My name is Andrew Reina. I’m one of the owners of Voya Financial Advisors at 3 Broad Street downtown.
We’ve been working with the medical school, the dental school and the pharmacy school in one capacity or another for a little over four and a half years now. There’s not too much you guys can throw at us and we already haven’t addressed or worked out before. We are here for you guys as a resource and we do not charge you guys while you’re in medical school, residency or even fellowship and that goes for MUSC. The other popular thing that we see is people do residency somewhere else and come back. Don’t worry. Even if you guys do your residency up in North Carolina or Georgia or wherever it is, we’re still a resource here for you guys. So make sure if you guys have questions that you’re reaching out to us. There’s no questions too big or too small. We’re, just here to help. With that being said, we would go ahead and jump right into this.
So tip number one, and this is probably one of the most important parts to understanding in helping you guys get out of debt and get out of debt efficiently. One of the things that you guys should know is actually how do you actually get into debt. Now, young physicians are in a unique position. There are a couple of things that come up more often than not with young physicians and a couple good reasons and real consistent reasons on why they get into debt.
The first one is something called future discounting. Like I said before, physicians are very unique. You guys can actually take your finger and put it on the calendar and see when you’re going to start making the big bucks. Now, why does that help you get into debt? It has a tendency to have young physicians spend money before they get it.
Think about it. We have Christmas coming around the corner, we’ve got the holidays coming around the corner. You guys are going to be out shopping for gifts for loved ones and you may very well look at something, maybe a new little electronic device and you’re saying, “Well, I can’t really afford it right now, but I know in another six months, four years, whatever it is, this is going to be chump change. I can definitely afford it then,” right? Don’t get caught in that trap. I know you guys spend a lot of time in school and it’s kind of frustrating, but believe me, it’s a lot better to just wait. Wait until those big paychecks start coming in before you start making those big ticket purchases. You know, I fall into the same trap as everybody else. I look at things and I say, “You know, I can afford that, maybe not right now, but maybe I can afford that in six months once I get another client or another two clients,” whatever it is.
Don’t do it. It’s a trap. It’s something that you’re always going to be chasing, something that you’re always going to be going after because what happens is as you guys buy that big ticket item, and then by the time you start making the money, that money is already spent. You guys don’t actually even see that money.
One of the other things that we find that happens a lot with young physicians are peer pressures. How do you show success to other people? A lot of times it’s you have to go out and buy something. You’ve got to buy the bling, you got to buy something flashy, right? Your loved ones and your family members and your friends, they see you as just a doctor, right? “Oh, if you’re a doctor. You’ve got to have deep pockets. Well, if have deep pockets prove it to me. rove it to me, and prove to me by buying a new fancy car.” You got to, you got to show everybody that you made it. You have show everybody your success by going out and spending money. Don’t do that.
That’s something that we see a lot of people get caught up in. They have their high school buddies that may be aren’t doing as well as you are and you feel the need to show them how well you’re doing by purchasing things, big houses, nice cars, electronics, all that stuff. It’s just objects. It’s going to get you into debt real quick. One of the stories we like to tell people is we’ve actually had anesthesiologists and other physicians make making $1 million a year that can’t pay their bills. How? They went out and they needed to show everybody how well they’re doing. They bought four or five properties, they bought four or five cars.
Don’t do that. You don’t need to prove your worth to other people by buying things. The other thing that we see and the only reason why we see young physicians get into debt problems is something called the uncertainty reduction theory. We see it as a lot with your student loan bills when they come in the mail. People don’t open them, they pretend like they don’t exist. That’s what the uncertainty reduction theory and tells me, is that if you don’t know how bad the debt is, then it can’t be bad. Well guess what? It can be bad, so take an active role in doing that. I know a lot of times the student loan bills, they’re taught to look at, I’m 30 years old, I still have some student loans. I don’t like opening the mail either, but just because I don’t open it doesn’t mean it doesn’t exist.
Tip number two? Know the type of debt that you have. Basically there are two types of debt. You have secured debt and you have unsecured debt and they’re basically broken up into two different ways of thinking. Secured debt has an asset attached to them, it has something attached to it. Think about car loans and mortgages. If you go get a secured debt, like a car loan or a mortgage, the bank says, “All right, I’ll give you this loan and if you don’t pay me back on that loan, there’s something that bank can go get to make them whole, to make them not lose money or lose less money.” Then there are things called unsecured debt. These loans don’t have an object attached to them. Think credit cards. So if you go out and you get a Best Buy credit card and you buy that nice 4K TV or whatever the newest TV is out there and you don’t pay your credit card bill, that’s why I can’t come and repossess your television.
Tip number three, knowing your budget. This is something that when we talk to, especially medical students and residents, they don’t do. They say, “I kind of know my budget.” Kind of knowing your budget and knowing your budget are two different things. So tips to help you guys along, write down your budget. If you write it down, it becomes more real. Lots of times when you talk to people saying, “Oh, well, I don’t really spend that much going out, but then you see them and they’re at Starbucks every 20 minutes and they don’t ever take that into account. One little exercise that you guys can do is whenever you have one, take a hundred dollar bill and say, “All right, I’m only going to spend money from this hundred dollar bill and see how long it lasts you.”
If you’re not paying attention to where the money goes, those $3 Starbucks, those $2 energy drinks you guys get at the gas station or whatever, they add up real quick, but you start writing this stuff down and actually keeping a tally of everything it becomes real and you can start getting your mind wrapped around it a little bit better.
The other thing that you need to differentiate is fixed expenses versus discretionary expenses. Oftentimes we meet with people and say, “Oh, well, I spend this much going out with the bar.” Now believe me, go out to the bar, have a good time, you guys worked hard, but just don’t always budget that in first. Budget in your rent, your car, your utilities eventually your student loans, anything like that. Anything that you know is going to be the exact same every month, start budgeting that stuff in first. The other thing that you have to do with your budget is know that you need to pay yourself first. Invest in yourself, that’s something that’s often overlooked.
Tip number four is know your interest rates. This is something that we run into a lot. People not knowing exactly what their interest rates are on their debts. For example, cars and mortgages, those have a little bit lower interest rate. It’s not uncommon to see anywhere between zero and 4% for those things. Now remember, those are secured debts. The reason why they have a lower interest rate is because the bank knows if they’re a little bit less at risk. We’ll go back to it, you don’t pay your mortgage, bank is going to take your house and get some money back for it. That’s one of those interest rates are a little bit lower. It’s so important to know them, but that’s why they’re a little bit lower.
Unsecured loans tend to be a little bit higher. Credit cards, for example, the national average right now is 14% on credit cards. Now that takes into account everybody, so that even takes into account those high earners that tend to have those 0% credit cards. It’s not unrealistic to see something that’s 20% or more. It’s important to know interest rates because as we start paying back your debt it’s important to know which ones you guys should be paying first. Obviously higher interest rates you’re probably going to want to pay back first because it’s going to save you money in the long run.
The last one is know your credit score. There are a couple of tools out there for you guys to actually find out what your credit score is. Credit Karma, it’s a pretty decent website. It’s free, you can do a lot of advertising, not always necessarily the most accurate, but it will give you a good idea of what your credit score is. Some credit card companies, like I have a couple of Capital One credit cards, they give me my credit score for free. All I have to do is click on a little button and it gives me my TransUnion score and you’re also entitled to a free annual report.
Google “free annual credit report,” and it will be the first thing that comes up. Click on that once a year and print out your credit report. It won’t necessarily give you the score, but it will give you everything that’s on your credit report. I had a couple of bad experiences of things that show up on your credit report that weren’t supposed to be there or inaccurate on your credit report. Those things will cost you money in the long run. As your credit score goes down, all those interest rates go up, so if you know what your credit score is, you’re going to be able to differentiate, “All right, am I getting a good deal on this credit card or this car rate?” a little bit more than if you’re going in there blind.
The next one, this is the big one, is know your student loan types. There are basically three types of student loans. You have your unsubsidized, your subsidized, and your private student loans. I’m saying that your student loans all have interest. While you’re in school, you don’t have to pay back these loans, but the interest rate is getting packed onto your balance every month. Subsidized loans, even though they’re going to show you an interest rate, the federal government is actually paying that interest for you while you’re in school. Quick way to tell is your unsubsidized loan balances, those are always going to be increasing. Your subsidized student loans, however, they’re going to stay the exact same. So when you open up that mail every month that we talked about, you’ll be able to differentiate pretty quick which ones are which. If you do happen to have money while you’re in medical school and want to start tackling some of these student loans, it’s a good idea to start tackling the unsubsidized ones before the subsidized ones.
The other thing and we don’t see too many of these, but they are out there, there are private student loan companies that are also making loans to medical students. They don’t play by the same rules as the federal government. Lots of times there are prepayment penalties, which means if you can take out a student loan and it’s $30,000 and you pay it off six months, they may very well charge you a penalty for that, the reason being is banks like to know what their profit’s going to be in the future. You pay back your loans early, you just cut into their profits a little bit, so they’re going to want some way to recoup that. So as you guys start working with advisors it’s important to know which student loans you have. Chances are you have a mix of unsubsidized and subsidized. You may even have all three.
Next one. Definitely know your repayment options. You’re going to be seeing a lot of this stuff coming up, especially once you get into residency. There are basically four types of repayment options. There are other ones, but we generally only see people go with one of four options. The first one is a standard repayment option. This is going to be your default option, so if you don’t do anything, your first student loan bill is going to be on the standard repayment option. Basically what they do is they say, “All right, here’s your student loan balance.” Let’s just say $100,000 for math purposes. They’re going to say, “You’re going to owe us $10,000 a year for the next 10 years.” That’s how that one works.
The next one is extended. It works similar to standard. However they say that, “All right, we’re going to extend these payments out for 20 years,” and you have to apply for extended. Same way, they look at your student loan balance, $100,000 and they say, “We’re going to divide that by 20 years. Great. You owe us $5,000 a year for the next 20 years.”
The third one, and this is becoming more and more popular, is something called income based repayment. This tends to be the most affordable to residents. Basically what it says is we’re going to cap the amount that you owe your student loans to 15% above 150% of the poverty line. So let’s say that as a resident, you’re making $50,000 a year. The current poverty line in the United States is about $11,500 a year. So we’re going to say, “All right, what’s 150% of $11,500 a year?” You’re going to end up getting an amount that’s basically $17,500. So they’re going to say, “Of that $50,000, we’re not going to count 17,500 off of it.” Basically what they’re going to do is say, “All right, you are going to owe us 15% of $35,000 a year.” That payment comes out to about $406 a month.
Now, one of the reasons why residents want to pay back their student loans if that number is accurate and works with your budget, is because while you’re in residency, student loan interest is actually a tax write off. That’s something that’s not going to be available to you once you’re out of residency and in practice. Flat out you’re just going to make too much money for them to allow you to write it off. So if you can afford income based repayment, it’s pretty beneficial for you guys to do that. It’s going to get you a write off and it’s also going to start giving you some peace of mind, where you’re actually going to see a balance start decreasing for once.
The fourth one is actually called forbearance, which means there’s no payment required every month. This is something that’s automatically approved if you’re in a medical residency or fellowship. You do have to apply for it, but basically what that says is, “You don’t have to pay us anything.” Your interest is still going to be increasing your debt amount, so your balances are always going to be going up, but you’re not required to pay on anything. Now, one common question that we get is, “All right, if I apply for forbearance, can I still make a payment?” The answer is yes.
Think of these four repayment options as putting into your floor, where you’re obligated to pay every month. Standard is going to be the highest that you’re obligated to every month, followed by extended, followed by income based repayment, and then forbearance. So for people that are really, really good about their budgets and really, really good about watching where their money goes, especially that first year of residency, you guys, a lot of times you guys are going to be moving somewhere, there are going to be bills that come up that are unexpected. It’s not uncommon for us to see somebody go ahead and apply for forbearance but still actually make payments every month. It just depends on the individual and it depends on how comfortable they are being on a strict budget. If you know you can’t stick to a budget and you know unless you get a bill in the mail, you’re not going to make the payment, try doing that income based repayment option for the first year.
There are a couple of loan forgiveness options out there. There are a lot of actually. Two of the most popular ones, it’s a Public Service Loan Forgiveness Program. This is going to be the most popular one that we see. This is also known as College Cost Reduction And Access Act Of 2007. This basically says if you work for a 501(c)(3), basically a not for profit, and MUSC does qualify for this, and you make 120 qualified payments at the end of 10 years, whatever your balance is, that balance is going to be forgiven.
Now what are qualified repayments? Income-based is the qualified repayment, standard also qualifies as a payment, and extend also qualifies as a payment. So if you know that you’re going to go into a residency, let’s say five or six years and you know that you’re also going to want to do a fellowship for another two years, you can basically string together seven years of income and payments, something that’s very, very manageable for you guys and then those last three years you’re going to have to make some heavier payments, but whatever’s left over at the end is going to get forgiven. Now that’s very, very common. if you guys go to a medical university or work in a hospital system. It’s not as common if you go into private practice. One of the things that we do see though is if you go into private practice, you tend to make a little bit more.
The other one is what’s called an NHSC Loan Forgiveness Program. This forgives up to $50,000 in debt, but you have to serve in an underserved area. When I say an underserved area, a lot of times people think is they have to go work out in the boondocks. That’s not necessarily accurate. An underserved area also applies to the type of patient that you’re seeing. So for example, Franklin C. Fetter right here on Meeting Street actually qualifies for this because they see a lot of Medicaid patients. Again, you’re probably not going to make as much as if you go into a private practice, but if you’re looking at a couple of contracts and you’re seeing, “All right, now I’ve got this $300,000 in student loan debt. I can go work for Franklin C. Fetter and make a little bit less for a couple of years, but then $50,000 on my student loans taken off,” that may be something that you guys have to weigh as options. There are a couple of other state specific student loan forgiveness options, and I’ll show you guys that here in a little bit.
Here’s number eight no, your situation. This goes right back to knowing what your budget is and having it down on paper and opening your student loan statements every month. If you don’t know your situation it makes it as an advisor, really, really tough to give you sound financial advice because we don’t know all the variables. Look at all your repayment options before making your decision. It’s not uncommon that if married couples, say one is a resident and the other one has a very good job, it’s not uncommon for an extended repayment to make a lot more sense than an income based repayment.
You’ll also, like we talked about before, you’re also going to lose your tax write off after residency or fellowship, so then maybe something that you may want to go ahead and budget in while you’re in residency just to try and take advantage of that money. Even if you apply for forbearance and say, “All right, I feel comfortable making $200 a month payments,” chances are most of that’s going to be interest and you’re going to get it back at the end of the year in the form of tax deduction. So make sure that you know your situation. A lot of times we see medical students use the blanket advice that says, “Oh, you have to sign up for income based repayment.” That’s not always the best situation for everybody. It’s a popular one, but it’s not always the best.
Tip number nine. Know some tools to help. Repayment calculators. There are calculators right from the Department Of Education that’ll tell you what your monthly payments are going to be. They’re about halfway down on the right hand side of the page. It’ll be an income based repayment, it’ll give you standard, it’ll give you extended, it’ll give you some other ones in there that aren’t as popular as well. It doesn’t take too long to put in your information and actually see what’s going to make the most sense for you. It’ll probably take you an hour to do. If you don’t feel comfortable doing it, please reach out to us and we’ll do it for you.
Some budgeting software. Like we said, write it down. These websites are fantastic. Mint.com, envelopes.com, those basically keep track of where your money’s going for you. You don’t even really have to do anything other than connect your credit cards and your debit card to it and it’ll tell you at the end of the month exactly where all the money went. This may be something that you want to do while you’re in medical school, so you already know where your money’s going by the time you get into residency.
The other program that we use a lot is eMoney. You have to go through an advisor and get that one, mainly because it’s pretty expensive, but that works the same way as mine does, except a little bit more in depth. I’ll go ahead and show you what that is right now.
These are the loan forgiveness programs that you guys can look at. Let’s say you’re going to go and do your residency in, I don’t know, Arkansas. Go to this website, put in your state, which is Arkansas and there are actually a couple of other loan forgiveness programs out there that you guys need to take a look at. Rural Practice Scholarship for example. Just click on it. It’ll actually give you how you qualify for it and the amount of money that they’re willing to give you on your student loans. These are free programs. The important thing is to actually sign up and take an active role in doing it.
I know there’s some talk going around MUSC that some of these things aren’t going to be there, you know the college costs and Access Recovery Act that was started in 2007 and it has to do 10 years before it applies, so you guys can do the math and see that the first people that applied for it haven’t actually gotten their loans forgiven yet. These things are all free to sign up for, so our stance is you might as well sign up for it. If it’s there at the end, great your student loans are forgiven. If not, you’re still making qualified payments anyway. It’s just a good idea to take a look at these things and know your options that are out there.
The final tip is get outside help. Okay. Using an outside advisor is going to take the emotion out of making decisions. Whenever we see somebody that is making emotional decisions about their money, chances are they’re about to make a mistake. Using an outside advisor is going to allow you guys to use some money that’s not emotionally attached to your debt. I get it, those debt numbers, those are huge. Student loans are huge. It’s not uncommon for us to see $50,000 or $60,000 in credit card debt right out of medical school. These things all start stirring up emotions in you, there’s a lot of anxiety, there’s a lot of anger. Use an adviser because advisors will be able to look at these things for what they are, they’re just numbers. It’s just information that we use in making a financial plan. Now, when you’re looking for outside advisors, obviously you’re more than welcome to use us.
You don’t have to use us, but if you’re not going to use us, there are some things that we want you to take a look at. Make sure that they have experience, specifically with medical professionals. You guys are in very unique positions. Make sure the advisor knows how to handle them, make sure that you’re using an advisor that understands the resident path. Advisors are just like everybody else. A lot of times they just know that you’re a doctor. They don’t really know anything else, so they assume, “All right, I got this doctor here. I’m going to start selling them everything under the sun.” The reality of the situation is you may know your a doctor, you may still be a resident and you’re not quite making the big bucks yet, and they may not know how that applies to your student loans and your debt, things that are actually very important to you.
The other thing that you can do is know they’re for you. You can Google a broker check online and you can actually put in any advisor’s name on there and you’re going to be able to get their background check. You’re going to be able to see how many years have they been in business? Do they have any complaints against them? Do they actually have their own financial problems? Advisors are just like everybody else. Every once in a while they make mistakes and they end up having to file for bankruptcy or something like that. My position is is if your advisor is filing for bankruptcy, clearly they didn’t know how to manage that. You may want to steer away from that person.
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