Ease Your Debt Burden

May 1, 2003

Loan consolidation -- and other options -- may help you better manage debt

Do you ever feel like your medical school loans will be dogging you forever? It's a burden virtually all physicians must bear -- but there are ways to decrease the pain.

"The joke is to keep the crash carts nearby during the financial exit counseling when [student borrowers] see how much their loans have accrued," says Patricia Scherschel, a loan consolidation product expert at Sallie Mae. Unlike relatively manageable car or home equity loans, "When they get into repayment, they owe substantially more than what they borrowed," she says.

According to the American Medical Association (AMA), the average medical student graduates with about $93,000 in student loans. This isn't pocket change, particularly when many young doctors are also buying a house and raising a family, and the average starting salary for a family physician is $144,000, according to Merritt, Hawkins & Associates 2001 data.

Unless you are independently wealthy, it's hard to avoid going into med school debt -- but with the many lenders and loan programs available, it's likely you can find one that will leave you with more money in your pocket and a load off your mind. Start by researching your options based on the amount of money borrowed, the original loan agreement, your personal and family situations, and financial goals.

One increasingly popular option is loan consolidation, with benefits that include low fixed interest rates, flexible repayment options, and fewer monthly payments to track. With the economy on shaky ground, consolidation is worth considering. The trick is committing the time to do it.

"You do get the impression that physicians don't have the time to look at the more practical aspects of life," says Scherschel. They're so busy focused on being a physician that they can sometimes act like they can't sweat the small stuff -- but this isn't small stuff, Scherschel contends. "Some programs can shave years off your loan, which can equal substantial dollars."

Start by reviewing your loans, and then make a round of phone calls to lenders to determine consolidation opportunities or other options. Consider these questions when speaking with lenders:

  • What will happen to the status of my student loans if they're in deferment (a period of time when borrowers can postpone repayments) or forbearance (a temporary adjustment to the repayment schedule) when I apply for a consolidation loan?
  • What will the monthly payment be and what will be the total repayment amount of the consolidation loan?
  • How will early payments be applied?
  • Is there a penalty to pay off a loan early?
  • Which of my loans can I consolidate? (By law, federal loans and private loans cannot be combined.)
  • Will I pay fees or hidden costs when I consolidate?
  • Does your company offer a lower interest rate if I make a certain number of continuous payments or if I make electronic payments?

Consolidation success

Jennifer Shu, MD, a pediatrician at Sharp Reese-Stealy Medical Group in San Diego, found that consolidation fit well with her financial juggling act. Shu's goal was to have lower monthly payments as the realities of life set in. "My husband and I are saving for retirement, to buy a house, for our 2-year-old's college education, and to replace our 11-year-old car," she says. "You have to balance what's going on with the rest of your financial situation."

Shu took several loans and bundled them into one for a longer term -- decreasing her original $850 a month payment to about $200 with a lower interest rate. Making regular payments since the mid 1990s and establishing her new loan has allowed her to pare down her original $60,000 loan to about $25,000. "If I am able to pay it off ahead of time," she says, "my total payment will probably be less than the original amount owed by several thousand dollars, depending on how far in advance I can do that. But the main impact was that there was less stress for me to come up with a large chunk of cash each month."

Greg Hood, MD, an internist at Drs. Borders & Associates, PSC, in Lexington, Ky., found advantages by consolidating while also aggressively paying the principal and first attacking the loans with the highest interest rates. He and his wife, also a physician, had original loans totaling $160,000, which add up to $415,000 with interest. By combining their 14 loans into seven, they saved approximately $30,000 through consolidation. They've whittled down their total debt to $160,000 and the seven loans will be reduced to four by the end of the year.

"When doctors earned more, and consistently received big bonuses, it was easier to pay off the loans. Now they have to turn to other options," says Greg Gates, president of Gates Moore & Company, which provides financial and practice management information to physicians. "If cash flow is an issue, they're going to want to have longer term loans because they want a low monthly payment. It's all in what you need at the time."

Gates suggests these financial benchmarks when mapping out your financial strategy and spending habits: "You don't want the home mortgage with property taxes and insurance exceeding 28 percent of the total income, and you don't want all of the debt with a house, cars, etc., to exceed 36 percent of the total income," he says.

Shu agrees that there are many options available to physicians these days. "There's no shortage of ways to make [repaying debt] even more manageable," she says. She suggests researching Web sites that have information on loan programs such as Collegiate Funding Services at www.cfsloans.com/ama, which is endorsed by the AMA. Also, the Association of American Medical Colleges offers information and resources on consolidation and debt management at www.aamc.org/students/medloans/.

Other ways to save

Hood and his wife also looked at the expenses associated with their southern California home and the cost of living there. If you're willing to move, it can be a great way to save and pay off debt, says Hood, who moved to Lexington in 2001 with his family. Although the couple took a 50 percent pay cut the first two years, their expenses also decreased by two-thirds. Next year they will have surpassed the salaries they were making in California. "We will, on an absolute dollar basis, be making more here than there," says Hood.


If you are a physician who is willing to move, another consideration is one of the federal or state-run programs that will help pay down medical school debt if you agree to work in an underserved area for a specified number of years. The National Health Service Corps through the U.S. Department of Health and Human Services is one example of this type of program. Physicians can check it out at http://nhsc.bhpr.hrsa.gov/.

Just be sure you like the place enough to live there for several years, says Gates. "The question sometimes becomes, 'How will my spouse feel about this, and can we find an underserved area we'd like to live and work in?' Keep in mind, if it's an underserved area, there are reasons why doctors are not practicing there," says Gates.
Another option for paying down student debt is to negotiate loan repayment with a new employer. "Remember that those payments are still included in the income for the physician, so it's taxable income," says Gates. "Physicians just need to know this isn't a freebie. They need to be prepared to have the cash flow at tax time to pay the taxes on the money, whether it's broken into annual payments or paid off in a lump sum. But, of course, it's always better to only pay the taxes than to pay the full amount of the loan."
Gates says, however, this loan repayment through employers is not common. "Practices are really getting squeezed right now. Unless it's a large and thriving practice, they probably don't have the money to do this."

Whatever your situation, take time to look into the options you have available. "It's not that any of this financial information is difficult to master," says Scherschel. "If physicians can get through medical school and residency, they can easily get through this. The key to this is taking the time to make good decisions, and some of them are hard because you may have to give up some things, but then you give yourself a greater range of financial options later." n

Karen Gatzke, senior associate editor for
Physicians Practice, can be reached at
editor@physicianspractice.com.

This article originally appeared in the May 2003 issue of Physicians Practice.