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). Finally, it seems like a product exists to reward you for your time training to be a physician. After all, it’s been tough. For the past few years, you’ve watched many of your friends become homeowners.

While they were posting their latest photo of a fun, DIY home renovation, you were stuck in the library studying pathology. While they hosted a summer barbeque in their own backyard, you were sitting through an 8 hour board exam (and timing your breaks perfectly so you could scarf down a protein bar.)

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 physician mortgage loans stack up against everything else that’s available? Are they really as good as they sound? Let’s find out.

At this point in the home buying process, you’ve already made a solid decision about how much to spend on your home and you have your financial ducks in a row. So, the next step is 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

First, let’s talk about why physician mortgage loans even exist. The reason is that 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.

Keep in mind, though, that their ultimate goal is to get you in the door and sell you other products 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. That’s why it’s so important to compare physician mortgage loans to other types of mortgage loans before making your decision.

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:

Also, please 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:

So, now that I’ve explained why physician mortgages are different and why they appeal to many young physicians, it’s time to take a look at mortgage expenses. Many people focus on the monthly payments when considering buying a home, but there are several 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.

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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 – An Example

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% down option?

Pic 2

Pic 3

The total lifetime interest costs:

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

As you can see on the charts above, putting $100,000 down will end up saving you over $240k in interest. Plus (and this is a huge plus), you’ll get your mortgage paid off almost 12 years sooner.

Additionally, don’t forget that having equity in your home 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, 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?

Perhaps by now, you’re more excited than ever about buying a house, especially now that you know an option exists where you can get a home with $0 down and no PMI. However, in order to cover all my bases, I did want to point out that 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 tempting you to consider buying too much house
  • You have (or will have) at least 20% to put down on the home. In this situation, a conventional mortgage is best.
  • You’re in the military. In this situation, 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

There are many online resources to help you learn more about mortgages. Some examples include:

  • The Mortgage Professor: A site with several mortgage calculators and spreadsheets to help analyze mortgage options.

Also, if you’re feeling overwhelmed by all of these options or have any questions about anything mentioned in the post above, 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.

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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.

13 Mistakes Young Physicians Make With Student Loans

13 Mistakes Young Physicians Make With Student Loans

Student loans have quickly become the most complex financial issue facing young physicians. The average physician in training owes well over six figures. And these aren’t your normal run of the mill loans. Student loans today come with high interest rates and 100’s of options to analyze – all of which end up intertwining into personal and professional planning. The additional complexity paired with massive balances dramatically increases the potential for costly errors.

As financial planners for young physicians, student loan planning has become a big part of our business. I can tell you first hand that we see an alarming volume of errors occurring. Even those people I would consider “on the ball” are missing opportunity to the tune of tens to hundreds of thousands of dollars.

I’ll share 13 of the most costly errors we see young physicians making with student loans. My hope is that you can learn from the mistakes of others instead of making these mistakes yourself.

Forbearance

Student loan forbearance is tempting during residency and fellowship. What’s the harm in delaying payments when finances are tight? It’ll be easy to make up on the back end when the big bucks start to come in. After all, student loans are “good debts”. Many young physicians use logic like this to justify entering into forbearance during training. But they’re failing to figure up the true cost of this decision!

Forbearance sets off a number of negative triggers with opaque costs. Collectively these negative side effects make forbearance a terrible idea for anyone with the means to make payments.

Not Going For PSLF

Let’s look at how this might affect someone with $300,000 of unsubsidized federal student loans at 6% coming out of medical school that’s not going for PSLF. To simplify, we’ll assume Income-Driven payments are $0/mo. (which is reasonable for the person legitimately considering forbearance because they lack discretionary income). Forbearance payments are also $0/mo. Check out how the balance grows over time.

Residency Student Loans

Total balance at the end of 4 years of residency:
Forbearance – $378,743.09
IBR/PAYE – $372,000 ($6,743.09 savings)
RePAYE – $336,000 ($42,743.09 savings)

Medical School Loans During Residency

Total balance at the end of 8 years of residency and fellowship:
Forbearance – $478,154.42
IBR/PAYE – $444,000 ($34,154.42 savings)
RePAYE – $372,000 ($106,154.42 savings)

When PSLF isn’t in play, total balance owed is critical because 100% must be paid back. If you come out of training owing $100,000+ more because of poor decisions, you must own it.

Going For PSLF

Forbearance is also terrible for the PSLF crowd but for totally different reasons. PSLF makes total balance much less important. Instead, it’s all about making qualified monthly payments that are as small as possible (lower payments = greater forgiveness). Let’s use the same loan scenario and consider PSLF.

Say Dr. Davis originally plans to go into private practice and chooses to forbear on loans during residency. Then midway through, she realizes the hospital she’ll likely work for is a PSLF eligible not-for-profit. At this point, she starts the PSLF clock by signing us for RePAYE. But what’s the cost of missing two years? Let’s assume her payments would have been $0/mo. for the first two years of residency. When she is in practice, payments max out at $3,000/mo.

With PSLF, you clock in 120 qualified payments and then you’re done with the loans. As far as PSLF is concerned, $0/mo payments are equal to $3,000/mo payments. She misses the opportunity for 24 “free” PSLF payments and is forced to make them up in practice at a cost of $3,000/mo. In just two years, this mistake costs her $72,000 ($3,000 times 24 months) in future wealth.

In these examples we looked at extended periods of forbearance during training. It’s also common to see intermittent forbearance periods (many of which are a surprise to borrowers). We’ll cover these more in mistake #4.

The only way forbearance makes sense is when you truly have a major financial hardship – obviously it’s more important to feed your family than to make payments on student loans (when you could otherwise forbear). I get that. But if you’re fortunate and have enough to cover life’s necessities, don’t forbear. Get rid of your cable TV or your decked-out cell phone plan so you can make the minimum student loan payments.

Wrong Repayment Plan

With so many options on the table, this is bound to happen. You have PAYE, RePAYE, IBR, new IBR, 10 year standard, graduated, extended graduated… and several others.

When PSLF is off the table, student loans act more like traditional debts. In general, it’s wise to minimize interest and maximize payments. Ideally, you pay off debt with the highest interest rate first.

With PSLF, the goal is to make qualified payments at the lowest amount possible. One of the requirements of a “qualified payment” is being on a certain type of repayment plan. If your repayment plan is not qualified, those payments don’t count toward the 120-payment clock. If you are using a qualified repayment plan, the key is to pay the least amount possible. Each payment has the same net effect no matter the amount. Therefore, it’s absolutely critical to make sure your repayment plan offers the lowest possible payments for your circumstances.

For example, many young physicians can qualify for PSLF under RePAYE or IBR but aren’t eligible for PAYE based on the dates their loans were taken out. Most of these physicians are using IBR because it was the original option. However, in many cases, RePAYE provides a payment that’s 30% lower. This easily results in $10,000’s in additional forgiveness. Many are missing this opportunity.

Failure to Consider Tax Implications

Taxes used to be independent of student loans. Today, though, that’s not the case with “income-driven” repayment, PSLF and income-driven forgiveness.

Student loan decisions can affect taxes. If you’re going for income-driven forgiveness (20 or 25 year), you better be prepared to pay income taxes on the ultimate forgiveness amount.

Tax decisions also can affect student loans. Lower PSLF qualifying payments = greater forgiveness. One simple way to lower your PSLF qualifying payments is to make decisions that lower your Adjusted Gross Income – “AGI”. If you save in pre-tax retirement plans like the 401k, your AGI will be lower and, therefore, income-driven payments will be lower. This can ultimately increase the amount forgiven under PSLF and income-driven forgiveness.

Another example… if you’re married and elect to file taxes separately, IBR and PAYE payments only consider one borrower’s income. If the tax cost of filing separately is less than the increased projected forgiveness caused by lowering payments, this strategy can add value.

Income-driven Application Procrastination

We regularly see NSLDS student loan reports showing periods of forbearance around the time people file for income-driven recertification. Often the borrower has no clue that the forbearance periods exist. They submitted the forms before the deadline and never missed a payment. Often, that’s not enough.

Loan servicers need time (apparently a lot of time) to process the application. If you submit the income-driven application a couple weeks before the deadline, it’s likely they will not finish “processing” until after the deadline. The average student loan report we see has intermittent forbearance periods sprinkled into repayment that the borrower was totally unaware of.

Let’s look at an example – Dr. Smith is going for PSLF and his student loans have a 10 year standard payment of $2,500/mo which he expects to begin paying after a few years in practice. During his 5 year training, he has the opportunity to rack up 60 PSLF qualifying payments that average $200/mo. Although he successfully makes all 60 payments, to his surprise, he only gets credit for 50. The 10 non-PSLF payments were actually periods of forbearance he wasn’t aware of. At a net cost of $2,300 per payment, we’re talking $23,000 of total additional costs.

To counter this, submit the application as soon as you receive the annual letter. Fax in the paper version and follow up weekly until you receive confirmation that it’s complete. This may sound like a hassle, but for the average physician with six figure loans going for PSLF, it’s worth thousands to get right.

Failing to Verify Employment

According to the US Government Accountability Office Student Loan Research Report from August ’15, about 147,000 borrowers had employment and loans certified in anticipation of PSLF, and 4 million current direct loan borrowers may be employed in public service. Essentially, less than 4% of those likely eligible for PSLF are proactively positioning themselves for approval. The problem is that people have a choice: Verify now – or – verify later.

“Employment verification” is not required until you apply for PSLF (after 120 payments). You can either verify when you apply or as you progress through time. It seems most people are opting to verify later. They choose to work for 10 years “unverified” and then go back and verify all 10 years at once. This is all happening while they’re waiting to see if they qualify for $10,000’s and sometimes $100,000’s of forgiveness benefits.

Based on my experience helping people apply (over time) for employment verification, I expect this to be a huge mess for some borrowers opting for the procrastination method. I see the challenges and surprises that pop up going through this process year by year. Mistakes are made, people get confused, the process gets dragged out. I can only imagine what that might look like when you try and verify 10 years all at once.

Paying too much Interest

This is mainly for the non-PSLF folks out there. When you’re not going for PSLF, student loans are more like a typical debt. The higher your interest rate, the more you end up paying back. What’s interesting with student loan interest rates is that they vary considerably. There are loans out there with interest rates in the 2% range and others with rates over 10%.

As a general rule of thumb, if you’re not going for PSLF or any other forgiveness program and your rate is above 5%, you should be considering refinance. The higher your rate, the more emphasis I would put on this. Failure to refinance into a lower rate can easily cost $10,000’s in extra interest payments.

Be extremely cautious when refinancing – especially if you or your spouse (see #10) have any chance of going for PSLF or income-driven forgiveness.

Poor Refinancing Decisions

If you or your spouse are eligible for PSLF, refinance is almost always a really bad idea (see #10). You must maintain qualified federal loans in order to maintain eligibility for PSLF. Some borrowers unknowingly refinance when they are qualified for PSLF. Others aren’t confident in PSLF panning out and refinance. Either way, it’s going to cost you.

And for those who aren’t eligible for PSLF, you have to watch out for bad refinancing deals. Many lenders offer student loan refinancing deals that are not in your best interest. Do your homework and make sure you understand the options. Here is more info on several of the lenders offering student loan refinancing.

Bad Consolidation Decisions

Some borrowers fail to consolidate loans they should have consolidated, and others consolidate loans they should have never touched. Still others wait to consolidate and miss out on valuable cost savings. Either way, consolidation mistakes are very common.

Dr. Turner is finishing up medical school, has lots of Direct federal loans and plans to go for PSLF. When she goes through loan exit counseling, she’s confused by all the options. Ultimately, she decides to go for PAYE and will fill out income-driven paperwork before her grace period is up to get the PSLF clock started. Consolidating her loans never crosses her mind – why consolidate two loans? What she doesn’t realize is consolidating into a Direct Consolidation loan immediately after graduation allows income-driven payments to begin much sooner by side-stepping the grace period. If she were able to get payments started six months earlier, it would have increased her projected forgiveness amount by $12,000. For most recent medical school grads, these early payments are very low or even $0.

Dr. Baker is also going for PSLF. He has some Direct Loans and some older FFEL (or non-direct) loans. FFEL loans were very common federal loans before 2010 and aren’t PSLF qualified unless you consolidate them into a Direct Consolidation loan. Dr. Baker chooses to leave the FFEL loans as is because he doesn’t want to mess up his PSLF progress. When you consolidate, this starts your PSLF 120-payment clock. A big misconception is that when you consolidate, you must wrap all loans into the new consolidation loan. Naturally this would discourage someone like Dr. Baker with Direct loans well on their way to PSLF from consolidating an old FFEL loan. Fortunately, it’s not true. You can leave the current Direct loans as is and consolidate the FFEL loans into a separate Direct Consolidation loan. This allows the otherwise non-PSLF loans to joint the party.

Dr. Jones has a similar loan profile to Dr. Baker – mostly Direct loans with some older FFEL loans – except he’s not as far along with PSLF. He hears somewhere that it’s smart to consolidate FFEL loans so they become PSLF qualified. Like Dr. Baker, he believes consolidation is an all or none deal. After running the numbers, he decides it’s best to reset the PSLF clock on all his loans to allow the FFEL loans to be included on PSLF. So he does the full consolidation. This comes with a major cost – all those PSLF payments made on the already qualified loans are lost when he “resets the clock”. Instead, just like Dr. Baker, he should have consolidated the FFEL loans only.

Either one of the above consolidation mistakes eaisly cost tens of thousands of dollars. Be extremely cautious with consolidating your loans. Make sure you have a good reason for each loan you choose to consolidate. And always keep PSLF qualification in mind before making decisions.

Reactive Income-driven Verification

Young physicians, like many people, tend to make reactive decisions. Income-driven verification is no different. They receive the annual notification that it’s time to re-certify and they knock it out. And that’s about the only time they think about it each year. What people don’t realize is they always have the option to volunteer income verification outside the normal annual timeline.

This can prove extremely valuable when income verification results in lower PSLF qualifying payments. This might occur if your income decreased as a result of changing your filing status, going back into training, or reducing moonlighting. Or maybe you’re expecting a pay increase or bonus before your next recertification date. Why not recertify now at the lower income level. If your income decreases or is about to increase, don’t wait until your next verification. Apply now.

Not Considering Spousal Student Loans

For many physicians in private practice, refinance may seem incredibly obvious. Why hang onto your 7% interest rate student loans when lenders are offering 4%? Especially if PSLF is off the table. But what if your spouse is going for PSLF? Many physicians fail to consider the impact a refinance has on their spouse’s federal loans.

Your spouse’s income-driven payment calculation uses income to set payments. The resulting payment then gets prorated between ALL household FEDERAL student loans. In many cases where loan balances are high, the total payment will not be affected when the total federal loan balance decreases as a result of private refinance. Therefore, the income-driven payment due for the family stays the same after refinance. Effectively, the PSLF spouse’s payment increases substantially to compensate. This comes with massive PSLF costs to the total household that typically dwarf interest saved from a refinance.

It may be a good deal for you, but if your spouse is going for PSLF, refinance can end up costing them 10’s of thousands in the missed PSLF benefit. Before refinancing, consider your spouse’s PSLF impact. In many cases, it’s better to keep both spouse’s student loans with the federal government, and save the additional desired payments into a side account. Then as soon as the PSLF spouse qualifies for forgiveness, the non-PSLF spouse refinances (assuming rates are still favorable) and pays a lump sum using the side account.

Not Fighting Servicer Errors

Loan servicers will inevitably make errors that negatively affect unfortunate borrowers. As student loans become even more complex, this will likely increase. It’s a mistake to assume the loan servicer will always look out for you.

You should be keeping an eye on your progress and make sure your records match the loan servicer and NSLDS records. When you spot errors, they should be addressed immediately.

As you submit paperwork and have interactions with loan servicers, it’s important to document everything. Save copies of all paperwork and correspondence (like annual income driven applications and confirmation letters). Write down notes from all calls you make that include the name of the people you talk with and the date of the call.

Taking Bad Advice

As a result of growth in student loan balances and complexity, companies are popping up everywhere claiming to be student loan experts. Be extremely cautious taking advice from a student loan advisor. Figure out if they Fee-only (100% of revenue comes directly from clients) or not. Many of the student loan companies aren’t fee-only and get compensated from student loan refinance companies to send business. That’s a major conflict of interest that can cloud their advice.

Student loan planning today is very different from traditional debt planning. It’s much more complex and traditional rules of thumb don’t apply. As a result, many financial advisors, accountants and other advisors are unknowingly providing the wrong advice.

Improperly Negotiating Student Loan Stipends

Every year, not-for-profit 501(c)(3) hospitals all over the country hire thousands of young physicians. Many offer student loan stipends and repayment packages for new hires. These hospitals agree to pay annual lump-sum student loan payments for new physician hires. Normally these payments are made directly to the student loan servicers.

On the surface, this seems like a fantastic benefit. However, it’s often an absolute waste of resources when PSLF is in play. With PSLF, the goal is to pay the minimum payment. Lump-sum extra payments end up providing no economic benefit as they end up reducing total forgiveness dollar for dollar. On top of that, it’s typically a taxable benefit. So you pay tax on money you effectively give right back to the government. We have seen cases where people are better off not receiving anything at all. It’s a mistake to let this happen without intervening.

A better route would be to negotiate a salary increase instead of student loan payments. Or have the payments paid directly to you. Most hospitals are happy to make the adjustment once they realize it helps you and doesn’t affect them. However, some hospitals won’t allow this even though it’s an absolute waste of money.

Bringing It All Together

As you can see, student loans have become pretty intense. To help you simplify this concept and wrap your head around the best path to take, we created this student loan flow chart you can see below.

Also, if you’re interested in our student loan advising services, check out this page for more info.

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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.

Why Using Your HSA Balance Now Is Not Always Smart

Why Using Your HSA Balance Now Is Not Always Smart

Most people assume it’s best to use their HSA for out of pocket healthcare costs. But the math says otherwise.

How The HSA works

Contributions are pre-tax or tax-deductible in the year they’re made. The balance, which is NOT required to be used each year, grows tax-free. And qualified withdrawals are also tax-free.

Most people think of their HSA as a health “spending” account when in reality it can also be a long term wealth building account. HSA’s commonly offer a variety of mutual funds you’re able to select based upon long term goals.

Common HSA Scenario

You go to the doctor and eventually receive the bill after your insurance has paid its share. You can either pay the bill with cash savings or use your HSA. Like most people, you assume the HSA is best, but let’s check out the numbers first.

The HSA is likely the most tax sheltered account you own. It’s certainly more tax sheltered than your savings account. If your $50,000 savings account earns 1%, that’s $500 interest. If you’re marginal income tax rate is 50%, you’ll pay $250 in taxes leaving $250. Therefore 1% ends up really being like 0.50%.

If you earn the same 1% inside an HSA, it’s not going to incur taxes. Therefore, your after-tax return is also 1%. In this scenario, the HSA income is double the savings income. This compounds over time as you begin earning interest on interest.

The HSA advantage increases even more with longer time periods, higher expected returns and higher tax rates. All things being equal, the HSA always outperforms cash savings or any other taxable account because of its more favorable tax treatment. So why in the world would you choose to spend out of the better performing account first?

The HSA Advantage

If we’re assuming:
– you have plenty of money to pay for healthcare even if you don’t use your HSA.
– your financial ducks are in a row (emergency savings good, no credit card debt, good insurance coverage, etc)
– you have enough future qualified out-of-pocket healthcare expenses during your lifetime to eventually spend down your entire HSA balance

Using the cash now instead an HSA will yield better results. This occurs simply because of the tax benefits associated with the HSA. Tax-free accounts (like HSA’s) will grow faster than taxable accounts (like cash savings accounts). The actual value generated depends upon factors such as time, rate of return, tax rates, and health care costs.

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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.

Incentives and Behaviors:  What We Can Learn From the Wells Fargo Scandal

Incentives and Behaviors: What We Can Learn From the Wells Fargo Scandal

If you want to understand a person’s behavior, look no further than at what they are incentivized to do. In fact, this is perhaps the only way to understand how, over the course of the last 5+ years, more than 5,300 Wells Fargo employees managed to open over 2 million unauthorized accounts for their customers. Given the overall scale of the operation (5,300 employees!!), it is not surprising the attention this story has received. But how did the world’s largest bank by market cap find itself under such intense scrutiny? The answer is in the incentives created by the bank’s “boiler room” sales culture.

Any time you tie someone’s pay, or their career, to a certain outcome — you can be certain you will receive more of that outcome. In this case, high sales targets, paired with the disincentive of corporate shaming, led to what sums up to be consumer fraud. And while this rightfully has received a lot of publicity, Wells Fargo is far from the only guilty party. In recent months, Morgan Stanley, American Century, and Ameriprise all have received negative publicity for similar practices. To be clear: it’s a problem.

As a consumer, what should you take from this? The answer begins with awareness. Be aware of what conflicts of interest may be present in any business arrangement. Understand that employee incentives can sometimes cloud objectivity. Don’t take anybody’s word as truth without first asking the tough questions — “Why are you selling me this?” “Why is it the best solution?” “What conflicts of interest exist in this relationship?”

And this goes far beyond finance and banking. Car salesmen, real estate agents, and even your waiter at dinner last night, each has their own set of incentives driving their behavior. By taking proactive measures, you can protect yourself from making costly decisions. At the end of the day, you are the one facing the consequences of the decisions you make — don’t let someone else’s biases dictate those decisions.

I do believe that people are generally good-natured. The problem lies in our incentive based culture and the blinders these create. In fact, I haven’t met a single financial advisor who would say they don’t put their client’s best interests as top priority. But as time passes, and people forget about the Wells Fargo scandal, there will undoubtedly be another occurrence of consumers getting the short end of the stick. And once again, the ultimate root of the problem could be traced back to incentives and conflicts of interest that arise from them.

As a fee-only financial planner, we pride ourselves in the proactive measures that we take to reduce these conflicts of interest. By eliminating product based sales, we can see the client’s situation clearly, and without blinders. We have no financial incentive to do anything other than serve our clients, and in the best way possible. But until the rest of the industry follows suit, you owe it to yourself to ask the tough questions and ensure that you and your family do what’s in your best interests, not somebody else’s.

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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.

3 Ways Doctors Can Increase Their Savings Rate Without Cutting Expenses

3 Ways Doctors Can Increase Their Savings Rate Without Cutting Expenses

Building wealth is simple: make more than you spend and invest the difference.

There are two ways to increase your savings rate: spend less or make more. There are also two ways to earn more income: work more hours or earn more per hour. Many of you already spend enough time working, so let’s start by talking about how you might go about increasing your hourly rate.

What’s Your Hourly Rate?

No matter how you’re compensated, everybody has an hourly rate. Knowing this rate can help you make better financial and professional decisions. Take your total pre-tax compensation (income before anything is taken out) and divide it by the number of hours you typically work. The resulting dollar value is your hourly rate for the period. Here’s a quick example:

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Negotiate More Income Per Hour

Build your case before asking for a pay increase. Start by learning about the market pay rates. Find out how much your colleagues are paid. Check salary studies for your area and specialty. Learn the going rate for locums in your area.

Once you’ve built a compelling case, meet with the decision maker and confidently share what you’ve found. And make the ask. If they say no, ask them what you can do for the practice to make it happen.

Also, be cautious with new job responsibilities. Your employer may agree to your request in exchange for you taking on more job responsibility. That’s not what you were asking for initially, so take some time before saying yes.

This doesn’t have to be purely tied to your primary job. Maybe you’re an emergency room physician who works extra shifts from time to time, and in your market research you determine your employer pays locums far more per hour than your typical overtime shift rate. Knowing this, you now have the opportunity to begin asking for a higher rate on overtime shifts – especially those that are last minute.

Change Your Hours

Look at the hours you’re working. Identify what your hourly rate is for the different hours/tasks you’re performing. Work on cutting the low rate work and increasing the high rate work. For example, you might give up your management role that pays a lesser amount, and instead moonlight more for a higher rate.

Or maybe you can negotiate for less contracted shifts and agree to working more overtime shifts, since you now know those pay rates can be higher.

Outsource Jobs And Work More

Take some time to make a list of all the unpaid work you do, and estimate the time you spend on each task. Next, find out how much it would cost someone else to perform these services. What is the opportunity cost of doing this work yourself vs. working more in your profession and outsourcing the unpaid work?

Consider, for example, yard work – many of us are faced with this time-consuming chore. Let’s say you take 5 hours each month to mow, trim & fertilize your yard – plus the cost of equipment (let’s say $50). On the other hand, your hourly rate as a physician is $200. Doing this yourself essentially costs you $1,050 per month ($200 per hour x 5 hours + $50).

On the other hand, your research shows you can hire the best lawn care company in the area for $300 per month. This saves you $750 per month when you compare it to the opportunity cost of your potential earnings. On top of that, they do a better job than you. And you enjoy your work more than mowing. It’s really a win-win situation.

Then the final (and most important) step is to make sure you actually save the increased cash flow. Set up an automatic savings program so you don’t get used to having the extra money in your bank account. And as always, we would love to hear how our tips worked for you, and how your hourly rate negotiations worked! Please share your experiences!

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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.