The other day a work friend of mine and I were chatting about student loans and the current forbearance for student loans. They are working in academia partly to get Public Service Loan Forgiveness (PSLF), which pays off all loans after 10 years of working for a qualifying charity or government organization. Unfortunately, they didn’t contribute during their residency years, so instead of having 7 years of academic work to reach PSLF, they have the full 10 years.
We were lamenting the fact that new house officers and graduates are told very little about how to manage their financial life. I gave a presentation to our incoming house officers in 2022 on how to manage their finances, and wanted to share some top tips with you all. If you expect to have significant student loan debt on graduation (more than 2x your income), these tips are essential for you.
- If at all possible, go to an academic internship and residency. Your 4+ years of training can be credited towards PSLF, reducing the number of years you would “need” to work for an academic institution to get your debt forgiven.
- DO NOT PUT FEDERAL LOANS INTO FORBEARANCE OR DEFERMENT. The system automatically sets up deferment for your first 6 months. You will need to consolidate your loans in order to start paying as soon as you can. Here’s why. If you are doing an income-driven repayment (IDR) scheme for student loans (IBR, PAYE, REPAYE, PSLF), your payment is calculated on your discretionary income. Discretionary income is equal to taxable income minus 150% of the poverty line ($19,320 for a single person in 2021). Average intern salary was $35,423 in 2020 and you only earn money for the half of the year you’re an intern (the other half of the year you were finishing school). The standard deduction for a single person was $12,550. So your 2020 taxable income would have been $35,423/2-$12,550 = $5,162. This is below the poverty line, so your discretionary income is $0. PAYE charges 10% of discretionary income. $0 * 0.10 = $0 per month.
- Basically, you can get credit towards paying off your loans by paying zero dollars. So for PSLF you will only have to work 9 years after your internship, and for PAYE you’ll only have to work 19 years, as opposed to 10 years and 20 years. You get 6 months of credit for FREE.
- After the new year of your intern year, your income is still probably going to be very low. You can get credit towards PSLF or other IDR by paying very small amounts of money. It’s better to make payments when your salary is low and accumulate the credits for those payments rather than defer payments and have more payments to make later when your salary is higher, because your payments will be much higher.
- For new graduates (or anyone, really) doing IDR with a higher salary (average about $100k in 2021), put money into tax-deferred retirement plans (401k, 403b, IRA). IDR is calculated based on your _taxable_ income. Money put into a 401k isn’t taxed. Here are two examples.
- No 401k contribution. $100k (salary) – $12,550 (standard deduction) – $19,320 (150% poverty line) = $68,130 (discretionary income). For PAYE, $68,130 * 0.10 = $6,813/12 = $568 per month.
- 401k max out. $100k (salary) – $12,550 (standard deduction) – $19,320 (150% poverty line) – $20,500 (401k contribution) = $47,630 (discretionary income). For PAYE, $47,630 * 0.10 = $4,763/12 = $397 per month.
- For everyone, if your salary is relatively lower than you expect it to be in the future (all house officers, some new graduates), contribute to a Roth IRA if at all possible. Your tax rate in internship/residency will be incredibly low. For a Roth IRA, you pay taxes now (when your tax rate is very low) and that money never gets taxed again (i.e. in the future when your tax rate goes up as you earn more money).
That’s it- it’s not a lot, but it can be a little bit complicated. If you need help, be sure to seek out good advice at a fair price- a flat fee financial advisor who specializes in student loan issues. But you need to make these decisions ASAP. Not figuring these steps out can cost you hundreds of thousands of dollars. Use your time in advanced training to your maximum advantage financially!