When you’re pursuing your education, the medical school loans you are accruing are a thought for the distant future—but once graduation rolls around and you begin to compare job offers and consider what your salary will be, they become a much more pressing reality. With the average medical school debt racking up at well over $200,000, deciding on a repayment plan is not just about what you can afford every month; it is also about what will save you the most on interest (and give you the potential for loan forgiveness) later on.
Below, we will be looking at both basic and income-based repayment plans that are popular for federal loans. As you evaluate your options, it is important to remember the tax considerations and forgiveness possibilities associated with each, so you can make the best decision for your monthly budget as well as your long-term goals.
Basic (Non-Income-Based) Repayment Plans for Student Loans
With basic repayment plans, there are three main options that are set up over a 10- or 25-year repayment period depending on which type you pick. While these plans can accrue less interest overall, they are not eligible for any public service loan forgiveness (PSLF) programs and must be repaid in full, even for physicians who end up working for nonprofits or government programs.
Standard Repayment Plans
In a standard repayment plan, you will be required to pay back a set amount each month for a 10-year period. This type of plan will typically carry the steepest monthly payment but will incur the least amount of interest due to the accelerated repayment timeline.
Graduated Repayment Plans
A graduated repayment plan is similar to a standard plan with a 10-year repayment schedule, but with an increasing monthly payment amount at every two-year interval. In the beginning, you will be required to repay the minimum amount each month, and with each two-year period, the amount will increase—this structure is designed to increase your monthly payment in the intervals that your income would (presumably) increase.
Extended Repayment Plans
Extended repayment plans can either come in standard or graduated forms, but instead of a 10-year repayment schedule, the period will be increased to 25 years. This will lead to an increased amount of interest but can cause less financial pressure in the short term.
Income-Based Repayment Plans for Medical School Loans
Because basic student loan repayments are not eligible for PSLF programs, many people wisely opt to choose income-based repayment plans for their medical school loans. With these income-based plans, your monthly payment is based on your income and reevaluated each year, so you are never stuck committed to paying more than you can afford. Additionally, these loans can be forgiven after a certain amount of time or if a certain career path is pursued.
Revised Pay As You Earn (REPAYE) Plans
The REPAYE plans are structured based on your Adjusted Gross Income (AGI) as it compares to federal poverty guidelines, with your state of residence and size of household taken into consideration. These repayment plans are typically structured in 20-year increments for undergraduate loans and 25-year increments for graduate and medical school loans. The REPAYE plan is most notable because it is the only income-driven repayment option that the government will pay towards the interest on the subsidized and unsubsidized loans.
Pay As You Earn (PAYE) Plans
The PAYE plan is a popular option due to the length of the repayment period and the relatively low monthly commitment. The PAYE plan payments are 10% of your discretionary income, which is the difference between your AGI and the poverty guidelines from your state after retirement and HSA contributions are taken into account. This is a great option for people with a high debt-to-income ratio because your monthly amount is recalculated every year so the payments reflect an accurate percentage. Under the PAYE plans, after 20 years of payments, the remaining loan balance is completely forgiven.
Income-Based Repayment (IBR) Plan
IBR plans calculate your monthly payment based on your income, and your spouse’s income is only taken into consideration if you are filing joint taxes. The payment will be 10-15% of your discretionary income, and you will have a 20 or 25-year period to repay your loans.
Income-Contingent Repayment (ICR) Plan
The ICR plan is quite similar to the IBR plan, but the difference is that under the ICR plan, the payment is 20% of your discretionary income. Alternatively, the payment can also be based on the amount you would pay on a repayment plan over 12 years (adjusted to your current income) so there are more options for repayment available to you.
If you are working to pay off medical school debt and aren’t sure which option is right for you, a financial advisor can be a tremendous asset. Contact us today to learn more about your options and how we can help you save for your future while paying down the debt from your past. This material is for information purposes only, Guardian and its subsidiaries do not issue or advise with regard to student loans.