How to Prepare Financially for Residency
April 19, 2017
You did it! You matched into the specialty of your choice and have spent the last month celebrating your accomplishments with all your friends and family. But as July 1st nears, you may begin to wonder what issues need to be addressed before you start residency—and one of the biggest things on everyone’s mind is finances.
Fourth year of medical school can be an expensive year and most students find it beneficial to take the maximum on their loans. Board exams, audition rotations, residency applications, and interviews can result in thousands of dollars of extra expenses. And that’s not even including the cost of moving to your new residency location!
What about my residency loans?
According the the AAMC, the average medical student graduates with $189,165 of debt. Most residents will not be able to afford the standard payments for their debt on a resident’s salary alone. Regardless of whether your plan after residency is to refinance, find loan forgiveness opportunities, or pay it off yourself, it is worth considering the Income-Based Repayment plans the government offers while you are in residency.
The two main plans to check out are PAYE and REPAYE. Both of them have payments capped per year at 10% of your discretionary income, but REPAYE has the added bonus of paying 50% the difference between your accrued monthly interest and monthly loan payment. There are restrictions, so make sure to confirm if you qualify for either plan.
The good news is that both plans do qualify for Public Service Loan Forgiveness (PSLF), which require 120 monthly payments under a qualifying plan while working for a governmental, 501(c)(3), or public service organization. Even if your employment after residency does not involve one of these institutions, your residency program likely qualifies and thus there is no downside in applying for PSLF.
It is also worth noting that (1) there is no tax on the amount forgiven with PSLF unlike other loan forgiveness plans and (2) the amount paid through PSLF is income-based, meaning it is independent of how much you owe overall. For those who are interested in pursuing PSLF, it is also worth looking into Direct Consolidation to forego your grace period and have six extra months of zero to low payments at the beginning of your PGY-1 year that count towards the 120 payments. However, Direct Consolidation has its own downsides, so be sure to do your research on whether it is the best decision for your situation.
All the above apply to federal loans only. If your private lenders do not make adjustments to your payments for residency, consider loan refinancers who do understand your income limitations and are willing to accommodate them.
What about my taxes?
Filing taxes as a resident is fairly easy for most people. However, it is important take advantage of all the tax benefits you qualify for. Many residents will have paid tuition for medical school in the same year that they begin residency, thus qualifying them for the Lifetime Learning Credit, which is capped at $2000. If you pay student loan interest (and you will, even with REPAYE), you can take a $2500 tax deduction. You can also deduct moving expenses, provided you are moving farther than 50 miles away.
There are some other credits and deductions that certain residents may be able to take advantage of, such as mortgage interest, childcare expenses, and commuting expenses. Last, but not least, consider contributing to a 401K or IRA, especially if your residency program is willing to match your contributions. It is unlikely you will able to do so as an attending physician and the income you contribute is not taxed.
Starting residency is a daunting prospect for every medical student. It is easy to get overwhelmed with the paperwork, moving plans, and new responsibilities you will need to shoulder. A strong financial plan is the backboard from which you can launch your career and ensure the most peace of mind as you move into the next stage of your medical training.
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