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How to take control of your medical school debt

Making smart financial decisions-including consolidation and deferment-can help residents

From the January 1997 ACP Observer, copyright 1997 by the American College of Physicians.

By Christine Wiebe

It's often what residents don't know about paying off their medical school debt that can make a big difference in how well they handle this increasingly overwhelming burden.

Cindy Ciocca, MD, for example, learned at the last minute that she could defer repayment of some loans while she serves as chief resident at the University of North Carolina Hospital. She discovered that essential bit of information during a casual conversation with housestaff about the previous chief resident.

"I didn't understand what was deferrable, so I would have kept on paying," Dr. Ciocca said. She and her husband, a first-year fellow in sports medicine, together owe about $90,000. He recently discovered—to the couple's surprise—that he, too, can defer some loans during fellowship.

It's no wonder so many students are in the dark. Just consider the historic lack of debt counseling for residents plus the increasing amount of the debt—the Association of American Medical Colleges (AAMC) estimates student debt averaged $69,000 in 1995. But the trend seems to be reversing. A handful of medical schools now provide debt counseling for residents and teaching hospitals are considering expanding similar services, said Paul Garrard, AAMC director of student financial services.

In part, the move to help residents manage debt is the result of an increasingly complex financial world. "Not only is the average debt going up," Mr. Garrard explained, "but the environment of borrowing is changing drastically." And while residents have a number of new loan repayment and consolidation options to choose from, he said, federal legislation passed in 1993 soon will eliminate some of the deferment options that allow housestaff to postpone their loan payments. The current class of senior medical students will be the first group affected by the changes.

Experts on helping residents manage their debts say that new physicians should be careful where they get their advice. Although financial advice is available from many sources, new physicians may get more appropriate advice from counselors well versed on medical school loans, cautioned Julie Disa, MS, director of financial aid services at Johns Hopkins University School of Medicine in Baltimore.

For better or worse, the emotional burden of carrying a high debt load often drives financial decisions, she said. For instance, Dr. Ciocca is debating whether to use what little money she can save on her chief resident's salary to pay off her deferred loans, or whether to use that same money for a down payment on a home. While she recognizes that home mortgage interest is tax deductible, she wonders whether that advantage is sufficient to ignore her loans. For now, however, she is using any extra cash to pay off school loans, in part to relieve the psychological weight of the couple's large debt.

Consider the options

But residents don't have to be intimidated and frustrated by debt, experts said. Options include taking deferments or forbearance, restructuring payment plans or—with good advice—consolidating multiple loans into one payment.

It all starts with analyzing the particulars of your situation. "Before they can do anything else, residents need to develop a good understanding of their debt portfolio," explained Desh Hindle, associate director of Boston University Medical Center's office of residency planning and practice management. He has seen everything from residents who come in with extensive filing systems and homemade charts to those who couldn't even find their mail. "In some cases, folks are actually delinquent or about to go into default," he said.

If you don't have complete, current records of your loans, Mr. Hindle advised, contact your school's financial aid office. Next, contact each lender and ask whether your loans have been sold to another institution. In addition, make sure their mailing address for you is current.

Once you're familiar with your loan portfolio, you can consider your options. "Not every case will demand action," Mr. Hindle said. "Sometimes residents can just feel satisfied that they have a complete understanding of their obligations."

But if you're like many housestaff, you should probably consider restructuring your repayment plans. For residents who have several loans, each with different terms, Mr. Hindle said that a consolidation program might help. Government loans can usually be consolidated through the individual lending agency, while private loans can be consolidated by going through the lending bank or institution.

Unfortunately, too many residents accept questionable consolidation offers they receive in the mail. "I can't tell you how many house officers are willing to trade off to a higher interest rate just to [consolidate their loans into] one payment," Ms. Disa said. "In terms of loan portfolios, medical doctors' are about as complex as they can get."

Mr. Garrard from the AAMC said that residents can ask lenders to restructure payments to better suit their financial situation, such as reducing payments when their incomes drop, a tactic that can relieve repayment pressure during residency. He also recommended that residents ask their lenders to "run the numbers" and create more than one repayment schedule; the idea is to get a better picture of the future. While standard payments remain the same over time, graduated payments rise over time, income-contingent payments rise and fall according to current income, and extended payment plans lengthen the overall repayment period to give borrowers more time.

Perhaps most importantly, residents need to learn about their deferment rights, according to Ms. Disa from Johns Hopkins. Graduating medical students typically receive this information during exit interviews with their medical school's financial aid office, but many are uninformed, especially about forbearance provisions that extend throughout training. Under these provisions, loan payments can be deferred, but interest accrues. If a loan has such a provision—many federal loans do—the lender cannot deny forbearance.

But because bank officers aren't always aware of this provision, it is critical that residents know their rights. While delaying payments is not always the best strategy—you'll end up paying more in the long run—forbearance provisions give residents an option.

Nevertheless, residents need to learn how to maximize their deferments. For instance, Mr. Hindle from Boston University explained that many residents start repaying loans they could defer simply because they want to get a jump on their debts. Oftentimes, residents are better off deferring payments and applying the same amount of money toward the principal on their loans. This helps reduce the loan amount more quickly, and eventually saves money.

Future planning

Even residents with a sizable debt burden should think about saving and investing some money, said financial experts. At the very least, forming a long-term financial plan can help keep debts in perspective.

"Stick to the basics," advised Steven Scheibe, tax director for Coopers & Lybrand in Chicago. "Structure [debt] payments so you have the flexibility to begin your financial game plan, which includes setting a little money aside for a rainy day." In addition, he advised residents to participate in some sort of retirement plan, such as a 401K, particularly if their employer will match any contributions. "You're way ahead if you participate, even though you may be foregoing some debt repayment," he said.

After covering those areas, residents should focus on paying off their loans as quickly as possible, Mr. Scheibe said. "Generally, the after-tax cost of this type of debt is high, so paying it back rapidly may be the best investment around."

One last bit of advice: Residents should forego other large expenses until they are earning more. "Debt can snowball," Mr. Scheibe explained. "A little sacrifice in the early years will go a long way later."


A resource list

For specific advice on how to manage medical school debt, there are a number of resources.

  • To schedule a workshop or get individual advice on debt management, contact Paul Garrard at the Association of American Medical Colleges at 202-828-0400.
  • To refinance HEAL loans, contact the Department of Health and Human Services (HHS) at 301-443-1173.
  • To consolidate federal loans in the Federal Direct Consolidation Program, contact HHS at 800-848-0982.
  • To consolidate or restructure private loans, contact the individual lending institution.

    Christine Wiebe, of Providence, Utah, writes frequently on issues related to medical residency.

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