There are a fortunate few who graduate medical school without incurring any debt. This is often accomplished through financial aid, academic scholarship, military service, or parental assistance.

Then, there are the rest of us walking this earth burdened with mounds of student debt, for whom this post was written. Please note that it is not financial advice nor should it be used as a substitute for professional financial services. The objective of this piece is to simply educate medical students about student loans so that they may make informed decisions to reduce their debt burden. To learn more about the recent student loan forgiveness initiative, check out this post on the Student Debt Relief Plan.

How Much Should I Take Out For Med School Loans?

For most of us, student loans are necessary for tuition and living expenses while in medical school. Due to the interest on the loans, it is usually a good idea to accept only what is needed, and not much more. Despite this, I’ve heard stories of many financial aid offices offering and even encouraging larger loans.

The most economical path is to take out what is necessary to cover living and tuition costs, with a little extra for a rainy day. Avoid inflating your lifestyle just because there is more money available to borrow—remember you will have to pay the money back with interest! In fact, according to AAMC data, the annual cost of attending medical school varies drastically, from $33,000 to $91,000 per year. The large variance in costs is only in part due to tuition. There are other significant but oft-forgotten costs such as fees, educational supplies, cost of living, and varying amounts of scholarship and/or financial aid offered to students.

Physicians, in theory, have relatively stable jobs with higher than average incomes, but most young physicians graduate with a mountain of student debt, averaging over $207,000 for medical school debt alone! Learning about the types of loans offered may help you choose the correct loan for you and hopefully mitigate your financial burden.

Federal vs. Private Loans

Federal Loans

Pros

1. – No credit check is required. Federal student loans are available to you as long as you are pursuing education beyond high school.
2. – For students who qualify for subsidized student loans, the federal government pays the interest on your loan while you’re in school, saving you money in the long run.
3. – Student loans are disbursed at a fixed rate, meaning the interest rate for the loan will not change.
4. – Payments are not required while in school.
5. – Several repayment plans and options are available.
6. – Potential advantages include forgiveness, forbearance, and zero interest.
7. – Loans can be discharged if the borrower passes away.

Cons

1. – You will have to fill out a FAFSA form to determine eligibility for federal student loans. 
2. – Not all borrowers qualify for subsidized student loans.
3. – There is a limit to how much you can borrow.
4. – Defaulting on loans will ruin your credit, leading to a potential loss of income. The government can also garnish your salary.
5. – Most federal student loans will incite loan fees when disbursed, decreasing the loan reward amount. You will still be responsible for paying back the entire amount borrowed including fees. 

Private Loans

Pros

1. – Borrowers can generally borrow more to cover the full cost of education
2. – Sources of loans include banks, credit unions, and other financial institutions, and borrowing money may have an easier application process than applying for federal loans.
3. – Interest rates are based on credit, and may reward you or your cosigner for excellent credit with lower rates.
4. – Statute of Limitations: Unlike federal government loans, if you default on your student loans, after 3-10 years (varies from state to state), lenders may be unable to force you to pay back the loans. Your credit will be affected, however. 

Cons

1. – Interest rates are more likely to be variable and may increase over time.
2. – Payments commonly start while still in school.
3. – Payment plans are less flexible, and borrowers usually won’t benefit from federal zero-interest periods, forbearance, or loan forgiveness programs.
4. – May require a cosigner. Debt is also not always discharged after the death of the borrower or the cosigner.

Types of Federal Student Loans Available in 2022

Stafford Loans/“Direct” Stafford Loans

These are the most common student loans currently being issued to cover the cost of higher education as of the time of this writing. For graduate and professional degree students, only Unsubsidized or Consolidation (and not Subsidized) loans are available. 

Health professional students may borrow up to $40,500 per year in direct unsubsidized loans. The aggregate borrowing limit is $224,000 and the fixed interest rate for the 2023-2024 academic year (for loans first disbursed between July 1, 2022, and June 30, 2023) is 6.54%. The loan fee is 1.057%. 

Grad PLUS Loans/Parent PLUS Loans

Borrowers are issued Grad PLUS loans after they have exhausted their Stafford loans to cover tuition. If the loans are issued to a parent, they are referred to as Parent PLUS Loans. These loans have higher interest rates than Stafford Loans and require a credit check from the U.S. Department of Education.

Limits on Grad PLUS loans are the cost of attendance minus other aid. The cost of attendance includes tuition, fees, books, supplies, room and boat, transportation, and personal expenses, and is determined by the school. For the academic year 2023-2024, direct PLUS loans have a fixed interest rate of 7.54%, and an origination/“loan fee” of 4.228%.

What Are the Repayment Options for Federal Loans?

Repayment plans for federal loans are generally divided into two categories: “traditional” repayment plans and income-driven repayment plans.

Traditional Repayment Plans

Standard Repayment

1. 1. Assumes a 10-year repayment term 
2. 2. Default Plan unless another plan is chosen
3. 3. Requires a fixed monthly payment, usually has a lower interest cost

Extended Repayment

1. 1. Assumes a 25-year repayment term. Must owe more than $30,000 to qualify
2. 2. Reduces monthly payments due to longer-term loan repayment
3. 3. Over time, may cost borrowers more due to more interest paid over a longer term

Graduated Repayment

1. 1. Assumes a 10-year repayment term
2. 2. Payments start off smaller and increase after 2 years
3. 3. May result in higher costs than the Standard Repayment plan, but accounts for potentially lower income during the first two years of residency 

Income-Based Repayment Plans

Based on a median medical school debt of $200,000 at a 7% interest rate, monthly payments owed for traditional payment plans can cost approximately $2400 per month. This can quickly become unaffordable, especially for residents usually taking home less than $4000 per month who still need to pay for rent, living/work expenses, and sustenance.

Payments under income-based plans are based on a percentage of discretionary income and can cost much less per month, usually in the $100-$500 range. A major con of this route is that the payments will do nothing to address accruing interest, meaning that the loan will continue to grow during residency. However, they are an option for the borrower who has no other viable means to keep up with a traditional payment plan.

Income Contingent Repayment

Payments are 20% of your discretionary income. This plan can be used with Parent Plus loans after they have been consolidated. 

Income Based Repayment (IBR)

For new borrowers after July 1, 2014, payments are capped at 10% of discretionary income. Payments are also capped at the standard 10-year repayment plan level. Interest is not capitalized until you leave the program, but there is no limit placed on the interest capitalized. Interest Capitalization is when unpaid interest is added to the principal amount of the federal student loans, effectively increasing the principal balance of the loans. From then on, the interest rate is charged based on the higher principal balance.

Borrowers must prove partial financial hardship. In order to qualify for this, your monthly payment in income-based repayment plans must be lower than the standard 10-year repayment plan. 

For Dual-Income Households, the spousal income can be deducted from your payment calculation if you file taxes as “Married, Filing Separately.”

Pay As You Earn (PAYE)

Similar to IBR, payments are 10% of discretionary income. Payments are capped at the standard 10-year repayment plan level. The advantage PAYE has over IBR is in regard to interest capitalization. Interest is not capitalized until you leave the program and the amount capitalized is limited to 10% of the loan balance. 

For Dual-Income Households, the spousal income can be deducted from your payment calculation if you file taxes as “Married, Filing Separately.” Partial financial hardship must also be demonstrated.

Revised Pay As You Earn (REPAYE)

Payments are capped at 10% of discretionary income. Unlike IBR or PAYE, you cannot separate your spouse’s income from your student loan payment calculation. 

The advantage REPAYE has over IBR and PAYE is that interest is partially subsidized for unsubsidized loans. This means that, even though paying 10% of discretionary income monthly means that interest continues to build on the loan every month, half of that interest amount is waived, effectively lowering the interest rate for most residents. Additionally, partial financial hardship is not required to be eligible for this program.  

Loan Forgiveness Programs, Deferment, and Forbearance

The aforementioned income-based repayment plans all have their own forms of loan forgiveness. Generally, loans are forgiven after 20-25 years of payments. Anything forgiven is liable to be taxed. Within the terms of the repayment plans, these built-in forgiveness plans are often not the most financially advantageous, and loans are likely to be paid off before borrowers can qualify for forgiveness.

Public Service Loan Forgiveness (PSLF) is one of the most discussed and popular forgiveness programs that appeals to most doctors. Forgiven loans are not taxed, and are available after 10 years of qualified payments (120 qualifying payments). The requirement is that the physician must be directly employed full-time by a non-profit 501(c)3 while making 10 years of payments in an eligible payment program (an income-driven repayment plan). Loans must be in the form of Direct Loans.

Additionally, until October 31, 2022, borrowers may receive credit for payments that did not previously qualify for PSLF. 

What is Deferment?

Deferments are given in 6-month increments by your loan servicer. If you, like most graduate and professional students, have unsubsidized loans, they will continue to accrue and capitalize interest during the deferment period. Subsidized loans will not accrue interest during this time. Eligibility requirements may be quite restrictive, and many residents will not qualify. 

What is Forbearance?

Forbearance is a 12-month pause on payments. It may be easier to qualify for than a deferment. Resident doctors can qualify for “mandatory” forbearance as medical residency qualifies as an extenuating circumstance that makes them eligible for forbearance. Subsidized and unsubsidized loans will continue to accrue interest and will capitalize once the forbearance period is over. 

Resident doctors may choose forbearance during residency because they don’t want to deal with student loan debt while living through a difficult and formative period of their training. They may plan to pay back aggressively when they become attending physicians. Ultimately, this will cost them more money in the long run due to the rapid loan growth in the forbearance period.

Both Deferment and Forbearance, due to the rapidly accumulating loan, should only be considered in drastic circumstances. Most often it is recommended to try to continue payments via an income-driven repayment plan if possible, and potentially qualify for forgiveness down the road.

Should I Refinance My Med School Loans?

Refinancing a loan essentially means a new loan is created with a private lender, with a new interest rate. The private lender pays off your current loan, and they are now your new loan servicer. Refinancing your loan may be a good option in order to qualify for a lower interest rate and lower monthly payment. If you have private loans, it is generally a good idea to refinance your loans if you can get a lower interest rate and a better monthly payment. 

Refinancing may be a good option for physicians transitioning to a high-paying, private practice position who want to aggressively pay off their loans under more advantageous terms. However, if you have federal loans, and are hoping to qualify for PSLF or another federal loan forgiveness program down the line, you should not refinance your federal loans with a private lender, otherwise, you will not qualify for the forgiveness program.

Another factor to consider is that during the COVID-19 pandemic, many resident physicians and attending physicians who elected to privately refinance their federal loans missed out on the benefits of the temporarily paused interest accrual and temporary suspension of payments, and ended up paying more to private loan refinancers than they would if they had maintained their loans with the federal government. In this situation, of course, hindsight is 20/20, and these kinds of public health disasters being unprecedented make it difficult to factor them in while making the decision to refinance. Therefore, the decision to refinance your loans should be carefully considered and tailored to your personal situation.

In Summary

The world of medical school loans can be overwhelming and confusing. During your residency training, your focus should primarily be on honing your skills as a future physician and mastering your craft. Hopefully, knowledge of the loan basics can empower you to make the best financial decision for yourself so that you can pursue your passion within the field of medicine without being weighed down by financial factors.

Further Reading

• Managing Your Finances Through Med School and Beyond
• How to Pay for Medical School in the Real World
• Can I Get My Med School Loans Forgiven in 10 Years?
• How to Change Financial Education in Med School
• Money & Med School: Making Sense (and Cents) of a Big Investment

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