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Education Debt




When it comes to federal student loans, there are three main questions that residents need to answer:


  1. Should I pursue Public Service Loan Forgiveness (PSLF)?

  2. Which loan repayment option should I choose?

  3. Should I refinance my loans with a private company?


In this section, we will help you develop a framework for answering these questions based on individual circumstances. Note that in this chapter, we will not discuss other possible but less common loan forgiveness options such as the National Health Service Corps, military service, or employer programs.

Two core principles are at add odds in these decisions: net worth (the combined value of all the assets you own minus the debts you owe), and liquidity (the ability to use your assets to buy things).

Net Worth

In general, the faster debts like student loans are paid off, the more your net worth will be increased over time.*

This is because faster loan repayment more quickly reduces the loan principal, which is used to calculate the amount of owed interest that accumulates over time.


The money saved by avoiding interest accumulation represents a relative increase in net worth (compared to slower payments).


While paying down loans quickly can decrease the amount of interest that accumulates, it requires larger payments. Larger payments mean less money available for other purposes (i.e., liquidity is reduced).

Residents typically have limited disposable income; choosing a loan repayment plan with lower monthly payments allows greater flexibility in spending, including the ability to more quickly recover from unexpected expenses.

* Assuming no higher-interest debt nor higher-interest investment opportunities exist


Two residents have the same amount of loans ($100,000), required monthly loan payments ($200), salary ($50,000), emergency fund savings ($10,000), and extra money in their budget this year ($5,000).

Resident A is most interested in maximizing her net worth. She therefore chooses to put this $5,000 toward a supplemental payment on her student loan principal.

There is no immediate change in her net worth since the value of $5,000 in hand is the same as the value of reducing the amount she owes by $5,000; however, that $5,000 in loan principal that Resident A just paid is no longer accruing interest, so Resident A's future net worth will begin to grow relative to what it would have been without this payment. Resident A's ability to recover from unforeseen expenses, however, will be limited to her ability to reduce expenses in her existing budget plus her $10,000 emergency fund.

Resident B is concerned about her ability to pay for unforeseen expenses, so is interested in maximizing liquidity this year. Resident B therefore may choose to to put the extra $5,000 into her emergency fund instead of toward her student loan principal.

Going forward, Resident B's net worth will trail Resident A's net worth by the amount of interest that accrues on the $5,000 difference in their loan principals. However, Resident B will have greater liquidity with an extra $5,000 in her emergency fund, which can be used to pay for unforeseen expenses such as car repairs, replacing a broken computer, or health care bills. Since the inability of Resident A to pay for expenses with "liquid assets" (such as cash in her emergency fund) can lead to the need for her to take on more debt, her lack of liquidity could end up being harmful to her net worth, even though this is what she set out to maximize.

The purpose of this example is to emphasize the importance of balancing the competing concepts of net worth and liquidity. The importance of this balance will come up again in Question 2: Which loan repayment option should I choose? and Question 3: Should I refinance my loans with a private company?.


Should I pursue Public Service Loan Forgiveness?

If you have a large amount of qualifying loans, a high likelihood of working at a qualifying employer (i.e., government or non-profit organization), and especially if you have a long training period (5-plus years), you should consider PSLF. However, the future of the program is uncertain.

Which loan repayment option should I choose?

If you're pursuing PSLF, pay as little as you can—the less you pay, the greater the benefit of PSLF. Think RePAYE unless your spouse has a high income, in which case you may consider PAYE while filing taxes separately.*  If you're not pursuing PSLF, choose a plan where you're paying as much as you can afford.

Should I refinance my loans with a private company?

Definitely not if you're pursuing PSLF, but still probably not while you’re in residency. To get the main benefit of refinancing (i.e., a lower interest rate), companies usually want shorter repayment periods with higher monthly payments. Most residents can't afford that. Plus, federal loans have perks like deferment and forbearance if you run into financial problems. If you are absolutely sure that you will not be pursuing PSLF and you can secure a significantly lower interest rate with payments you can afford, refinancing is a reasonable option.

* This should not be the only factor in deciding how to file your taxes. Consider consulting a tax professional for assistance if considering this option.

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