By Dr. Jim Dahle, WCI Founder
There have been a lot of changes in paying for medical school since I graduated way back in 2003. For instance, tuition is dramatically higher. The cost of living at school has certainly gone up with inflation, but the rate of inflation of the tuition itself has been about twice as high.
However, a more significant change is the series of interventions that Congress and particularly the Department of Education have made in federal student loan programs. When one combines all of these benefits, it is now possible to attend medical school almost for free. Let me explain.
Consider a student who attends college on federal loans. Let’s say they graduate with $50,000 in federal student loans. Then, they go on to medical school, again paying for it with federal loans. Between direct unsubsidized loans and direct PLUS loans, they borrow another $300,000 for a total of $350,000. They file taxes just before graduation showing an income of $0 the prior year. They consolidate as soon as they graduate, eliminating the six-month waiting period. They file an extension each year for their taxes and file them in October.
This is followed by a three-year residency and then a three-year fellowship—both of which, like most physician training programs, are 501(c)(3) or government institutions. They are enrolled in the SAVE program this entire time. Their SAVE payments are $0 for the first half of residency and then about $133 a month for the rest of residency, fellowship, and that first year of attendinghood. They stay on as faculty for four years (or get a job at a VA or other PSLF-qualifying job). They’re making $300,000 a year, but their payments for the next three years are only about $2,060 per month. At this point, they receive PSLF tax-free forgiveness of more than $300,000. They borrowed a total of $350,000 but only paid back $133 × 66 months + $2,060 × 36 months = $82,938. This is about 24% of the $350,000 that was borrowed.
This example isn’t even the best-case scenario. Some people borrow even more as undergrads, grad students, or medical students. Others spend another year or two in training. Many people had an even higher percentage of their debt forgiven recently because of the $0 payments for 3 ½ years due to the COVID “emergency.” Suffice it to say, paying a quarter for a dollar of value is an awfully good deal. While I’m pretty sure this isn’t very good government policy, that certainly wouldn’t keep me from taking advantage of it. Here are the steps to doing so.
More information here:
Steps to Go to Medical School Almost for Free
The more of these steps you do, the cheaper your medical school will be.
#1 Only Use Federal Loans
Only federal student loans qualify for the federal Income Driven Repayment (IDR) programs and the Public Service Loan Forgiveness (PSLF) program. Try to avoid private loans as much as possible; you’ll actually have to pay those back.
#2 File a Tax Return for Your Last Full Year as a Medical Student
You’re probably not even required to file a return as an MS4, but you should do so anyway. When it comes time to certify your income for the federal IDR programs later that year, you get a choice. You can either prove your income using your current paystubs, or you can do the smart thing and use your income from your most recent tax return. You know, the one that shows you didn’t make any money last year.
#3 Consolidate Loans Upon Graduation
As discussed in this post, most people are forced into a six-month grace period upon graduating from school. That isn’t actually to your advantage. You want to be “making payments” during this time period. The payments are almost surely $0 anyway. If you consolidate your loans as soon as you graduate, you don’t get that grace period . . . and that’s a good thing if you’re going for PSLF.
#4 Enroll in SAVE
Next, you need to enroll in the best IDR program for you. That is usually SAVE, the newest program. It certainly is the best for single people and those who are married to a non-earner or a low earner. SAVE has all kinds of advantages compared to prior IDR programs. Instead of defining your discretionary income as your income minus 150% of the poverty line, it defines it as your income minus 225% of the poverty line. Instead of making you pay 20% or even 15% of your discretionary income in payments, it only requires you to pay 10% (5% of undergraduate loans). Instead of adding unpaid interest onto the balance (since payments during training generally don’t even cover accruing interest), SAVE waives all unpaid interest.
#5 Max Out Tax-Deferred Accounts
Next, you should find out about and maximize contributions to any tax-deferred accounts you qualify for, including traditional IRAs, 401(k)s, 403(b)s, and even Health Savings Accounts (HSAs). Yes, I know this is different from the usual advice for people in a relatively low-income year. Normally, the advice would be to preferentially maximize Roth accounts over tax-deferred ones. Yes, I know this may cause you some (generally solvable) pro-rata issues for your Backdoor Roth IRA process down the line. But it will also reduce your income and, thus, your required IDR payments.
#6 Silo Your Spouse’s Income by Filing Married Filing Separately
Filing your taxes with the status of Married Filing Separately (MFS) generally increases your tax bill. But it does allow your IDR payments to be based only on your income. This is a “trick” well worth employing for a resident going for PSLF who is married to an attending or other high earner. The additional forgiveness will often outweigh the additional tax cost.
Some people take it one step further. Since the IRS allows you to refile your taxes for three years, they first file MFS to minimize IDR payments and then later refile as Married Filing Jointly (MFJ) to get an additional tax return. It seems the Department of Education really doesn’t communicate well with the Department of the Treasury. Whether that is ethical (or even legal) is a bit gray.
#7 File Tax Extensions
While you have to pay any taxes due by April 15 of the next year (and sometimes earlier), you don’t actually have to file your tax return until October 15 if you file a very simple tax extension by April 15. This six-month time period is six months that you can use the tax return from the prior year (almost always showing a lower income) to establish your income for IDR purposes. And if something happens to your income that causes it to fall, you can use a different method of establishing income that year. You can have your cake and eat it too when it comes to certifying your income.
#8 Consider Swapping to PAYE If Your Debt-to-Income Ratio Is Low
One disadvantage that REPAYE and now SAVE has when compared to the older PAYE program is that there is no cap on your payments. If you make more, you have to pay more, even if that payment is more than it would be under the standard 10-year repayment plan. That’s not the case with PAYE. So, some docs change from REPAYE (and now SAVE) to PAYE about the time they finish residency to take advantage of that cap. PAYE, like SAVE but not REPAYE, allows you to file MFS. These are generally docs with relatively low debt-to-income ratios (owes $100,000 and makes $400,000, for example), not the preventive medicine doc making $150,000 while owing $450,000.
#9 Only Consider PSLF-Qualifying Jobs
Since you’re going to get an additional $200,000, $300,000, $400,000, or more in what is essentially tax-free income via PSLF, it should take a dramatically better job offer making dramatically more money from a private employer or group to cause you to pass on a PSLF-qualifying job. Consider that $300,000 tax-free may be like a raise of as much as $150,000 per year for someone going for PSLF. While it varies by specialty and by geographic area, it is possible for just about any doctor to take a PSLF-qualifying job. Most specialties are needed at VAs and in the military, and all are needed in academia. There are plenty of others out there, too. More seem to show up all the time as the PSLF requirements get loosened. Even doctors contracting with a 501(c)(3) in California and Texas are qualifying.
If you need help sorting through all this (or are considering something like the 20-25 year taxable IDR forgiveness options), definitely consider booking an appointment with our highly recommended StudentLoanAdvice.com service. Just a few hundred dollars may save you hundreds of thousands (the average client saved $191,000 last year) and provide the peace of mind that you’re doing the right thing with your student loans.
More information here:
This is great, isn’t it? All these doctors can now go to school for what appears to be dimes on the dollar.
Well, there are some downsides. Most of them are best described by the economic (not ethical) term “Moral Hazard.” Moral hazard is an economic term that refers to the unintended consequences of a certain law or policy. When faced with different incentives, people make different decisions. Here are some of the downsides of these generous federal loan policies.
#1 People Get Mad
As a general rule, people get angry when they find out their hard-earned tax dollars are going to the wealthy. Whether doctors are wealthy or not, most people don’t consider them in need of government assistance to the tune of several hundred thousand dollars. Via their politicians, they are likely to cause rule changes that could surprise indebted doctors, especially if they are not grandfathered in. Perhaps PSLF goes away for graduate loans, or it becomes means-limited.
Remember the Biden Administration forgiveness plan (struck down by the Supreme Court) where you were ineligible if you had an Adjusted Gross Income of more than $125,000 ($250,000 married)? That could easily be applied to PSLF, causing doctors to want to work less in that 10th year or to make more tax-deferred contributions to stay under the income limit. There are a lot of people in this country who paid for their college themselves or didn’t even go to college because they couldn’t afford it. Don’t underestimate their anger when they find out you received $400,000 in PSLF.
#2 Tuition Skyrockets
Since students don’t have to actually pay the tuition themselves, there is very little to keep schools from continuing to jack it up like crazy. The easy accessibility of student loans is clearly a major contributor to the skyrocketing tuition prices over the last few decades. While that might not affect you if you actually get PSLF, there are plenty of people who won’t get PSLF. The higher tuition affects all of them. Consider:
- People who pay for medical school using family money
- People who pay for medical school through their own work and that of their spouse
- People who actually pay back their loans
- People who go to schools (Caribbean) where they can’t get federal student loans
- People who don’t match
- People who can’t get a PSLF-qualifying job
All those people are hurt by generous student loan programs that cause tuition to rise.
#3 People Take Out More Loans Than They Otherwise Would
Technically, you’re not supposed to borrow more than you need to pay for school. But let’s be honest, this is a pretty gray area. I often get questions from medical students planning to go for PSLF asking if they should take out even more debt than they otherwise would because they expect it to be wiped out. Maybe they’re investing that money, but they’re more likely just spending it either now or later.
#4 Fewer People Try to Enroll in the Free Medical Schools
There has been a movement where a few medical schools offer free tuition, at least to families below a certain socioeconomic standard. Who needs that when you can go for dimes on the dollar? For these schools, the demand (and thus the incentive for more schools to do this and even those who already doing it to continue doing it) goes down.
#5 Fewer People Enroll in MD/PhD Programs
I often say don’t do an MD/PhD program for the money; do it because you want an MD and a PhD. But let’s be honest, who wants to bust their butt for three or four years in a lab when you are being financially penalized by comparison for doing so? Fewer people than there used to be.
#6 Fewer People Enroll in Contract Programs
There are a number of “scholarship” programs out there that are really contracts with a certain government agency. The most common one is the military’s Health Professions Scholarship Program. But there are similar programs with the National Health Service Corps, the Indian Health Services, and the National Guard. Why should I agree to serve my country in the Middle East or Podunk USA when I can just stay on as faculty in a great city, make twice as much money, and get a similar educational benefit? I wouldn’t be surprised at all to see these programs struggle to recruit even more than they usually do in the coming years.
#7 Fewer Options to Refinance Student Loans
The student loan refinancing business has had a near-fatal wounding. This includes the lenders (like the folks in the chart below) as well as those who refer people to the lenders (like The White Coat Investor.) Those of us with a few gray hairs remember when it wasn’t possible to refinance student loans at all (see 2008-2012 or so for details.) That sort of situation could easily happen again if all of these companies go on to something else. Between payments being waived for 3 1/2 years, interest rates being set at 0% for 3 1/2 years, more generous PSLF provisions, better customer service from federal student loan servicers, and a rapid rise in interest rates afterward to rates similar or even higher than what federal student loans were at until recently, there have been precious few incentives to refinance federal student loans lately. The constant political proposals for additional forgiveness or even more generous repayment programs haven’t helped that business.
Five or six years ago, I had a discussion with the CEO of one of these companies and asked about the major risks to their business. He was very optimistic and felt that even if interest rates went up sharply, they would go up just as much on federal loans as on refinanced loans. I don’t think either of us had any idea of how much legislative risk there was in this business line. Now, these companies are still limping by refinancing private loans and the occasional federal loan where it still makes sense to do so (and, of course, many of them have other product lines just like WCI does). But it wouldn’t take much more governmental intervention in this space to see your refinancing options become much less attractive or even disappear completely.
If I had federal loans and expected to pay them back, I would at least check what my refinancing options were. And, of course, you can refinance private loans any time you can get a lower interest rate. Here are our recommended partners to do so:
† Bonus includes cash rebates and value of free course. Borrowers who refinance more than $60,000 in student loans using the WCI links will be enrolled in The White Coat Investor’s flagship course, Fire Your Financial Advisor for free ($799 value). Borrowers will still receive the amazing cash rebates that WCI has negotiated with each lender. Offer valid for loan applications submitted from May 1, 2021 through October 31, 2023. Free course must be claimed within 90 days of loan disbursement. To claim free course enrollment, visit https://www.whitecoatinvestor.com/RefiBonus.
Medical school may be more affordable now than it has ever been, despite the dramatically higher sticker cost. However, the policies that have led to this may have dramatic unintended consequences.
What do you think? What are you doing with your student loans right now? What rates are you seeing when you go to refinance? How much have you had forgiven via PSLF? Comment below!