MSHQ 044 : How to Pay Back Your Medical School Loans

Session 44

In today's episode, Ryan talks with Tony Sozzo for the second time on the show as they shed light on paying back medical school loans specifically about different options for loan repayments, what it means to your bottom line and your bank account at the end of the day, the pros and cons, and some things you need to consider.

You may not appreciate the topic for now but this can come handy eventually. You need to understand what it's like on the other side of medical school as you're paying back several hundred thousand dollars worth of student loans.

Ultimately, Tony strongly advises that no matter what you do, allow yourself to have as many options possible at the end of the day.

Here are the highlights of the conversation with Tony:

The average debt medical students have:

$170,000 for medical schools as a whole

$185,000 – 190,000 for private schools

Average residency salary:

$50,000-$55,000 (depending on location)

Why is it so expensive to go to medical school?

  • Equipment
  • Simulated patients (Harvey)
  • Pay for good instructors/professors
  • 2/3 of the money goes to educational instruction

Choosing medical schools based on tuition:

You have to go deeper than that. A $10,000-difference over the course of your lifetime isn't going to make that much of a difference.

Instead, look into these considerations:

  • Match list
  • Safety
  • Comfort
  • The school's philosophy and culture

For any type of repayment plan you choose, have a lot of options. Options make it work!

Repayment plan options:

First three are time-driven:

  • How much debt do you have?
  • How long are you going to repay it back?
  • We'll figure out the monthly payment.

For example, you have a debt of $170,000 and you want to pay it over a period of 10 years (120 months), you will have a very high monthly payment. Extend that to 25-30 years, you have lower the monthly payment because it's stretched out.

Here’s a better picture:

If you choose a 10 year repayment plan for $170,000 @ 6.8%, you'll pay:

$1,956.37 – Monthly Principal & Interest

$234,763.87 – Total of 120 Payments

$64,763.87 – Total Interest Paid

If you choose a 25 year repayment plan for the same $170,000 @ 6.8%, you'll pay:

$1,179.92 – Monthly Principal & Interest

$353,976.77 – Total of 300 Payments

$183,976.77 – Total Interest Paid

The pro of a 10-year plan:

Cheapest plan where you're leaving your money out there only for 10 years with compounded interest

With the 25-year plan, more interest is added even if you have lower monthly payment

Now, picture this scenario:

  • Medical school debt: $170,000
  • Period: 10 years
  • Monthly principal and interest: Around $2,000/month payment

Consider your income:

  • The average residency salary: $50,000
  • After withholdings: $3,400/month
  • Subtract that with rent, utility bills, insurance, food, cars, gasoline…

How much do you have left?

Other existing, older repayment plans

Graduated plans

  • Graduated plan is when you’re paying so much for months or a year, it goes up a little next two years and then the next. (Balloon Mortgage)
  • Standard/graduated plans are more challenging for you live off of

ICR (Income Contingent)

Private loans: Ask your lender what options you have for deferment after you graduate

Newer payment plans:

Income-based repayment plans/Income-driven plans/Pay-As-You-Earn

They look at your discretionary income assuming only small percentages of that and deriving your monthly payment

Major qualification: Partial financial hardship (if your loan amount far exceeds 10%-20% of your income

So how much do you have to pay for per month if you opt for the income-derived plans?

  • 20% plan: $642/month
  • 15% plan: $410/month
  • Pay-As-You-Earn: $273/month

*Remember, this is based on your income so if your income increases, the exact amount may vary.

Benefits of the newer repayment plans:

Gives you breathing room with modest loan repayments

*These are all U.S. Government plans and only apply to the government or federal student loans

Loan forgiveness:

With some of the plans, the government will forgive your debt after a certain number of payments, which is great! However, you might be taxed on the difference though.

Benefits of Federal loans:

  • They are better because of the safety and protection
  • They don't capitalize the interest while you're in school
  • They have loan forgiveness plans

The “public service loan forgiveness” plan:

  • Doesn't have to be consecutive
  • At least 30 hours a week in the not-for-profit

When preparing to go on your interviews, ask two questions:

  • Are you a not-for-profit?
  • Who will pay me?

*Around 80%-90% of hospitals are not-for-profit

What happens to U.S. medical school graduates not getting residency spots?

They have protections.

  • In-school deferments
  • Forbearance (doesn't hurt your credit and buys you time for about 6 months)
  • Employment deferment

Tony recommends to go into one of these income plans. You would have no income so they would give you a zero payment and the months would still count.

Some pieces of advice for premed students:

  • Allow yourself to have as many options at the end of the day.
  • Stay with federal student loans over private loans to have more flexibility.
  • Be more mindful of your credit card debt. Use credit cards wisely. Use them for emergencies. They are not a lifestyle!
  • Talk to a tax expert and a financial planner to determine what’s best for you.

Links and Other Resources:

Session 21: Medical School Financial Planning Expert Interview

What Tax Bracket Am I In?

Federal Student Aid – Understanding Repayment Plans

Repayment Schedule Estimator

Federal Student Aid – Repay Your Loans

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  • Lauren

    Very helpful, thank you! Not boring, we need to know this information =)

  • Shannon Friedbacher Scott

    Great Podcast! I just got accepted to medical school so the financial questions are certainly on my mind. This podcast is a great way for me to start planning my financial future with medical school, residency, and beyond in mind. Excellent resources as well. I feel a little better equipped now to tackle the money issues of medical school. Thanks!

  • Brent

    Is paying off accrued interest prior to entering into repayment always a good idea?

    I realize that it would make monthly payments less; however, in plans such as PAYE the interest capitalization is limited and I wonder if I’d essentially be paying back more than I would save if the loans were ultimately forgiven after 10 years. Any thoughts would be appreciated as I have about $25,000 in interest that has already accrued.

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