Paying off student loans after completing medical school can feel confusing, frustrating, and overwhelming. However, waiting to pay student loans after residency could increase the interest accrued on the principal balance owed.
As interest accrues, the overall balance becomes much larger than the initial amount borrowed. Thankfully, there are payment options which reduce the monthly amount due to make payments more affordable.
Make Payments During Residency
Making regular student loan payments reduces the total amount of money owed, as well as the accrued interest. Most student loan payments are automatically applied to interest accrued during the previous month. Anything left goes toward the principal balance.
Income-Driven Repayment (IDR) Plans
We understand residents have other financial obligations as they complete their programs. We also understand residents may have little discretionary income to put towards student loans after meeting basic needs. Consider looking into income-driven repayment (IDR) plans to create more affordable monthly payments. Student loans from private lenders are not eligible for IDR plans.
Income-driven repayment plans are ideal for residents unsure if they can afford to make regular federal student loan payments. They set monthly payments at an affordable rate based on a borrower’s current income and family size. The payment amount under IDR plans is calculated based on a set percentage of the borrower’s discretionary income.
Borrowers can choose between four IDR plans. However, most residents prefer the Pay as You Earn (PAYE) and Repay as You Earn (REPAYE) plans. Both options use 10% of a borrower’s discretionary income to calculate payments and forgive remaining balances after the repayment period.
In 2023, the Department of Education announced the Saving on a Valuable Education (SAVE) plan would replace REPAYE plans. SAVE eliminates all remaining interest on subsidized and unsubsidized loans after each monthly payment is made. This prevents loan balances from growing due to unpaid interest. For example, a student who has interest accruing at $100 a month but their payment is only $75 per month, the $25 remaining interest will not be charged.
SAVE also excludes spousal income for married borrowers who file their taxes separately. The SAVE plan is in effect now with additional benefits effective in July of 2024.
Those already enrolled in the REPAYE plan were automatically switched to SAVE when it became available. Borrowers entering repayment can apply using the IDR application and select the option for their loan servicer to place them in the lowest monthly payment plan, which will usually be SAVE.
Repayment periods can last 20 years under the PAYE plan and up to 25 years under the SAVE plan. The goal of both plans is to have the lowest monthly payment possible so residents can afford regular payments. This is an excellent repayment option for residents until they transition to attending physicians.
Once residents become acting physicians, they can consider other options such as Public Service Loan Forgiveness.
Public Service Loan Forgiveness (PSLF)
The Public Service Loan Forgiveness (PSLF) program forgives the remaining balance on federal direct loans. Staying aware of the PSLF program is important for those currently in a residency program or fellowship to ensure loan repayments are affordable and eligibility criteria are met.
To be eligible, borrowers must:
- Have federal direct loans or consolidated other federal loans into a direct loan.
- Be employed full-time by a government organization at any level or a qualifying not-for-profit organization. Doctors serving as full-time volunteers for the AmeriCorps or Peace Corps also qualify for the PSLF program.
- Repay loans under an IDR plan or a 10-year Standard Repayment plan.
- Make 120 separate qualifying monthly payments.
Lump sum payments can count as qualifying payments once borrowers certify their employment for a 12-month period, however, understand that each lump sum payment will only count as one qualifying payment and any additional payments made during the time in which you are “paid ahead” will not count towards the 120 qualifying payments. In other words, paying extra will not shorten the eligibility window of 10 years. To ensure qualifying monthly payments are made, graduates with direct loans, should enroll in automatic bill pay with their lender. Once borrowers have successfully met the PSLF’s eligibility requirements, any outstanding direct loan balances are forgiven.
Graduates with other federal loans should speak with their lender about consolidating them into a direct loan. This may allow them to be eligible for PSLF. We recommend graduates speak with their lender’s PSLF experts to learn more about their options. Most lenders have a dedicated phone number for their PSLF experts. These experts can help graduates explore plan options and select the best one for their specific situation. Student loans from private lenders are ineligible for PSLF. Those with loans from private lenders should reach out to their lender to discuss repayment options available.
Employer Sponsored Loan Repayment Programs
Employers may use student loan repayment programs as incentives to attract and retain physicians. These programs typically have eligibility requirements which can require specific lengths of employment, job performance, and loan types. These programs are typically applicable to physicians working to pay off federal loans.
Not all employers offer student loan repayment programs. However, we recommend carefully reviewing eligibility requirements to ensure existing student loans are eligible. Private student loans may be ineligible for employer sponsored loan repayment programs.
Next Steps
With a little budgeting and repayment plan research, aspiring physicians can manage their medical school debt. Before graduates start repaying their loans, they should understand their loan terms and explore different repayment options. This helps graduates pick the option best suited to their current situation and needs.
Ready to take the next step towards your medical degree? Get started today with the American University of the Caribbean School of Medicine.
This post was medically reviewed by Dr. Joseph Annunziata, MD (’13)
