5 Tips for Physicians: Paying Off Student Loan Debt
Medical School Comes with a Hefty Price Tag, but Here’s How to Tackle It
Though medical school can be a fantastic investment, it’s no secret that it can be incredibly expensive. Most med school students believe this investment to be worth it due to the estimated income of most healthcare professionals. However, it comes at a high cost. Statistics show that the average student loan debt for college students is $32,731, whereas the average medical school debt is $201,490 – quite a drastic difference.
Having large amounts of debt can seriously impact your finances, as well as your emotional and physical well-being. It can increase stress and tension and contribute to things such as poor judgment, inability to focus, and habitual procrastination. These are obviously not conducive to establishing a thriving medical career.
If you’re a medical student or doctor looking to protect your net worth and quality of life, it’s imperative that you establish a savvy plan for paying off your student loans. Here are five tips to get you started.
Tip #1: Budget Out Your Paycheck
It may seem tempting to put all of your paycheck towards paying your loans off in the hopes of paying your debt off early. However, it’s still important to be focusing on other aspects of your budget and working towards other financial goals you have for yourself. This means putting some money into a savings account to establish an emergency fund so that you’re protected should something unexpected happen.
You don’t necessarily have to amass huge savings. However, you should have a solid amount to fall back on should life throw you a curveball – which it’s bound to do at some point. The last thing you want to do is increase your student loan debt by adding more debt because you didn’t have the funds to cover an emergency or unexpected expense, so shoot for saving $1,000 to begin with and gradually work up to three to six months of expenses.
This advice applies to buying a home or a car, as well. Being sure that you’re taking those sorts of financial goals into consideration as you plan out your budget can help keep you from running up your debt more than is necessary.
Tip #2: Consider an Income-Driven Repayment Plan
An income-driven repayment program is a repayment plan through the federal government that sets your monthly student loan payment to an amount that is deemed to be affordable based on your income and family size. Programs such as the Pay As You Earn (PAYE) or the Income-Based Repayment (IBR), adjust your monthly student loan payments at around 10% of your discretionary income amount.
Discretionary income is determined by taking the difference between your Adjusted Gross Income and 150% of the federal poverty guideline. In 2021, the federal poverty guideline is $12,880 for an individual, $17,420 for a couple, and $26,500 for a family of four.
Income-based repayment plans can be incredibly advantageous and alluring from a cash-flow basis. However, figuring out which repayment plan is right for you requires some commitment and research. To find the plan that’s best for you, you’ll want to consider the anticipated forgiveness and the tax consequences, any potential qualification for Public Student Loan Forgiveness, any risk of capitalizing interest, your filing status, and, if applicable, spousal income.
Tip #3: Refinance with Caution
Chances are you’ll come across options to refinance your loans at a lower rate through private lenders. This might be a smart move if the loans are equal, however, equal loans aren’t always the case. Often, you may end up taking on more risk through a refinance than originally intended.
Though it might not be obvious at first glance, federal student loans come with several benefits that refinanced loans don’t have. For example, with federal student loans, you can qualify for income-driven repayment programs, public service loan forgiveness opportunities, and more forgiving ways of dealing with financial setbacks such as long-term disability.
Should you be considering refinancing your loans, make sure you consider all of your options and carefully weigh the pros and cons.
Tip #4: Be Aware of Lifestyle Creep
As you get more established in your medical career and begin to see your hard work reflected in your paycheck, it can be tempting to start introducing more luxury into your lifestyle or to increase your spending. While you don’t have to live like you’re not making anything, be sure that you’re budgeting appropriately.
Prioritize building an emergency fund, mid-term savings goals, maxing out your retirement accounts, and paying down your student loans. After your financial responsibilities are satisfied, then you can think about treating yourself and indulging.
Tip #5: Start with the High-Interest Loans
While some experts recommend paying off your smaller loans first, the benefit of tackling your debts this way is purely psychological. Financially speaking, there’s no real benefit to paying off smaller loans before others. Instead, paying off your loans with the highest interest rates first allows for you to pay less in interest and more towards principal payments.
At the end of the day, the best investment you can make is investing in yourself – whether that investment is in the form of time, sacrifice, or money. As a medical school student, you’ve most likely invested all three into yourself. While you may feel your time and sacrifice paying off as you get more established in your medical career, chances are you’re still feeling the burden of the financial investment you made, too.
The above steps are meant to guide you as you begin to tackle your student loan debt. Should you feel like you could benefit from having a conversation with one of our professional financial advisors, please contact us today
Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.