Med school loan when not necessary?

[MT Headed]

Is there any good reason to take out a loan for medical school when it isn't necessary?

I had a successful first career, and I can easily pay my own way through medical school. The student loan options in 2012 seem to consist of only 6.8% loans with interest that begins on day one of med school. If I ever needed access to capital I can certainly get it at a lower interest rate than that.

I am familiar with IBR. I don't qualify for it (or, my IBR payments would match my 10 year payments the second I start residency). I am familiar with PSLF. It is extremely unlikely I will enter public service.

Sometimes I hear about programs where the employer (or the state) pays off a portion of the student loans, but I don't have any details on these. Do such programs really exist? How much is typically paid off? Would it make the most sense to pay cash M1-M3 and then get stafford student loans for M4 just to keep my options open?

I don't want to be the chump that loses out on thousands of dollars of reimbursement as a physician because I chose to not take out a student loan.

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[tkim]

Unless you can find a way invest the money you have now to earn a return in excess of the interest rate you borrow at, I would pay your way through school and emerge debt-free. There are loans that would pay back some part of your loans if you work in an underserved area. But if that's not worth working in an area that you likely would never move to/live in otherwise, save yourself some grief and pay for school.

 

[MT Headed]

I forgot about the underserved angle. I come from an ultra-rural region of the country (stoplight density: 1 per 1000 square miles) and there is a high probability that I will return to practice primary care privately in a federally designated primary care Health Professional Shortage Area (HPSA). I'm thinking specifically of programs like the Montana Rural Physician Incentive Program

http://mus.edu/Prepare/Pay/Loans/MRPIP-benefits-obligations.asp

I mean, I'm no expert, but to me that looks like $100,000 of free money that can only go towards student loans. If I had them...

 

[tkim]

then take out the loans and be prepared to pay it back + 6.8% capitalized interest x 4 years if you decide not to do the underserved thing.

 

[MT Headed]

That's what I'm thinking. I can even put the tuition money aside in a risk free account that will earn some interest (though certainly not 6.8%!). It seems a small price to pay for such a potentially large opportunity. If the opportunity does not come to fruition, I can pay off my loans in one balloon payment and be done with them.

It just seems so dumb to be forced into unnecessary loans like this in order to take advantage of this program and others like it. But I'm beginning to realize that this entire medical path involves a lot of "playing the game."

Thank you.

 

[shantster]

then take out the loans and be prepared to pay it back + 6.8% capitalized interest x 4 years if you decide not to do the underserved thing.

It's more like 4 years plus residency years.

Plus you still have to pay back the amount that is above what the programs will cap at, so it's accruing the 6.8% interest. And then you are expecting that 4+(however long your residency is) years from now, the program would still exist, will have the cap at the same level, and that you will be accepted to the program. That's a pretty big risk that I personally wouldn't take. Save the money where you can.

When you get accepted to multiple schools, see if any of them will give you extra grants or something to decrease your COA by saying that you will pay in cash. I don't know how flexible they are with that, but if you have more than one offer, and one place would be a significant amount less once you get the financial aid package, tell the other one how much less you would pay at the other school and let them know you have the capital to write a check. You might be able to save some money that way.

 

[tkim]

It's more like 4 years plus residency years.

I was under the impression that you could no longer defer repayment during residency?

 

[shantster]

I was under the impression that you could no longer defer repayment during residency?

It's dependent on how much loans you have to defer or forebear. You still accrue interest in it.

My point was that if you are planning to take out loans just to get the repayment program, which won't give you the money until you are an attending in the rural area, rather than a resident, you also have the interest accruing during the residency years in addition to the medical school years.

But that does bring up the good point that if the OP does not qualify for being able to forebear/defer his/her loans during residency, he/she will still be paying IBR during residency and will be paying interest on money that he/she did not need to take out. All in hopes of being accepted to a repayment program that might not be around that many years in the future.

 

[cincincyreds]

If I were you, I would truly look into if this is a situation of other people's money. You would have to run the statistics and see if you can truly profit off of this. When I was in med school, the rates were really low, so I took out the maximum and made a nice little safe profit by buying safe long term 6.25% cds AND US treasury TIPS bonds.

Even though I have over 150k at under 2% interest fixed which didn't even accrue interest when I was a resident, I bought with the excess funds I didn't use a bunch of 30 year TIPS with real yields of 3.5% [please note I get plus inflation which now runs about 3% or so for a total of 6.5% a year]. So after taxes I am getting 4% and paying 2%. Pretty good deal if you ask me. And it is all free money. So if I make a 2% profit on 150k after taxes, that is 3k in free money per year. Pretty nice deal if you ask me. And I know for a fact we will always have inflation because we have debt and this is the only way our government can pay off debt is with inflation.

So I would say run the numbers, look for investments that appear to be risk free, and go for it. At the worst you may lose a few bucks, but it never hurts to be more liquid with cash than you need to be. If you are truly being offered free money, take it!

 

[MT Headed]

I do not think I will be able to play the "other people's money" game. In my era of 6.8% interest that accrues on day one of medical school, that window has closed for me.

The intention of my original question was two-fold:

(1) are programs like the Montana Rural Physician Incentive Program common? I.e. there other states and/or employers that as a part of a benefits package offer to pay off some or all of your school loans but will not simply pay you the cash? I'm getting the impression that, except for unique programs like MRPIP and PSLF, the answer is a resounding no, especially since I plan to join a small private practice.

(2) since I believe I will qualify for MRPIP, should I take out utterly unnecessary school loans and accrue interest throughout medical school and pay them off at the ten year rate starting on day 1 of residency, just so I can collect the free $100,000 in the first 5 years of me being an attending? Ironically, I've run a spreadsheet and the answer to this question is that it looks like a total wash!

How could it be a wash, you ask? It's because I'll be paying off my loan at the 10 year rate starting on day 1 of residency. So when I'm an attending, I'll be looking at 7 years remaining on my loan. With my loan payments and the bonus MRPIP payments, my loans will be paid off 3.4 years after I am an attending, so I will never be able to collect the full $100,000. It would be closer to $57K. And the net interest I would have to pay at the end of the total 11.4 years of loan is about... $57K. If I play with the numbers I can get it to swing $10K in either direction, but this is basically pocket change and we're talking 12 years from now.


TL;DR: If you have both the cash to pay for medical school and the income throughout residency to not qualify for IBR, in today's interest rate environment (punitive stafford loan rates and terms, low bond yields) it does not make sense to get a student loan, even when bonus money programs like MRPIP are taken into account.

 

[dotdash]

Why not just stick to your day job instead of trying to game the system with taxpayer dollars?
You have to realize that those loans are available to you because it is in the interest of taxpayers to have trained physicians -- not as a free perk for getting into med school. Leave them to people who need them. (And if you think they aren't heavily subsidized, try to get a personal loan without an income stream and see what the rate would be)

 

[Tiger10]

In this economy, I wouldn't count on repayment and incentive programs having the same funding they do now. They might, but it'd be taking a risk.

 

[MT Headed]

You have to realize that those loans are available to you because it is in the interest of taxpayers to have trained physicians -- not as a free perk for getting into med school.

Are Stafford loans need-based? Allocated from a limited pool? If I take a Stafford, could that act deny somebody else from getting one? I honestly don't know the answer to these questions.

I thought Staffords were simply a program that exists, like in-state tuition, the mortgage interest rate deduction, or a resident's salary. These three taxpayer-subsidized programs exist to encourage taxpayer-desired behavior by significantly altering the costs or financing of certain activities. Once these programs have been established for everybody, would not I be a fool to decline participation if it was also to my benefit?

 

[dotdash]

You see a way to make a little money at taxpayer expense. That's the nut of it, right? But the program was not designed to give you a little pocket change to invest; it was designed to provide needed financing to those who couldn't otherwise go to medical school. Whether it makes you a "fool" not to take advantage of a program intended for some other purpose and subvert it to your own goals -- that's a question for you to answer.

 

[MT Headed]

You see a way to make a little money at taxpayer expense. That's the nut of it, right?

I know what you are trying to say, but I disagree. I'm not trying to "make money" by going to medical school; I'm trying to find the least expensive way to attend medical school. Engaging in student loan interest rate arbitrage like cincincyred, or hiding income and/or assets to qualify for need-based financial aid, yes I think those behaviors are abusing the system. But I fail to see how taking a Stafford loan is me abusing the system.

Anyway, the point is moot because as I explained above, I find the current terms of Stafford loans to be highly disadvantageous. If I truly needed loans for school I could get a much better deal by opening up a home equity line of credit instead. And no, I will feel no guilt whatsoever getting a much lower interest rate, and tax-deductible HELOC interest expense, if I took advantage of that taxpayer-subsidized option either. Even though it was designed to provide needed financing to those that might not otherwise be able to afford home ownership.

 

[redtomate]

I know what you are trying to say, but I disagree. I'm not trying to "make money" by going to medical school; I'm trying to find the least expensive way to attend medical school. Engaging in student loan interest rate arbitrage like cincincyred, or hiding income and/or assets to qualify for need-based financial aid, yes I think those behaviors are abusing the system. But I fail to see how taking a Stafford loan is me abusing the system.

Anyway, the point is moot because as I explained above, I find the current terms of Stafford loans to be highly disadvantageous. If I truly needed loans for school I could get a much better deal by opening up a home equity line of credit instead. And no, I will feel no guilt whatsoever getting a much lower interest rate, and tax-deductible HELOC interest expense, if I took advantage of that taxpayer-subsidized option either. Even though it was designed to provide needed financing to those that might not otherwise be able to afford home ownership.

Btw- this highlights how current student loans are predatory (similar to all sub-prime mortgages). For it to be fair to both sides (lender and lendee), a person with the cash should be more or less indifferent between taking the loan and paying with cash. For it to be highly disadvantageous to take the loan just highlights how bad of a deal it is for students (most of which do not have a choice and must take the loan, since they could not afford to otherwise).

 

[EM_Rebuilder]

Pay for the schooling with the money you have... instead of some sort of loan repayment, you can ask for a 10-100K 'sign on bonus'...depending on where you end up and what field you choose.

I was able to keep my loans very low by helping with a family business; a few months of moonlighting once I was a resident allowed me to pay them off completely. The next year of moonlighting went in the bank... I recieved a nice signon bonus when I signed on for my full time job.

Paying off your loans early will put you ahead of 95%+ of other students and will put you leaps and bounds ahead financially....