Student loans are an import- ant part of financial planning for physicians and therefore require proper management. In this article we will lay out several key considerations
of student loans that will guide you
toward smart decisions for your financial future.
What is the difference between
federal loans and private loans?
Typically, federal loans have more
flexible repayment options and potential forgiveness. However, many
private loan refinance options now
offer significantly lower interest rates
than existing federal loans.
Is the interest paid on student
loans tax deductible?
If you are single and your modified
adjusted gross income is less than
$80,000 or you are married and earn
less than $160,000 combined, all or
some of your interest paid – with a
cap of $2,500 – is deductible. These
figures can change annually, so it is
best to refer to IRS publication 970
for the most up-to-date information.
How does the interest rate on
a student loan impact your
strategy towards paying it off?
Naturally, it is always advantageous
to pay off the higher interest rate
loans before the lower interest rate
loans. However, there are additional
factors to consider when developing
a plan to pay off your loans:
• Are the loans federal or private?
• Are you planning to be eligible for a
• What is your overall loan balance?
• Do you expect your income to increase over time or could it have major fluctuations?
Are all federal loans the same?
No. When you took out the loan,
what the loan was for, and what
your financial need was at the time
of the loan will dictate the type of
government loan that you have. The
three common federal loan types are
Stafford, Perkins, and Plus. For more
information about these types of
loans, visit www.studentloans.gov/
What are the most common
federal repayment strategies?
• Income Based Repayment (IBR) –
Generally, 15% of your discretionary
• Pay As You Earn (PAYE) – 10% of
your discretionary income.
• Standard Repayment – You have a
maximum of 10 years to pay off the
outstanding principal and interest of
• Extended Repayment – You have a
maximum of 25 years to pay off the
outstanding principal and interest of
Some considerations to keep in
mind about these repayment strategies include:
• There are no prepayment penalties
for government loans; therefore, you
have the ability to pay “extra” money
toward these loans to pay them off
• As your income increases, so will
the monthly payments on your IBR
and PAYE. However, the monthly payment on your IBR and PAYE will never exceed your Standard Repayment.
• Not all borrowers are eligible for
PAYE currently; however, by the end
of 2015 we expect that all borrowers
with “Direct Loans” will be eligible.
Direct loans are those made directly
by the U.S. Department of Education.
PAYE is the most advantageous plan
if you expect to be eligible for various
forgiveness programs, as this option
will require the lowest out-of-pocket
What is Public Service Loan
In October 2007, the PSLF program
was introduced by the U.S. Government under the College Cost Reduction and Access Act of 2007 (CCRAA).
This program offered forgiveness to
individuals that make 120 qualifying
payments on “Direct Loans.” There
are many government or not-for-profit institutions that are eligible,
but we highly recommended that
you verify, in advance, that your current employer fits the qualifications.
There is a lot of uncertainty related
to caps on forgiveness amounts and
eligibility requirements surrounding
PSLF; therefore, it is important that
you keep up to date on proposed
changes coming from our government.
Is it better to pay the minimum on
loans or aggressively pay them off?
If you are hoping to be eligible for a
forgiveness program, there is no reason to “overpay” now on your loans
only to have the balance forgiven at
some point in the future. On the contrary, if a forgiveness program is not
There are no prepayment penalties for government
loans; therefore, you have the ability to pay “extra”
money toward these loans to pay them off sooner.