The Complete Guide To Physician Mortgage Loans

The Complete Guide To Physician Mortgage Loans

On the surface, physician mortgage loans look great. No money down. No jumbo limits. No private mortgage insurance (PMI). But let’s be real. Lenders are in business to make money and they can’t just give you a free ride. So, how do these loans stack up against everything else that’s available? Are they really as good as they sound?

You’ve already made a solid decision about how much to spend on your home and you have your financial ducks in a row. Now, it’s time to decide how to finance your home and whether a physician mortgage loan is the best option for you.

To help you make an informed decision, we’ll cover:

  • How Physician Mortgage Loans Work
  • Alternatives and How They Compare
  • Deciding On The Best Mortgage For Your Situation

Physician Mortgage Loans

Physicians are extremely profitable customers for lenders. They take out big loans early in their careers and almost always pay them off. Lenders use physician mortgage loans to lock in early-career physicians by lending them more money with fewer stipulations than their competitors. They make it even more appealing by marketing it as a “special program” just for physicians.

The goal is to get you in the door and sell you other stuff as your needs change. A medical student transitioning into residency with zero earnings history, no cash and a boatload of student loans would normally never qualify for a mortgage if it wasn’t for physician mortgage loans. However, there’s no such thing as a free lunch. These loans are appealing at first, but often end up being more expensive than the alternatives.

What’s So Special?

So how is the physician mortgage loan different than a typical mortgage? Here are some of its common features:

  • Zero (or very low) down payment required
  • No private mortgage insurance “PMI”
  • No rate increases on jumbo loans (typically, loans larger than $417K)
  • Lending based on a physician’s signed employment contract
  • Less critical of student loan debt

Who Counts as a Qualified Borrower?

A “qualified borrower” is normally a medical resident, fellow or attending physician with a signed contract for employment. Some lenders also include dentists, veterinarians, and other doctors.

Who Offers Physician Mortgage Loans?

There’s a growing list of lenders offering physician mortgage loans, including:

(Note that we do not have a financial relationship with any of these lenders. If you’re a lender and would like to be added to our list, please let us know.)

Mortgages Expenses:

There are a few costs that make up your total mortgage expenses:

  • Interest – The cost of interest is based on the interest rate, loan balance and loan repayment term
  • Closing costs – A one-time, out-of-pocket expense paid at closing, wrapped into the loan balance or wrapped into the loan in the form of a higher interest rate
  • PMI – The monthly fee typically paid until reaching 20% equity

Closing costs and interest rates are kind of like a teeter totter: reducing closing costs on a mortgage increases the interest rate. Or if you want the lowest rate possible, you’ll have higher closing costs. You can see how this works in this breakdown from the Mortgage Professor website.

Pic 1

As for PMI, you either have it or you don’t. It’s typically going to cost between 0.3% to 1.5% of the original loan amount per year. A surefire way to avoid PMI is to put 20% down. Some loans, however, like the physician mortgage loan, do allow you to avoid PMI even though you don’t have 20% equity.

Another way to avoid PMI is to get two mortgages – one that finances 80% of the deal and the second that covers the remaining debt (up to 20%). But keep in mind that all of these PMI avoidance tactics come with additional costs.

Rates and Costs

Let’s assume you’re a physician considering a $500,000 home. You have fantastic credit but no cash for a down payment. What are your options for mortgages with no PMI? Here are the most popular:

  • Physician Mortgage Loans: 30 yr fixed rate – 4%
  • Physician Mortgage Loans: 7/1 ARM – 3.25%
  • Conventional 80/20:
    – First mortgage (80%) – 30 yr fixed – 3.5%
    – Second mortgage (20%) – Interest only HELOC (prime + .5% or 4% today)
  • VA Mortgage (must be military): 30 yr fixed rate – 3.25%

Which Option Should You Choose?

If you’re in the military, the VA Mortgage is usually a home run, especially if you’re considered disabled.

Physician mortgage loans have the highest interest rate but it’s locked in. The ARM has a better rate than the 30-year physician mortgage, but the rate becomes variable after seven years.

The conventional 80/20 offers the best rate on the primary mortgage, but the second one has a variable rate.

Assuming you’re not in the military and can’t get a VA Mortgage, you should base this decision on how long you’ll own the home and how much you plan to pay on the mortgage. Let’s go over the best options based on these factors:

  • 0-7 years – If you don’t foresee yourself living in the home for at least seven years, the Physician Mortgage Loan 7/1 ARM is your best option. But, really, if you plan on living in it for fewer than five years, you should be renting.
  • 7+ Years (and average income and savings) – In this case, the Physician Mortgage Loan with 30-year fixed rate is the better choice. But this should be revisited when you have 20% equity, you drop below the jumbo limits or if rates drop in general. Once you fit the profile, you can often refinance into a new, non-physician loan that’s much more competitive.
  • 7+ Years (and ability to pay the HELOC off very quickly) – The Conventional 80/20 typically provides the best deal if you can get the home equity line of credit knocked out within a year or two.

To simplify the math, we didn’t include closing costs. We always suggest asking lenders to provide an estimate with as close to zero closing costs as possible – at least for starters. That way,compare apples to apples. It’s much easier to compare mortgages structured similarly from a cost standpoint.

Should You Put Cash Down?

What if you have some cash to put down or are considering waiting until you have the cash? In that case, you’ll be comparing the physician mortgage with the conventional 20% down mortgage. Once again, we’ll assume both are structured to wrap closing costs into the loan to make the math simpler. To give you a clear comparison, let’s structure the 20% down conventional loan to have the exact same payments as the physician mortgage loan. The only difference is the down payment and the interest rate.

Option #1 – $100K down payment conventional loan

  • $400,000 balance
  • 18.1183 year fixed rate at 3%
  • $2,387.08 per month principal and interest

Option #2 – $0 down payment physician mortgage loan

  • $500,000 balance
  • 30 yr fixed rate at 4%
  • $2,387.08 per month principal and interest

Looking at those numbers, you’re probably thinking you’d take the $0 down option. Maybe you don’t have that much cash available or maybe you think there are smarter ways to use that $100,000. You could use it to pay off loans or start investing. And 4% is still a really good rate. But how does it really compare to the 20%?

Pic 2

Pic 3

The total lifetime interest costs:

  • Option 1 – $118,998
  • Option 2 – $359,348

Coming up with the $100,000 will end up saving you over $240k in interest, plus you’ll get your mortgage paid off almost 12 years sooner. On top of that, having equity will provide greater security and flexibility, especially if something unexpected happens. With the 100% financed physician mortgage loan, you should expect to start out underwater. If something doesn’t work out and you’re forced to sell quickly, you should be prepared to write a potentially large check for up to 10% of the purchase price just to get out of the home.

On the flip side, if you do come up with the $100,000, you could finance 100% using the physician mortgage loan and invest the cash. If you run those numbers, the end result will look much better. But not only does this require an aggressive investment, it also requires greater leverage on your home, which further adds to the risk. It will also require many years of disciplined investing and assumes you never spend any of it. That’s not impossible, of course, but it’s much easier said than done.

At the end of the day, getting the conventional mortgage and paying it off more quickly is a much better deal. If you don’t have the cash for a down payment, however, the physician mortgage loan is a solid alternative worth considering. Still, it’s not always automatically best solution.

What if You Already Have a Physician Mortgage?

If you already have a physician mortgage loan but you’re not paying attention to it, there’s a good chance you’re throwing away good money. You should review your options for refinance if any of the following occur:

  • Interest rates drop
  • You reach 20% equity
  • You get below the jumbo limits
  • Your plans change

In the past few years there’s a good chance all four of these things have happened for many of you. Here’s a scenario that illustrates one of the most common money saving opportunities for physician mortgage loan borrowers:

Dr. Smith bought her home using a 100% financed physician mortgage loan at 4.75% in July of 2013. The original loan amount was $500,000 with monthly principal and interest payments of $2,608.24. The lifetime interest for that loan would have been $438,965.21. Fast forward three years to today and Dr. Smith’s property has appreciated to around $600,000 in value and she owes $475,712 on her original mortgage.

When she bought the home, she had no cash to put down and very few options. The physician mortgage loan was probably her best bet. But now that she has over 20% equity and a healthy earnings history, all sorts of options have opened up. Odds are she’d be able to qualify for the best deal around.

If she had the initiative to refinance and wanted to keep the payment similar to the one she was already used to, she’d be looking at a new 20-year fixed mortgage at 3%. The monthly principal and interest payment on the $475,712 new mortgage would come up to $2,638.29. More importantly, she’d be shaving seven years off her repayment term with only a $30/mo increase in payment. Now that’s a home run!

She could also consider refinancing into a new physician mortgage loan. That would have been better, but nowhere near as appealing as the conventional mortgage. She’s now in the sweet spot for traditional mortgages and she should take advantage of it.

Pic 4

When you’re considering a refinance, be sure to check out a few different lenders. And remember that while refinancing into a new physician loan may be a good deal, it’s not always the best one. Doing your homework before refinancing your physician mortgage loan will pay off. Ideally, you also have someone, like a financial planner, who can help you analyze your options objectively.

When Should You Avoid Physician Mortgage Loans?

You should probably stay away from physician mortgage loans if any or all of these conditions apply:

  • The ease of getting a physician mortgage loan is causing you to consider buying too much house
  • You have (or will have) at least 20% to put down on the home
  • You’re in the military – look at a VA loan instead
  • You expect a large influx of cash shortly after buying, and are using the physician mortgage to get the deal done now
  • You aren’t comfortable with the prospect of starting out 5-10% underwater on your home (in other words, you don’t want to write a big check to get out of it if your circumstances change)

Alternatives to Consider Before Signing

In my opinion, it’s best to wait until you have at least 20% to put down on the home. That way, you’ll to get the best deal possible. Plus, you don’t have to take on any of the risks that come with financing anything 100%.

If you like that idea, go ahead and rent for now and start stashing away some cash in preparation for buying your first home. If you already own a home and plan to upgrade, the best way to save for your future down payment is by paying your current mortgage off more quickly. You might even consider refinancing your current mortgage into a shorter term to get used to monthly payments. You can also structure the new loan so that it allows you to build equity to the amount necessary to have 20% by the time you plan to upgrade.

There are several other types of loans we didn’t cover that could come into play. Here are some of them:

1) The Conventional Loan with PMI typically requires at least 10% down. If you have 10% to put down, this may be a better option than the physician mortgage loan, if you plan to own the home long enough for the PMI to stop.

2) The FHA Loan typically requires 3% down and has very competitive rates, but it also comes with a monthly permanent fee similar to a PMI. The monthly FHA fee makes it way less appealing for most borrowers.

3) The Jumbo Loan with PMI typically requires at least 10% down. This type of loan would be worth comparing to larger physician mortgage loans. Often, it comes down to how long you plan to own the home. The Jumbo might have a lower rate but it also comes with PMI.

Other Mortgage Resources

If you’re feeling overwhelmed by all of these options, please reach out to us. We help clients navigate these types of decisions all the time. We’re happy to set up a free consultation to find out whether we’re a good fit.

Or if you’d prefer to do it yourself, there are tons of online resources to help you learn more about mortgages. One of my favorites is the Mortgage Professor. This site has a great inventory of mortgage calculators and spreadsheets to help analyze mortgage options. You can also check mortgage rates based on your circumstances and without providing personal information.

Also, White Coat Investor has a great post similar to this one. It includes a very thorough list of physician mortgage lenders, including the states they work in.

Do you have any experience – good or bad – with physician mortgage loans? Share your story with us in the comments.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Study Reveals Physicians In-training are Failing Financially

Study Reveals Physicians In-training are Failing Financially

Are physicians bad with money? This recent study helps answer the question using data collected from 422 medical residents and fellows at Washington University and the University of Arizona. The participating physicians completed a quiz on basic personal finance knowledge and answered additional questions on financial status, behaviors and professional advice. And the results aren’t pretty.

They scored a big fat F (52%) on the quiz section. Only 65.4% knew Roth IRA’s allowed for tax-free withdrawals in retirement, 19.9% knew bond prices fall when interest rates rise and 16.1% knew why different mutual fund share classes existed (to provide the same investment with a different expense structure).

Their feelings about financial status, behaviors and dealings with professional advisors are equally concerning. They gave themselves a score of 4.8 out of 10 in regards to their satisfaction with their personal finances. Only 14% of residents with children have a will. Of those surveyed, 46.7% or 197 residents and fellows obtained professional financial advice in past 5 years. However, the overwhelming majority didn’t actually pay anything for the professional financial advice (maybe they’re getting what they paid for). Insurance and investment advice topped the list of the type advice received. Coincidentally, most financial professionals, especially those that don’t charge fees, only get paid when they sell insurance and investment products.

Professional Financial Advice Is Not Working

It’s clear from the study that physicians in-training are failing financially. And I’m not surprised. After all, when you’re working 80+ hours per week learning medicine, everything else takes a back seat. Before we talk about solutions, let’s talk about what’s not working.

As the data suggests, plenty of financial professionals are actively providing free financial advice to help address the problem. But it’s not working because it turns out these financial professionals are really salespeople paid to sell insurance, not give advice. In fact, most financial advisors chasing residents are explicitly required per their employment contract NOT to give financial advice. Why would they call themselves “advisors”? Because anybody can call themselves a financial advisor and it’s easier to sell product as a “professional advisor”.

Financially inexperienced and illiterate physicians in training aren’t qualified to sniff out salespeople vs true advisors. It’s the perfect opportunity for aggressive salespeople to disguise themselves as advice providers offering free “education”. Every day, financial advisor-salespeople deliver financial lectures to residents and fellows across the country. They gladly offer attendees no-cost financial advice, planning and one-on-one meetings. In fact, they’re going to chase every single attendee until they agree to schedule a one-to-one meeting.

The real damage happens in these one-on-one meetings. Young physicians lacking experience and financial knowledge are at a serious disadvantage when they sit face to face with a highly trained salesperson disguised as a financial advisor. Many don’t understand the danger of conflicts of interest and naively assume people are looking out for their best interests. They need all kinds of financial advice: when to buy disability insurance, what type mortgage to get or how to manage student loans. Why not get it all from the free trusted advisor that’s offering to come to you? I know this process well because I used to be one of these advisors. Eventually, I realized how this was misleading, quit my sales job and started my business.

What’s The Solution?

Quality, unbiased financial education is the starting point. The author implies that it’s the medical educators’ and ACGME’s responsibility to improve financial wellness for in-training physicians. He suggests that medical educators should incorporate financial education into curricula. And that it be measured for effectiveness. All great ideas!

The question is: who is capable of providing the quality unbiased financial education to medical residents and fellows? It’s certainly not financial advisor-salespeople.

What about the educators themselves? This cuts out most of the conflicts of interest. Money is a tricky topic – especially when you consider the behavioral components. However, these medical educators have no experience with delivering financial education and coaching. Plus. it’s taking them away from their expertise of teaching medicine. I don’t see this as the ideal solution either.

For this to work, it must be provided by a third-party company with expertise and experience with delivering objective and actionable content to physicians in-training. Conflicts of interest must be avoided by using a company that’s strictly fee-for-service (no commissions or kickbacks) with concentration in financial wellness for physicians. These financial wellness programs should be incorporated into curricula and be paid for by the institution. Incentives similar to health wellness programs could be built in to drive participation. The program would include workshops, tools and other resources tailored to in-training physicians and delivered by the objective experts. The educational campaign should be measured along the way for effectiveness at improving financial literacy and desired outcomes.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Mega-Deduct and Convert: Save Thousands On Roth IRA Contributions

Mega-Deduct and Convert: Save Thousands On Roth IRA Contributions

This article from the Finance Buff explains a great way to save hundreds on Roth IRA contributions.

But I wanted to expand upon this idea and highlight an even bigger way to save using a similar strategy. Thanks to changes in tax law, the “deduct and convert” strategy has become much more beneficial. Before you read on, if you’re pre-retirement age, you must reside in Illinois or Kentucky for it to work well. For all Kentucky and Illinois residents, pay close attention!

The Original Strategy

This strategy exists thanks to Kentucky and Illinois favorable IRA rules. Both states allow state income tax deductions on IRA distributions (including Roth conversions) up to state specific limits. They also allow state income tax deductions on qualified Traditional IRA contributions.

The strategy involves contributing to a traditional IRA, taking the tax deduction (assuming you qualify), and then converting it to a Roth IRA. Kentucky has a progressive state income tax which ranges from 2% to 6%. Most people are paying closer to the top.

For example, in Kentucky if you contribute to an IRA and qualify for the deduction, you’re able to deduct the contribution for state income taxes. So no state income tax going in. You’re also able to convert Traditional IRA’s to Roth (aka Roth conversion) at any age and avoid Kentucky income tax on the converted amount. So no state income tax on a conversion to a Roth IRA.

By taking the extra step, you avoid state income tax on the Roth IRA contribution. For someone in the top KY tax bracket, this strategy effectively saves them 6% on the contribution amount when compared to contributing directly to a Roth IRA. For a $5,500 contribution, that’s $330 in tax savings. With two IRA’s maxed out at $11,000, the max household benefit would be $660.

Although $660 is better than a poke in the eye, it may not be worth the hassle to many taxpayers. And most don’t even qualify in the first place because they don’t live in Kentucky or Illinois and/or cannot deduct IRA’s. We’re talking about a small benefit for a small group.

However, since the article was written, new laws now allow 401k’s to offer in-plan Roth conversion. This effectively opens up the strategy to 401k participants and raises the stakes with much higher contribution limits!

Mega-Deduct And Convert

Greg and Jane live in Kentucky and plan to maximize Roth 401k’s in 2017 ($18,000 each) for a total household contribution $36,000. Instead, they contribute $36,000 to traditional pre-tax 401k’s and in the same tax year convert $36,000 to a Roth 401k. The Traditional 401k contribution is pre-federal and state income tax. The Roth conversion causes additional federal income tax but avoids state income tax. Basically, the federal income tax offsets and ends up the same as if they had contributed directly to Roth. However, they save 6% in state income tax by taking the extra step thanks to the favorable Kentucky IRA tax laws. This saves them $2,160 of state income tax. Now we’re talking about a pretty serious benefit.

The net effect for Kentuckians is a 6% boost on Roth 401k contributions (3% for Illinois). This works especially well for those already planning to contribute to Roth 401k. However in reality, most people aren’t 100% certain that the Roth is better than simply going with the traditional 401k. There are several additional factors to consider as detailed in this article by Michael Kitces on making the Roth vs Traditional decisions. Also, there is also the fact that state income taxes are potentially deductible if you itemize deductions. If this is the case, the effect of this benefit will be reduced based on the tax savings of the deduction.

There’s also the step transaction doctrine to consider. This IRS catch-all rule says you cannot take multiple steps to circumvent the rules. This might be viewed as a violation under audit. Therefore, because of this and because in reality most people aren’t sure if the Roth is actually best (even with potential for up to 6% boost), an even better strategy would be to go ahead and contribute to the traditional 401k. Wait and see how the year shakes out. And decide on the Roth Conversion at the end of the year. Doing this actually gives you a much better idea of what your marginal tax bracket will be which factors heavily into the decision. This allows you to make the decision based on the maximum amount of information. It also lessens the chance of it being considered a violation of the step transaction doctrine.

As with any potentially taxable transaction, you should ultimately consult your tax advisor before moving forward.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

PSLF Lawsuits and Why You Can’t Rely On Servicers for Good Student Loan Advice

PSLF Lawsuits and Why You Can’t Rely On Servicers for Good Student Loan Advice

October of 2017 will mark the first year for borrowers to become eligible for loan cancellation through the Public Service Loan Forgiveness (PSLF) program. This program promises tax-free forgiveness to borrowers who make 120 qualifying payments while working for certain employers — generally either for the government or a non-profit organization. Unfortunately, it is becoming clear that the number of those expecting forgiveness is much greater than those who will actually see their loans cancelled later this year.

As borrowers begin to apply for forgiveness, many are finding that they were never eligible, despite previously being approved by their loan servicers. Given the way various payment plans are structured, this means that many people will have a higher balance today than when they entered into repayment, with no relief in sight. As a result, many are filing suit against the Department of Education, as well as servicers like Navient who previously informed borrowers that they were approved. If their claims are accurate, this would understandably create some concern from those counting on their loans being forgiven.

Despite what many are considering a broken promise by the DoE, it appears as though those at the heart of the lawsuit weren’t ever eligible for forgiveness. In order to be eligible for PSLF, you must follow these three criteria:

  • Eligible Loans – Specifically, FFEL loans are not eligible
  • Eligible Repayment Plan – IBR, RePAYE, or PAYE are the most common. Graduated, or extended plans, while sometimes resembling income driven repayment plans, do not qualify.
  • Eligible Employer – generally a government or 501(c)(3) organization.

The biggest source of confusion seems to be the eligible employer criteria, as the tax-exempt status of many organizations can be confusing. In fact, the American Bar Association — which is one of the employers in question in the suit — is considered a 501(c), which can be confusing to even the most savvy of borrowers. If you are unsure of the tax exempt status of your employer, you can look it up online.

While being sure up-front about your eligibility for forgiveness is ideal, this situation also could have been prevented if the servicers hadn’t initially “approved” these borrowers. The key takeaway here is that the loan servicers do not work for the borrower – they work for the lender. As a result, they are not a viable option for seeking counsel on your loans. In fact, it may be the opposite, per Navient executive Jack Remondi — “There is no expectation that the servicer will act in the best interest of the consumer.

It is important to be fully aware of your options, as well as being confident that the one you have selected is best for you and your repayment strategy. If not done properly, it can cost you big time. And with many graduating medical students holding loans in excess of $300,000, it pays to be proactive.

If you have questions or would like to discuss your student loans, you can schedule a free consultation with us here. You might also find some valuable information in our Complete Guide to Student Loans.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Student Loan Perks Designed to Recruit Physicians Can Actually Hurt Them

Student Loan Perks Designed to Recruit Physicians Can Actually Hurt Them

Many physicians entering practice today owe more than $200,000 on their federal student loans. It’s become a major priority to address these massive loans as they enter into practice.

As a result, hospitals are introducing physician loan repayment perks for new hires to drive recruitment. However, confusing intricacies with the new Public Service Loan Forgiveness program “PSLF” are causing major unintended consequences.

Here’s how the typical physician loan repayment perk goes:

Dr. Smith is finishing training and owes $400,000 on his student loans. He signs on with a hospital for three years of employment and, in exchange, the hospital will pay $75,000 toward his student loan balance. The hospital pays the $75,000 directly to the loan servicer in one, lump-sum payment (or sometimes spread out over three annual payments). If Dr. Smith breaks his contract early, he must repay some or all of the stipend.

At first glance, it’s a win win. The hospital wins by getting Dr. Smith to sign on. Dr. Smith wins by receiving help with his massive student loans.

PSLF Game-Changer

Public Service Loan Forgiveness “PSLF” totally changes the game. Physicians who have qualified loans and are employed (full-time) by a qualified employer and make 120 qualified payments can receive tax-free forgiveness of any remaining balance (after they successfully prove everything was “qualified”).

Qualified loans are federal direct student loans – these are by far the most common type of student loans young physicians take out for medical school. If they happen to be federal non-direct, there are methods to change them into direct to make them “qualified”.

Government, 501(c)3, AmeriCorps, Peace Corps and other qualifying public service employers are considered qualified employers. The majority of hospitals (and residency programs) in the US fall into this category.

A qualified payment is a successful payment made to any qualified loan under any of the income-driven repayment plans or the 10 year standard repayment plan while employed by a qualified employer. These income-driven payments are exactly what they sound like – payments set based on income. Lower income equals lower payments and under most plans, there is a payment cap.

Maneuvering PSLF

Any medical resident with any wherewithal will rack up low PSLF qualifying payments and set themselves up to receive massive PSLF benefits if they end up with a qualified employer. The value builds during residency and remains even if the new physician scores an extremely high-paying job. It’s not uncommon for us to see physicians making mid six-figure salaries on track to receive tax-free six-figure PSLF forgiveness.

PSLF makes student loans unlike any normal debt. With normal debts, the more you pay, the less you end up paying back. Extra payments to principal are great because you save interest. With PSLF, the less you pay, the less you end up paying back. All payments are equal for PSLF therefore, lower payments are always better for the borrower. The $0/mo qualifying payment has the same PSLF value as a $3,000/mo qualifying payment. Once you rack up 120 qualified payments, all remaining qualifying debt vanishes tax-free. The physician that ends up paying the lowest possible total 120 qualifying payments will maximize PSLF value. In most cases, additional payments to principal are worthless. Seems odd right? If you don’t believe me, check out the rules here.

Student Loan Perks for New Doctors

As 501(c)3 hospitals implement student loan repayment perks, they fail to consider the PSLF benefit. In the earlier example, Dr. Smith also happens to be on track for PSLF. In fact, he signed on with this hospital partly because they were a 501c3 so that he could continue qualifying for the program. He’s already satisfied 60 PSLF qualifying payments during residency and fellowship. Therefore, all he needs is 60 more payments to receive full forgiveness. Dr. Smith isn’t sure how the $75,000 will affect PSLF however he assumes it can’t hurt. As strange as it might seem, the $75,000 paid toward his student loans has no affect on PSLF except that it’s taxable income and therefore increases his total remaining payments by $7,500. It turns out he would have been better off receiving nothing. On top of this, Dr. Smith has to pay tax on the $75,000. IF we assume the tax is 40%, that’s $30,000.

In this case, Dr. Smith would have benefited $37,500 by declining the student loan perk. The hospital would have also saved $75,000. That’s $112,500 of missed opportunity.

PSLF Friendly Student Loan Perks

One solution would be for 501c3 hospitals to stop paying student loan stipends directly to servicers. Instead they could pay the borrower directly. However this would not incentivize physicians to maximize PSLF and it wouldn’t save the hospital any money.

To accomplish the desired outcome, 501(c)3 and government hospitals must restructure their student loan recruitment perks to consider PSLF. Because of it’s surprising complexity, it’s rare to see physicians maximizing the program.

A better solution would be for hospitals to use a small portion of their “student loan perk” funds to hire student loan consultants for their new physicians to help them navigate and maximize PSLF. Hospitals could then reimburse the physician for successful PSLF payments made. This would incentivize physicians to manage PSLF effectively and lower the hospital’s loan reimbursement payments. This would save the hospital money and help physicians eliminate their student loan burden faster.

PSLF has changed the game and hospitals must adapt if they want to attract and retain top physician talent. It’s only a matter of time before hospitals figure this stuff out and start offering new and improved recruitment incentives that help address the student loan problem. In the mean time, if you have a similar offer, it’s worth having a conversation with your employer about an alternative set-up that could ultimately save you thousands.

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