Strategies for New Physicians to Maximize Med School Loan Forgiveness

The Medical Professional’s Dilemma

Young physicians are often faced with a unique situation – higher incomes and higher student loans debt burdens than most individuals will ever see.  In the past, the strategy for most young doctors was the following: keep student loans in forbearance during residency, refinance them at a low interest rate when your salary increases, and then pay them off over the next 10 years while maintaining a spartan, no-frills lifestyle.

This changed in 2007 with the creation of the Public Service Loan Forgiveness (PSLF) program.  This program was designed for those working at non-profits to have their student loans forgiven after ten years.  New physicians often work for non-profit hospitals and hospital networks, making them eligible for loan forgiveness under this program.  For new physicians, however, with their wide fluctuations in income and their high incomes overall, special care needs to be taken to make the most of PSLF.

The Goal

To qualify for PSLF, along with other requirements, you need to make 120 income-based loan repayments.  Thus, the goal is to make your reported income as low as possible to keep payments low.  Also, depending on when you took your first student loans out and which income-driven repayment plan you have enrolled in, your maximum monthly payments may be capped at 10% or 15% of your discretionary income.  For the remainder of this article, I will assume the borrower is in the federal Income-Based Repayment program (IBR) and took their first loans out prior to July 2014, meaning their monthly loan payment cap is 15% of discretionary income.

Employment Strategies

First, do not enter loan forbearance when you are a resident or fellow.  If you made this mistake, rather than pursing loan forgiveness, you may be best served refinancing your loans at a lower rate with a private lender.

The easiest way to lower your income-based repayments is to have a lower salary.  All you need is 120 qualifying payments to qualify for loan forgiveness – it doesn’t matter how much each one is.

Therefore, aspiring doctors should choose to make their income-based repayments during their medical residency and/or fellowships.  Yes, you are going to feel impoverished during that time, but you will be grateful when you realize that each $250-$450 monthly payment made during that period will mean one fewer payment of potentially $2,000 or over when you finally get your “doctor’s salary.”

Here’s some quick math to make my point:

A medical resident makes $61,200 on average and let’s assume this individual has $500,000 in debt.  The average income is similar for medical fellows.  Therefore, using figures from 2020, your “discretionary income” will be calculated as $42,060, which means the maximum loan repayment you will be liable for under an income-based repayment plan is $6,309 a year, or $525.75 a month.

Once you get your “doctor salary,” your income will substantially increase.  Depending on if you have a specialty, and what specialty that is, you could easily be making in excess of $200,000 during your first job out of residency/fellowship.

With a $200,000 salary your discretionary income would be $180,860 (2020 figures) which means the maximum loan repayment you would be liable for would be $27,129 per year, or $2,260.75 per month.  That’s over four times your payment as a resident or fellow.  Therefore, you should try to make as few payments as you can after your salary jumps.

Employee Benefits Strategies

403(b) Plans

The first employee benefit you will want to take advantage of is your 403(b) retirement plan.  You are allowed to deposit $19,500 in this account each year (2020/2021 figures), and amounts contributed to a 403(b) plan are excluded from discretionary income.  By “maxing out” this account each year, you can potentially reduce your monthly loan repayments under an income-based repayment plan by as much as $2,925 per year, or $243.75 a month.

HSAs & FSAs

Another benefit you will want to take advantage of is your health savings account (HSA) or flexible spending account (FSA).  These accounts allow you to deposit and $3,550 and $2,750 each year for a single taxpayer (2020 figures), potentially decreasing your monthly loan repayment by $502.50 and $412 per year, respectively.

Health, Vision, Dental Insurance Costs

If you elect to purchase these benefits through your employer, your portion of the insurance costs are paid with pre-tax dollars, which will not be reported as taxable income and thus further decrease your monthly payments.

Investment Strategies

Invest in Rental Real Estate

For those making under $150,000 a year (this might be difficult for doctors out of residency), you may be able to take advantage of a section in the tax code which permits deducting real estate losses from your normal salary (check with your tax advisor).  It is very common for landlords to have losses for tax purposes, even though they are cash flow positive, during the first several years of owning a property.  This is because mortgage interest and property taxes are deductible, and payments of these two items are especially high in the early years of a new mortgage.  Similarly, you are allowed to reduce your income each year by a portion of the amount of the purchase price of your home.

Contribute to a Traditional IRA or Roth IRA

These accounts allow you to invest without dividends, interest, and capital gains being added to your taxable income.  Moreover, a Traditional IRA allows you to deduct the contribution amount from your income at lower income ranges (below $66,000 for single taxpayers in 2021 and $105,000 for married taxpayers filing jointly unless a spouse isn’t offered another retirement plan, such as a 401k).

Tax Strategies

Consider Stopping Distributions from Beneficiary IRAs

If a loved one named you as a beneficiary of their retirement account and has since passed, you will be required to liquidate (sell everything and take the money) the account over the next ten years.  When you make withdrawals from the account, the amount of the withdrawal is added to your income, and therefore can bump your student loan payments higher.

Therefore, if you hold a beneficiary IRA, you should consider not making any distributions until after your loans are forgiven.  To see if this strategy is right for you, contact your financial planner or tax advisor.

Get Married or Have Children

I only suggest this as half-serious strategy, as starting a family because of med school loans doesn’t seem prudent.  Even so, unless your spouse also makes a significant amount of money, your calculated monthly loan payments will most likely decrease if you get married and/or have children.

Final Thoughts

Above I outlined some methods to reduce your income for the purpose of maximizing the dollar amount of student loans to be forgiven under the Public Service Loan Forgiveness program.  I emphasize again that none of these strategies will help you if you are not following the guidelines to qualify for this program.  You must be working full-time for a qualifying employer, make 120 on-time loan payments, and be enrolled in an income-driven repayment program.  Moreover, the loans must be Federal Direct Loans, not Federal Family Education Loans, Perkins Loans, or any loans via a private lender.  If you would like to discuss your own loan situation and see if you are able to qualify for PSLF and taking the right steps to maximize the amount of your loan forgiven, give me a call at 561-972-8011.