Buying a house during residency

Should I buy a house as a resident?

Probably not.

The American tendency to prioritize owning your house or car can be a bit misguided. When you buy a house with a mortgage, the title may be in your name, but it’s really the bank that owns it. You’re slowly buying it from the bank, paying interest all the while. It’s not that buying a home is a bad idea; it’s that owning a home is not intrinsically good financially. Owning something instead of renting isn’t always better.

Before we discuss the pro/cons, a disclosure: we bought a house when we graduated medical school, and we bought (and sold) a house during medical school as well.


It takes on average 4 years to break even on the transactional costs of buying and selling a home. You can’t just compare the monthly mortgage payment on a potential house and the monthly rent for an apartment or house rental and see which is lower. The mortgage will typically be lower, but this masks several things:

  1. Upkeep costs. You’ll need to pay for repairs and maintenance on your house that you wouldn’t be responsible for as a renter
  2. You’ll need to pay taxes and home insurance, which may not have been in your original mortgage projection. This is deductible if you itemize deductions, but note that the “extra” savings on these are related to your marginal tax rate on the difference between these amounts and the standard deduction. An inexpensive house or townhome isn’t going to make a big dent in your tax burden.
  3. You’ll almost certainly lose money to realtors when it comes time to sell. 6% is common (3% to each agent [who then share that with their broker]). With the rest of the closing costs, earmarking 10% is considered a good estimate.

Bottom line: Even if the monthly mortgage payment + the upkeep etc comes out to a better deal than a rental, you’ll still have to take #3 into account. Whether or not the closing costs will make or break the +/- versus renting will depend on how much you sell the house for when the time comes and how long you held the house for (i.e. how much total money you’ve saved vs renting over time). In most cases, selling the house for exactly what you bought it for will actually result in a loss.

Buying a house and planning to sell it after a three-year residency, for example, is essentially investing on margin unless rental prices in your area are super high. You’re just hoping that real estate prices rise fast enough to counteract the costs of a real estate transaction.


Conversely, there are some benefits. Your mortgage interest and real estate taxes are deductible, so if your house will cost enough to make your tax deductions bigger than the standard ($9300 head of household or $12600 for couples in 2016), then you can itemize deductions and get some of that money back (essentially reducing your monthly payment). Note that deductions don’t give you a dollar back for every dollar deducted, they merely reduce the income you’re paying taxes on and so save you a fraction of that dollar at your marginal tax rate. But because the standard is always an option, it takes a fair amount of tax to make it all worthwhile. If your itemized deductions add up to 13,000, for example, then you’ll only really save yourself the tax paid on the extra $400: $100 if in the 25% tax bracket that many married residents are likely to find themselves in.

You get to own a house. While upkeep could be a big headache, owning a house and having your own space could be awesome. While owning a home isn’t “priceless,” this part of the value is at leasy partially a personal calculus. Additionally, sometimes owning is the only healthy option. Some places, particularly small towns, don’t have much of a renter’s market. There may be no houses for rent in the areas convenient to the hospital nor decent apartments. In some unusual cases, you may feel like you don’t have a choice but to buy depending on where you match.

Real estate can also be an investment. Most houses a resident (or graduating medical student, really) can afford probably aren’t your forever home. That said, depending on what your finances will look like when it’s time to upgrade, you could conceivably keep your first house as a rental property (though again this may impair your ability to qualify for another mortgage etc when holding the additional debt). It also assumes you want to deal with being a rental owner/real estate investor, which comes with its pro/cons, costs, and headaches. But buying a home now with a low-interest rate in a good area for rentals may be viable long-term plan; it depends a lot on the local market.

You can also consider buying and finding a renter for a spare bedroom to help defray your costs. This essentially allows you to be a real estate investor and homeowner all in one with someone else paying part of your mortgage while you still get to enjoy (part of) your home. It’s a good way to hedge your bets.

So if need to buy a house or simply “need” to buy a house

  • Try to limit your mortgage to 2x your annual income, even if a bank will give you more. Consider 3x to be an absolute limit.
  • 20% down payment is normally considered “good” and will give prevent you from having to pay private mortgage insurance (PMI). Most residents who buy houses do not achieve this.
  • If you have medical school debt (and by odds, you probably do), you may need some variety of physician loan. There are 100% financing varieties as well as ones that require some money (usually 5%) down. Physician loans will allow you to use your match letter as proof of future income so that you can close on a house before you actually earn a paycheck and tend to ignore your student debt in making their approval calculations. If you aren’t planning on a public service career and loan forgiveness via PSLF, you’d want to see how private refinancing stacks against REPAYE, but you’d definitely want to wait to do any refinancing until after your mortgage clears.
  • Whether an ARM is worth it will depend on how likely it is that you’d keep the house past the fixed-rate limit, how much lower the rate is compared with a conventional 30-year fixed, how much the per-year increase is capped, and if there’s a maximum cap. Any lender can run the options for you so you can see what it means for the specific house you make an offer on. A 5/1 ARM (fixed for 5 years, variable for 25 years) is the most common variety. It’s possible, for example, that a 5-year ARM rate could be 1% less than the 30-year fixed with a 0.5% per-year maximum increase after 5 years (and thus would take a minimum of 7 years before it would overtake the conventional loan’s rate). If you know you’ll hold a house for less than 7 years, then you’re taking on minimal risk in choosing the ARM.1 7-year ARMs also exist if you want a smaller benefit with less risk. In this scenario I also assume a 15-year is out of the question (because a 15-year fixed loan is more expensive per month but usually has better rates and by far lowest amount of money lost to interest). An ARM is best when you know you’ll only be holding on to a house for the fixed period of time before moving/selling.

  1. Note, if you plan on keeping a house as an investment with an ARM, you better be ready to pay that mortgage down fast if the rate rises, so this is best done when the house is cheap relative to your future income.

The slow growing tide against PSLF

Jason Delisle does a nice job describing the majority of the arguments used to suggest that PSLF should be severely curtailed or destroyed in “The coming Public Service Loan Forgiveness Bonanza” for the Brookings Institution.

PSLF will be revised at some point if no other reason than this:

In 2014, the CBO estimated that the Obama administration’s proposal to cap the amount that could be forgiven under PSLF at $57,500 would save $265 million over 10 years (2015 to 2024). The agency recently revised that figure to $6.7 billion.

I don’t think the people making these programs had any idea how much graduate school costs and the incentives they were promoting through potentially unlimited forgiveness.

I still think current borrowers will be grandfathered into the program, and I think politically it is for more likely for forgiveness to capped +/- changes to eligibility rules than for the program to just disappear.

Delisle also lumps all IDR programs together as IBR and says that IBR, PAYE, and REPAYE are functionally equivalent. This certainly isn’t true for pre-2014 borrowers, but also doesn’t take into account REPAYE subsidy or changes to the payment cap (for example) and their effect on the amount forgiven under the PSLF program.

And while he discusses how a cap would help combat the perversion of this program in justifying tuition increases to students, this would really impact longer degrees like law and medicine. A $57,500 cap would still be very enticing to people going for masters degrees in things like social work or speech-language pathology.

You’ll be seeing more like this over the next year (presumably including profiles of rich suddenly loan-free doctors) as the first round of forgiven loans happens in 2017.


PAYE vs REPAYE: interest capitalization cap better than interest subsidy?

The PAYE interest cap is essentially never better than the REPAYE interest subsidy. There are reasons PAYE can be a better choice for many borrowers, but the interest capitalization cap isn’t really one of them.

But let’s take a step back: If you’re reading this post, you may already know the relevant facets of income-driven repayment plans that I’m referring to: Within the PAYE plan, any accrued interest that capitalizes is limited to 10% of the original principal amount when you enter repayment. What this means is that no matter how much interest accrues, the maximum principal amount after capitalization in the long-term is the original amount + 10%. Which means that over the long term, the rate of interest accrual is capped (but not the amount, of course). When does interest capitalize within the PAYE program? When you lose your partial financial hardship, which will likely happen at some point during attendinghood depending on how much you owe vs. how much you make. An example would be if you had a $200k loan with $50k in accrued interested; after capitalization in PAYE, the loan would be $220k with $30k in accrued interest instead of $250k, which means at 6.8% $14,960 accrues per year instead of $17,000.

In contrast, REPAYE has a subsidy that pays half of the unpaid accrued interest on a monthly basis. The reason the above question is basically never is because REPAYE interest never capitalizes unless you leave the plan. Because there is no hardship requirement, your interest will continue to accrue at the same rate it always has. Only if you try to change back to a different repayment plan (say, to lower payments as a high-earning attending) would your interest capitalize. That $200k loan in REPAYE will always accrue the same amount of interest every year (until you begin to pay down the principal, of course).

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How/Why to Consolidate Federal Student Loans When You Graduate Medical School

When you get federal student loans from the government for medical school, you don’t just get one loan: you get at least one per year. Back in the day when graduate students still received subsidized loans, many borrowers would receive three: one subsidized, one unsubsidized, and often a small “low-interest” (5%) Perkins loan. Now, in practice, holding on to multiple loans doesn’t really affect your daily life much. Your federal loan servicer (the company that takes your payments) will apply your payments automatically across all of your DIRECT loans for you (your Perkins loans, if you have any, will be due separately from the rest).

Consolidating your federal loans into a DIRECT Consolidation from the federal government (as opposed to private refinancing, discussed here) does make things look nice and tidy in that you’ll now have a single loan with a weighted-average interest rate based on the rates of the individual loans it replaced, but this paperwork trick isn’t particularly meaningful in and of itself. Unlike private refinance options, you’re guaranteed to not save a single dime on the interest rate. In fact, a slight rounding change could give you a trivially higher rate (it’s rounded up to the nearest one-eighth of 1%).

But there are definitely a few reasons to consider consolidating your loans, particularly as early as you can, in large part due to government’s newest income-driven repayment plan: REPAYE. (Sidebar: please read this for more info about REPAYE and why it’s generally a good idea of residents if you’re not already familiar with the program). And there’s a double reason if you’re considering PSLF.

In short, starting a consolidation when you finish medical school will do three things to save you money:

  1. Reduce the amount of capitalized interest on your loan, which reduces the rate at which it will grow for a long time
  2. Temporarily increase the amount of your REPAYE unpaid-interest subsidy
  3. Help you achieve loan forgiveness a few months faster

We’ll discuss each of these in detail followed by brief step by step instructions. Stay with me.

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Yes, you can switch back from REPAYE to IBR or PAYE

There has been a lot of confusion from borrowers whether or not REPAYE, with its partial interest subsidy, is a good choice for people with high future income (e.g. residents). The main concern is what happens after training when salaries increase and the possibility of breaking past the monthly payment cap, which could make you lose money (in the context of trying to minimize payments in anticipation of PSLF). Note: If you’re just trying to pay off your loans in an efficient way, breaking past the cap should be mostly irrelevant–you should be trying to pay down your loans as fast as possible anyway.1

If you call your federal loan servicer but don’t ask the right questions, your servicer may lead you astray in how they answer questions about the terms of the REPAYE program. It’s misleading but technically true: if you are making so much money that you break past the REPAYE cap, you absolutely cannot switch back to PAYE or IBR.

That’s NOT because you aren’t allowed to switch out of REPAYE in general (you are), but because at that point you would no longer have a “partial financial hardship” and thus no longer qualify for those plans to begin with. Your servicer is able to provide information and advice, but don’t for a second think that they don’t have a vested interest (see what I did there?) in your payments. A simple rule of thumb is that if you owe more on your loans than you make in a year, you definitely still quality for your income-driven repayment plan.

What is actually used for payment calculations is not your gross income but your discretionary income: your adjusted gross income minus 150% of the federal poverty line for your family size (e.g. family size of 1, 2, and 3 is &17,655, $23,895, and $30,135 in 2015, respectively). The official rule is that if your calculated monthly PAYE/IBR payment (whichever you qualify for) using 10/15% of your discretionary income is less than the standard 10-year repayment, then you still qualify.

So there is a simple solution for forward-thinking borrowers who want to take advantage of the REPAYE benefits but don’t want to tie themselves to higher future payments: Switch back before you make money.

You can switch from REPAYE to PAYE as long as you still qualify for PAYE. Or you can switch back to IBR instead if you had older loans and didn’t qualify for PAYE to begin with.2 Do this at the end of your training and the problem is solved. (Technically, many people could do it even once out in practice; it all depends on how much you borrowed versus how much you/your family makes per year. You can use the calculator to see what household income you’ll need to break past the threshold.)

Also note that since most people generally use tax-returns and not pay stubs to verify income, there is generally a delay between when your income rises and when your taxes reflect that increase. This isn’t the way servicers would like it, but it’s the reality on the ground. You could be an attending as of July 2016, but when you resubmit income verification in the fall of 2016 for REPAYE, you’ll be submitting your 2015 taxes, which is a combination of your last two PGY years of training.

Note that your unpaid interest will capitalize when you switch out of REPAYE, but it’s all going to be forgiven in PSLF, this is essentially irrelevant.

The bottom line is that you absolutely can switch out of REPAYE—you just have to be a little bit thoughtful on when you want to switch out to not miss the window. REPAYE makes the most sense for many if not most residents. For people who aren’t going for PSLF (especially if they’ve borrowed smaller amounts and won’t enjoy a big interest subsidy), no-cost private refinancing may be a better choice.

This plan-switch information comes from this document and FAQ, and I’ve confirmed this interpretation with Nelnet (one of the federal loan servicers). If you talk to your servicer and they say otherwise, ask them to explain exactly why and we’ll get to the bottom of it. Because they should be wrong.


  1. I.e. it would mostly likely only matter if lifestyle has inflated to the point where the money you should be using to pay down your loans has been earmarked for other purposes, like car loans.

  2. IBR payments are higher than PAYE payments (15% vs 10% of AGI), so PAYE is preferable in the context of minimizing payments for PSLF.