5 Best Practices: Paying Off Medical School Debt
Medical school can be a great investment, possibly one of the best investments you can make in yourself. This holds especially true in The Triangle, which has one of the nation’s highest concentrations of physicians and health care professionals focused on medical care and research. According to Salary.com, healthcare professionals in Raleigh NC can expect to earn a strong salary over their lifetime. This income varies, of course, based on career path you've chosen. Take for example the following four, rather common, roles within the Raleigh medical system:
- Physician Assistant: $102,727 1
- Nurse Practitioner: $104,416 2
- Registered Nurse: $75,975 3
- Physician – Family Practice: $197,049 4
While these income levels may be admirable by some, the student loan debt taken to achieve this level of income is admirable by none. The average student loan debt in 2019 was $31,1725, whereas the average medical school debt was $196,520 6 (six times the national average).
In early 2020, I wrote about the effects of debt on a person's emotional and physical well-being. The obvious effects include stress and tension, while the less obvious impacts include cognitive and behavioral issues such as poor judgement, inability to focus, and habitual procrastination. These are among the last characteristics you want to exhibit as a medical professional. Read “7 Effects Debt Has on Your Emotional and Physical Well-being” to learn more.
To help protect your net worth, your quality of life, and your sanity, you’ll need to pay off that debt in a smart way. Here are a few ideas to help get you started.
1. Don't Throw All Your Earnings Towards Your Debt
This may seem counter-intuitive, but don't throw every last cent from your paycheck towards paying your loans off early. It's always important to keep some cash on hand in an emergency fund to cover unexpected events like car repairs or health expenses.
Having emergency savings doesn’t mean you have to have 3, 6, or even 12 months of cash on hand. It does mean, however, that you need to have some savings to fall back on in case life throws you a curve ball; life always throws you a curve ball. Take, for example, the following scenarios:
- You broke your wrist while helping a friend move into their apartment
- Someone ran a red light and landed your car in the body shop for 2 weeks
- Death of a close family member. You need to travel across country to attend the funeral
- Your landlord has decided to sell the building. You’re required to find a new apartment in 2 months, as well as come up with the first and last month plus security deposit
You don't want to turn relatively inexpensive student loan debt into credit card debt because you had no cash savings to cover these type of emergencies.
Next, think about other goals you have, such as buying a home or getting married. Again, not keeping extra cash to cover these expenses could leave to you feeling pressured to take out new debt at a higher rate.
2. Consider an Income-Driven Repayment plan
Income-Driven Repayment (IDR) programs, such as Pay As You Earn (PAYE) or the new Income-Based Repayment (IBR), cap your monthly student loan payments at around 10 percent of your discretionary income.
Discretionary income is defined as the difference between your Adjusted Gross Income (AGI) and 150% of the federal poverty guideline. For 2020, the federal poverty guideline is $12,760 for a household of one, $17,240 for a family of two, and $21,720 for a family of three 7.
Let’s say for example that you’re a nurse practitioner earning $104,000 per year. After certain deductions, maybe your AGI ends up around $95,000. Under the PAYE plan, as a single tax filer, your monthly payments could end up around $685 per month. This may be significantly better than the standard repayment option.
While an Income-Driven Repayment plan can be extremely advantageous from a cash-flow basis, getting aligned with the best one (for you) is anything but simple. Choosing the best plan, and one you qualify for, includes a review of anticipated forgiveness and the tax consequences thereof, potential qualification for Public Student Loan Forgiveness (PSLF), risk of capitalizing interest (being charged interest on interest), filing status and spousal income to name a few.
Due to the complexity of Income-Driven Repayment plans, it’s in your best interest to speak with a Financial Planner that specializes in student loan strategies. For example, Lucid Wealth Planning, based in Raleigh, offers the following services in its student loan analysis:
- Review of each individual student loan
- Weighted average interest rate
- Advantages/disadvantages of consolidation (not refinancing)
- Review of available Income-Driven Repayment (IDR) plans
- Eliminating ineligible IDRs
- Education around eligible IDRs
- Strategize the best IDR, if applicable
- Projected monthly payments based on annual re-certification
- Projected forgiveness amount under each IDR
- Anticipated tax liability for amount forgiven
- Savings strategies to prepare for future forgiveness tax liability
- Annual repayment reduction strategies
- Use of above-the-line deductions to limit your Adjusted Gross Income (AGI)
- Other tax planning techniques specific to your situation
- Exploration of refinancing (not consolidation)
Alternatively, you can access up-to-date information on Federal student loan repayment options directly from StudentAid.gov > Repayment Plans.
3. Use Caution When Refinancing
You'll likely be bombarded with offers from private lenders offering to refinance your federal student loans at a lower rate. If these loans were equal, it would be a smart move, but that is not always the case. In many ways, you’re taking on more risk for the lower rate.
Federal student loans have several benefits that refinanced loans do not. These include income-driven repayment options, public service loan forgiveness opportunities, and more forgiving ways of dealing with financial hardships such as long-term disability.
Refinancing may have its benefits, however, and each should be weighed carefully against its drawbacks. You can learn more in my article “Student Loans: 5 Benefits and Drawbacks of Refinancing.”
4. Avoid Lifestyle Creep
When you start getting a bigger paycheck, avoid the temptation to dramatically increase your spending. Some people say to keep living like a resident, but you don't need to take it that far.
Prioritize building an emergency fund, mid-term savings goals, maxing out your retirement accounts, and paying down your student loans. Once those goals are met, you can treat yourself a little for your hard work.
5. Pay Higher Interest Student Loans First
While Dave Ramsey advocates for paying the smaller loans off first, the benefit only applies in a psychological sense 8. Nevertheless, there's value to this that shouldn't be overlooked. According to Amy Morin of Psychology Today, “Studies show debt weighs heavily on your mental health, and paying it off may reduce your stress and improve your psychological well-being.”9
In a rational world, however, we must recognize that there’s no financial benefit to paying off smaller student loans before others. Instead, the most strategic way to improve your financial wellness is to pay off the highest interest rate loans first. The goal here, of course, is to pay less in interest and more towards principal.
When you're making these strategic payments, watch how they are applied. If you set a monthly automatic payment higher than the minimum, it may be divided equally between your loans. The same thing applies if you make an extra payment without specifying the loan it should go towards. It'll benefit you to contact your loan service providers to ensure your extra payments are going to the right place.
Closing Thoughts
There are few who have said it quite as well as Roy T. Bennet in his recent book "The Light in the Heart." Roy says "There is no more profitable investment than investing in yourself. It is the best investment you can make; you can never go wrong with it. It is the true way to improve yourself to be the best version of you and lets you be able to best serve those around you.” This investment can be in the form of time, sacrifice, or money. For those in medical school, it's likely all three.
Fortunately, for those who have moved on from medical school, the time and sacrifice is behind you. This may not be so for the money owed. My only hope is that the information in this article can help move you in the right direction, moving you closer to financial independence.
Contact Jeffrey Stewart directly if you’d like to discuss this information in more detail or determine its application to your situation specifically. Lucid Wealth Planning offers consultation via student loan analysis, budgeting, as well as comprehensive financial planning and investment strategies.
Reference
1 https://www.salary.com/research/salary/benchmark/physician-assistant-medical-salary/raleigh-nc
2 https://www.salary.com/research/salary/benchmark/nurse-practitioner-salary/raleigh-nc
3 https://www.salary.com/research/salary/general/registered-nurse-rn-salary/raleigh-nc
4 https://www.salary.com/research/salary/benchmark/family-physician-salary/raleigh-nc
5 https://www.credit.com/personal-finance/average-student-loan-debt/
6 https://www.nerdwallet.com/blog/loans/student-loans/average-medical-school-debt/
7 https://aspe.hhs.gov/poverty-guidelines
8 https://www.ramseysolutions.com/debt/how-the-debt-snowball-method-works
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