This post is written by Donovan Sanchez of Skyview Planning. He is on the recommended list of financial advisors because he meets the Gold-standard I support (flat-fee, fee-only, fiduciary who works with physicians).
Coronavirus and Resident Physicians: Proactive Steps in Light of Current Circumstances
If you’re a physician in residency or fellowship, life probably looks a lot different than it did only a few months ago. For those of us outside of the medical profession, let me tell you how grateful we are for the work you’re doing. Our thoughts and prayers are with you and we thank you.
My desire in writing this article is to provide some clarity and direction on a few of the recent changes that may affect you financially. No doubt you’ve heard about these in passing, but perhaps you haven’t had the chance to dig into the details. I hope this article provides you with a little bit of peace in an uncertain world.
We’ll first review some of the recent changes that may have affected your federal student loans. Then we’ll talk about the recovery rebates, and what that might mean for you. Lastly, we’ll review a few proactive steps you should consider in light of money that may be coming your way.
Zero Percent Student Loan Interest Rate on Eligible Loans
You have likely heard that student loan interest is currently being waived (set to 0%) for eligible loans. If you have Direct Loans, FFEL Program loans, or Federal Perkins Loans, you will benefit from a 0% interest rate from March 13, 2020 through September 30, 2020. No action is necessary on your part to benefit from the 0% interest rate.
To be clear, there’s a bit of a wrinkle for those who have FFEL Program loans, or Perkins Loans. Some of these loans are owned by commercial lenders or by the institution the borrower attended, and aren’t currently eligible for the 0% interest rate.
If you’re not sure whether your loans will benefit from the 0% interest rate period, your loan servicer can provide confirmation.
Temporary Suspension of Eligible Student Loan Payments
When President Trump signed the CARES Act into law on March 27, 2020, federal student loan borrowers were automatically placed in an administrative forbearance. This forbearance suspends payments on federal student loans until September 30, 2020. You are not required to suspend payments, however, and can continue making them by contacting your loan servicer.
If you’re in a stable financial situation, and aren’t going for Public Service Loan Forgiveness (more on this in a moment), it may be a good idea to continue making payments. Without interest accruing, this is a chance to make a dent at your loan balance.
Some may mistakenly believe that payments made during the 0% interest period will automatically be applied towards principal. This is only true once all the interest that accrued prior to March 13, 2020 is already paid. But if you’re not going for Public Service Loan Forgiveness, every payment towards interest counts.
As an aside, if you made a federal student loan payment after March 13, 2020, you can contact your loan servicer in order to receive a refund, if desired.
Public Service Loan Forgiveness and the Recent Changes
So long as you meet the requirements, suspended payments still count towards Public Service Loan Forgiveness.
“If you have a Direct Loan, were on a qualifying repayment plan prior to the suspension, and work full-time for a qualifying employer during the suspension, then you will receive credit toward PSLF for the period of suspension as though you made on-time monthly payments.” (https://studentaid.gov/announcements-events/coronavirus#borrower-questions.)
Many physicians in residency and fellowship training will benefit from recovery rebates. Eligibility is based on your 2019 or 2018 adjustable gross income. For single-filers with an AGI under $75,000 you may be eligible to receive the full $1,200 rebate. For taxpayers who are married and filing jointly with AGI below $150,000, you may be eligible for a full rebate of $2,400 with an additional rebate of $500 per child under age 17—bet you’re wishing you started having kids earlier!
If your AGI is above these limits, you may still be eligible for a reduced rebate. (Taxfoundation.org has a useful “CARES Act Rebate Calculator” that you can use to estimate your rebate amount.)
The Treasury Department and the IRS announced on March 30, 2020 that “distribution of economic impact payments will begin in the next three weeks and will be distributed automatically, with no action required for most people.” (https://www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know)
Many of you reading this may benefit from suspended student loan payments, temporary 0% student loan interest rates, and recovery rebates. Before you decide to use the money for a down payment on a car, or for diversions on Amazon to get you through quarantining at home, let’s make sure that your financial house is in order.
Here are some ideas for your consideration:
1. Build up your emergency fund.
It’s always important to have an emergency fund (generally 3-6 month’s expenses). If you don’t have this built up already, use the money coming your way to do so. And a reminder, emergency funds are set aside for . . . emergencies.
It’s probably a good idea to separate this from your checking account so that it’s more clearly set aside for purposes other than spending.
2. Prepare for upcoming expenses.
If you’re finishing up your residency or fellowship program, you may have upcoming expenses. You should prepare for these as much as possible so that you don’t need to tap into your emergency fund.
Expenses related to an upcoming move, board exams, and licensing fees can and should be quantified in advance so that you know what’s coming. If you haven’t prepared for those expenses yet, this money can help.
3. Obtain quality disability and life insurance.
Perhaps you’ve been delaying the purchase of own-occupation disability insurance. This should have been one of the first things you did as a resident, but if you haven’t done it yet, there’s no time better than the present. (TPP: And, if you need to buy insurance, you should buy insurance from someone on this list).
If you’re married, make obtaining affordable term life insurance a priority to be taken care of as soon as possible. Even single physicians should consider obtaining some term life insurance in order to lock in a rate while they are younger (and possibly healthier) to prepare for that future date when others may rely on them financially.
4. Pay down high interest debt.
Until credit card debt gets paid off, it is extremely difficult to get ahead financially.
Depending on your circumstances, it may make sense to use money from the recovery rebate, or freed up money from the student loan payment suspension, in order to pay down credit card debt.
5. Invest for the future.
As a resident physician, your time horizon to retirement is generally very long. If your financial house is already in order from a defensive standpoint (you have an emergency fund, disability insurance, life insurance, and do not have credit card debt), it may make sense to invest the money you will receive.
Burton Malkiel, author of A Random Walk Down Wall Street stated in an April 7th article,
“[n]o one knows how many people the global COVID-19 pandemic will kill or how long it will last. Nor does anyone know the extent of the global downturn and how much further stock prices will fall. But there is one thing that everyone knows: Equity valuations are far more attractive today than they were at the start of 2020.” (“It’s a Good Time to ‘Stock’ Up,” The Wall Street Journal, Accessed April 8, 2020)
Some final thoughts.
If things are feeling a bit overwhelming and you sense that you would benefit from professional guidance and care, consider working with a fee-only financial advisor. Some advisors are willing to offer significantly reduced rates to resident physicians for ongoing financial planning and investment management. (My firm, for example, offers a reduced rate to families in residency and fellowship programs for a flat $125 quarterly fee.)
Stay strong and know that our thoughts and prayers are with you as you go about completing the important work you do.
The content provided is for informational purposes only and represents my personal opinions based on my experience, study, and practice. Yes, I’m a financial advisor, but this article isn’t intended as advice for you specifically. Your unique situation needs to be taken into account, and the ideas presented here may not apply.
Please make sure you do your due diligence before implementing anything. Due diligence includes hiring a qualified professional who understands your situation completely and can offer you personalized advice.