Ask Me Anything, Volume 5: Your Questions on Student Loans, Housing Budgets, and Lifestyle Creep Answered

Welcome back to another round of Ask Me Anything! For this fifth edition, you’ve sent in fantastic questions covering everything from student loans to housing costs to managing lifestyle creep during career transitions. These questions came in droves, primarily through our Google Form, reflecting the challenges many of you face.

Today, we’re tackling five key topics that touch on real-world financial issues. Whether you’re just starting your medical career, thinking about tackling a student loan strategy or planning your housing budget, there’s something for everyone here.

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The Financial Landscape in October 2024

It’s an interesting time for student loans. At the date of this recording (October 22, 2024), a major hearing on student loans is just two days away. Due to pending changes and possible appeals, we don’t yet have definitive updates on the SAVE plan.

But don’t worry; this doesn’t mean you’re stuck in limbo entirely. Instead, it’s essential to focus on what you can do right now to make progress on your financial goals. The questions you’ve submitted reflect these uncertainties, but the answers aim to provide clarity and actionable steps.

Student Loan Strategies for Residents

What Should PGY1s Do Without Access to the SAVE Plan?

Let’s set the stage. You might feel stuck if you’re in your first year as a resident (PGY1) and haven’t signed up for the SAVE plan because it’s unavailable. Deferment seems tempting, but is it your best option?

The good news is that there’s still a way forward. The primary alternative is enrolling in an income-driven repayment (IDR) program like the Income-Based Repayment (IBR) plan. It relies on your most recent tax return, which shows little to no income in most cases for PGY1s.

This is where the IBR program works to your advantage. If your reported income is extremely low—even zero—your monthly payment will also be low while still counting toward Public Service Loan Forgiveness (PSLF). Consider IBR as your gateway to kickstarting your PSLF tally without the drawbacks of deferment.

Why is deferment a less ideal choice? Because it doesn’t count toward PSLF at all. Every month spent in IBR at a low payment not only keeps you on track but also prevents unnecessary delays in achieving forgiveness.

How Can Residents Start PSLF Early, Even During Deferment?

This next question piggybacks on the first. Residents making $50,000–$70,000 annually and stuck in deferment often wonder if they should start PSLF payments now. The answer? Absolutely, if you qualify for IBR.

Here’s why: When your student loan payment is calculated based on a lower income, it keeps costs manageable while still building toward the required 120 qualifying payments for PSLF. Even PGY2s and beyond, earning slightly more, can still often secure affordable payments under IBR.

Think of this as planting financial seeds. The earlier you start qualifying payments, the sooner those seeds turn into PSLF forgiveness.

Breaking Down PSLF Buyback

How Many Years Can Be “Bought Back” Under the PSLF Program?

The PSLF buyback program is a game-changer for anyone who missed qualifying payments while working for a PSLF-approved employer. But how far back does it let you go?

Under currently available guidance, you can “buy back” up to 10 years of missed payments, provided you meet all program criteria. That includes working at a qualifying employer and adhering to other eligibility factors.

Here’s how it works:

1. You apply for PSLF and are rejected due to gaps in qualifying payments.
2. The program notifies you of periods you can buy back.
3. Then, they’ll provide the exact amount you need to repay to “catch up” on missed payments.

For example, if you missed 12 months and your calculated payment was $100/month, you might cut a check for $1,200 to include those months retroactively.

While this program remains new and untested for many of our clients, its potential is unmatched. It’s an option worth watching closely—especially as more details emerge.

Housing Budgets: What’s the Right Percentage?

Finding Your Ideal Housing Budget

Next, we’re moving into housing—a hot-button issue no matter where you live. One of you asked the all-important question: How do we figure out our housing budget?

Let’s start with the well-known rule: Your housing expenses shouldn’t exceed 28% of your gross income. But here’s the kicker—I think that number is too high.

Why? The higher your housing costs, the less discretionary money you have for everything else: travel, savings, dining out, childcare, education—the list goes on. If you can push your housing budget closer to 20% or even less, you’ll enjoy far more financial flexibility.

A Real-Life Example: Southern California

Look at this hypothetical breakdown:

• Household income: $370,000 gross.
• Mortgage: $5,000/month.
• Property taxes: $116,000/year.

Total annual housing costs come to $76,000—right at 20% of gross income.

For high-cost areas like Southern California or the Northeast, 20% might be the best you can aim for. But it’s a reasonable target even if your local market is competitive. Stretching to 28% can create a cash-flow pinch, leaving you stressed and strapped.

Exceptions to the Rule

There are exceptions when slightly exceeding the 20% rule could work. If your household income is expected to increase drastically soon—for instance, when one spouse completes training—it might be worth paying a bit more now.

But tread carefully. Banking on future raises or bonuses isn’t foolproof. Avoid overextending yourself to the point where an unexpected market downturn or life event jeopardizes your financial health.

Preventing Lifestyle Creep

Balancing Higher Income and Smarter Spending

Moving on to lifestyle changes, another great question: How do you prevent lifestyle creep during the transition to attending while enjoying your new income?

Lifestyle creep happens when higher earnings translate into higher spending—as often as not on things you don’t really need. It’s easy to inflate your budget while saying, “I’ve worked hard; I deserve this.” And you’re absolutely right—you do deserve to enjoy life. The trick is to do it responsibly.

Top-Down Budgeting: A Smart Framework

Enter top-down budgeting—a simple system to prioritize savings and essential expenses first. Here’s how it works:

1. Start with primary expenses (housing, insurance, taxes).
2. Max out savings vehicles like 403(b), 457(b), Roth IRAs, and taxable accounts.
3. Allocate the leftover funds for spending guilt-free on discretionary items.

When you set up your budget this way, you’re free to enjoy what’s left without worrying if you’ve neglected your long-term goals.

Planning and Flexibility

Think of your financial goals as creating a roadmap. Want to retire by 55? You’ll need to save harder and focus on investments—likely by upping contributions to taxable accounts once your traditional accounts are maxed out. The alternative? Retiring later, which often requires less immediate savings.

The key is tracking your progress so you don’t lose sight of the long-term picture. And yes, hiring a financial planner for project-based help can make a massive difference.

Wrapping It All Up

This AMA covered your most pressing questions about student loans, housing budgets, and lifestyle changes. Here’s a quick recap of today’s key takeaways:

• For PGY1s, start the clock on PSLF with an IBR plan instead of deferment.
• Lower-income residents can benefit from reduced payments while making progress toward PSLF.
• PSLF buyback lets you retroactively add qualifying payments—up to 10 years—but requires upfront costs.
• Keep housing below 20% of gross income whenever possible; flexibility matters more than size.
• Use top-down budgeting to control lifestyle creep while enjoying your hard-earned income.

Thanks for reading, and we’ll catch you next time!

 

Looking for a more thorough all-in-one spot for your financial life? Check out our free eBook: A Doctor’s Prescription to Comprehensive Financial Wellness [Yes, it will ask for your email 😉]

Disclosures