Most of the individuals I work with are young physicians, so I ofetn guide people through their student loans. I’ve spent months trying to understand the government student loan repayment logic (depending on the loan servicer, there is no logic!). In short, sometimes it isn’t logical, but breaking it down into two categories can help organize your plans for a smooth transition into being debt free ASAP.
There are two categories in the Student Loan Battle:
- Managing Student Loans
Unfortunately the government loans have the management component down with the many different repayment strategies, including deferment and forbearance. There’s even a glimmer of hope in student loan forgiveness, but just Google the news of “PSLF” (public service loan forgiveness), and you’ll find pretty much nothing but bad press and depressing stories. I say it’s unfortunate that the government loans are the best at managing student loans for one main reason: The loans are insanely complicated. To add to that, the loan servicer’s “customer service” is an oxymoron. There are many, many different loans (and they all work differently, too!) wrapped into a master loan shell. Which ones get paid? Which ones gain interest? Right after my wife’s fellowship, we were on an income-based repayment, and our payment was about $4,000 per month! The loans still accrued interest each month, even with such a giant payment! Our student loan servicing company couldn’t explain how the loans worked and why we were moving so far backwards with such large payments. They were incredibly happy and nice about it, but they couldn’t explain anything. We just got sent to the transfer portal every time we called, being transferred to one nice “customer service” representative after another. I read and studied about each kind of government loan for weeks. I already felt educated about the loans, but I needed more information. The student loans repayment method that worked in residency and fellowship didn't work for the next step. Short answer to the story is that for managing the student loans, the government loans can keep your costs down during residency and fellowship, but there’s still a price for that – interest accrual. From a cash flow perspective, the government loans have flexibility that other loans don't offer. As for repaying the loans (unless you're counting on the PSLF program), the government loans are just unfair.
- Paying Student Loans
For most residents and fellows, paying student loans isn’t an option, at least if you have kids. When I sniffed out the scheme going on with the government loans, the private sector had just opened up to no longer be monopolized by the government. We refinanced, and cut our loan payment by more than half, received a lower interest rate, and hit principal with our first payment (albeit by pennies). Please note that this is not an advertisement to refi your student loans, and if you're depending on the PSLF program to forgive your student debt, you never move to the "Paying Student Loan" category; you'll constantly manage your student loan until it's forgiven. The point is that the refinance freed up significant cash flow. We could put the extra $2K+ into the loan as an extra payment. Or we could create an emergency/opportunity account. Or we could create an emergency/opportunity account and keep funding this account until the balance of the emergency/opportunity account equaled the balance of the student loan, and when those balances crossed paths, we could liquidate the emergency/opportunity account and pay off the loan! Paying off the loan, all while controlling our liquidity! The private sector isn’t available to everyone due to credit scores, cash flow, etc. But for a repayment strategy, the private sector certainly helps keep the costs consistent. I have some really good calculators I’ve used and shared to help people understand when it’s a good time switch from managing student loans to paying student loans. Each decision on both managing and paying student loans are intensely personal and based solely on your personal situation.
At the end of it all, proper management of your student loans will lead to a quicker start after medical training. Don't let student debt drag you down as you're building your career. Plan your financial path and move forward!