

Maximize deferments, explore forbearance

In what appears to have been a misguided attempt at simplification, Congresstried to combine 14 educational loan deferments into three or four. Theoption to defer repayment until after a two-year residency--once part ofseveral government loan deals for medical students, including the federalPerkins and Guaranteed Student Loan programs--got lost in the shuffle, accordingto Paul S. Garrard, director of student financial services for the Associationof American Medical Colleges. The current crop of second-year residentswas the first to feel the impact of that, when they applied for defermentin the fall of 1997.

Deferment is still available for some education debt, such as HealthEducation Assistance Loans (HEALs). Those who received Stafford loans before1993 and those who can prove economic hardship can also defer repayment.However, even then, interest continues to accumulate on unsubsidized loans.

The same interest dilemma applies to debts in forbearance, which is availablefor all medical education loans. This allows you to postpone paying theloan even after it's due. Financial planners recommend forbearance onlywhen you lack other viable options. You can apply for forbearance of a federaleducation loan any time in your career. It's usually granted for hardshipsituations, disability, unemployment, or additional training.

Whether you're in deferment or forbearance, you should at least makeinterest payments. If you let interest accumulate, it will be added to theamount of the loan, and it could eventually double what you owe. Chippingaway at the interest will reduce your future debt.

If you can't pay all of the interest you owe, pay it on the loans withthe highest interest rates. The tax deduction you can claim on educationalloans will lessen the sting, at least for residents who are already repayingtheir school debts. It's unlikely that doctors already in practice can qualify,because of income ceilings. To be eligible, a single taxpayer must earnless than $55,000, and a couple less than $75,000. And the borrower can'ttake a deduction for payments made while the loan is in deferment.

If you qualify, though, you can deduct a portion of the interest duringeach of the loan's first five years. The maximum write-off for 1998, whenthis deduction took effect, was $1,000. It rises each year until 2001, whenit will be capped at $2,500.

Bet the house on your future

Given the miserly benefit of the educational-loan interest deduction,some financial planners say you may be better off getting rid of those loansusing home equity. Married homeowner couples who file jointly can deductall of the interest on up to $100,000 of home-equity debt. For singles andmarrieds who file separately, the per-person limit is $50,000.

Brian Hensen, a financial planner in Madison, WI, urges young doctorclients to go the home-equity route. "Many people overlook the opportunityto clear up loans by borrowing on their houses and deducting the interest,"he says.

If your home is worth $200,000, for example, and you've paid down $50,000of that, you might be able to borrow, say, $50,000 at 7 1/2 to 9 percent,and deduct all the interest. However, generally you must pay back home-equityloans within five to 15 years, Hensen says, while you can stretch out consolidatedloans much longer.

Ease the pain with consolidation

If you're staring at loans from many lenders, with varying balances,interest rates, and due dates, consider a consolidation loan. This paysoff existing debts and bundles them into a new loan. It will simplify yourlife, by eliminating most of the paperwork. And to make monthly installmentsmore affordable, you can repay a consolidation loan over 25 or 30 years.

"Consolidating can make as much sense emotionally as financially,"says Todd Bramson, a Madison, WI, financial planner. Bramson, however, frownson consolidation if a borrower's goal is just freeing up cash for luxurieshe or she can't yet pay for out of cash flow.

Consolidation loans are available from the federal government, throughSallie Mae, banks, and other lenders. The terms don't vary much. The federallymandated interest rate for educational consolidation loans is the same forall lenders. It's based on a weighted average of the loans being bundled,and rounded up to the next highest one-eighth of 1 percent. This rate won'tbe above 8.25 percent, and it's fixed for the life of the loan.

Be careful if you're consolidating HEALs with other types of loans, however.In some types of consolidations, HEAL rates aren't figured into the weightedaverage calculation. So if your HEALs have lower rates than the other loansin the consolidation, you could lose the benefit of those lower rates. Onthe other hand, if your HEALs have higher rates than the other loans, you'dbenefit by not having the HEALs factored in. Ask your loan officer how HEALswould be treated in the consolidation loan you're considering.

If you have several low-rate HEALS, you may benefit more by consolidatingthose separately, through a HEAL Refinancing. The rate will differ fromlender to lender, but it will be variable and tied to the 91-day TreasuryT-bill.

Consolidation can help you reduce the amount you pay over time if you'reholding loans above the federally mandated rate, and if you pay offthe consolidation loan in the original time frame. If you extend the repaymentperiod, you could end up shelling out more interest.

Loan consolidators offer attractive terms. For example, it's possibleto arrange for a graduated payment schedule, increasing monthly paymentsas your income rises. And you can make penalty-free prepayments. That'show Indianapolis anesthesiologist Michael A. Kellams is retiring a 20-yearloan in 10 years, saving himself an enormous amount of interest (see "Loan Consolidation and a high salary chop down debtfast"). Your consolidation can even include a loan that's in default.

In addition to a consolidation's terms, carefully consider timing issues.In some cases, you'll lose deferment and forbearance provisions on the bundledloans. Primary care doctors can't defer payment on consolidated HEAL loansfor six or seven years, for instance.

AAMC's Paul Garrard suggests that, before you consolidate your loans,you ask questions such as:

  • What will happen to the status of my student loans if they're in deferment or forbearance when I apply for a consolidation loan?
  • What will the monthly payment be, as well as the total repayment amount of the consolidation loan?
  • How will early payments be applied?
  • Which of my loans can I
    consolidate?
  • Will I pay fees or hidden costs when I consolidate?

And New York City financial planner Lawrence Keller offers this caveat:Although lenders will consolidate spouses' student loans into one repaymentpackage, that's generally a bad idea. "If one spouse dies or becomesdisabled, the other will still be responsible for payment of the entireloan," he says. Furthermore, the couple must agree to repay the consolidationloan regardless of any change in marital status. So if you separate or divorce,you'll still be linked, no doubt unhappily, for the life of your loan. Incontrast, if you and your spouse consolidate your loans individually andone of you dies, that spouse's consolidation loan will be taken off thebooks.

Share the burden with Uncle Sam or your state

If you're willing to be flexible about where you work, you have an altruisticstreak, and you're adventurous, you could participate in a government-runloan-repayment program. The National Health Service Corps, for example,offers loan-repayment incentives for primary care physicians willing towork in medically underserved areas. In addition to the salary and benefits,you can get up to $50,000 in government and commercial loans repaid if youmake a two-year commitment--more if you sign on for a longer term.

Of course, you could probably earn more in private practice and, if youhave the discipline, use all of those extra funds to pay off your loans.However, as an enticement to serve in the NHSC, Uncle Sam kicks in an additional39 percent of the loan-repayment money. That's to cover taxes, since therepayment is considered taxable income. Not a bad deal, as long as you enjoythe experience.

One obvious drawback is that if you don't like where you're sent, you'restuck. The opposite can happen, though: Suzanne Hawkins (see "Thelottery failed this doctor, but Uncle Sam came through") has stayedon at her clinic in Holland, MI, long after she fulfilled her obligationto the program. She has family nearby, and she enjoys her patient population,mostly migrant workers. "They're very nice people, very appreciativeand compliant," she says. "I can see myself making a difference."

Another public-service option is the Indian Health Service Loan RepaymentProgram. The IHS serves about 1.5 million American Indians and Alaska nativeswho belong to more than 557 federally recognized tribes in 34 states. You'llearn about $70,000 plus benefits, and get up to $20,000 a year toward yourloans, for a minimum two-year commitment. You can stay in the program untilyour entire debt is wiped out. Plus, the IHS will pay up to 31 percent ofthe federal taxes due on the loan repayment.

Various branches of the military offer scholarships to medical studentsin exchange for service after their training. That's how Gary C. Edelmandealt with his medical school expenses. Today, three years after he woundup his service, Edelman calls it a pretty good deal .

If you're already an established physician with a liking for the military,and you can spare at least one weekend per month for service, consider thereserves. Both the US Navy and Army offer loan repayment of up to $20,000.

Not to be outdone by the federal government, many states offer loan-repaymentprograms for clinicians who will work in poorly served areas . The US government,in fact, bolsters the repayment budgets of 36 states, dollar for dollar,with up to $6 million a year. That money, though, must be spent in federallydesignated Health Professional Shortage Areas.

The loan-repayment program in Washington state has grown to be "asignificant recruitment strategy here," says Kathy McVay, program administratorin Olympia. Since its 1990 inception, the program has lured 38 doctors torural practices. The amount available for disbursement has grown from $200,000in the 1991-93 biennium to $1.5 million this year. The funds are availablefor all health care professionals, including physician assistants, dentists,and others. Washington receives $100,000 annually in matching dollars fromthe federal program.

Since Uncle Sam's matching dollars started flowing in 1988, states thatbenefited from federal largesse have recruited 1,041 mostly primary caredoctors and 1,577 other health professionals. The states' payments vary,but $20,000 to $25,000 in loan reductions per year is common. The minimumcommitment is usually two or three years, with optional longer stays.

Find a practice that desperately needs you

Some practices and hospitals use bonuses to entice debt-laden doctors.Others help pay off loans of doctors they hire. Such attractive deals maybe getting scarcer for primary care physicians. "The residency programsdid such a good job of drawing doctors to the primary care specialties thatdemand is not as strong as it was one or two years ago," explains SteveSchoen of the Miami recruiting firm MDR Associates. "And there's anupswing in demand for internal-medicine and surgical subspecialties."

Ironically, though, primary care doctors have the most interest in debt-reductionspots. "The specialists know they can generate enough income to takecare of their obligations," Schoen says. "Primary care docs knowthey'll never earn as much as some specialists, so they're looking for anedge in whittling down their loans."

So, if you're a primary care doctor hoping to find a practice to takeover your debt, you may have to go far from the bright city lights. Schoensuggests you consider rural communities in the Midwest, noncoastal regionsof the South, western Texas, and some parts of the Northeast, such as smalltowns in New York state that border Canada.

Wherever you land, make it somewhere you're likely to enjoy for the longterm, because you'll probably have to sign on for about 10 years. "Ifyou decide you don't like it after a year or two, you could feel prettytrapped," Schoen says.

  

How four young doctors banished medical school debt

When we talked to young doctors who were struggling with debt sixyears ago, their frustration, and even despair, was palpable. However, whenwe checked in with four of them recently, we found them in good financialshape. They had either partly or fully paid down their debts. They wereenjoying medicine and life, their money worries long forgotten. Here's howthey got their heads above water.

  

The lottery failed this doctor, but Uncle Sam came through

FP Suzanne L. Hawkins (below), the lottery ticket buyer in the accompanyingstory, cheerfully admits that her biggest win was $100. So much for an instantsolution to her debt. Hawkins incurred about $80,000 in HEAL loans duringher DO training. Interest started from Day One of each loan. By the timeshe finished her three-year residency, her total debt had grown to $140,000,and financial freedom was nowhere in sight.

Hawkins chose to work off the debt in the National Health Service Corps'loan-repayment program, and was assigned to a public clinic in Holland,MI, in 1990. Besides her salary, she received about $20,000 toward her loansannually for four years. Then she extended her contract for two more yearsand received $35,000 annually toward the loans.

When we talked to her in 1993, she owed $103,000, even though she'd paidmore than $83,000--mostly in interest--over the prior three and a half years.Interest was still mounting, to the tune of $635 a month.

By 1996, Hawkins' debt had been reduced by $150,000 in all. She's nowpaying less than $200 a month on the balance, which is less than $10,000.

In 1995, Hawkins was able to fulfill her dream of buying a house. Herattempts to do that a few years earlier had been futile. "Bankers laughedwhen they heard about my loans," she recalls. This doctor now ownsa modest three-bedroom split-level house that she purchased for less than$150,000, with only 5 percent down.

Would she recommend the NHSC route to other young doctors with heavydebt? Possibly, now that the program has improved somewhat. Previously,the federal money was distributed quarterly, but interest accrued monthly,so doctors couldn't reduce their loans as fast as they could with timelierpayments. Now, NHSC doctors can get their federal loan money in annual lumpsums, so it's easier to melt down what's owed.

Hawkins notes one drawback about her years at the public clinic: "Icould have been in private practice all that time, and made more money,and been vested in a retirement plan," she says. Although the NHSCloan-repayment plan offers some benefits, there is no pension plan.

  

The military solution: paying with time instead of money

Some people join the Navy to see the world. Gary C. Edelman (above) joinedso the Navy would pay for most of his medical education. Overwhelmed bythe prospect of borrowing at least $22,000 annually to fund four years atDartmouth Medical School, Edelman applied for and won a Navy scholarshipduring his first year at the Hanover, NH, school.

The scholarship covered tuition, fees, books, health insurance, and amonthly stipend for living expenses. Edelman borrowed only $17,000, forother costs. When his five-year residency in general surgery ended in 1993,he became a lieutenant commander in a US Naval hospital in Millington, TN,and repaid the Navy with three years of service.

Does he regret those years? Not one bit. "By the time I left, in1996, my salary was $96,000," says Edelman. "I was able to bankevery other paycheck." That gave him an early start on retirement savings,which now total $240,000. Not bad for a single 37-year-old.

The major drawback, Edelman found, was that because so much of medicalcare for military employees is farmed out to civilians, his surgical experiencein the Navy was limited. "I did a lot of hernias and gallbladders,"he says. "I didn't get complicated cases. If you're a surgeon and youwant to do a couple of big cases a month, you won't get that in the military."

Besides scholarships, the military also offers post-residency loan-repaymentprograms. A doctor who's thinking of joining the military to wipe out adebt should talk to physicians at the nearest military base, advises Edelman,who is now a general surgeon in private practice in Tucker, GA. "Askthem the tough questions," he urges. "Are you happy with yourprofessional status? What do you do?"

"Being in the military is a good way to save money, but there isa professional cost," he concludes.

  

A repayment offer this doctor couldn't turn down

"We'd like to take a nice vacation once in a while," SusanM. Szabo (below) said wistfully when we talked with her in 1993. The Oshkosh,WI, pediatrician had consolidated 21 loans in 1988 and was feeling the burdenof $1,300 monthly payments--one third of her income, equal to the mortgagepayments she and her husband were making. A manager in retailing, her spousewas earning $40,000.

Szabo had reduced the $145,000 loan to $138,000 in five years. The paybackperiod stretched ahead for 25 more years. She was making two prepaymentsannually, hoping to knock about 10 years off that. "My daughter, who's6, would have been a junior in college by the time the loan was paid off,"she said.

But in 1994, another practice recruited her, with the promise of paying$9,200 a year on her loan for 15 years. The catch, of course, is that Szabocan't leave during that time. And she pays $4,000 a year in income tax onwhat the practice pays toward the loan. Still, this benefit has enabledher to save money for her two children's education and take some of thosevacations she'd wanted.

Szabo feels fortunate in her position. Not only is she enjoying pediatricmedicine, but, she says, "not many practices seem to be offering loanrepayment anymore."

  

Loan consolidation and a high salary chop down debt fast

As Michael A. Kellams (below) began an anesthesiology residency in 1993,he worried that health care reforms might limit his earning potential. With$130,000 in loans and interest mounting, he'd been counting on a high salaryto bail him out. Anxiety was his constant companion. "Rarely a daygoes by that I don't think about my school debt and wonder if I'll be ableto pay it off," he told us then.

But his story has a happy ending. In 1996, he joined a 56-doctor anesthesiologyservice in Indianapolis. Although the practice participates in managed careplans, it negotiates keenly for favorable reimbursements and also has fee-for-servicepatients. As a result, Kellams, 33, earns $350,000 a year and is well onhis way to vaporizing the debt, which, with interest, had climbed to $170,000.

After residency, he consolidated about 18 loans that had interest ratesfrom 7 1/2 to 9 1/2 percent, and now he has one 30-year Sallie Mae loan.By using an automated payment plan for his $1,400 monthly installments,he shaved half a percentage point off the interest, which brought his rateto 7 1/8 percent. And because he's paying an extra $1,400 a month, Kellamsexpects to completely retire the loan by 2005. "It has worked out reallywell," he says. "I don't even think about the debt anymore. It'sjust another bill to me."

  

States extend helping hands to doctors

The 36 states listed below offer loan-repayment programs, mainly to primarycare doctors who agree to practice in areas of need. Almost all of thesestates get matching federal dollars to assist public clinics or privatenonprofit practices. Uncle Sam's funds are not available for doctors goinginto private practice. However, some states will make grants of their ownmoney to private-practice doctors in underserved areas.

  

How to find help

Loan consolidation and debt management advice

Association of American Medical Colleges
202-828-0400
www.aamc.org/stuapps/finaid/start.htm

US Department of Education's Consolidation Department
800-557-7392
www.ed.gov/offices/OPE/DirectLoan/consolid.html 

Sallie Mae
888-272-5543
www.salliemae.com/loans 

Loan-repayment programs

Air National Guard Student Loan Repayment Program
301-836-8677
hafnera@ang.af.mil.

Army National Guard and Army Reserves Student Loan Repayment Programs

See the service representative in your area. 

Indian Health Service
301-443-3396
www.ihs.gov 

National Health Service Corps
800-221-9393
www.bphc.hrsa.dhhs.gov/nhsc

. Say goodbye to your med school debt. Medical Economics 1999;23:38.

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