Medical School Debt: Best practices when paying it off

Julianne F. Andrews, MBA, CFP®, AIF®
Julianne F. Andrews, MBA, CFP®, AIF®

Julianne F. Andrews, MBA, CFP, AIF is a principal and co-founder of Atlanta Financial Associates. She specializes in working with physicians and executives in the healthcare industry. Her passion for working with physicians comes from being a pediatrician’s spouse for more than three decades. Julie has been featured on Forbes’ list of America’s Top Women Wealth Advisors since 2017 as well as Forbes’ Best-in-State Wealth Advisors since 2018. Julie can be reached at jandrews@merceradvisors.com.

Pay off debt in a smart way to make sure that it doesn't cost you any more than it needs to.

Taking on medical school debt can be a smart investment to increase your future earning potential. However, you still need to pay off that debt in a smart way to make sure that it doesn't cost you any more than it needs to.

1. Don't Throw All Your Cash at 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. You don't want to turn relatively inexpensive student loan debt into credit card debt because you had no cash savings to cover an emergency.

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 lead to you feeling pressured to take out new debt at a higher rate.

2. Consider Income-Driven Repayment

Income-driven repayment programs, such as ‘Pay as You Earn’, cap your monthly student loan payments at around 10 percent of your income. While you might want to knock your student loans out as quickly as possible, trying to do so during residency or even the first few years of your career could put you in a needless cash crunch.

If you're worried about interest, remember that federal income-driven plans cap the amount of interest that can accrue while you're in the plan. Finally, you can always make extra payments above the minimum when you can comfortably afford to do so.

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.

Federal student loans have several benefits including income-driven repayment options, public service loan forgiveness opportunities, and a more forgiving way of dealing with financial hardships (such as long-term disability). Therefore, if you refinance to a private loan, you're taking on added risk for the lower rate.

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 even 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. Budget Your Salary, Invest Your Bonuses

It's a good idea to create a budget based on your fixed salary. Treat any signing bonuses, annual bonuses, or overtime compensation as an unexpected windfall. Use them towards an extra student loan payment or as a way of meeting your savings goals faster.

6. Pay Off Higher Interest Student Loans First

There is no benefit to paying off smaller student loans first, and most of the time you'll only have one monthly payment even with multiple loans. Pay off the highest interest rate loans first to pay less in interest over time.

When you're doing this, watch how your payments are applied. If you set a monthly automatic payment higher than the minimum, it may be divided between all of your loans. The same thing applies if you make an extra payment without specifying the loan it should go towards. If you pay online, there should be an option to select the specific loan you want to make a payment on.

About the Author
Julianne F. Andrews, MBA, CFP, AIF is a principal and co-founder of Atlanta Financial Associates. She specializes in working with physicians and executives in the healthcare industry. Her passion for working with physicians comes from being a pediatrician’s spouse for more than three decades. Julie has been featured on Forbes’ list of America’s Top Women Wealth Advisors since 2017 as well as Forbes’ Best-in-State Wealth Advisors since 2018. Julie can be reached at jandrews@atlantafinancial.com.

Please Note: Atlanta Financial Associates is a tradename. All services provided by Atlanta Financial Associates investment professionals are provided in their individual capacities as investment adviser representatives of Mercer Global Advisors Inc. (“Mercer Advisors”), an SEC-registered investment adviser principally located in Denver, Colorado, with various branch offices throughout the United States doing business under different tradenames, including Atlanta Financial Associates.
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