American College of Physicians: Internal Medicine — Doctors for Adults ®

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How to manage your finances while still in training

Besides dealing with debt, residents need to decrease expenses and take steps to begin boosting their savings

From the November ACP-ASIM Observer, copyright © 2001 by the American College of Physicians-American Society of Internal Medicine.

By Christine Kuehn Kelly

As if the rigors of training aren't stressful enough, many residents also struggle to keep afloat financially. Heavy debt, bad spending habits, lack of tax savvy and no savings can produce a financial mess that takes years to clean up.

But this doesn't have to be the case. By learning to manage your finances and getting good financial advice now, you can reduce today's money worries and enjoy financial security after training.

To start, experts say, analyze your current financial picture and consider your available options. Financial planners can help residents sort through debt options and give advice on insurance, cash management and retirement planning.

"We see more young physicians looking to avoid the financial mistakes they saw older physicians make," said Brian Dilley, manager of the young physicians and residents department at Chicago's Mediqus Asset Advisors, which provides financial services to health care professionals.

To find an expert, ask colleagues for recommendations or consult a listing of local financial advisors. Certified financial planners are one good bet; so are certified public accountants (CPAs), who can help you with tax issues, managing debt and building savings. (Expect to pay $75 to $125 an hour for advisory services.)

Here are some areas you need to address on your own or with the help of a financial planner to take control of your finances and build a better financial future:

managing financesManaging debt. Education debt is the financial issue that worries most residents, and for good reason. While third-year internal medicine residents earn about $40,000 a year, their combined educational debt is often more than double that figure.

In 2001, the median college and medical school debt for private and public schools reached $97,000, up 8% from the previous year, according to the Association of American Medical Colleges (AAMC).

How can residents manage such huge sums? Two standard approaches are consolidation and deferment, or forbearance.

Consolidation reduces the number of checks you write every month. It can also extend your repayment beyond 10 years, reducing monthly payments. Because of low interest rates, now is a prime time to repackage your loans. (See "Good financial news for residents," below.)

"Having a number of loans is like having several mortgages," said Mary Fenton, assistant dean of student financial planning at St. Louis University School of Medicine. "It's very time-consuming." She advised residents to go to their own institutions first for help with consolidating loans and coordinating deferments.

If you are making separate payments, experts advise that you pay off loans with the highest interest rate first. Advisors can help you understand the relative cost of your loans, including the interest rates, rate caps and capitalization policy (principal and interest).

The AAMC is another top-notch source of up-to-date strategies for managing loans. You can find detailed information on consolidation and deferment on the AAMC Web site at www.aamc.org/stuapps/finaid/layman/strat5ln.htm. The AAMC also offers an educational debt management listserv called Moneymatters, which lets residents post questions confidentially. They can then read answers to their own questions and queries from colleagues online.

Avoiding—and resolving—problems. Missing a loan payment may be embarrassing, but experts suggest being proactive to avoid making matters worse. If you miss a payment, contact your loan servicer immediately to work out payment. To avoid future problems and a bad credit report, try to negotiate a lower rate on a credit card or nonsubsidized loan.

Your institution's financial aid office can also help you resolve problems. Ms. Fenton recalled one student whose loan was considered in default, even though deferments had been processed. "The lender claimed the only way to get out of default was to pay $4,000 to $5,000 right away." Fortunately, her office was able to clear up the mistake and save the resident from having to come up with some fast cash.

While few residents actually default on their loans, those who do now face serious consequences. States including California, Georgia, Minnesota, Texas, Virginia and Washington have recently passed tougher rules that punish defaulters with measures ranging from fines to license revocation. Maryland revoked a physician's license and put another on probation, while Washington suspended (and later reinstated) a surgeon's license to practice.

Controlling spending. Once you've begun to manage your loan portfolio, look at your spending habits. Track where your money is going, from cable television fees to dining out, said Gerry Wixted of the Consumer Credit Council Service in Philadelphia.

Although most residents say they don't live extravagantly, credit card debt can easily pile up. If you miss payments at a credit card's low introductory rate, your interest rate may jump to 18%.

If you get your hands on any extra money, experts recommend the "one-third" rule: Split the amount in thirds and use each portion for extra loan payments, IRA investments and cash savings.

Minimizing taxes. Residents have a number of options to reduce their tax burden during residency. While you can take a do-it-yourself approach and buy a good tax preparation software package, you should consider hiring a tax professional to avoid running afoul of complex IRS regulations.

Samuel J. Evans, ACP-ASIM Member, a fellow in pulmonary critical care at the University of California, Davis, said that when he was a resident, he did his own taxes. Last year, however, when he finally consulted a professional tax advisor, he discovered that he could deduct expenses like work shoes and dry cleaning. He paid the advisor $200 but received $8,000 in tax refunds.

You can deduct many commonly unreimbursed job expenses like lab coats, journal subscriptions, professional society dues and tools like handheld computers and related software when you itemize on Schedule A. (For more information about Schedule A deductions, go to the IRS Web site at http://ftp.fedworld.gov/pub/irs-pdf/i1040sa.pdf.)

The catch? You must have incurred fairly significant expenses to make itemizing worthwhile. Your miscellaneous itemized deductions (including other items such as tax-preparation fees) must exceed 2% of your adjusted gross income to be eligible to be claimed. In other words, if your adjusted gross income is $35,000, you cannot deduct the first $700 of unreimbursed job expenses, but you can deduct the excess over $700.

You should also remember that Schedule A deductions are an alternative to taking the standard deduction. To really take advantage of itemizing, your combined Schedule A deductions (including unreimbursed job expenses; mortgage interest; gifts to charity; casualty and theft losses; and state, local, real estate and personal property taxes) need to total more than $4,550 if you're single or $7,600 if you're married and filing jointly. A tax professional can help you determine whether you have enough deductible expenses to justify itemizing.

If you were eligible to take deductions in past years but failed to do so, you can file amended returns up to three years later. Instructions for filing an amended return (Form 1040X) are on the IRS Web site at http://ftp.fedworld.gov/pub/irs-pdf/i1040x.pdf.

For more information on tax issues for residents, see "Navigating IRS deductions: a tax guide for residents" online at www.acponline.org/journals/news/feb99/taxguide.htm.

Insurance. Life and disability insurance are important parts of a financial plan, particularly if you have family depending on your income. You can purchase College-sponsored group life and long-term disability insurance at preferred rates through Group Insurance Administrators (GIA). The company offers a plan designed specifically for the employers of interns and residents that combines disability, term life and accidental death insurance.

GIA also offers "specialty-specific" group disability insurance. Besides offering full disability benefits, the coverage includes benefits for partial and residual disability. A gastroenterologist who becomes unable to perform colonoscopies or other procedures, for example, could be eligible for full disability payments under this plan. For information, call GIA at 800-442-7526.

Retirement. If you plan to stay at your institution after you finish training, you may be able to take advantage of matching employer contributions for retirement funds. If you can't invest through your employer, consider investing on your own.

Home ownership. If you plan to stay in the same location for at least five years, consider buying, not renting, a house. By buying, you turn the money you spend on housing into an investment. Renting, on the other hand, merely puts money in your landlord's pocket.

Because mortgage interest is tax deductible over the life of the loan, making extra mortgage payments generally is not the most effective use of extra income. Most experts suggest paying off credit cards or higher-interest loans first.

Christine Kuehn Kelly is a Philadelphia-based freelance writer specializing in health care.

Good financial news for residents

There is some good news for residents juggling student loans and itemizing their tax deductions.

As a result of the economy's slowdown, the Federal Stafford loan interest rates have dropped. For Federal Stafford loans disbursed on or after July 1, 1998, the new rate is 5.39% during grace and deferment. During "active repayment," which includes forbearance, the loan rate is 5.99%.

This new rate is good until July 1, 2002. If you haven't already consolidated your loans, you have until next summer to decide if this is the right option for you.

In addition, recent changes to the tax code for 2002 may help residents who itemize deductions. The tax deduction for qualified higher-education expenses during postsecondary education will increase to $3,000.

In addition, the allowable income level to qualify for a partial student loan interest deduction will be expanded. For singles, the income limit will be $50,000; for married couples, $100,000. In addition, voluntary payments made during deferment may be eligible for the deductions.

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