An Eye to the Future: Paying Down Med School Debt and Investing for the Long-Term
If you’re finishing medical school or residency and you’re staring at a large sum of student debt, you are not alone (According to the Association of American Medical Colleges, $200,000 is the median debt for students leaving medical school). Seventy-three percent of your closest medical school friends are just like you and share a similar burden and the fear of what comes next. Like any large-scale challenge, one cannot simply wish the problem of debt away, and procrastination will only exacerbate the problem by adding additional interest to your balance. So, what is a newly minted doctor supposed to do about a large amount of debt? How can you focus on debt reduction, while keeping an eye towards investing and building a solid financial base for the future? Here are a few ideas that might be beneficial to someone in your position:
Tips for Paying Down Debt
- Start paying down debt, while in residency. Many loans accrue interest right after you finish medical school and mitigating that growth can make a substantial difference over the 3 to 7 years spent in residency (ex. If you exit medical school with $200,000 of debt and loans carrying a 5% interest rate, neglecting payments for 3 years of residency will add a substantial sum of $30,000 in extra interest to your balance).
- Utilize Income-Driven Repayment Plans: If you start to repay debt during residency, a monthly debt payment of $2,000 isn’t very reasonable on a salary of roughly $55,000. An income-driven plan will cap your monthly payments at a reasonable percentage of your monthly income and allow you to start tackling your debt burden. Your payment will adjust every year, based on your income level.
- Consolidate Loans: If you have multiple loans, try consolidating into one loan at a lower interest rate. This could be a potential cost saver by refinancing multiple private or federal loans into a new private loan.
- Consider Public Service Loan Forgiveness (PSLF): If you work for a government or non-profit organization, you may be eligible to take advantage of PSLF, which would allow your remaining student loan balance to be forgiven after making 120 months of payments on the balance. PSLF is available for borrowers with DIRECT Loans. One additional benefit to enrolling in an income-driven plan (referenced earlier) is that those payments made during residency or a fellowship can count towards your 120 month total. If you spend five years making payments during residency and fellowship, then you only have 50% of your payments left to make once you’re done with your medical training.
Investment Considerations Post Medical School:
- If your employer offers a 401(k) match, contribute, at least, the necessary amount to receive the full employer matching contribution. Forgoing employer contributions is, essentially, giving away free money.
- Should you use extra cash to invest or pay down additional debt? Without a crystal ball, there’s no perfect answer to this question. Over the last 100 years, US stock market returns have averaged roughly 10% annually, which would exceed the interest rate on most student loans. So, if the market returns 10% and you’re paying 5% interest on your loans, investing extra cash would earn you an extra 5% on your money. Stock markets can often be choppy and don’t rise in a straight line. But by smoothing out returns, investing extra cash has the potential for upside.
- Compound Investment Growth: The old investment phrase of “time in the market, not timing the market” rings true. As you transition out of residency, or even have a spouse that contributes a second income, investing more will pay long-term dividends, simply based on the concept of compound growth. One thousand dollars invested today should build on itself year after year.
- Consider a Financial Plan: A Financial Needs Analysis may give you a better picture of the necessary income and savings over your career to provide for the type of retirement you desire. Don’t assume that financial planning is only for those nearing retirement. Just as with paying down debt, the discipline of a financial plan will pay tremendous dividends over the long-term.
Paying down several hundred thousand in debt can seem like a very daunting task at the outset. Developing a plan and utilizing the resources available to you, should alleviate some of the stress and allow you to focus on your medical career, while reducing your debt burden.
Delta Asset Management
- Association of American Medical Colleges: “Physician Education Debt and the Cost to Attend Medical School: 2020 Update”
- “Federal Student Aid”, http://studentaid.gov