Student debt for doctors continues to increase year over year, often above inflation (Source: AAMC). Hearing cases where doctors graduate with $400,000 in debt 10 years ago was almost unheard of. Now, it unfortunately seems to be increasingly common with some dual physician couples coming close to a million dollars in student debt. The number may seem overwhelming but if you follow the steps below, its possible to eventually become debt free while still enjoying your career.
Avoid Extra Debt
The last thing that someone with a high level wants to do is take on more debt. I can hardly believe it when I hear about doctors who want to buy a house with a half of million dollars in student debt. If you have student debt above your amount of income, you most likely can not afford to buy a house at this sage in your life till the level of debt improves. I say this because the maximum debt advisable is usually 3X gross income.
Buying a house 2X gross income with student debt that equals your income will leave no wiggle room in the budget. If you take on this high level (3 times your income) of debt then forget about being able to afford going out to eat or vacations. If you are in a lot of debt repeat this statement, “I am not a rich doctor, but a broke doctor.” Do not try to buy a house, new car, or taking out a new loan until the level of debt improves and there is a plan to be eventually debt free.
Your kitchen as a new attending does not need to be this opulent
Find Out Exactly How Much Debt You Are In And Interest Rates
Just because you took out $300,000 in medical school, does not mean that you owe the same amount today. Each day that debt is building interest. If your loans were obtained after filling out FAFSA, The National Student Loan Data System (NSLDS) can help pin down all loans taken own under this program. Taking out other loans will mean that you need to contact each private institution to get an update on debt owed. Make a list of all debts owed, including interest. Make a separate column next to each debt with interest rate and yet another for minimum payment. You can check your credit report once a year here. Check it once to see every creditor listed.
Create A Budget
Creating a budget will allow for you to know how much money is available to pay down debt. Take net income after taxes and retirement (if applicable) and subtract living expenses such as rent, food, electricity. Have a detailed description on paper as to where each dollar that is earned is being spent. Give each dollar a mission and make sure that they accomplish that mission. Once you have a budget, you have to be committed to stick to the budget. I blew my budget by lying to myself about spending. Try to avoid this happening to you. Here was my budget for residency where I was able to pay down $1,000 a month.
Create An Emergency Fund
Before paying down any debt there needs to be an emergency fund. Life happens and you need to be prepared for the unexpected. What will happen if you lose your job, a car breaks down, or someone gets sick and need cash right away. It is not advisable to spend all of your income on debt repayment with no cash reserves. First, have a cushion so if something were to happen you would not need to take out another loan to cover the short-term expenses. I had an emergency fund and it saved me from having to take out a loan when my job took longer than expected to pay me.
Take Advantage Of Tax Deferred Accounts
As a doctor you stand to make more than the average person. In order to decrease your tax burden each year there are accounts such as a 401k or Roth which can be used to decrease the amount of tax owed. If you have the financial ability, take advantage of these accounts. It will also be a great way to invest in the stock market to take advantage of years of compounding interest.
Lets face it, dollar for dollar the best way to pay down debt is not cutting costs in certain areas but to increase income. Picking up an extra shift may mean one to two thousand more dollars. It would take a lifetime of buying generic brand toilet paper instead name brand to make a dent in the debt payoff. Consider picking up extra shifts in order to pay down debt. I decided to pick up locum shifts to supplement my income in order to pay down debt.
Refinance The Debt
Student loan debt at the time of this posting is averaging around 6.8% for medical school loans. I refinanced to get my rate to 3.3%, effectively halving interest paid per year. On $200,000 in loans that equates to $6,000. If a doctor makes $1,000 net income a shift that’s almost a week of work per year that they could use to pay down debt more effectively instead of paying down interest. Refinancing can be a huge benefit to new attendings, but know that doing so cancels any ability for income based repayment plans or loan forgiveness. If refinancing isn’t an option then consider student loan forgiveness.
Consider Taking Advantage Of Student Loan Forgiveness
For loans greater than 2 times gross income, student loan forgiveness may be the most promising option. It’s an unfortunate thought, but if a doctor graduates with $500,000 in debt after interest has accumulated and makes $150,000 as a pediatrician, debt forgiveness is most likely the best option. These loans can almost never be discharged even with bankruptcy. If debt to income ratio is > 2 then there is no point beating oneself up over the damage that has been done. The best thing is to look at the steps above and find a repayment plan that works best of you. This will mean finding jobs that also qualify for these government programs. Luckily, many of the jobs in healthcare do and should not be very hard to find.
For those individuals with this level of debt, it may seem overwhelming. But just know that the government program and IBR plans can help so that life is not consumed and overrun by this level of debt. You can still become debt free with time!
Do you have any other advise to give those individuals with a high student load debt?