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Managing Medical School Debt

December 2000

By Bonnie Darves, a Seattle-based freelance health care writer.

Career Resources Editor’s Note: With huge financial burdens weighing heavily on the shoulders of most recent medical school graduates, it is imperative that loan recipients maintain positive relationships with lenders by remaining in contact with them. This connection will help smooth out any bumps encountered along the road toward repayment — and perhaps pave the way to favorable consideration for future loans.

— John A. Fromson, M.D., Chairman of the Department of Psychiatry at MetroWest Medical Center

Develop rapport with your lenders now, and you may get a break later if you need it.

In their excitement to start the next chapter of their careers, medical school graduates are understandably focused on that long-awaited moment when they begin their residency. But after the initial novelty wears off and the realities and responsibilities of resident life set in, new physicians find themselves facing another reality of the residency years: medical school debt.

Although tallying the total tab can be a sobering experience — the average 1999 medical school graduate owed $90,745 — the good news is that there are more resources and more repayment options than ever before to help new physicians manage their educational debt. Comprehensive debt-management publications, sophisticated full-service websites, targeted workshops, and online discussion forums are just a few of the avenues available to physicians seeking guidance in managing medical school debt and starting the repayment process. (See Debt Management Resources.)

Sometimes, help is just around the corner, says Charles Terrell, Associate Dean for Student Affairs at Boston University School of Medicine. “If you’re in a big city such as Philadelphia, Boston, or San Francisco, go to the financial aid office at the medical school. If they can’t give you all the help you need, they’ll know where to send you,” Terrell says. In addition, Terrell notes, many large hospitals and medical centers have designated departments, or programs and seminars, designed specifically to help residents with financial matters related to educational debt.

Ensuring “Safe” Status

The first order of business for residents is to make sure all loan paperwork is in order, accessible and organized, to ensure they establish a good relationship with lenders even in advance of beginning repayment. Many physicians choose to take advantage of all of the grace, deferment, and forbearance options allowable during residency, which entails completing a fair amount of paperwork to maintain good standing with lenders, according to Paul Garrard, Director of Student Financial Services for the Association of American Medical Colleges in Washington, D.C. “You want to be sure you’re in a ‘safe’ status with your lenders, whether the loans are accruing interest or not,” he says because with most lenders repayment technically begins six months after borrowers leave school. “I tell medical students that they need to think like their loan servicers.” The point, Garrard explains, is that even though lenders have thousands of medical school borrowers, and they know that those borrowers will do residencies, the lenders don’t know what the borrowers intend to do until they inform the lenders through the proper forms.

Master File and Contact Log

One way to get a handle on the loans and paperwork is to create a master filing system for all loans — with a separate file for each loan if there are multiple loans, as is often the case — and to back up that system with a log detailing all form filings and contact with lenders.

“It should be a logical system, one that works for you — but the most important thing is to keep copies of every loan document you sign,” urges Barbara Warren, Assistant Director in the Office of Practice Opportunities at Mercer University School of Medicine in Macon, Georgia. Warren also recommends keeping a master calendar of all important filing dates and deadlines, and using certified mail or some other traceable documentation to show that forms were received. If finance isn’t your strong suit, seek assistance from a spouse, significant other, family member, or financial planner to help manage the process. “It’s helpful to have someone who understands the terminology, who can help residents understand what’s happening to them behind the scenes,” she says.

At a minimum, the lender contact log should include the following information: date, name of person who took the call or answered the e-mail query, the issue discussed, and the outcome or pending action. Sample master calendars and contact logs are available on the AAMC’s Web site, www.aamc.org/students/financing/debthelp/start.htm

Maintaining the Relationship

The key to maintaining a positive relationship with lenders and ensuring loans don’t go into delinquent or default status (which could end up damaging a borrower’s credit record) is to open all mail from lenders as soon as it arrives, file all paperwork on time, and inform the lender or loan servicer of any change of address or financial status. That way, Garrard says, if a borrower ends up in a bind during repayment, lenders will be more willing to help out. “In the grand scheme, medical students are the most desirable borrowers — and they are not trying to get you to go into delinquency or default,” he says. “If you ever needed the lender to err on your side, it’s better to have a history of calling in and staying in touch.”

Figuring the Cost

All borrowers, regardless of whether they intend to begin repayment during residency or later, should also ensure they understand the relative cost of their loans. This entails looking at not only the interest rate and interest-rate “caps” but also the lender’s capitalization policy — which is the schedule on which accrued interest is added back into the loan principal. Many Web sites provide calculators to help figure the total cost of loans, and most large lenders now offer online loan tracking to allow borrowers to determine exactly where they stand in total indebtedness. Residents can then establish a priority list for their loans, beginning with those that have the worst terms. “Then, if you have a little extra money during residency and you want to start paying down some of your debt, you know which loans to go after first,” Garrard says.

Light at the End of the Tunnel

Finally, it’s important to remain positive about the debt load, in light of the excellent prospects for future earnings that will make that debt manageable, says Jeffrey Hanson, Director of Debt Management Services for Access Group, Inc., in Wilmington, Delaware, a leading professional education lender. “We always emphasize that medical students absolutely will be able to pay off their loans and have a comfortable lifestyle,” Hanson says. “Student loans are the best financial investment they can make, because those loans allow them to pursue their professional dreams.”

To residents concerned about their financial future, Garrard offers this final reminder: “We do have the history that says this investment is well worth it, and there are more options than ever to repay loans, so the news on balance is still pretty good.”

Lending Lingo

Here are some key terms you’ll encounter when taking out new student loans or reviewing loan documents:

Annual percentage rate (APR) — This percentage reflects the basic interest rate and all additional fees on an annual basis. The APR is almost always higher than the basic interest rate.

Credit bureau scoring — An evaluation tool used to determine a borrower’s likelihood of repaying a loan based on the borrower’s past performance. The lender looks at such factors as the number of credit cards, promptness in repaying obligations, total credit limit, and total indebtedness on credit accounts.

Deferment — A period during which repayment of the principal (the amount borrowed or still owed) is suspended when the borrower meets requirements set by either the lender or by law. For example, some education loans are deferred while a borrower pursues another degree or a fellowship. Interest may or may not be deferred during the deferment period. (See Forbearance.)

Disclosure statement — A document detailing the actual loan costs, including interest rates, charges, and other fees. This document should be presented to the borrower at the time the loan is made.

Equal (or level) repayment — A repayment plan that calls for equal or level payments (including principal and interest) each month, for the period of the repayment.

Forbearance — An agreement that allows the borrower to temporarily cease making loan payments, to reduce the amount of payments, or to extend the repayment period. Usually granted when the borrower proves economic hardship or other extenuating circumstances.

Graduated repayment — A repayment plan in which the amount of payment required at the beginning of the repayment term increases periodically or at pre-set dates during the repayment term, regardless of changes in the borrower’s income.

Income-sensitive repayment — Like graduated repayment, these plans allow for incremental increases in payment, but payments increase as income rises. The maximum repayment term is 15 years.

Prepayment penalties — These extra fees, charged when you pay off a loan faster than stipulated in the prescribed payment schedule, are much more common with home mortgages than with student loans.

Did you find this article helpful? What other topics would you like to see covered? Please send us an e-mail to let us know what you thought at resourcecenter@nejm.org.

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