By Noel Roach, AIF®
Choosing to complete medical school is not only a large time commitment for physicians but also a large financial commitment. With no federal grant money available and little in private scholarships, students are entering residency with a significant amount of student debt. It is not uncommon for medical students to owe $200,000+ upon graduation.
So as physician, how should you eliminate student debt without eating ramen noodles for the foreseeable future? See below for our top tips on managing what may seem like a monstrous goal.
1) If You Are in Residency, Don’t Defer (if possible)
It’s tempting… deferring your loan during residency might seem like a plausible plan, and quite frankly, the easy button. But with ease comes a consequence… and in this case it means accruing more interest. If you have a $150,000 balance at a 6% interest rate and you defer for 3 years of residency, you add $27,000 of interest to what you already owe. Wouldn’t it be nice to use that on a house down payment or that car you had your eye on? Or even a celebratory vacation?
Although your salary during residency may be much lower than your future income potential, pay-off what you can during residency. This will keep your balance from ballooning. You can also consider an Income-Based Repayment (IBR) plan or Pay as You Earn (PAYE) plan.
2) Explore Loan Repayment Programs
Are you relocatable? Many organizations (including the federal government and individual states) have programs that will pay your student debt if you are willing to commit a certain length of time in in area with limited access to healthcare. Think rural, inner-city, and tribal hospitals and clinics. If this sounds interesting to you, check-out organizations like the National Health Service Corps who offer as much as $50,000 or even $120,000 towards your student loan bills (tax-free). For a list of loan repayment/forgiveness programs by state, go to the AAMC site.
You should also ask prospective employers if they offer any kind of student loan repayment programs. Although not extremely common, there are facilities and staffing agencies that are willing to assist in your debt reduction. Like the government programs, these typically are designed around staffing facilities in rural or inner-city locations and require you to commit for a designated time frame. At the minimum, you may be able to negotiate a hefty signing bonus that could be used to significantly reduce what you owe. Not only will you pay off some of the principal, but you can save a chunk in interest too.
3) Refinance Your Student Loans
Because medical school debt has a high interest rate, physicians find themselves paying on average $74,000 in interest (according to AMMC, the average medical school debt is $189,000; apply a 7% interest rate). Refinancing your loan requires you to take out a new loan from a private lender. This allows you to revisit your loan payment schedule and possibly lower your interest rate. Even reducing your interest rate by a few tenths of a percent can make a big difference. What drives the interest rate for a private loan? Typically, private lenders look at your credit score, income, and whether you are choosing a fixed or variable-rate loan.
If you choose to go this route, be sure you understand the fine print from the lender you select. By switching from a federal loan to a private loan, you may be giving-up some options like the choice to defer student debt or loan forgiveness. Be sure to also understand other details like if there is a pre-payment penalty, origination fee, loan maximum or a required co-signer.
Sallie Mae just introduced a new product to address medical school loans. CommonBond and SoFi are also places to start.
4) Be Strategic in Eliminating Student Loan Debt vs. Saving for Retirement
It’s easy to compartmentalize paying student loans and saving for retirement. Many tackle the debt first and the savings second. Although this isn’t a bad plan, you may be able to be more efficient with your personal finances by doing a combination of both at the same time.
Keep in mind retirement savings offer tax breaks, possibly company matches, and compounding. In many situations, these components may outweigh some interest savings on a student loan. Work with a financial planner who is experienced in balancing a high dollar student loan with retirement savings strategies. Your financial professional should also be able to provide financial projection software to see your hypothetical progress over time.
5) Make Extra Student Loan Payments
This may be hard to do early in your career. However, as you being to accumulate wealth, consider making extra payments. When that unexpected bonus comes along, treat yourself, but also seriously consider putting a significant portion of those earnings towards your debt reduction. This will not only shorten your repayment term but also save on interest.
Eliminating medical school loans may seem time consuming and daunting, but it’s well worth your time to get organized with a plan early on. You don’t have to do this alone. Whether you are just starting residency or several years into your career, a financial advisor can help design a plan that fits your needs. Find a trusted advisor who understands the nuances of tax and retirement saving strategies, as well as the challenges of managing high student debt balances and low residency pay. With the right plan and guidance, you’ll be on your way to financial independence.