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Drowning in Debt

As tuitions rise, medical students struggle with excessive loans.

The New Physician September 2003
What's the price of becoming a physician? For Kevin Rufner, a third-year M.D.-M.P.H. student at Tufts University School of Medicine, it will be one-quarter of a million dollars by the time he graduates. And that's not counting the thousands of dollars he will pay over the years in loan interest. By the time he finishes residency and begins paying back his $250,000 to the government and private lenders, his monthly loan repayment will look very much like a home mortgage.

Thanks to his enormous debt load-large even by medical-student standards-Rufner has made a difficult decision recently. Interested in working in international public health, he realizes the low pay associated with such jobs is not going to make a dent in the financial monkey growing on his back.

"For myself and for a lot of the others in the program, most of us look at doing public health 10, 15 years down the road, after our loans are paid off, which is a shame."

So instead, he's turned to a more profitable primary care specialty-maybe internal medicine with its $120,000 starting average, which is what his financial aid office tells him he will need to earn after residency to make his loan payments. In fact, he says most of his classmates have turned to other specialties for the same reason.

"The hardest part for me is why am I doing the M.P.H. now? I'm going to need to spend the first part of my career doing another discipline just to pay off my loans. I think a lot of public-health people have the idealism that money's not going to be a factor." They would be wrong in assuming so. Experts have been tying rising student debt to decreases in family practice and surgery residents for several years. With primary care's low pay and surgery's long residency, extending the amount of time loan interest accrues before beginning payment, these fields can become specialty pariahs to a student facing more than $150,000 in loans. Future physicians will also say that post-residency fellowships are less appealing if applicants have large debts to pay off.

Medical student debt has been rising at an annual rate between 5 percent and 7 percent throughout the 1990s, according to the Association of American Medical Colleges (AAMC), and a Council on Graduate Medical Education study found the average debt increased 211 percent between 1985 and 2000. These increases mean the average newly minted physician went from owing $59,885 in 1993 to $103,855 in 2002.

Not unrelated, tuition hikes have been staggering at many schools, particularly at public universities as states struggle with budget deficits in the billions. And since each tuition hike means more loans for all but about 17 percent of medical students who unbelievably graduate debt-free, financial aid officers worry that future physicians are reaching loan levels they won't be able to manage with today's lower reimbursements and the higher costs associated with medical practice.

Hitting students' pocketbooks

The news isn't encouraging. As endowments take a blow from the sluggish economy, schools have increased tuition. Georgetown University medical students will see a 3 percent increase to $33,600 for tuition fees this year, which Dr. Ray Mitchell, the dean of medical education, says is the target for annual increases. "My heartbreak is that we don't have as much grant money as we need," he says. "Clearly the earnings of the endowments are down."

Drexel University College of Medicine students are digging into their pockets for the $34,000 it will cost them to attend this year, reflecting a 5 percent increase. "We have tried to maintain tuition at the 50th percentile of the private medical schools," says Dr. Barbara Schindler, Drexel's vice dean for education and academic affairs. In fact, Schindler is right on target for private school tuition hikes, which mostly hover between 3 percent and 5 percent this year.

Historically affordable, state schools are facing a more serious trend as they fall victims to the state budget crises. "I think it's a critical time. It has affected not only the private institutions, which have wrestled with this for a long time…but the public schools as well," Mitchell says.

Budget cuts caused public Eastern Virginia Medical School to raise tuition 15 percent to about $19,000 for in-state students. The first-years at the University of Virginia saw a 20 percent increase and are paying more than $22,500, which some would argue is getting into the range of a private medical education.

In cash-strapped California, where at press time legislators were deadlocked over how to resolve a $38 billion budget deficit, the University of California's Board of Regents was expected to dull the financial blow from a proposed $380 million in state funding cuts through fee increases. The state's seven medical schools already saw between 5 percent and 10 percent increases in fees last year, which the university charges students in lieu of tuition, driving costs to between $10,000 and $11,000.

Across the country, New York's public schools are not faring much better. The State University of New York (SUNY) system just handed medical students a 14 percent increase in tuition, jumping from around $15,000 last year to $17,000 this year.

And at the University of South Carolina, medical students expect to see a 30 percent rise in tuition, double the increases slated for law students, as the institution's trustees grapple with their share of the state's $51 million in cuts to higher education.

State schools will certainly learn the close relationship between tuition hikes and increases in student debt, for as the cost of medical education rises, so does the bottom line on many students' financial aid packages, especially at less expensive schools that attract those in the greatest financial need.

Amanda Little* is one such casualty. A student at the public University of Arizona College of Medicine (UA), she expects to have accumulated about $150,000 in education debt by the time she finishes school. Little has been financially independent since her teenage years; she helps support her disabled mother, and her father is deceased. And while just making it to medical school may seem like a huge accomplishment for someone who has had little help since high school, to do so she also accumulated $13,000 in credit card debt, which is risky for someone who will reach the federal educational borrowing limits sometime during her third year of medical school, forcing her to turn to private lenders, who more heavily consider consumer debt when making loan decisions.

All this debt weighed on Little as she decided where to go for medical school. Having already borrowed $60,000 for her undergraduate and master's degrees, she knew she had to consider the cost differences between UA and private Albany Medical College, at which she was also accepted. UA's $11,500 per year tuition is about one-third of what she would have paid at Albany. "That in conjunction with my credit card debt is the main reason I'm going to Arizona."

Right now, federal loans cover all but $500 of the $27,500 budget UA establishes for its students, which includes tuition, fees, books and living expenses. To make up the rest and pay the minimum balances on her credit cards, she works when school isn't in session, babysitting as much as 35 hours a week, but she can't do that when classes meet.

When she's not bringing in money, she says she has to get creative with her funds, buying food and gas on plastic and using her loans to make the $200 minimum monthly payments on her credit cards. "I need to keep my credit rating good. But that is a lot. That's a huge chunk out of a budget that doesn't account for it."

Little says she's concerned about selecting a school based strictly on where she got the best financial package. She says Albany was the better choice for her academically, but she's trying to put the best face on the situation that she can. "I'm a very regretful person, and I'm trying not to regret this decision. You're in school for four years, and you can get bitter, and residency doesn't get any better."

But it's not easy to stay positive. This year she's moving in with a new roommate who, with parental help paying for college and medical school, has about $3,000 in loans. "And that makes me bitter. But I just have to step back and say I have all this life experience, and that's important."

It's also important to make sure medical students will be able to pay off their education debts. Only a small percentage of medical students traditionally default on their loans, and their future income potential makes them attractive to lenders. Yet some financial aid officers worry medical education costs are at a point where some graduates won't make enough to repay their loans.

"I think the vast majority of students are being wise in their borrowing," says Irv Bodofsky, the assistant dean of students and director of financial aid at SUNY Upstate Medical University. "But in the last couple of years, we've seen some concern." He says any time a student hits the limit for federal borrowing, which is currently set at $189,625, he worries about whether the student will be able to earn enough to pay it back.

"You look at the indebtedness now, and in some cases, you're talking about a very hefty mortgage," says former academic financial aid officer Paula Craw, the director of student financial services for the AAMC.

Diane Gregory* might be someone to worry about. Already in debt $138,000 with about $47,000 to add for her fourth year at the University of Pennsylvania School of Medicine, she exemplifies many students in her aversion to the bottom line. "I've been trying to remain ignorant of the exact amount of my debt. Nothing about money interests me. I did think about it a little bit when I was picking a specialty," she says, but adds that in the end, she settled on lower-paying psychiatry over a more lucrative career in radiation oncology.

Future physicians' aversion to money issues is troubling, say financial aid administrators. Craw says one of the problems is that loan money never seems real-it's always there, and it's not particularly difficult to get, so it's not the same as earning a paycheck. "We used to refer to it as Monopoly money," she says.

"To me the number is so incomprehensible. It's like trying to comprehend infinity. You just can't get your head around it," says Daniel Doran, a fourth-year at the University of Colorado School of Medicine who will graduate with about $130,000 in loans.

Craw says many students struggle with this. "You mention money and their eyes just glaze over…. I've always referred to [student loans] as a necessary evil. They're just going to take them out. They'll have to, and at the end they'll figure out what it means," she says.

Gregory, who began medical school at age 32 after completing a Ph.D. in philosophy that cost her a mere $4,000 in loans, shares this casual attitude about finances. "I'll just find a way to make it work. Maybe I'm in complete denial," she says, but adds she has calculated that with a 30-year payment plan, she'll be 70 by the time she fulfills her loan payback. "Now that's bad."

Figuring it all out

You can't blame these debtors for their disinterest in education finances. Many say they're in medical school because they weren't good at math to begin with, and when you factor in the confusion about the different types of loans and all the options for repaying them, you can understand the endemic eye-glazing syndrome Craw sees.

The basic medical student loan is the federal Stafford loan, which has been around since 1987 and existed before that as the Guaranteed Student Loan Program. There are two types of Stafford loans: subsidized and unsubsidized. While both are loaned by the government and enjoy lower interest rates than loans on the open market, subsidized Staffords are more desirable. This is because the feds pay your interest: while you're in school; for the automatic six-month grace period Staffords offer after graduation; and during periods of deferment, in which you arrange with your loan servicing company to delay repayment, something medical graduates usually take advantage of during residency. Subsidized Stafford loans are need-based and carry annual borrowing limits of $8,500 with a lifetime limit, including undergraduate borrowing, of $65,500.

Unsubsidized Stafford loans are easier to obtain, as they don't require proof of need. Congress also set a higher limit for them: $30,000 per year as long as you remain within the combined Stafford aggregate limit of $189,625. But the drawback is that students are responsible for the interest while in school, although they have the option-one most students take-of capitalizing the interest during school years into the principal loan amount. While this tactic will fatten students' wallets for books and pizzas during school, it only adds to their final debts, so they should be aware of what the interest is doing to their bottom lines.

Schools administer Staffords either from the federal Department of Treasury through the government's Direct Loans program or through the Federal Family Education Loan Program, which draws on money put up by banks that use the government as a co-signer and to subsidize the interest rate. About one-third of schools have opted for the Direct Loans program, which is cheaper for the government because it bypasses the bank middleman. Borrowers are bound by whatever program their schools participate in, although the terms of the Staffords are identical for each one.

There are other federal programs, but none as substantial as the Stafford. Need-based Perkins loans are funded by the Department of Education and administered by schools, but they provide only small amounts of money. "You may want to think of it as the cement in a crack in students' finances," SUNY's Bodofsky says.

The Department of Health and Human Services' (HHS) 5 percent interest Primary Care Loan obligates graduates to practice primary care during repayment, but Bodofsky says with Staffords at 3 percent interest now, they're a better deal and lack a specialty requirement.

Once students have exhausted the federal loan options, they need to turn to private loans. There are about 10 programs to choose from, although Craw says the number is increasing. Financial aid officers will usually point students toward one program or another, Bodofsky says.

Private loans have higher interest rates and generally longer repayment periods than federal loans' standard 10 years. Generally, a third party will manage the program in partnership with a lender and a servicing company. For example, Craw manages the AAMC's MEDLOANs program, which offers private loans from Bank One that are serviced by Sallie Mae.

The aggregate limits on these loans are higher-for MEDLOANs it's $220,000, including federal loans-and Craw is concerned about programs with no limit, "which maybe says the sky's the limit."

One of the drawbacks to these loans, Bodofsky says, is that they aren't guaranteed like Staffords. "They're going to look at previous credit history."

This becomes especially important for students who expect to reach the federal loan limits during medical school, because, in the absence of a winning lottery ticket or a benevolent great-auntie, they'll be forced to turn to private loans for the rest of their education.

Once all this debt has been accumulated, it's time to think about repayment, which can be more confusing than the borrowing, for with repayment generally comes debt consolidation.

Consolidation combines all loans-even those from college-into one payment at a fixed interest rate for between 10 and 30 years. "Consolidation is probably the most complicated element in student loans right now," Bodofsky says.

Again, blame the economy, but this time there's a positive side effect amid the negativity. With interest rates ever sinking, federal student loan rates have dropped to a historic low of 3.42 percent this year for those in repayment, and 2.82 percent for those still in school or in the middle of their six-month grace period or deferment. That equals a $3,622.79 savings over last year's previously historic low rates for someone with $100,000 in Stafford loans.

It all sounds like a good deal, but here's the catch-several of them, actually. Just like refinancing a mortgage, consolidation resets the clock on loans, which makes it less of a good deal for those nearly finished with the standard 10-year repayment. And since consolidation triggers the start of the loan's repayment period, Bodofsky suggests cash-strapped grads get all the details on going into a deferment or forbearance status before signing consolidation agreements, although students who consolidate before the end of a six-month grace period, which will be ending in a few months for the class of 2003, can do so at even lower rates.

With interest rates so low, enrolled students have been confused about whether or not they should consolidate and lock in a rate before they graduate. Doran says his loan officer encouraged him to do just that, although he's not sure that would be smart.

"It's left me somewhat in the dark to what I should be doing. I'm not prepared as a fourth-year student, with no income possibility in the next year, to make that decision. I'm also a little bit afraid to not make that decision. I would feel like a fool if I waited and then classmates were spending hundreds of dollars less than I because loan rates became variable," he says, referring toa legislative initiative by education lenders to change consolidation rates from fixed to variable, saving lenders money in economic downturns because rates drop so low.

Only certain students can consolidate before graduation. Anyone attending a school enrolled in the Direct Loans program can consolidate. So can a student who is taking a year off from school. But it's not a decision to make lightly even then, Bodofsky says. "Sometimes problems have cropped up, and if you haven't finished, you might need to take out more loans. Then you'll need to combine them under an average [rate] between the two," which defeats the purpose of consolidating.

And why can't students just reconsolidate if they have to take out more loans to finish school? Here's another rub: Unlike a mortgage refinance, consolidation is a one-time deal. Loans can't be reconsolidated if the rates drop further next year, although no one expects them to.

As if this weren't complicated enough, there are other rules to consider. The great rates apply only to federal loans. So if a student has private loans he wants to consolidate, he must do so under a private program. And once he's graduated, the government turns his federal loans over to a servicing company-Sallie Mae is the most well known, for example. If one servicer holds all the loans, laws mandate borrowers must stick with that company's consolidation program.

"Loan consolidation was not intended to be this hard. It was simply set up to be a way to extend repayments beyond 10 years," Bodofsky says. "[But] nobody expected these low, low interest rates." However, students should take heart, he says. Even the confusing world of debt management can be a learning tool. "This is a way for students to begin to learn the way the economy works."

And they have some time. Since federal student loan interest rates change only once a year, future physicians have until June 30, 2004, to decide what is the best solution.

Fixing the problems

The Higher Education Act (HEA), which recently has been reauthorized every five years and whose current version is set to expire on Sept. 30, governs many of these federal loan matters. And student advocates are pushing for some changes.

"The biggest issue for medical students…is about annual loan limits," says Jonathan Fishburn, a legislative analyst for the AAMC. In January, 49 higher-education organizations signed onto a list of proposals for the HEA reauthorization that included exploring different options for changing federal loan limits. The coalition wants to see some movement on this, but because of differences among the group, the letter doesn't ask for a specific solution. Fishburn says the AAMC seeks loan limits adjusted for inflation back to 1992-the last time Congress increased them-which would put subsidized Stafford limits around $12,000. Others want limits spread like a line of credit over the years a student is enrolled in school, which would allow students with greater needs to draw on the aggregate amount without worrying about a yearly limit.

Most financial aid administrators favor these plans, believing they will reduce a student's reliance on private loans. "Tuition is going up. There are only two solutions: Ask parents for more money…or cut your budget. If you're being frugal to begin with, where are you going to cut your budget?" Bodofsky says. "The final choice is…a private loan you can go borrow."

But students' reactions are mixed, with some seeing it the way Bodofsky does, and others predicting a different outcome. "I think it's a problem. When you start giving students more loans, you encourage states to increase tuition," says Bill Walsh, a fourth-year at Indiana University School of Medicine.

The other medical student-related issue Fishburn expects to see discussed during the HEA reauthorization is a change in the length of time a student in repayment can apply for an economic hardship deferment. You can defer for three years, but Fishburn points out that many residencies last longer than that.

While these are both benign ideas that are expected to at least be discussed during the legislative process, Rep. Buck McKeon (R-Calif.) has proposed legislation that would force schools to keep tuition increases below twice the rate of inflation or lose their participation rights in federal loan programs.As the House's chair of its subcommittee in charge of HEA reauthorization, McKeon isn't kidding around.

The concept doesn't shock Fishburn. "The fact that accountability is going to be a buzzword in authorization this year was not a surprise," he says, adding that the penalty clause was an idea that medical schools didn't foresee and don't like.

Tuition caps are something Walsh would like to see implemented. He suggests rolling four-year caps, such as the Washington University School of Medicine uses. Students are guaranteed the same tuition during four years of medical school, although they "complain the entering tuition is just raised as high as they can when they start," Walsh says. Ultimately, he favors voluntary absolute caps, but he recognizes this is an unpopular idea among schools that would all have to sign on for the idea to work.

Regardless of the popularity of any of these ideas, don't expect to see Congress jumping through hoops to pass the HEA reauthorization before it expires this month. A built-in extension to the current law takes some of the pressure off, giving lawmakers the next year for debate. Political timing plays a part, too, Bodofsky says. "In fact, we predict it will be signed in August or September [of 2004], because it is an election year. Hey, money for education-that's as American as apple pie."

Yes, you can help

In the absence of real reform, you can do a few things to lessen your burden at each rung of the medical school ladder.

Premeds need to think hard about the financial responsibilities involved with medical school, Bodofsky says. Many students will tell you they were so excited when the acceptance letter arrived in the mail, they didn't even think about what it was going to cost until they arrived on campus, and that can be dangerous, if you're not independently wealthy. Instead, "spend a few days basking in the glow of your accomplishments, but then come down and do some future planning," he advises.

Part of that planning can involve getting your consumer debt under control before you begin accumulating $30,000 annually in education loans. For Gregory and Little, who both have accumulated $13,000 in credit card debt, this is a serious issue. They both say they are careful about making the monthly minimum payments on time, because they know the consequences of not doing so is a ruined credit rating.

But many students suffer under larger consumer debt loads. "Credit card debt and credit card education is probably one of the most pressing issues we're dealing with right now," Bodofsky says. Some private schools have been thinking about requiring students to submit a credit report so they can begin consumer counseling from the first year, he says. "I wouldn't be surprised to see some public institutions asking that as well, as tuitions begin to rise."

Some future physicians are already getting credit counseling from their financial aid offices. Fourth-year Shelley Schoepflin Sanders says she was shocked when she heard her financial aid counselor at the University of Rochester School of Medicine say to her that if you put a $12 pizza on your credit card and pay it off with your student loans, "I can't remember how much it was, but it was over $100," she says.

But many schools don't go beyond the entrance and exit interviews required of anyone taking out a federal loan. "I don't feel like I'm getting the kind of counseling that a debt of this amount of money should take," Doran says.

Craw says the common phrase students say near the end of their borrowing is "I wish I knew." So she likes University of Chicago Pritzker School of Medicine's (UC) requirement that students show up for mini counseling sessions each year they visit to sign their checks. "I really, really think that repetition is good."

And even if your financial aid administrators don't require counseling, ask for it. Schedule regular meetings with your liaison to discuss your debt and how it is going to impact you later. Sanders stresses the importance of knowing exactly what you're getting into. Even with her physician father, "I had no clue going in." She had disillusioned physicians tell her they wished they hadn't gone into medicine, but she paid them no heed-until a difficult third year on the wards almost convinced her to leave medicine.

Her husband still encourages her to drop out if she wants to, but she says it just isn't a financially sound decision for someone with $160,000 in debt and less than a year to go. "I will go on, and I will be a good doctor, but the fact that I had the debt-I looked a lot harder to find that niche," she says of her final decision to practice geriatric medicine.

Some of your peers have found creative ways to manage their debt. Yousef Turshani, a second-year at UC, expects to pay about $15,000 in loans by the time he's finished with his education that costs $29,500 annually. How's he doing it? By taking a full-ride scholarship at his undergraduate college and allowing his parents to invest the money saved, he can now use the funds for medical school. OK, this plan isn't applicable to most of you, but Turshani does have some other ways he keeps costs down, which allowed him to reduce his loans by $3,000 in his first year.

"I call it my trifecta: no car, alcohol or cell phone," he says of his frugal lifestyle. He also suggests bringing lunch to campus or going home to eat. "Don't use a credit card you aren't able to pay off. I think that's a huge trap for medical students."

Turshani also lives in a three-bedroom Chicago apartment with two other students. It's not the most private situation, but he's got his eye on the future. "I realize that I'll be able to live a little bit nicer, and in a few years after that I'll be able to live nicer than that. I'm happy with my life. Why make it harder on myself?"

This is not an attitude all medical students share. Bodofsky says he sees some who come to him with a sense of entitlement, saying, "'I've reached this point, and I don't want to be controlling my spending.'" But he cautions them, saying, "You can live like a student now, or you can live like a student later when you're repaying your student loans."

Some future physicians agree this attitude comes with the territory. "As a doctor, I feel like I want to be compensated for my work. I think there is a little bit of entitlement there," Doran says.

To aid that dream, Bodofsky encourages residents and practicing physicians in repayment to enlist the efforts of a good financial planner. And be careful about whom you select-Craw cautions that not everyone understands the complexities of physician finances.

A good financial planner can help determine the best repayment option for you, suggest ways to manage your new-found wealth after residency and guide you through business loan applications you might need for your practice. "The real issue is not can I pay my loan back, but how can I manage my loans in the most efficient way," Bodofsky says.

* Requested pseudonym

Editor's note: Some attributions in the online version of this article have been amended.
Jennifer Zeigler is a senior writer with The New Physician. Direct questions and comments about this article to tnp@amsa.org.