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Young Physicians & Student Loans 101

If you’re shocked at the cost of medical school, you’re not alone. A whole new generation of young physicians just matched (Match Day 2018- 3/16/18) at their first residency program. After the excitement wore off, they came to the realization that they now have to pay off those student loans. Which is not fun considering most interns (PGY-1) make somewhere between $50-60k and could have a student loan balance higher than $200k. 

If you are a reader of the WealthKeel blog, you know that we write about this topic often. However, in this post we wanted to take it back to the basics, our what we call Student Loans 101. If you are looking for more information on student loans click here to read more on this topic on our blog

Okay, class is in session. 

There are two types of student loans – federal and private.1 Here are a few differences:

Federal Loans

Federal loans are issued by the federal government. They are easier to repay and the accumulated interest rates are usually lower. While many students are eligible for these loans, there are limits on the amount of money that can be borrowed.

Federal loans have a 6-month grace period after leaving school to repay the loan, and there are additional options for deferment available if the student has a financial hardship. Monthly payments may also be flexible. These loans may be eligible for debt forgiveness based on the career or type of service the student pursues (for instance those that enter into medicine, teaching, military service and other types of public service). 

There are four types of federal loans:

Subsidized Direct2

A subsidized direct loan is for undergraduate students who indicate financial need based on their Federal Aid Form for Student Assistance (FAFSA), which all students are required to complete. The school determines the amount a student can borrow and the Department of Education pays the interest while in school at least half-time, during the first six months after leaving school, and during any period of deferment (postponing payments due to financial hardship).

Unsubsidized Direct3

These types of loans are available to both undergraduate and graduate students. The school also determines the amount that can be borrowed. The interest accumulated on an Unsubsidized Direct Loan is responsible for being paid by the student during all time periods. The student may elect to defer interest payments, but this interest will be capitalized and added to the principal amount of the loan.

Perkins Loan4

The Perkins Loan is a federal loan available to undergraduate, graduate and professional students who have exceptional financial need. There is a fixed interest rate of 5 percent. One of the most distinguishing differences is that some schools do not participate in the Federal Perkins Loan Program. When acquiring the loan, students will make payments to the school, as they are usually the lender. Funds under this program are also contingent on availability.

Parent or Grad PLUS Loans

These loans are available to graduate students, or to parents whose students do not qualify for financial assistance. Parents who obtain a PLUS loan are responsible for paying the loan.

Interest rates for these loans range from 3.86% to 6.41%, with a loan fee of 4% on PLUS loans, and 1% fee for other Direct Loans.

Private Loans

Private loans are exactly that – private. They are usually distributed through a banking institution or private lender and generally cost more than when acquiring a federal loan. The terms and conditions of these loans also vary, and interest rates and payments could change without warning. These loans typically allow applicants to borrow larger sums of money.

It is very important to note that with private loans, interest is charged while the student is still in school. These rates vary based on credit and other factors, and there are usually a number of fees attached, including an origination fee. In most cases, a co-signer is required.

When taking out student loans, it is important to evaluate your options and only borrow what is needed, rather than accepting anything you have access to. Student loans can quickly accumulate into serious debt, which hinders the progression of the student as they move into their career. That being said, when handled appropriately, student loans are a good financial solution for those who wish to pursue their education and do not have the financial means.

As the cost of higher education continues to rise, knowing the types of student loans available to you and working out a plan for immediate repayment prior to obtaining the loan will be beneficial in the long run. Exercising caution is key.

1 https://www.consumerfinance.gov/paying-for-college/choose-a-student-loan/#o1

2 https://studentaid.ed.gov/sa/types/loans/perkins

3 https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized#subsidized-vs-unsubsidized

4 www.studentaid.ed.gov


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