Mindset of the Common John and Jane Doe
Striving to pay off medical school loans should be a priority, but most people worry about it later.
If you are like most people, you are probably thinking about buying a house, a car, and a vacation. After all, you deserve it, right? You worked so hard and now you’re a doctor. Why not borrow a bit more and get the things you have always wanted? When you have established yourself as a doctor, you’ll pay off your loans.
Loans Will Grow Too Quickly
But if you are not careful, by the time you are ready to pay off your medical school loans, it would already be too late.
If you borrowed your way through medical school, it would be very possible for you to have already borrowed a quarter of a million dollars (especially with medical school tuition these days). For argument’s sake, let’s assume you have $240,000 in school loans. Now, at an interest rate of 6.8% compounded daily, the total interest for the year would be almost $17,000. And if you don’t pay off that interest, that interest also accrues more interest.
Growth During Residency
You know that residents get paid very little — peanuts — at least on a per hour basis. So let’s defer payment for 3 years until after family medicine residency is done. By then, the loan would have ballooned to almost $300,000. If you are specializing, then the loan would be even bigger because residency and fellowship are longer. If you defer it for 5 years, the loan grows to almost $340,000 — almost a $100,000 increase in just 5 years.
What You Must Do to Tame the Loans
As a Resident
Therefore, right after medical school, even though you are on a tiny salary, you must pay off medical school loans (or as much of it as you can). Do not defer unless you absolutely have to. If you are reading this before or even during medical school, try to save as much money as you can. Don’t go out drinking all the time because you will be paying for it later on.
During residency, I would advise you to make the interest payments. So let’s go back to the $17,000 in interest that was mentioned earlier. If you divide that up by 12 months, that is about $1,400 per month. With an after-tax residency pay of about $34,000, that leaves $17,000 for living after interest is paid. It could be possible to survive on $17,000 a year if you are single, don’t have to take care of children, and don’t live in a city. If this is the case, I would advise you to pay the interest every year.
Income-Based Repayment Program
But if you are unable to make the interest payments, let alone pay off medical school loans, it would be wise to look into the Income-Based Repayment (IBR) program. This program only applies to government loans. If you have a private loan, you will have to contact your lender and work something out.
The IBR program allows you to make smaller payments toward your loan, based upon your income. But if your payment does not cover the total interest, the difference would be subject to compounding. So if the yearly interest is $17,000 and you only could pay $10,000 through the IBR program, the difference of $7,000 is added to your loan and is further compounded.
There are two benefits of the IBR program.
- The government will pay the interest on your subsidized loan (such as the Perkins and subsidized Stafford) if you are unable to pay it for up to 3 years. Perfect for primary medicine.
- If you make monthly payments for 25 years, the unpaid amount would be forgiven. That means if you are making less than a doctor’s salary for 25 years and you are making payments towards the loan, it would be forgiven. Are you willing to live with a substandard salary for 25 years to pay off medical school loans?
Visit the section on medical school loan forgiveness / repayment programs for assistance in paying off medical school loans.
As an Attending
After residency, assuming the healthcare environment did not change, your salary should be much higher. As an attending, you should be preparing to pay more than the interest. You should pay off your medical school loans as fast as you can.
So if you have been paying off the interest, the total amount on the loan would be $240,000. With the same interest of 6.8% compounded daily, you will be paying over $2,700 per month for 10 years. So if your after-tax pay is $100,000, then that means you are living on a bit more than $50,000 per year, which is a sharp upgrade compared to living on $17,000 per year.
But if you want to live like a doctor, then you will have to consolidate your medical school loans and stretch out the repayment for 30 years. If that is the case, you will be paying a little over $1,500 per month. You’ll also have more money left over to live on. Just remember that the longer it takes for you to repay back the loan, the more interest you will be paying over the life of the loan.
Have Extra Cash Lying Around?
If you come across money and are able to pay off your medical school loan in its entirety, then it generally would be wise to do so. First, make sure that you have enough money for urgent expenses such as food and rent. If you have enough, go ahead and pay the whole thing off. Call up the lenders and let them know you want to pay it off in full. They will walk you through the process. It is quite easily actually. The only caveat is that some loans may not be repaid, such as the Primary Care Loan.
Make Sure Excess Payments Are Applied Correctly
If you want to pay more than the stated monthly amount, make sure the lender knows you want to apply it towards the principal (the original amount of the loan). When I had a car loan, I was paying more than the stated amount thinking that the lender will automatically apply the extra towards the principle. I was wrong. Instead, they held onto my money and just delayed the due date of my next payment. So if I made an overpayment in June, the due date for the next payment would not be in July but in August. The extra money I sent was not earning me interest in my account and my lender was still charging me interest on the portion I could have paid.
Don’t let the same thing happen to you.
Money In Must Be Greater Than Money Out
If you want to pay off medical school loans, then you must be frugal and know how to budget. A bit of financial knowledge won’t hurt either. If you don’t want to be frugal or learn how to budget, then you will have to learn how to earn more. Either way, the money you make must be more than the money you spend.
This article is part of the Medical School Loans series. Click on the link if you want more tips and hints about borrowing money smartly.