Fellowship Loan Strategy: Managing Medical School Debt

Fellowship is an odd financial period, earning more as an Attending than as a resident barely more. Salaries range between $300,000 and $600,000 and last one to three years. Meanwhile, you have a debt load of $250,000 to $350,000 from interest. Fellows struggle to meet expenses of $65,000 to $80,000 a year. Making decisions about this debt is very crucial and fellows fully recognize this.

Fellowship Salaries vs. Loan Balances

By 2024 typical salaries for fellows range from about $65,000 for first year subspecialists to over $90,000 for senior fellows in procedures. Salary varies by specialty and program and level of training.

Over the course of residency three to five years of interest on loans has likely increased the amount you owe from when you started. Fellows who went into residency with $270,000 in loans and paid only modest IDR payments for four years might now owe something like $310,000 to $330,000 based on aggressive capitalization of interest.

Now fellows are facing a big question: Should you continue IDR and work towards PSLF if eligible or pay more aggressively now and change strategy?

If You're Pursuing PSLF: Fellowship Is a Goldmine

For fellows at places like hospitals, schools for children, VA, or other 501(c)(3) and government employers, every month spent working there counts toward 120 qualifying payments under PSLF. Fellows who work 2 to 3 years for these employers accumulate 24 to 36 qualifying payments. Usually fellows accumulate 48 to 84 qualifying payments by becoming attending physicians and then they need to make 36 to 72 additional qualifying payments as attending physicians. So strategy during fellowship is clear:

Use IDR like SAVE or PAYE or IBR
Make qualifying payments even if they are small
Annual verification of employment certification
Do not refinance federal loans

Monthly payments under IDR usually range from $400 to $800 depending on salary and family size, which is a large portion of salary but the math for PSLF often makes such payments more valuable than saving extra money toward principal each month.

If You're Not Pursuing PSLF: Fellowship Is About Positioning

For fellows who refuse to work for qualifying employers such as cardiologists who join private practice or dermatologists who work at clinics, PSLL is useless. This strategy shifts to lowering interest and getting prepared for aggressive repayment during fellowship training.

Continue IDR during fellowship just as during residency. Fellowship pay is still too low to make a big reduction; you are too soon for pay to kick in.

Refinance not during fellowship time, it's too early. Still in training and income low. Refinancing into private loans locks high payments if something changes such as injury, program changes or life events. Use public loans safety net during this time of training.

Start modeling repayment plan now when you become attending. You already know specialty you will practice and where you plan to work along with range of pay for attending. Use this information to work out aggressive repayment planning: what refinancing rate you want and how long and how much monthly payment it will take. Plan now to act quickly when you start as attending and refinance on first day, set up automatic payments, and start repayment immediately rather than struggling in the first year.

The Refinancing Question During Fellowship

Some advisers say refinancing during residency is a good idea to secure a lower rate early. Let me give you a more realistic perspective on this.

One reason: refinancing rates for residents are currently between 5 and 7 percent depending on creditworthiness and lender. Currently Federal Direct PLUS loans are at 8. 05 percent. The difference in rates saves a lot of money if you are planning to pay off fast anyway.

Opposing this is that residency is still a learning time and things do change; refinancing also permanently takes you away from IDR and PSLF. If your attending employer qualifies for PSLF then this refinance cannot be undone. Protection from low income through IDR is still valuable even if never used.

Recommendation: Refinance only if you are absolutely sure about three things: you are not applying for PSLF; your attending employer is for profit; and you have a clear repayment plan; otherwise wait out any uncertainty.

Managing Cash Flow During Fellowship

Physicians go through the tightest period of financial training during fellowship; unlike residencies where financial relief is clear (IDR, move on), fellows feel anxious because the income increase is only a year away. Living on $70, 000 feels even worse.

Here are practical tips for fellows:

Get mortgage as a physician if you buy a house. Many lenders who serve residents and fellows offer no PMI loans for low down payments and you do not have to be in training to qualify and can buy at market value even if you are not yet in salary doubling.

Accelerating loan payments should be done only mathematically sound for you. Do not accelerate payments yet; cost of putting $2000 per month during fellowship to reduce principal is usually higher than savings on interest.

Contribute also to 403(b) or 457 if your program offers one; many fellows overlook retirement contributions during training; deferrals reduce Adjusted Gross Income and also reduce taxable income.

The Transition to Attending: What to Do With Your Loans in Your First 30 Days

After you transition from fellowship to attending, most mistakes related to loans occur. As you start to face real decisions and a large range of options, they seem much bigger. Here's what to do in the first thirty days as attending physician:

Determine if your group is a 501(c)(3) or for profit. If you qualify for PSLF and have made qualifying payments, stay on Income Based Repayment (IDR) now.
If switching to private practice: Contact different lenders such as ELFI, Laurel Road, Earnest, and SoFi. Use the offer letter as proof of income before you get your first paycheck.
Re certify your IDR plan with new attending salary before your first annual recertification deadline. You will have higher payments but they are expected.
Submit ECF for PSLF to your fellowship institution if you worked at an eligible program and secure qualifying months before it gets harder to reconstruct that trail.
Do not make any permanent decisions such as refinancing or switching PSLF track until you are 90 days into the job and you are sure about your employment situation.