Student Debt & Medical Professionals

Aug 24, 2018

Student loans have become much more of a necessity for funding educational costs over the past decade. And it is relatively easy to qualify for student loans to help pay for tuition and related educational expenses. Most private and federal student loans require the borrower to:

  • Be a U.S. citizen or permanent resident
  • Have a high school diploma or equivalent, such as a GED or certificate from a homeschooling program.
  • Enroll in an eligible school.
  • Fill out the Free Application for Federal Student Aid.
  • Maintain a 2.0 GPA
  • Have a part-time student status or more
  • Have a cosigner

Furthermore, the borrowing limits for student loans vary from federal programs to private lenders. Depending on the private lender, creditworthiness may not be a factor in determining the maximum or annual amount of credit that can be extended.

What this means for most students is managing debt must be done from the first year of undergraduate pursuit through the final year medical, professional, or graduate school. The total accumulation of student debt can vary widely from private to public universities and private to federal lending programs and many students feel trapped, accumulating debt to finish their degree with few alternative funding choices available. When finished with their education, graduates expect that the degree will allow you to pay them back in full, with no hiccups. But the reality is not that simple…

Student Debt in the Medical Industry

Becoming a Doctor has many financial benefits; however, it almost always comes with student debt. The American Medical Student Association estimates that over 86% of graduates in the medical field carry student debt. In 2016 the average student medical debt was $190,000. Of the total graduates in 2016, 25% of them had a student debt of over $200,000.

Many medical students that are carrying large amounts of this debt are choosing higher-paying specialties to pay off their loans. As student debt increases and tuition rises, it could lead to a shortage of physicians in fields like primary care and physicians for under-served areas.

Student Debt in the Dental Industry

According to the American Student Dental Association (ADSA) in 2016 about 80% of dental school graduates had over $100,000 in student debt. 30% of the student debt holders had over $300,000 of debt. The average amount of student debt for dental school graduates in 2017 was $287,331. This is almost $100k more than the medical industry average and $250k higher than the total average student debt.

With a large amount of student debt in the dental industry the ADSA is working with Congress to find solutions. They are pushing for:

  • Increased tax deductions for student loan interest, student scholarships, and loan repayments
  • Reducing federal student loan interest rates
  • Forgiving the loans of dentists practicing in underserved areas
  • Creating tax deductions and rebates for dentists working in underserved areas
  • Protecting private student loan borrowers

Large debt and the effects

Large student debt balances have become more of a reality for many graduating professionals and the trend is continuing to increases especially in the past decade. How your debt is managed can have long-lasting effects on building future wealth, planning for retirement, starting or purchasing a business, as well as cash flow and payments. Credit ratings and borrowing potential can also be adversely affected and limit the ability to purchase a home. It’s a lot to think about and important to make decisions on managing debt based on real numbers and illustrations.

Each individual is unique and each solution for managing student debt is unique. And, keep in mind there are many solutions from income-based repayment plans, refinancing, debt forgiveness, and combinations of these approaches that can help make sense for each individual situation. Understanding how each of these approaches can work for you is important in defining your overall strategy.

Medical Professionals and the Effects on the Practice

Despite the high income that is associated with a medical degree, many struggle to manage their debt. This will not only affect their personal lives but it has the potential to disrupt the business planning cycle of their practice.

With student debt comes monthly loan payments. And obviously, the higher the debt the higher the payments. If a practice participates in a Perpetuation Plan, (where younger doctors working in the practice purchase shares of the practice that older doctors own) student debt could disrupt that cycle. If a medical professional is struggling with student debt it holds them back from purchasing their intended shares. Many doctors rely on perpetuation purchases for retirement and extra income. If an owner had planned on their shares being purchased and the other doctor fails to follow through it has the potential to significantly harm his retirement plan. The effects of student debt are not solely carried by the debt holder.

Loan Forgivness

Most have heard of student loan forgiveness programs, especially if you have student debt. While these programs can be attractive on paper they may not be as beneficial as assumed too many debt holders. In general, student loan forgiveness applies only to specific Federal student loan programs which may not be inclusive of accumulated student debt.

Income based repayment plan

Income-Based Repayment was set up by the Department of Education for students that can't afford their monthly federal loan payments. According to the Federal Student Aid Office, such a plan “sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size.”

IBR plans set monthly payments according to “discretionary income”. This is calculated by subtracting the debt holders gross income, from 150% of the annual poverty line for a family of their size and the state they live in. The debt holder will pay 10-15% of their discretionary income to their loan. Furthermore, extending their payment period to 20-25 years depending on the amount and when the loans were disbursed.

Under an IBR plan payments are individualized to match income, cost of living, and family needs. If the debt holder still has a remaining balance after their 20-25 year payment plan, the loan has the potential to be forgiven.

Keep in mind, that the amount that is forgiven is usually taxed as income and the debt holder should be prepared to pay a higher income tax if their loans are forgiven.

Loan forgiveness for Medical Professionals

When concerning medical professionals there are many options available for loan forgiveness in exchange for service. Below are a few options:

National Health Service Corps

The NHSC program awards up to $50,000 to licensed health care providers such as a primary care doctor, dentist, or a mental or behavioral clinician. You must commit to working two years at an eligible site in order to receive loan assistance. Learn more here

Students to service program

This program is for students in their last year of medical or dental school. They can receive assistance in return for at least three years of service at an NHSC approved site. The debt holder can earn up to $120,000 in loan repayment funds. Learn more here

Indian Health Services Loan Repayment Program

This program encourages medical professionals to work in underserved, Native American and Alaskan communities. Participants must commit to two years of service in exchange for up to $40,000 of loan repayment. It allows the physician to participate in the health and well being of a medically underserved patient population. They will work with people that are “appreciative, deserving and need your expertise most.” Learn more here

PFSI Advantage

We have advised many clients on student debt and each situation is different. Paying off debt quickly gives more options to start building your life, wealth, and career. There are options available for refinancing, forgiveness, income-based repayment plans, and many others. Understanding how to leverage and combine each approach according to your financial needs is necessary.

We work with multiple banks and loan advisors. If you have any questions please reach out. We would be happy to assist you with your wealth building process. PFSI is one agency for ALL of your needs!

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