By Wesley Sebacher, CFP®, CAIA®
As a physician, you have invested a significant amount of time and resources into your career. For most physicians, this investment into oneself is accompanied by a considerable amount of student loans. Physicians have several options for repaying these student loans and opportunities for forgiveness. The specific repayment options available to a physician may depend on the type of loan, employment status, and financial situation. Here is an outline of the common student loan repayment options for physicians:
Federal Loan Repayment
There are several options for repayment amongst federal or public loans. Federal loan repayment plans will provide you with the option of repaying your loans over a 10–30-year period. The payment options can be fixed, graduated payments, or income driven. The cost of repayment between the repayment plans can be projected using the loan simulator provided through studentaid.gov. Federal loan repayment plans have their own unique characteristics, all the plans listed below can determine which plan is best suited for your repayment strategy:
Standard Repayment Plan – Eligible for various federal loan types for borrowers seeking repayment within 10-years (10-30-years for Consolidation Loans). Repayment is established as a fixed monthly payment.
Graduated Repayment Plan – Eligible for various federal loan types for borrowers seeking repayment within 10-years (10-30-years for Consolidation Loans). Repayment is established as a graduated monthly payment, where the payment begins low and gradually increases over time.
Extended Repayment Plan – To be eligible, you must have more than $30,000 in outstanding Direct Loans or FFEL Program loans. Repayment is available as a fixed or graduated monthly payment with loan terms up to 25 years.
Income-Driven Repayment (IDR) Plans – Under the income-driven repayment plan umbrella, the four repayment options are the Saving on a Valuable Education (SAVE) plan, Pay As You Earn (PAYE) plan, Income-Based Repayment (IBR) plan, and the Income-Contingent Repayment (ICR) plan. Each of these plans will have their own unique characteristics regarding the percentage of discretionary income used toward repayment, the minimum and maximum allowable payment, and the loan-term. Each of these plans is eligible for various federal loan types.
Private Loan Repayment
As with federal loan repayment, private loans will have several options for repayment. Common private loan repayment options include immediate repayment, interest-only repayment, partial-interest repayment, and full deferment. Private lenders may offer a myriad of repayment terms – such as 5, 7, 10, 15, or 20 years. Unfortunately, private lenders do not offer the option of income-driven repayment and eventual forgiveness of their private loans, as seen in the public loan repayment programs.
Immediate repayment – Full student loan payments begin while in school. This option helps accelerate repayment over deferring the loans. However, most students are not able to meet this financial obligation while in school.
Interest-only repayment – Only the interest incurred on your student loans will be required to be paid while you are in school. This plan can help reduce the build-up of interest on your loans, however, you will not reduce the principal balance until after school and full payment is required.
Partial-interest repayment – Similar to interest-only, but you will only be paying a portion of the interest incurred on your student loans. This can help manage the interest build up in your loan balance while in school.
Full deferment – Allows you to make no student loan payments while you are in school, which is a commonly used option for students as there is minimal or no income to be used toward their repayment. The disadvantage is the buildup of interest in the student loans while the payments are deferred.
Considerations When Refinancing Federal Loans For Private
The decision to refinance federal loans for private loans has many considerations and the choice is irrevocable. If you have federal loans and make the decision to refinance the loans to a private option, you will not have the option to return these to federal loans. This can be a significant detriment if your employer qualifies for public service loan forgiveness (PSLF) or any number of other loan-forgiveness programs. Additionally, if you are on an income-driven repayment (IDR) plan and choose to refinance to private, you will give up the option of IDR forgiveness at 25-years of qualified payments on graduate level student loans.
There are benefits of refinancing with a private lender. In a low-interest rate environment, you may significantly reduce the interest expense on student loans and lower your monthly payment by refinancing. This is advantageous if you plan to repay your student loans prior to the term on your public loans, or if the total repayment is less than the amount repaid on a standard plan, graduated plan, extended plan, or an IDR plan pursuing of forgiveness through qualified payments.
It’s crucial for physicians to assess their specific goals and financial situation to determine which repayment option best suits their needs. The decision to refinance or remain on your federal loans is nuanced. Physicians should consider seeking professional advice from a qualified fiduciary to understand the benefits and drawbacks to make an informed decision.
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