Debt Management
Indebtedness
Annually, the Association of American Medical Colleges surveys graduating seniors at medical schools concerning their medical education. One section of the survey, "Demographic and Financial Information," contains valuable data on medical student educational indebtedness. According to the 2009 AAMC Graduation Questionnaire, the national average level of debt for the 2009 medical school graduating class was $156,905 which includes both premedical and medical school debt. The average indebtedness level for 2009 graduates of the University of Minnesota Medical School was $166,667. The level of indebtedness of the 2009 AAMC Graduation Questionnaire respondents is reported in the following chart, along with data for the University of Minnesota respondents:
| Debt Level | Minnesota (%) |
All Medical Schools (%) |
|---|---|---|
| No debt | 6.2 | 13.8 |
| $1 to $24,999 | 2.7 | 3.2 |
| $25,000 to $49,999 | 1.8 | 4.7 |
| $50,000 to $74,999 | 0.9 | 4.6 |
| $75,000 to $99,999 | 4.4 | 5.6 |
| $100,000 to $124,999 | 8.0 | 9.7 |
| $125,000 to $149,999 | 8.8 | 8.7 |
| $150,000 to $174,999 | 14.2 | 14.1 |
| $175,000 to $199,999 | 24.8 | 10.6 |
| $200,000 or more | 28.3 | 25.0 |
Locating resources to finance your medical education is probably the most important financial priority while in school. Upon graduation, the loan repayment obligations incurred will take on significance. Decisions about current budgets and the indebtedness that they entail should be made with an understanding of loan repayment requirements. Furthermore, a systematic method for keeping track of loans will prepare you to select repayment alternatives that fit your needs and circumstances.
As you borrow, it is advisable to keep accurate records that include copies of the loan agreements and an updated list of all loans. The list should include information about the amount borrowed, interest rate, type of loan, when payments begin, and the type of repayment schedule required. Proper maintenance of loan records protects the borrower against any errors a lender may make in billing or crediting payments. It is suggested that you utilize the Loan Repayment Logs to help with this task. (See page 30.)
Each time money is borrowed, a new loan agreement or promissory note is signed. This note is a legal document and financially binds the borrower for repayment. Failure to honor the terms of the contract will negatively affect the borrower's financial future and credit rating.
Residency Salary Information
It is a good idea for borrowers to project the amount of their monthly payments against their anticipated income during residency training. For purposes of calculation, the following 2009 mean salaries for housestaff may be used:
Year 1: $47,458 minus $13,288 (taxes) = $34,170 net
Year 2: $49,337 minus $13,814 (taxes) = $35,523 net
Year 3: $51,363 minus $14,382 (taxes) = $36,981 net
Year 4: $53,432 minus $14,960 (taxes) = $38,472 net
Although these figures may seem generous in comparison with student budgets, please remember that it can be anticipated that approximately 28 percent of a resident's salary will go to pay Social Security and federal and state income taxes.
Students should deduct the amounts currently budgeted for living expenses from these reduced income figures. The remainder will be the maximum that will be available for making loan payments.
Physician Salary Information
According to the July 13, 2009 Modern Healthcare's Physician Compensation Survey, the following are 2009 average compensation ranges for physicians:
| Specialty | Salary Range |
|---|---|
| Family Practitioners | $166,848 to $212,032 |
| Internists | $179,958 to $222,377 |
| Ob/Gyns | $240,700 to $321,746 |
| Pediatricians | $150,000 to $217,000 |
| Cardiologists | $387,600 to $496,068 |
| General Surgeons | $287,520 to $369,898 |
Taxpayer Relief Act of 1997
The Treasury Department has published IRS Notice 98-7: Returns Relating to Interest on Education Loans which provides guidance to loan holders on the implementation of the student loan interest provision for tax year 1998. This provision allows qualified student loan borrowers to deduct interest paid on student loans up to a maximum amount. This deduction was phased in over four years.
The maximum deduction is $2,500.
Taxpayers may take the deduction only for the first 60 months of the loan's repayment period. The amount of the deduction is phased out for borrowers who have Adjusted Gross Incomes between $50,000 and $65,000 ($100,000 and $130,000 for joint filers).
Loan Repayment
The Medical School Financial Aid Office has computer software that can show the cost of repaying your educational loans in relation to your future income projections. Monthly payment amounts, payment beginning and ending dates, amount of interest, and total payments by loan type can be calculated.
For complete information as to deferment options, forbearance options, and other repayment types, set up an appointment with one of the Medical School Financial Aid counselors to go over your specific loan portfolio.
An example of the type of information available utilizing our computer software follows.
Assumption: Student will graduate in May 2010 and will begin a three-year residency. The student has borrowed a total of $175,000. The chart shows both a 10-year and a 30-year repayment period.
| Loan Program | Interest Rate |
Amount Borrowed |
Pay/mo. 10 yrs. |
Total Interest |
Pay/mo. 30 yrs. |
Total Interest |
|---|---|---|---|---|---|---|
| Subsidized Direct Loan | 6.8% | $51,000 | $587 | $19,429 | $332 | $68,693 |
| Unsubsidized Direct Loan | 6.8% | $106,000 | $1,565 | $81,857 | $887 | $213,261 |
| Perkins* | 5.0% | $5,000 | $53 | $1,360 | ||
| University Trust Loan* | 7.0% | $9,000 | $104 | $3,540 | ||
| Minnesota Medical Foundation* | 6.0% | $4,000 | $77 | $640 | ||
| TOTALS* | $175,000 | $2,386 | $106,826 | $1,453 | $287,494 | |
| *Perkins, University Loans have only a 10-year repayment; Minnesota Medical Foundation Loans have only a 5-year repayment. | ||||||
Repayment Options
Most federal loan programs are set up with a 10-year repayment plan. There are several types of programs available to students, such as graduated repayment and consolidation, that allow guarantee agencies, such as the Student Loan Marketing Association (Sallie Mae) and other eligible lenders, such as the Direct Loan Servicer, to pay off your existing student loans and create one new loan. You need to select a repayment plan prior to the time repayment begins. If you do not select a repayment plan, you will automatically be placed on the Standard (10 year) Repayment Plan. Following is information on a few of these programs:
Loan Consolidation
Loan consolidation is a process that allows a student to consolidate previous federal educational loans into one new loan. Consolidation is intended to help students manage their educational debt by offering services such as: reducing the monthly loan payment, enabling students to write one check per month to pay on their loans as opposed to a check for each loan, graduated repayment, a locked-in interest rate for the life of the loan, and the possibility of additional deferment time. The disadvantages of loan consolidation include the possibility of higher total debt from the extended repayment period and the possibility of a higher interest rate on the consolidation loan than on one or more of the individual loans. Students should consult the Medical School Financial Aid Office if they have questions about consolidation.
Extended Repayment Plan
With extended repayment (sometimes referred to by lenders as a Consolidation Loan), you will make fixed payments over a period of time that varies from 12 to 30 years. Because you, generally, take more than 10 years to repay your loans, your monthly repayment amount will be less than if you choose the Standard Repayment; however, you will pay more interest.
Graduated Repayment Plan
Your payments are lower at first and increase every two years. The repayment period varies from, generally, 12 to 30 years and depends on the total amount of loans you have borrowed. This plan might be right for you, if you expect your income to increase steadily over time.
Income Contingent Repayment Plan
Designed to give borrowers the flexibility to meet their student loan obligations without causing undue financial hardship. Generally, your monthly payment will be based on your annual Adjusted Gross Income (AGI) and the total amount of your Direct Loans. Your monthly payment will not exceed 20 percent of your discretionary income.
Income-Based Repayment (IBR) Plan
The IBR program "caps" loan payments at 15% of your income that exceeds 150% of the federal poverty guideline for your family size. A borrower can choose to participate in this payment plan for up to 25 years.
What does each plan cost as far as interest paid?
| Plan Type | Loan Amount | Monthly Payment | Total Repaid | Total Interest |
| Standard Repayment (10 years) |
$150,000 | $2600 | $307,000 | $157,000 |
| Graduated Repayment (10 years) |
$150,000 | $1300/$3000 | $319,000 | $169,000 |
| Income-Based Repayment (12.5 years) |
$150,000 | $1900/$2600 | $340,000 | $190,000 |
Note on Prepayments: All federally sponsored loans allow you to prepay part or all of your loan obligation at any time during the life of the loan without penalty. Prepaying can greatly reduce the total cost of your loan. Prepayments are credited to outstanding interest first, then principal.
Residency Repayment Tip: Just because you may qualify for and receive grace, deferment, or forbearance on your loans during residency does NOT mean that you shouldn't start to make voluntary payments during this period. Such payments will reduce the overall interest cost of your loans over time, and making these payments will NOT jeopardize your grace, deferment, or forbearance status while you are in residency.
