Beware! Federal student loan payments resume soon

Editor's note: Since this article was written the Biden administration has extended the pause on student loan repayments by another 90 days. Payments will resume May 1, 2022.

On January 30th, 2022, the period of administrative forbearance on federal student loans is scheduled to expire, and payments will resume February 1st. With lockdowns being implemented across states during the first months of the COVID-19 pandemic, borrowers’ ability to work and pay their loans was significantly reduced. To provide relief to these borrowers, Congress passed the CARES Act which included provisions that suspended payments on student loans, dropped interest rates to zero percent, and suspended collections on student loans in default. Both President Trump and President Biden extended these provisions multiple times as COVID continued to impact people’s ability to work. However, at the time of writing this article, there appears to be no plan to extend the relief program again, and physicians who took advantage of forbearance will once again be expected to make payments on their loans.

Student loan debt weighs heavily on many physicians. The average physician leaving their training programs has an average debt balance of $241,600[1]. A priority for many physicians is to identify strategies to reduce their interest accumulation and/or reduce their monthly payments so they can focus extra resources toward goals like saving for a home, retirement, and their children’s college educations. The student loan forbearance program assisted many physicians with devoting resources towards these goals. With that program ending, now is a good opportunity to review options available to reduce debt levels or reduce payment amounts:

• Public Service Loan Forgiveness (PSLF)- If you practice medicine at a not-for-profit employer, you may be eligible for loan forgiveness. PSLF continues to be a hotly debated topic, and some have suggested capping forgiveness amounts or completely eliminating this program. However, as long as it remains a viable option, it is one worth considering for physicians with substantial student loan balances. Many physicians, when they first start as an attending, may have already made 5-7 years of qualified payments if they made payments during their residency and fellowship years. This means they may only have a few years to go to reach the 10-year (120 payments) mark. The months of zero payments count toward the 120 total payments needed for PSLF.
• Repayment Assistance Programs- Many states have loan assistance programs for physicians who practice in state facilities. On a national level, the National Health Service Corps (NHSC) offers repayment assistance to providers who practice in geographic areas with inadequate medical care. This program will pay up to $50,000 towards loan repayment. In 2022, NHSC plans to make approximately $3,500 new awards to health professionals serving rural and underserved communities. The National Institutes of Health (NIH) will repay up to $50,000 of loans to professionals who agree to conduct medical research in needed fields.
• Loan Refinancing- For physicians who work at a for-profit company such as a private practice or private equity group, PSLF won’t be available and refinancing is worth exploring. With interest rates near historic lows, refinancing can significantly reduce you interest rate and monthly payments. Lowering the interest rate on your loans may result in paying less over the lifetime of the loan. Credit score and income will likely determine how low of an interest rate a physician can get when refinancing.

Why should refinancing be considered? Reducing your interest rate will lower interest accumulation over the lifetime of the loan and the lower monthly payments can free up additional cash flows that can be used to pay down your loans more aggressively or towards other financial goals.

As a quick reminder, the general rule of thumb on whether you should put extra money towards your loans or save and invest that money is, if you believe you can earn a higher rate of return investing the money than the interest rate being charged on your loans, saving and investing the money is theoretically the better financial move. However, investment returns are rarely guaranteed whereas interest rates usually are. Your risk tolerance will likely play into which route you decide to go.

Finally, your personal well-being and mental health should be considered. If loans are causing significant anxiety or other health or lifestyle issues, your well-being should take precedent and paying extra towards the loans should be considered.

Determining which repayment option is best for you can be a difficult task. Everyone’s situation is unique, and many factors impact which student loan repayment strategy is most beneficial. Consult your financial professional to determine which option fits your needs best.

Jeff Witz, CFP® welcomes readers’ questions.He can be reached at 800-883-8555 or at witz@mediqus.com.

[1] Education Data Initiative. 2021. Average Medical School Debt [2021]: Student Loan Statistics. [online] Available at: <https://educationdata.org/average-medical-school-debt> [Accessed 15 November 2021].