Student Loans: Entering Residency

A short instructional video by Wes Read, CPA, CFP® advising medical graduates entering residency on how to configure and manage federal student loans. The presenter recommends enrolling loans in an Income-Driven Repayment (IDR) plan (Pay/Repay) to start forgiveness timelines, reduce payments and interest accrual, and possibly receive an interest tax deduction; he contrasts IDR with deferment and forbearance and explains trade-offs for subsidized vs. unsubsidized loans during residency.
Chapters
We're going to take a few minutes here and talk specifically for those of you who are going into a residency. If you're not going into a residency, you could probably just skip this module all together. But there are five things I want you to consider going into a residency and or five points I want to mention here. The first point has sort of three elements to it or three options. The first point is what is the best loan payment for you to be in when you're entering residency or the best configuration of your loans? I will say not just the best payment type, but the best configuration. Well, the best choice is that you convert all your loans into an IDR plan, such as Pay or Repay. This will one, and this is very important, start the forgiveness clock on those loans so they count toward your forgiveness years, 20 years or 25 years for an IDR payment plan and of course, 10 years for the PSLF. But number two, it will keep your payments really low. As a resident evil, you're not out making $150,000 a year. You're making, I don't know, you're making 30, 40, 50,000, maybe $60,000 a year as a resident. And 10% of that, even though it's still money coming out of your pocket, it should be low enough that you can sustain that. And just the benefits are that you get to count those years toward that forgiveness clock. You have less interest that's accruing to the balance of your loan as well. And remember when you come out of residency and then that there's a potential that that capitalizes also. So the third thing is to allow a tax deduction. It allows a tax deduction on the interest you pay, assuming your income is low enough. Now, for most of you in a residency, you saw in our previous module about the income phase out, if you're single, it's 70,000. If you're married, filing joint, it's 140,000. That's going to change a little bit every year, but as of 2020, that's what it is. If you're earning less than that as a resident, then you'll get a tax deduction on the interest that you do pay. So let's say you come out of pocket $3,000 for the year, you may get a $700 tax deduction or $1,000 tax deduction or $500 tax deduction for that interest that you paid. So the easiest thing, which is going to be the next best choice, is that you go on deferment. And this is what I find Typically.
Graduates who are going into a residency program are doing, but it's only because they're not thinking sort of long term. And the benefits of staying on an IDR plan during those years of residency, but deferment, you make no payment, which sounds great, but you don't get any of the benefits listed above. And under deferment, any subsidized loans won't accrue interest for up to three years of residency. So remember that if you have a subsidized loan, which is your undergraduate.
Subsidized Stafford loans, then you won't have to pay interest on that and it won't accrue interest for up to three years of residency. But your other loans, like your normal graduate unsubsidized loans, they're actually going to continue to accrue interest. The last choice would be forbearance. And forbearance is that simple phone call with your student loan servicer, hey, I can't pay because I'm in residency. Sure, no problem. Boom. They make that happen easy, but not the right choice. We don't recommend this since your loans will continue to accrue interest at the, at the highest level. And whenever you come out of forbearance, it will always capitalize. Now, you're going to pay interest on that accrued interest and you don't receive any of the benefits of starting that forgiveness clock either. So at least do deferment instead of forbearance. But our first choice is an IDR plan. Pay or repay. Now, let's talk about this. This was the second part of what I wanted to mention is unless.
Really, no unless, there's really no reason that I can think of for you to be on IBR, and especially not ICR during your residency years, pay or repay are going to be your better options. Pay is better if you know you're going to do the PSLF program because your residency is going to count toward the 10 years. And then when you get out, you can now remember there's some other implications here, but you can do married filing, joint married filing separate to exclude your spouse's income in determining what is your income for calculation of the 10% max payment. And any capitalized interest above 10% of your balance will be paid for by the, by the government. Now, when you come out of deferment out of your residency, I believe that that's going to capitalize. Well, at least with pay, anything above 10% will be paid for by the government. So if you're just determined on having loan forgiveness. And you think that's going to be your career path, that's going to be your sort of pathway to getting out of student loans. Pay is probably going to be your best option. However, if you think I'm going to come out of residency and I'm going to hit it out of the park and I'm 10% of my income is going to be pretty high and I want to own this, I want to pay these off and be done with it. Repay is a good option because you'll be able to leverage the government to pay for 50% of the interest that you never paid while you were in the residency program. And perhaps those early years out of dental school when your income is lower, the government will pick up 50% of that interest. So eventually, as your income rises way up and now you have more to pay, the balance on your student loan will be less than under a pay plan. The repay plan will be better for those students who want to earn higher income and pay off their student debts. Really important information if you're going in to your residency programs to consider with your student loans.










