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Medical Residents Blog

Financial Planning for Medical Residents

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Case Study – How a University of Iowa Medical Resident Saved $263,000 on Student Loans WHILE Saving for Retirement

 

Let’s compare the financial situations for two medical residents at the University of Iowa, each with $191,000 in student loans:

 

Resident #1: A University of Iowa medical resident has $57,200 salary, which after taxes leaves a monthly income of $3,521. They have to pay $1,207 per month on student loans, and can’t afford to save based on their living expenses.

 

Resident #2: A University of Iowa medical resident has the same salary of $57,200. They have to pay just $225 in student loan payments each month, are saving $1,000 per month for retirement, and have just as much money to spend each month as Resident #1 for their living expenses.

Would you rather be Resident #1 or #2?

Now here’s the crazy part:

 

Resident #2 is Resident #1 after they got help from a financial planner.

 

These numbers are for the exact same person! How is Resident #2 only required to pay $225 per month for the exact same loan balance? Let’s take a look at how this medical resident was able to save for retirement, lower their student loan payment, and keep up their lifestyle:

 

The Average Medical Resident Needs Financial Planning

 

For this example, we used the national averages for resident student loan debt ($191,000), and starting salary ($57,200)

[Sources for these numbers: Average debt comes from the Association of American Medical Colleges, average salary comes from MedScope].

Based on that amount of student loan debt and a standard payment schedule, Resident #1 would have a monthly payment for their student loans of just about $1,200:

191000_student_loan_debt_repayment.png

 

With this information, it is easy to see why so many medical residents apply for loan forbearance while in their residency. Resident #1’s student loan costs are likely their largest monthly expense!

But as we showed in a previous post on medical resident loan forbearance, that can be an expensive decision.

 

A Better Financial Plan for Medical Residents

 

Our post that we linked to above goes into more details on the types of loans that are eligible for income based repayment. For now, let’s assume the resident’s student loan debt is eligible for an income based repayment plan.

But what does an “income based repayment plan” really mean?

An income based repayment plan caps your monthly student loan payment at 10% (or 15%, depending on the date you received your loans and your payment plan) of your discretionary income.

Right away, that makes our resident’s situation much more manageable. Based on a $57,200 salary ($4,390 per month before taxes), that reduces their payment to $439, a reduction of more than two-thirds.

 

But it gets better.

 

The calculation for a monthly payment under an income based repayment plan for your student loan is not based on your total income, but your "discretionary income", which is calculated as:

 

Adjusted Gross Income (AGI) – (150%) * Federal Guideline Level = Discretionary Income

 

If our medical resident can reduce their AGI, their discretionary income calculation will be lower, and they will therefore have a lower monthly payment on their student loans.

Let’s look at both these inputs, and see how our resident can reduce their payments further:

 

Federal Guideline Level

The Federal Poverty Guidelines can be found here: https://aspe.hhs.gov/poverty-guidelines

For those in the 48 contiguous states the numbers are all the same:

poverty_level.png

So, if our example resident lives in Iowa and is single with no children, their poverty guideline is $12,140. 150% of that is $18,210.

In other words, the first $18,210 of income for our medical resident is not used to calculate your new income-based student loan payment.

What other portions of your income is exempt from the calculation? For that, we need to look at what makes up your Adjusted Gross Income.

 

Adjusted Gross Income Calculation for Student Loans

Here’s how your AGI is calculated on a tax form:

AGI_Calculation.png

Your AGI is not your salary, but instead your income after any and all of the qualified expenses. Here are a few expenses that lower your AGI (which will, in turn, lower our resident’s monthly student loan payments!).

  • Health Savings Account (HSA) Deduction
  • Moving Expenses
  • IRA Contributions
  • Student Loan interest

Note: Contributions to your workplace 401(k) or 403(b) lower your taxable income as well.

(Other expenses that may be applicable for some residents; moving expenses and student loan interest)

 

Here’s How Our Medical Resident Pays Almost $1,000 Less per Month for Student Loans While Saving $270,000 for Retirement

 

Resident #2 has a salary of $57,200.

We subtract the 150% Federal Poverty Guideline of $18,210 and we are left with $38,990.

Based on this information and with no other adjustments to our resident’s AGI, their monthly student loan payments would be between $324 and $487 per month, depending on their repayment plan.

 

But we can get that even lower.

 

Both IRA contributions and the residents TIAA 403(b) contributions will lower their AGI. For every dollar you put in these retirement savings accounts, your student loan payment drops!

For many residents, the next step for lowering their AGI will be to contribute to a traditional IRA.

Just by our resident making a traditional IRA contribution, their income based student loan payments would fall to between $279 and $418 depending on their plan.

If our resident contributed $3,000 ($250 per month) to their workplace 403(b) retirement plan and $3,450 ($287 per month) to a Health Savings Account – Quite possibly the world’s best potential retirement savings vehicle! -  Our resident will only be required to pay $225 per month for their student loans.

 

Our resident applied for income-based repayment, saved $995 per month for retirement, and saved $1,000 per month on their student loans.

 

Lower Student Loan Payments

These reduced payments still count as qualified payments for public service student loan forgiveness (PSLF). Since University of Iowa residents work at a qualified institution, a 4 or 5 year residency can get you halfway towards total student loan forgiveness and being completely student loan free!

 

With an income-based repayment plan, this University of Iowa resident will save more than $263,000 on their student loans.

full_repayment_calc.png

 

 

Even if our resident goes to work elsewhere after the University of Iowa residency as does not apply for PSLF, an income-based repayment plan for the next 20 years will still save $186,000 in total student loan payments!

 

A Long-Term Benefit for Residents Who Start Saving For Retirement Early

 

If the resident keeps up that rate of retirement savings ($5,500 traditional IRA + $3,000 in Iowa’s 403(b)) for 4 years, by the time they are ready to retire, their savings would have grown substantially!

residency_retirement_savings.png

 

By retirement, our resident will have more than $270,000 just from their savings while in residency!

This is a screenshot from our Compound Interest Rate Calculator. You can go to the link yourself and enter whatever numbers you want. But for our example resident - Just the money they were able to put away in residency would be worth more than a quarter million dollars by the time they retire!

Add in the HSA savings, and our resident will have more than $380,000 saved up.

These numbers are used purely as an example and do not imply any guarantee for return.

 

Let’s sum this up.

 

With a little bit of planning and investment management, a resident today can:

  • Save (a lot!) more for retirement,
  • Pay (a lot!) less on their student loans,
  • And still have just as much money left over for monthly expenses.

 

For this Iowa Resident, working with a financial planner should add more than a quarter million dollars to their net worth by the time for retirement. And that’s just from smart moves during 4 years of residency!

 

The decisions you make today regarding your finances are the most important you will make in your life.

Ready to see what we can do for you?

 

 

Further Reading:

Many residents are unfamiliar with a Health Savings Account. To learn the basics, check out this article that Hylland Capital was interviewed for in The Penny Hoarder:

The Penny Hoarder - 5 Smart Ways to Use Your HSA

 

Because of compound interest, beginning to save early in your career has tremendous benefits. We cover this topic in much more detail in an article (That has since been featured in Medium!) here:

Not Investing in an IRA This Year Will Likely Cost You At Least $42,000

 

Matt Hylland