Med Student Money Blog

Financial Health & Fitness Tips for Medical Students

Are federal student loan interest rates too high?

Filed under: Loans and Borrowing — Tags: graduate students, interest rates, stafford loan, student loans — Jose Espada on April 25, 2012 @ 3:34 pm

Student Loan interest rates are back in the news again. President Obama touched on the interest rates in his State of the Union address in January 2012. This time everyone appears to be on board to make a change. Even though, during the current fiscal year (July 1, 2011-June 30, 2012) undergraduate students have been paying 3.4% on unsubsidized loans and the federal government is paying 3.4% on subsidized loans (while the student is in school), the news media is ignoring the fact that graduate students have been paying 6.8% on unsubsidized loans all along. They were not given the same break the undergraduate student population received 5 years ago.

Are student loan interest rates too high? As you look historically at student loan interest rates, there was a time in the 1980’s when Federal Stafford Loan interest rates were much higher than they are today. Prior to 1988, the Federal Stafford Loan interest rate was 9% and for a brief period between 1988 and 1992, the rates were a hybrid 8% – 10%, where the first four years of repayment the interest rate was 8% and then it jumped to 10% for the remaining 6 years of a standard loan repayment period. It wasn’t until after 1993 that Congress made Federal Stafford Loan interest rates a priority and based it on a variable rate using the 91-day Treasury bill. Initially, in 1992 the Federal Stafford Loan interest rate was set each July 1 using the 91-day Treasury bill plus 3.1%. In 1995, that formula was revised to the 91-day Treasury bill plus 2.5%. Later in 1998, Congress approved the formula to be the 91-day Treasury bill plus 1.7%. In 2006, Congress moved to fix the interest rates at the present 6.8%. This was done to stabilize the program’s cost after a 5 year stretch where interest rates were at their historical lows (ranging from 2.77 – 5.39%). In 2004, the interest rate was 2.77%. In fact, just this year the variable interest rate formula puts the interest rate at its lowest in history at 1.72%. This is for students who borrowed the Federal Stafford Loan prior to July 1, 2006.

You can imagine how fortunate former students are who took out student loans during the period when interest rates were based on the 91-day Treasury Bill plus 1.7% (from 1998 – 2006). Among our Class of 2012 graduating medical students, we have a few students graduating who took the option to consolidate loans taken out during the variable rate era and locked in the interest rates in at 2.875 (in 2005) so that today, their rates are slightly higher than when they took out the loan (in 2004).

So, as you can see, the federal government has made significant strides to lower and control the interest rates on federal student loans. Can they do more? Absolutely! When you consider that the graduate student has taken the brunt of Congress’s more recent changes in the program. There is an argument that things should be equitable across the board. The Debt Ceiling legislation in July 2011 was yet another hit that graduate student took when the Subsidized Federal Stafford Loan was eliminated for their population, but left intact for the undergraduate population. Additionally, the origination fee rebates for graduates were also eliminated causing the graduate student to pay more for the use of the funds, but not so for the undergraduate students. Also, graduate students are feeling the pinch when they have to borrow the more expensive Federal Graduate PLUS Loan at 7.9%. Why not expand the unsubsidized loan to the cost of attendance and eliminate the Grad PLUS Loan altogether?

Ask my opinion, and I would say it is about time. Especially since the government is now the only student loan provider and does not need to subsidize lenders, like in the past.

Comments (1)

Another armed-services option for medical students

Filed under: Armed Services,Scholarships — Jose Espada on April 13, 2012 @ 9:00 am

In my prior post I explained how the Armed Forces Health Profession Scholarship Program works. This time I cover the National Health Service Corps (NHSC).

The NHSC is considered a uniform service, but a uniform is no longer required. This program is looking for applicants to be from disadvantaged backgrounds and have experienced or understand working with underserved populations. It is not clear what makes a successful applicant for this program. The amount of funds provided the student is based on what are the reported cost of tuition and other related costs (books, supplies, health insurance, etc…). The scholar is responsible for securing a civilian residency in one of the acceptable areas. Upon the completion of their training, the scholar is responsible for securing a position with a clinic or health care facility that is qualified to place a NHSC scholar. There is no guarantee that the scholar will be able to secure a position close to where they would like to be permanently. Also, because the NHSC program is limited to certain areas of medicine, there is always the potential for a medical student or resident to change their mind, which may find them in breach of their NHSC agreement. This can be extremely painful financially with the scholarship required to pay back three times the amount of the scholarship plus penalties of 18% retroactive interest on the scholarship initially received.

The HPSP and the NHSC are just a couple of examples that medical students can consider as an alternative to borrowing for medical school. Although they seek a commitment from the student before they enter medical school, or in some cases in their first or second year of medical school, it is an option for those do not fear commitment and have a fairly strong conviction that they will follow through on their commitment. For the young spirit, it can be an exciting option.

Comments (0)

Armed forces scholarships for medical school

Filed under: Armed Services,Scholarships — Jose Espada on March 30, 2012 @ 9:00 am

As I mentioned in my last post, there are a few exceptions that students can consider to reduce or eliminate borrowing altogether, including programs like the National Health Service Corp (NHSC) or the Armed Forces Health Profession Scholarship Program (HPSP). But even these opportunities are limited.

For example, the NHSC is a federal scholarship program that annually gives 80-90 scholarships nationally that pay for medical school (tuition, books and a living stipend) in exchange for the student’s later obligation and commitment to practice in areas of need (i.e., family medicine, general internal medicine, general pediatrics, Med/Peds, OB/GYN and Psychiatry). The HPSP is a congressional program that authorizes the military branches (Army, Navy and Air Force) to pay the costs of medical school (tuition, books and a living stipend) for approximately 200 students nationally per military branch in exchange for the student to practice as a military doctor.

Military recruiters regularly visit our medical school offices to offer information about the HPSP scholarships and ask for opportunities to make medical students aware of the scholarships. The HPSP is currently a very lucrative opportunity for a medical student. In the last few years, each of the military branches has been able to offer interested medical students a $20,000 sign on bonus. This is in addition to the military scholarship covering tuition, fees, health insurance in addition to reimbursing all costs related to required books and supplies. A living stipend of $2,108 (based on 2011-2012 academic year stipends) is also issued monthly while in medical school. Most HPSP candidates will graduate and go directly into a military residency program where they often receive salaries that are approximately $20,000 above the civilian residency programs. Later, when they go into their practice years with the military, they make less money, but what they earn is generally devoid of any commitments to paying off medical school debt and also receives a generous housing allowance.

Clearly, there are a lot of benefits to doing the HPSP, but there are also drawbacks. Drawbacks that I have heard on more than one occasion are the loss of independence until you have completed your stint with the military, the small chance that you may not secure a residency in the area of your interest or it may be delayed by a year of more. You can imagine that you are making a commitment of at least 11-13 years to the military when you consider medical school (4 years), residency training (3-5 years) and the practice years (4 years). Being a military spouse can be difficult at times.

Here is information for the HPSP with the Army, Navy, and Air Force.

In my next post, I’ll discuss the National Health Service Corps.

Comments (0)

Merit-based scholarships scarce for medical school

Filed under: Loans and Borrowing,Scholarships — Marti on March 13, 2012 @ 2:25 pm

The most difficult reality for many accepted medical students is the lack of scholarship opportunities that are substantial enough to eliminate borrowing. This time of year, a large number of accepted medical students are turning their attention to how to pay for medical school. Only 12-15% of those entering medical school in the fall have had experience borrowing monies to complete their undergraduate work, or for some, graduate programs. The majority had great opportunities at their undergraduate institutions to have most, if not all, of their undergraduate education paid for through merit-based scholarships. Many were highly recruited from high school to attend their institutions with a substantial scholarship carrot.

Don’t get me wrong, there are still some merit-based opportunities out there for the best of the best entering medical school. But that is just it, 80-90% of those entering medical school used to be classified as “the best” but are now just average and above average for medical school merit-based funding. Besides, the number of medical school merit-based scholarships is small in comparison. So, what now?

Well, for many medical schools, the expectation is that 86-88% of their student body will be borrowing through the available federal programs. In my next post I’ll discuss several alternatives to borrowing money to pay for one’s medical education.

Comments (0)

Holiday Spending, one perspective

Filed under: General Money Tips — Jose Espada on November 28, 2011 @ 4:49 pm

Many of us are probably right now in full swing when it comes to holiday shopping. Our first and second year medical students are focused on finishing out the semester with finals looming in the next couple of weeks so shopping is not on their radar. One the other hand, our third and fourth year medical students have more time on their hands. So, perhaps, it is timely to write about holiday spending in general and how to survive without getting into too much debt.

I am under the opinion that the holidays are for kids. There is no doubt that holidays are fun and it wakes up the kids in all of us. This is a very cool thing until you get to the money part. We can all agree that children don’t know how to handle money very well. In some ways, you can probably say the same thing about medical students. As children are considered impulsive, we can say that when we were in college, we were just as impulsive enjoying being kids and all of that, during the holidays. While we enjoyed the holidays and acting like kids, we have to be grownups when it comes to money.

So, how do you prioritize shopping for your people? I’d say make a list of the people you want to spend money on for the holidays. Who is the most important person on your list? Making a plan is important so that you lay everything out. Remember, Santa Claus made a list and he even checked it twice. So, here is my tip. I recommend that you do the same. Get an envelope and on the front of the envelope write the names of all of people you will be buying for and how much money you will be spending for each people. You total the number and this is your holiday budget. You take cash and place it in the envelope to equal the amount of your budget. That, my friends, is your walking around holiday money. When the envelope is empty, it is time to stop shopping and go home. Doing it this way can be challenging, but fun at the same time.

Is there a way to use credit cards and us them responsibly during the holidays? If you ask me, it is like carry around a loaded gun in your pocket and can go off, wounding something permanently. We certainly do not want to permanently damage your financial situation. We are talking about avoiding impulse and having a plan and the credit card is the opposite of that spectrum. It is like saying go screw the rest of your life financially by being impulsive. This may sound harsh, but it is that time of the year where being harsh is the best way to get your point across.

For a large portion of consumers, credit cards cause trouble. That may not be a reason to avoid credit cards entirely, as consumers can learn how to use credit cards effectively. Those of us who do believe we use cash back credit cards responsibly, paying bills in full every month, never paying interest, and buying only what we can afford, are relatively comfortable with the use of this tool, but even the best of us are subject to issuers’ traps. The process of taking cash out of your envelope and handing that money to another person is a very deliberate activity, both physically and mentally. Parting with cash has psychological ramifications. In most people, particularly those who best understand the value of having money saved; the act of giving the cash away triggers the same reaction as a painful activity. Spending money and pain are linked in the brain.

So, what if I followed the advice in this blog and you didn’t quite meet the challenge and you did not do so well with your budget? Can you recover heading into the New Year? Well, like anything, anytime you make a mess, you have to assess the size of that mess and develop a plan for cleaning it up. Right! So, if you wake up with a financial hang over because you weren’t responsible, well, I guess that makes you an American. But, that is not a plan. Now, you have to do the reverse and live on beans and rice or potatoes and maybe take some of those presents back.

Does it have to be about money for the holidays? Remember in the olden days when doing a favor was what people did for the holidays. Particularly, when broke (medical) students do not have much money and so they don’t have it to spend. This is probably more the case, then not. So, one idea is recapturing some of those old ideals. Get off the internet a certificate design that you can put on a document and fill in the document with a favor or promise to do something. For example, walk the dog while on your break or clean the gutters or cook a meal once or twice. Just think of something nice that you can do without having to spend money, but instead spend time. This can show the person receiving your favor your true love for them instead of a plastic item from the mall or local retailer.

If a favor or promise is not in the cards, the bottom line is that you shop smart. Have a plan.

Comments (2)

Update on President OBAMA’s Announcement to Lower Student Loan Payments for Student Loan Borrowers

Filed under: Income Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF),Uncategorized — Jose Espada on October 27, 2011 @ 12:22 am

Before you begin reading or hearing half-cooked reports about the announcements President Obama made last night, I wanted to give a summary of what was announced and also my thoughts and concerns. Much of what is being announced will not involve you as current medical students, but it may have an impact for those graduating in 2012 and also to those who graduated in 2011 and 2010 who are contemplating loan consolidation or are in the process of completing a consolidation. There are many details that have to be ironed out by the U.S. department of Education before we know fully how this will have an impact for those graduating in 2012 and beyond.

Below is the White House Press Release:

WE CAN’T WAIT: OBAMA ADMINISTRATION TO LOWER STUDENT LOAN PAYMENTS FOR MILLIONS OF BORROWERS

Actions Offer Recent Graduates an Opportunity to Consolidate Loans and Reduce Interest Rates

WASHINGTON, DC – Today, the Obama Administration announced it is taking steps to increase college affordability by making it easier to manage student loan debt. The announcement is part of a series of executive actions to put Americans back to work and strengthen the economy because we can’t wait for Congressional Republicans to act.

The Administration is moving forward with a new “Pay As You Earn” proposal that will reduce monthly payments for more than one and a half million current college students and borrowers. Starting in 2014, borrowers will be able to reduce their monthly student loan payments to 10 percent of their discretionary income. But President Obama realizes that many students need relief sooner than that. The new “Pay As You Earn” proposal will allow about 1.6 million students the ability to cap their loan payments at 10 percent starting next year, and the plan will forgive the balance of their debt after 20 years of payments. Additionally, starting this January an estimated 6 million students and recent college graduates will be able to consolidate their loans and reduce their interest rates.

“In a global economy, putting a college education within reach for every American has never been more important,” President Obama said. “But it’s also never been more expensive. That’s why today we’re taking steps to help nearly 1.6 million Americans lower their monthly student loan payments. Steps like these won’t take the place of the bold action we need from Congress to boost our economy and create jobs, but they will make a difference. And until Congress does act, I will continue to do everything in my power to act on behalf of the American people.”

“College graduates are entering one of the toughest job markets in recent memory, and we have a way to help them save money by consolidating their debt and capping their loan payments. And we can do it at no cost to the taxpayer,” said U.S. Secretary of Education Arne Duncan.

Current law allows borrowers to limit their loan payments to 15 percent of their discretionary income and forgives all remaining debt after 25 years. However, few students know about this option. Students can find out if they are currently eligible for IBR at www.studentaid.ed.gov/ibr. Last year, the President proposed, and Congress enacted, a plan to further ease student loan debt payment by lowering the IBR loan payment to 10 percent of income, and the forgiveness timeline to 20 years. This change is set to go into effect for all new borrowers after 2014—mostly impacting future college students.

Today, the Administration is proposing to offer even more immediate relief to many current college students by giving them the chance to limit loan payments to 10 percent of their discretionary income starting in 2012. In addition, the debt would be forgiven after 20 years instead of 25, as current law allows. For many who struggle to manage their student loan debt – including teachers, nurses, public defenders and others in lower-paying jobs – these proposed changes could reduce their payments by hundreds of dollars each month. Overall, this proposal would provide an estimated 1.6 million borrowers with more manageable monthly payments.

The Administration is also planning to offer student borrowers the chance to better manage their debt by consolidating their federal student loans. Today, approximately 5.8 million borrowers have both a Direct Loan (DL) and a Federal Family Education Loan (FFEL) that require separate payments, which makes them more likely to default. To address the needs of these borrowers, the Administration will allow borrowers the convenience of a single payment to a single lender for both loans. Borrowers who take advantage of this consolidation option, which begins in January, would also receive up to a 0.5 percent reduction in their interest rate on some of their loans, which means lower monthly payments that would save hundreds of dollars in interest. Eligible borrowers will be contacted by their federal loan servicer early next year with information on how to consolidate.

These changes carry no additional cost to taxpayers.

Below are my thoughts and concerns related to this press release and what is not being said:

1) What is not mentioned about IBR is that if a borrower has no income, they can have monthly payments of $0 and still be in repayment. This is and has always has been the case with IBR since its implementation in 2009. For first year residents beginning residencies in July 2012, nothing has really changed according to the announcement, but what may change is that the IBR calculation will be based on 10% of income instead of 15%, which is currently the case. The IBR Repayment Plan calculation is currently ((AGI – 150% of Poverty)* 15%)/12. According to the announcement, beginning July 1, 2012, the new calculation will be ((AGI – 150% of Poverty)* 10%)/12. Residents who graduated in 2011 were looking at zero payments based on this current IBR calculations during their first year of residency since many of them did not have income in tax year 2010. For the Class of 2012, once again many will likely have a zero payment in their first year of IBR.

2) Unfortunately, in the announcement and information I have seen thus far, there is no disclaimer regarding the ramifications to borrowers of reducing their monthly payments from 15% to 10% of discretionary income. Obviously we know that the less you pay now, the more you will pay overall because of interest accrual and negative amortization in IBR. It is not clear what the administration is thinking here, but in respect to current borrowers the assumption is that they will not be earning modest salaries for a long time period, will be in repayment (in IBR) for 20 years, and will have a loan balance after 20 years to be forgiven. With the Public Service Loan Forgiveness (PSLF), the forgiveness timetable is 10 years or 120 Direct Loan IBR payments as long as the borrower is working in a not-for-profit. For medical residents, the residency training counts as working in a not-for-profit and with 80% of hospitals 501 C 3 organizations, there is anticipation that many will realize the PSLF and not the IBR forgiveness of 20 years, or the current 25 years. Of course, some medical professions lend themselves to working in for-profit scenarios.

3) The question that needs to be answered by the U.S. Department of Education is whether the proposed IBR monthly payments of 10% (versus the current 15%) of discretionary income is suggested to take effect in 2012 for NEW borrowers only or for ALL borrowers in IBR? The legislation currently reads that the 10% to be implemented on July 1, 2014 and President Obama wants to advance to 2012, is for NEW borrowers after that date. By advancing the date to 2012, are ALL borrowers eligible, whether new borrowers or old borrowers?

4) All of the above questions, need to be clarified so we are able to respond to our recent graduates who may be consolidating (initiating it now or in progress) with their loans entering repayment in January? Will they receive a 0.5% interest rate reduction if their consolidated loan is completed by January 2012 or December 2011? What about the “rounded up to the nearest 1/8th of a percent” weighted average interest calculation that DL uses when calculating the interest rate of consolidated loans? How will that play into this? For current medical students and soon-to-be-graduates, a large majority have only borrowed through Direct Loans, so consolidation is not in the future?

As you can see, I personally have a lot of questions about the recent announcement. But, I wanted to share my thoughts with you so that you are aware of what is still unclear and how it may impact your future management of your student loans.

Comments (7)

Free Medical School for everyone?

Filed under: Loans and Borrowing — Jose Espada on September 30, 2011 @ 10:58 am

Recently, I listened to a Sound Medicine broadcast where the discussion was a plan for making primary care more attractive to medical students by eliminating medical school tuition. There was a similar article in the New York Times appearing on May 29^th where Drs. Bach and Kocher lay out a plan for making primary care more attractive. They proposed a plan to make medical school tuition, which averages $38,000 per year, waived. Doctors choosing training in primary care, whether they plan to go on later to specialize or not, would continue to receive the stipends they receive today. But those who want to get specialty training would have to forgo much or all of their stipends (borrowing instead), $50,000 on average. It was mentioned that there are nearly as many doctors enrolled in specialty training in the United States (about 66,000) as there are students in United States medical schools (about 67,000), the forgone stipends would cover all the tuition costs.”

It’s an intriguing idea and perhaps worth the discussion. But I am sure that someone in a specialty area poised to be burdened the most under such a plan may have significant reservations. Neurosurgeons, for instance, have perhaps the longest training of any specialty. The majority of neurosurgical residencies are 7 years and with a couple of years of fellowship training the burden for future neurosurgeons could be upward of $450,000 under the current proposal at $50,000 a year.

I would imagine that you could highlight several other specialty examples in a similar light, but you could also argue that their earnings potential will outweigh the burden. In the above specific example, neurosurgeons who go on to do 1-2 years of fellowship in pediatric neurosurgery take a significant pay cut as compared to those neurosurgeons who go into practice straight out of residency and treat adults. Or consider the infectious disease specialty where the average income is hardly more than that of a primary care physician but require extra fellowship years. It can be said and speculated that while the average income for a primary care physician is more homogenous, there is great variability in income for specialists. The proposal is likely to drive medical students and graduating residents, now forgoing primary care, out of certain specialties including infectious disease, physical medicine and rehabilitation and many pediatric surgical specialties to name a few.

By making medical school tuition-free, is it going to enough of an incentive to consider primary care? I am not so sure. In my opinion, with the specialty areas (especially the most lucrative specialties), I’m not sure the incentive will be enough. Consider the numbers, based on some of the reported median specialty and primary care incomes ($325,000 for specialty areas and $190,000 for primary care respectively), it may not be totally realistic if you have a a pediatric neurosurgeon earning the former and a primary care physician earning the latter.

Let’s say the pediatric neurosurgeon takes 8 years of training and owes $400,000 at the end. The primary care physician does 3 years of training and owes nothing. Assuming some level of loan guarantee by the government used by the pediatric neurosurgeon and they are paying them off over 15 years at a 6.8% rate.

Over a 20 year period (from the time the primary care physician enters practice after completing his or her free training to the time the pediatric neurosurgeon is finished paying his or her loans) the gross numbers stack up like this:

Primary care physician 20-year earnings
20 years x 190,000 = 3,800,000

Pediatric neurosurgeon 15-year earnings
Remember the specialist will be in training for five years while the primary care physician is out earning.

15 years x 325,000 = 4,875,000 – 640,000 loan payments = 4,235,000

This example shows that there is still incentive for medical students and residents to choose a high paying specialty area. So, I have serious doubts making medical school free will significantly bolster the future of primary care, but it is an intriguing idea.

Comments (4)

Should Cost be a Consideration when Choosing a Medical School?

Filed under: General Money Tips,Uncategorized — Jose Espada on September 5, 2011 @ 10:02 am

I am back after a busy summer of getting our medical students situated for this semester. With an entering class of 328 students and over 1315 medical students overall, there is always the question on how did or does someone choose a medical school; is cost a determinant?

In the past 22 years, I have been engaged in discussions with prospective medical school applicants who are trying to decide where to apply and eventually attend medical school. There are currently 134 allopathic medical schools in the U.S. (and potentially growing). Many medical school applicants use rankings in selecting medical schools by Top-tier/Dream Schools, Competitive Schools and Safety Schools. Top-tier schools have high admissions standards based on MCAT and GPA, Competitive Schools are schools where the applicant numbers are going to make them competitive and have they have a reasonable expectation of being admitted, and Safety Schools are schools where looking purely at numbers the applicant should definitely be invited for an interview and accepted. Having said this, medical school admissions are never a clear-cut process and many factors go into the equation. There are many stories of applicants getting rejected from competitive schools while getting into top-tier schools and vice-a-versa. Once they get accepted the discussion on how to pay for it ensues.

So, for the sake of discussion, I have made up the following scenario. Student A has been accepted to numerous schools and has narrowed the options to two, a private school and a public school. While the private school is ranked more highly than the public school according to US News and World Report, the public school ranks respectively. The annual tuition and fees at the private school is approximately $15,000 more than the public school. Choosing the private school over the public school would cost Student A approximately $70,000 additional in tuition and fees over the 4 years of medical school and another $4,000 per year because the cost of living is higher than at the public medical school. Student A expressed two factors: 1) ranking and 2) really liked the private school better. Also, Student A wants to get away from their home state. They graduated from a state institution and now want to experience something different.

My advice is generally the same. If you are paying for medical school yourself, unless the private school is offering scholarships, then consider going to the least expensive school at which you get accepted. Why? Well, I am under the opinion that medical school is medical school. This may be over simplifying it, but in my observations, how one performs in medical school (and on USMLE exams) is just as important in landing a competitive residency as where one attended medical school. I am sure there are others who may disagree with me.

Granted, it is without saying that a bottom-of-the-class student at Harvard will likely have more opportunities than a bottom-of-the-class student at a low-reputation (public or private) medical school, but the top students at nearly any school will likely have similar access or be competitive for the most competitive residencies. It seems to be just as important how one does in medical school than where one does it. This is why rankings can be deceptive and readers should not be too heavily influenced by them. A medical school may be highly ranked based on the how much NIH funding the institution garners and those numbers may not be meaningful for the applicant.

We all know that primary care physicians don’t make the big bucks that specialists make, and some of us have heard of would-be primary care physicians who ended up pursuing more highly-paying specialties. The perceived reason is (although not supported via any empirical studies on this topic) because of their perceived inability to manage their medical school debt burden on a primary care salary.

You often hear medical students mention getting a lot of advice from specialists to go to the best medical school that you can get into and that the money will take care of itself. If your dream is to be an orthopedic surgeon where the competition for residency slots is fierce and where you will likely be making a lot of money when you are in practice, then maybe it’s worth $100k to go to a more highly-ranked medical school to give you that tiny edge in achieving your dream. But if your dream is to be a primary care physician, then it seems to me that an additional $100k in debt may be a significant deterrent to achieving your dream, given that financial burden you’ll face repaying loans.

Medical school can be very expensive. I believe that for anyone contemplating medical school it is important to consider one’s goal and how the cost of medical school might impact reaching that goal.

Comments (0)

Knowing your student loan options; Federal Loans vs. Private Loans

Filed under: Loans and Borrowing,Uncategorized — Jose Espada on June 22, 2011 @ 2:49 pm

Although I love Sandra Block (who covers personal finance for USA Today) dearly, I can’t help but be a little disappointed with her sloppy reporting in her recent edition of “Your Money” in the June 19, 2011 Sunday STAR. Why is that? Well, when you leave out key pieces of information, it makes it difficult for people to be fully informed and people like me have to clean up her sloppiness.

She mentioned students who qualify for Federal Subsidized Stafford Loans will be paying interest of 3.4% beginning July 1, 2011. This is true, but only for undergraduate students and only until June 30, 2012, when the interest goes back up to 6.8% on July 1, 2012. The reason the loan is subsidized is because the federal government pays the interest on that loan while the student is in school and for the 6-month grace period once the student separates or graduates from school. Recently, as part of Congress’s discussions and efforts to cut the budget, there have been overtures to take the subsidy away from graduate and professional students. As of last year, all Federal Stafford Loans are through the U.S Department of Education Direct Loan Program cutting out lenders and servicers from the process.

Ms. Block makes reference to private loans and for the most part what she reports is good. She failed to mention that private loans are not the only option for eligible domestic graduate and professional students. Given the many federal government protections, the Federal Graduate PLUS Loan is the more desired choice for graduate and professional students. The Grad PLUS Loan is the equivalent of a private loan through the federal government, albeit a fixed interest rate of 7.9%. The Grad PLUS Loan does not have the interest rate volatility of private loans that are based for the most part on the London Interbank Offered Rate (LIBOR) index. Some are still based on the prime rate index. So, with private loans there is the real chance that your interest rate will increase before you begin repayment. And, if we hit another economic downturn, the interest rate on private loans can go through the roof.

Lastly, private loans have less-flexible repayment options. I have had medical students who have borrowed a private loan in undergrad and end up having to begin repayment while in medical school, which proves to be a major hardship. This is why I advocate for students to exhaust all federal loan avenues first before jumping on the private loan bandwagon. A few missed payments on a private loan could prove to be extremely harmful to your credit score and also trigger the calls from collection agencies. Federal loans have ways to assist students with delaying repayment by using forbearances or provide repayment plans that may fit the student’s budget.

Federal loans have a provision to permanently discharge or cancel loans in the event of death or total permanent disability. This is not the case with private loans and some lenders may consider doing something, but are not required by law to do anything. In many cases, it would be a good idea to carry insurance against the debt to insure that you do not pass on the debt to your estate. Co-signers may be under obligation to pay the debt in the case of the borrower’s death or total permanent disability. This is another reason why securing a co-signer may be difficult to attain.

Ms. Block did not go far enough with her statement regarding a co-signer. Although, in some sectors of the private student loan industry having a co-signer is a good thing and can garner a better interest rate, the primary reason for a co-signer in a student loan environment is generally to get a student qualified. Students with bad credit issues will need to seek a co-signer who has a good credit situation and is willing to take on the responsibility for the loan in the event the student cannot repay the loan.

She states that federal student loans are available to all full-time students, but here once again failed to mention that half-time students are also eligible and additionally, must be in a degree-seeking program to be eligible. Just simply going to school and taking courses does not automatically make you eligible for student loans.

In some cases, for fourth year medical students, private loans are the only way to finance relocating from medical school to a residency position. These private loans do not go through the school and the application and receipt of these funds are directly between the students the lender that offers it. Fortunately, residency interview expenses can now be accounted for in the financial aid budget due to a recent re-interpretation of the federal guidelines by the U.S. Department of Education. With this new opportunity to account for these expenses, fourth year medical students will be able to utilize federal loan funds instead of private loan options. This is a good thing since you cannot include a private loan into a federal consolidation loan and a private loan does not qualify for the Income Based Repayment or the Public Service Loan Forgiveness Program.

Comments (9)

What’s the Big Deal?

Filed under: General Money Tips — Jose Espada on June 6, 2011 @ 2:50 pm

How many of us enthusiastically belong to Sam’s Club, Costco or any of the big warehouse stores?

It is a tidy environment of bulk items that we use everyday – toilet paper, tissues and paper towels. Things that we can certainly stock up on given you have the room to do so. Even perishable items like milk are cheaper than at the regular grocery stores as well as prescription drugs. (Not to mention, the rotisserie chickens and gas, that can be 10 to 15 cents cheaper than the gas stations.) My favorite is the cheese that is much cheaper at Costco than at any other store in Indianapolis. Lastly, there are those big-ticket items that tend to be less expensive than the local electronic stores. So, why do people like me and you line up to shop at these stores? One big reason, as we described above, is what everyone has already discovered: cheaper stuff.

You may have noticed as a shopper that there are not as many product names at Costco and Sam’s Club compared to what is at Kroger, Marsh or Meier. One reason is that by focusing in on fewer product lines and larger volumes, warehouse stores can negotiate substantial discounts from manufacturers. The membership fees you pay help to reduce the cost of the products by the stores relying less on the profit margins. The annual membership fees start at $40 for Sam’s Club and $50 for Costco. The fee can climb to $100 for programs that reward members with rebates and steeper discounts. The result is much cheaper products and savings to you in the long run.

The down side is trying to carve out the space at home for the giant containers of Ketchup and other bulky items. So, in some cases, you have to decide if this type of retail makes sense to you. If space is an issue, then perhaps paying a little more for smaller size products at the other retailers is the best for you. You can imagine how long it will take you to use a 5 pound jar of peanut butter. The other issue is that some products have a short life at warehouse retailers, which can irk you if you get attached to certain products. The other side effect is that going in to Costco for a few items results in those few items growing to more than you intended. I have heard this referred to as the “Costco effect”. However, I have yet to drive away from Costco with that crystal clear large screen TV that I stare at each time I walk in.

A Harvard marketing expert gives these tips to undisciplined shoppers and it can apply to shoppers at warehouse retail stores:

Take only what you can use. If a 61.9 ounce box of cereal is too big to finish before it goes stale, perhaps you can pool together, like in the case of several medical student roommates, and buy cereal that everyone likes. This goes with the next recommendation.

Divide to Conquer. Shop with friends and split apart the large packages to share. Pooling together resources and purchasing in bulk could be cost-effective.

Buy before it flies. Since it is typical to see product lines change frequently at warehouse stores, it would be prudent to stock up if you see an item that you really need.

Don’t swear off your local supermarkets. Weekly store promotions at traditional stores can offer bargains on staples, such as cereal and laundry detergent. It may rival those prices at the warehouse stores.

Check out the checkout policies. Costco only accepts American Express credit cards. If you don’t have one, the alternative is a debit card, checkbook or cash. Costco and Sam’s Club do not accept manufacturer’s coupons. Return policies are generous at warehouse stores, but vary. For example, Costco and Sam’s Club accept returned electronic items within 90 days of purchase.

In the end, you can save more by shopping at a warehouse store, but you have to be a disciplined shopper and don’t stray away from your list. Also, keep in mind that having a diversified shopping strategy is also good. The traditional stores do have some great deals that compete with warehouse stores.

Comments (2)

Older Posts »