by Graduate medical school indebtedness averages about $140,000. For graduates of private medical schools, the mean is about $150,000. How do you best whittle that debt down? Should it be your first financial priority, or a lesser one?1
Attacking that debt now may be your best move. Look at the interest rates on checking and savings accounts today. Compare that with the interest on a college loan, usually around 5-6%. Those loans are costing you much more than your savings can earn. The takeaway here: ramping up your student loan payments today will effectively save you money over time. That doesn’t mean you have to live like a student until you hit 40, but it strengthens the argument for living on less than what you earn.
Do you have a spouse or a partner? Medical residents sometimes have highly educated significant others with large student loan debts of their own. If the two of you are both contending with monster college loans, the argument to try and live on 50-60% of what you collectively make becomes even more compelling.
If the payments are just too much right now, what options do you have? If you are a recent college graduate with outstanding federal college loans, look into income-based repayment, or IBR (find out more at ibrinfo.org). Through the IBR option, the federal government gives you the chance to limit the amount of your monthly payment to a realistic percentage of your income. IBR also effectively limits the term of your federal student loan to 25 years of payments – after 25 years under IBR, any debt remaining is forgiven. If you work for a 501(c)(3) non-profit or work in government, your student loans could be forgiven after just 10 years.2
Volunteering can be a path to drastically cutting down old college debts. If you make a 2-year commitment to serving a medically underserved community through the National Health Service Corps, up to $50,000 in student loan repayments are available to you. Each year you volunteer with NHSC beyond that, up to $35,000 in loan repayments are available. (This parallels the Nursing Education Loan Repayment Program, which picks up 60% of student loan debt for RNs who volunteer to work in a community underserved by nurses.) If you go into the Peace Corps, you can wipe out as much as 70% of Perkins loan debt after four years of service; AmeriCorps currently provides education awards of $4,725 per year of service. Lastly, if you can work 10 years as a public service professional (i.e., public health and safety), you have the chance to wipe out all remaining college loan debt after those 10 years if you make unbroken loan payments during that time (thanks to the College Cost Reduction & Access Act).3
Don’t adopt a psychology that promotes letting debt linger. Basic math suggests that it may take you 20 or 30 years to pay off those student loans, but beware of succumbing to the expectation that it will take 20 or 30 years to do so. If you tell yourself that it will take that long to wipe out that debt, guess what – it might, even if you gain the ability to pay it down faster.
Beware the “richly deserved” mentality. You likely graduated from medical school with the presumption of living well – not immediately, but eventually. Luxuries and status symbols beckon as rewards for your excellence and effort – hot cars, designer clothes, and so on. Resisting such temptations is financially wise, however – you’re just tacking on credit card debt, or “bad debt,” to the “good debt” you spent on your education.
Practice debt reduction before you explore buying a practice. If your goal is to go into private practice, do you really want to assume a practice loan on top of outstanding college loans? Instead of assuming that double burden, see if you can throw $2,000-3,000 per month at the student loans and cut that debt to zero or close first. And just as you don’t want student loan debt coincidental with practice loan debt, you don’t want practice loan debt coincidental with home loan debt. Avoiding these coincidences – if at all possible – can provide great psychological and financial relief to you and your household.
Consider waiting to start a family. In 2013, the U.S. Department of Agriculture (yes, the USDA – go figure) projected that a middle-income couple would spend $241,080 to raise a child born in 2012 to age 18. Families in the urban northeast with a combined income of $105,000 or higher were projected to shell out $446,100 per child across those 18 years. (Those figures don’t include college tuition.) To financially test if you could afford to be parents, you and your spouse or partner could try living on, say, $1,200-1,400 less per month for a month or two.2,4
Remember that you can invest & pay off debt at the same time. Scraping up some funds to invest may pose a challenge, but you should strive to invest for your future. The power of compounding, regular contributions to your investment accounts and getting an early start may help you build wealth sooner than you now anticipate. The less debt you have to pay down, the more money you can devote to investing and saving for retirement. The big-picture goal should be building your net worth with input from a capable financial professional.
1 – sls.downstate.edu/financial_aid/AverageDebtofMedicalSchoolGraduates.html [2/27/14]
2 – ibrinfo.org/ [10/21/14]
3 – credit.com/loans/student-loans/student-articles/student-loan-forgiveness-programs/ [5/8/14]
4 – money.cnn.com/2013/08/14/pf/cost-children/ [8/14/13]