Medical School Loan Repayment
The following article is provided by Brandon Barfield, Co-Founder and Regional Director of Doctors Without Quarters, LLC. Student loan related services are provided by Doctors Without Quarters, LLC, an affiliate of Larson Financial Group, LLC.
“Cash flow and debt management are intimately linked facets of a successful financial life for doctors. Debt is incredibly powerful. It can be leveraged to provide opportunities that cash flow would never provide, such as a dream home, and it can also devastate families through the stress it causes when payments cannot be met. As such, debt is a tool that should always be used cautiously.
If not, it can easily and quickly become a monkey that is impossible to get off of your back. It is important to note that while paying off debt quickly is often a positive decision, it should be balanced with achieving your other financial goals. We would be concerned if clients devoted the next ten years of their life to paying off debt at the direct expense of setting aside any savings for the future. Because cash flow is a limited resource, it is imperative that your family makes a strategic decision when determining how much of your income to allocate toward debt reduction versus savings.
When we refer to consumer debt, we are referring to loans outside of mortgages and student loans. Of these loans, the most problematic are certainly credit cards. This is the ultimate monkey. We have encountered physicians with as many as twenty-three credit cards. People often assume that they should pay off the cards in order of the highest to lowest interest rates. Instead, we often suggest a different approach. Rather than paying down the cards with the highest interest rates first, we often recommend that our clients focus on the cards that can be paid off the quickest.
Eliminating credit cards in this manner creates what we call the “snowball effect.” You gain more and more momentum along the way, until all of your credit cards have been eliminated. This approach actually decreases the amount of interest being paid in many circumstances, and psychologically it works better because the progress is visible. A final key to success is to begin saving the funds that are no longer required for debt payments once the target debts are fully eliminated.
Often, an even better approach to credit card elimination is a consolidation loan. By reducing the debts from many to one, the debt can often become more manageable. As long as new habits are established in conjunction with this strategy, this may be the most practical route to reducing the stress surrounding debts. The United States is still suffering through the economic after effects of the “great mortgage meltdown.” Banks have tightened up lending and lines of credit, but some great resources are still available for doctors. Just remember, it is more important than ever to maintain a clean credit report.
Most young physicians have substantial student loans. Our record loan to date belonged to one young couple that had over $680,000 in combined student loans. Although these loans can feel like a heavy burden, if your education has led to the opportunity for substantially higher-than average income in a career that you enjoy, it was a great decision.
When we asked one young physician how he felt about his student loans (with only a 1.6% interest rate), he responded, “They scare me to death!” Because the detailed intricacies of exactly how to structure your individual student loans are beyond the scope of this article, we thought it important to point out the basics that every indebted doctor and dentist should know about medical school loan repayment.”
Student Loan Fundamentals:
- Review how your loan portfolio is structured. If you have FFEL, Perkins, HPSL or LDS loans, consider consolidating these over to the Direct Loan Program. The latest federal repayment and forgiveness programs are only available for direct loans.
- If you have all direct loans, determine if consolidating is the best move. Consolidating can simplify your portfolio and complement an income-driven repayment or loan forgiveness strategy. On the other hand, not consolidating gives you the ability to target which loans you want to pay off first. Paying off higher rate loans first will cost you less money than paying on everything at once over a period of time.
- Be sure you understand how the income driven repayment plans (IDR’s) work. These programs provide substantial payment reductions during training, carry various interest subsidies / reductions, have their own loan forgiveness benefits, and qualify as accepted payment towards PSLF.
- Be sure you understand how the Public Service Loan Forgiveness program works. Many physicians work in the public service sector and do not realize it. Others think they are working their way toward loan forgiveness, but have not properly structured their portfolio.
- Consider refinancing private loans during training, or all loans post-training. Today’s market rates are significantly lower than the rates most physicians have on their federal loans taken out after 2006. Refinancing can significantly reduce the long-term interest costs.
- Residents with over $100k in student loans will usually benefit from strategic utilization of IDR plans and PSLF positioning. Residents transitioning to practice, along with other practicing physicians in the for-profit sector, can often save money by refinancing.
Note: This issue is usually no longer a factor upon graduation as your income should be too high to deduct the student loan interest anyway.
Physician Mortgage Loans
“Most physicians have four main questions regarding their mortgages:
- How much home can we afford?
- How much money should we put down?
- How should we structure our mortgage?
- Now that we have enough money, should we pay off our home, or keep our money invested instead?
An Affordable Home
To address the first issue, note that outside of divorce and lawsuits, little else can be as financially crippling to a physician as buying a home that is too expensive. Families in Phases I and II should avoid having a mortgage any larger than one to two times their annual income. However, this amount is considerably less than a lender will likely offer you for a mortgage. In other words, a bank’s pre-approval does not always equal a wise financial decision.
With the mortgage market in such flux over the past couple of years, physicians are asking more and more, “How much money should we have for a down payment?” Our short answer is that this is the wrong question. It goes back to the affordability issues described above. Provided your home meets the criteria suggested, it should not matter whether you put 5% or 50% down.
The only caveat is you might receive a lower interest rate by putting more money down. Going this route might make sense at times, but this issue has to be addressed on a case-by-case basis by evaluating these elements: cash flow, emergency reserves, asset protection issues, return on other investments, psychological attitude toward debt, other debts, propensity for risk, and other variables. In other words, an advisor’s advice is well warranted for this issue because it is more complex than simply acquiring a slightly lower mortgage rate.
Paying Off Your Home
At the other end of the spectrum, many of our doctors are in a position where they could liquidate their investments and pay off their homes, if they so desired. They often ask what their best course of action is in this respect. Our answer: It is a function of three elements working closely together:
- Client Economics
- Asset Protection
First, consider the economic component, as this is the easiest part. If you can earn a higher net return on your invested dollars than your mortgage is costing you (on a net-of-tax basis), why pay off the mortgage? This is especially true if you can accomplish this with the market risk involved.
However, in addition to economics, we realize that psychology is always involved with debt. No client has suggested that they love debt, and wish they had as much of it as possible. Even though the economic and protection factors may suggest that maintaining a mortgage makes the most sense, if it will cause you to lose sleep, we suggest you pay it off.
Finally, because people can become so emotionally attached to their homes, asset protection must be considered in the decision-making process. Some states, like Iowa and Florida, provide unlimited asset protection for home equity, which makes it very difficult to lose your home in a lawsuit or bankruptcy in these states.(3) Along similar lines, Texas provides unlimited asset protection, but only if the property is less than one hundred acres.(4) What a great law that only Texas would have. (5) However, other states like Missouri, Indiana, Michigan, Tennessee, Colorado, California, and Ohio provide very little protection of home equity. (5) (6) If you live in such a state, maintaining a mortgage can actually help reduce the risk of losing your property in the event of a lawsuit. Understanding how your state treats home equity, from an asset protection standpoint, is an important variable in choosing the best physician mortgage loans.”
(1) Bureau, U.S. Census. U.S. Census Web Site. [Online] [Cited: 2011 8-June.] http://www.census.gov.
(2) Kirwan, J.D., LL.M. Adam O. The Asset Protection Guide for Florida Physicians: The Ultimate Guide to Protecting Your Wealth in Difficult Economic Times. Orlando, FL : The Kirwan Law Firm, Updated and Revised for 2010.
(3) 10 acres for urban areas, 100 acres for rural areas.
(4) Adkisson, Jay D. and Riser, Christopher M. Creditor-Debtor State Exemption Chart. Asset Protection Book. [Online] [Cited: 2011 8-June.] http://www.creditorexemption.com.
(5) Riser, Christopher M. and Adkisson, Jay D. Asset Protection: Concepts and Strategies for Protecting Your Wealth. New York, NY : McGraw-Hill, 2004.
Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.
The information provided is for informational purposes only and should not be construed as a recommendation or advice. Further, this is not an offer to buy or sell securities or other products and services of Larson Financial Group or its affiliates Please consult an appropriate investment professional regarding your specific needs.