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Manage student loan debt at every stage of a career
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Orthopedic surgeons who are finishing their training and starting their first jobs are often disappointed by the onerous burden of student loan debt. Given the increased costs of medical education, living expenses during residency and fellowship, duration of orthopedic training programs and interest rates allotted to students, it is typical for young orthopedic surgeons to embark on a career with debt loads of $200,000 to $500,000. Unless the debt is addressed properly, it may dramatically affect real savings, retirement planning, family planning and even an individual’s credit-worthiness later in life. High student loan debt is an unfortunate reality for many millennial orthopedic surgeons and possibly another contributor to personal and family stress, professional insecurity and financial hardship.
This scenario is not uncommon. According to the American Association of Medical Colleges, 76% of medical students who graduated in 2016 carried student loan debt. They had a mean debt of $189,165, which was a 5% increase from the debt of the prior year’s class. At a typical 6% interest rate on student loans, the average graduate faces a student debt burden of $268,000 upon completion of a 5-year residency and 1-year fellowship if the loan is deferred during training. With compounding interest, it is easy to see how such debt loads can quickly get out of control.
In this column, we present some strategies for fighting student debt that millennial and non-millennial orthopedic surgeons can implement at various stages of their careers.
Avoid capitalization
Although student loans are sometimes unavoidable, their costs typically balloon the highest during the orthopedic residency due to a process called capitalization, which is the addition of unpaid interest to the principal balance of a loan. The principal balance of a loan increases when payments are postponed during periods of deferment or forbearance, and unpaid interest is capitalized.
It may be difficult to avoid capitalization during residency due to a high cost of living. However, if possible, paying some or all of the interest during residency allows a significant slowdown of capitalization of the debt burden.
Recently, income-driven repayment plans have become a solution that allows repayment of student loan interest during residency with more tolerable monthly payments. An example of one plan is the Revised Pay As You Earn (REPAYE) program offered by the U.S. Department of Education. With REPAYE, the federal government covers 50% of all interest above the monthly payment amount during repayment.
To illustrate how this works, if a resident who earns $55,000 a year has an unpaid student loan of $164,000 at 6% interest, the monthly payment just to cover the interest would be $824. Under REPAYE, the resident would only have to pay $300 per month while the federal government would cover $262 of the monthly interest. Although some interest still capitalizes, the amount is more tolerable.
First job: Refinance student loans
One of the simplest methods for reducing student loan debt is to refinance student loans through a private lender when starting in practice. Refinancing is a relatively easy way to not only consolidate any student loans into one lump sum, but also to lower the interest rate considerably. Although a young orthopedic surgeon may give up certain loan protections inherent to federal student loans and income-based repayment models in the process, the upside of such refinancing is typically a dramatic reduction in the interest rate on the student loan. It is not uncommon to see interest rates lowered by 2% to 3%, an amount that may dramatically reduce the cost of debt during a 10-year span. Consider the possibly reduced interest rates from refinancing a $268,000 loan that is paid back during 10 years at 6% interest, requiring a monthly payment of $2,975.35 with $89,042 in total interest. That loan paid back at a 4% rate would have a $2,713.37 per month payment with $57,604 in total interest.
Disability insurance, asset protection
Our column in the February 2019 issue of Orthopedics Today touched on the need for millennial physicians to protect their greatest asset — the ability to earn income, something which could be jeopardized by an accident or health condition. Securing adequate disability income insurance early in a career protects the student loan debt payment plan, as well as the physician’s ability to generate future income.
Student loan debt is one of the biggest national crises of our generation. Without careful planning, an orthopedic surgeon’s $200,000 to $500,000 loan after training can rapidly get out of control. The strategies discussed may be helpful not only for mitigating risk during orthopedic training, but also for optimizing repayment plans during the first few years of a career. Although the goals for debt repayment and saving/investing can become a balancing act for young orthopedic surgeons, having a sound plan helps in making great strides toward safeguarding the financial future.
- Reference:
- Wealth Protection Planning for Orthopaedic Surgeons and Sports Medicine Specialists or For Doctors Only: A Guide to Working Less & Building More Wealth Management Made Simple are available free in print or by e-book download by texting OT19 to 555-888 or at www.ojmbookstore.com. Enter code OT19 at checkout.
- For more information:
- Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Illinois. He can be reached at email: sanjeevbhatia1@gmail.com.
- David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy discussed herein. He can be reached at mandell@ojmgroup.com or 877-656-4362.
Disclosures: Bhatia and Mandell report no relevant financial disclosures.