As a former medical student and current doctor, I can empathize with everyone who has school debt. Most of you reading this website right now probably have medical school debt and are wondering “what can I do about it during residency?” Medical school students who want to practice in the United States understand that residency, which can range from 3 to 5 years and beyond sometimes, is a time where you’ll be earning a relatively low income with little to no opportunity to improve that state until you finish residency. But this does not mean you cannot and should not try to make an impact on your student debt. Read below to find out some tips and tricks that have worked for us and can work for you too!
Understanding Your Debt
First, it’s important to understand your debt. What we found to be the easiest thing to do is create a spreadsheet listing your current creditors (ex: MyFedLoans, SallieMae, Navient, Discover, AES, etc.), the amounts of each loan, private or federal loans, and the current interest rate on each loan. Remember that each loan depending on when it was disbursed can have different loan amounts. Also, federal and private loans can also be very different in both the way they are treated, their interest rate, and what type of deferment and forbearance options you have. Once you have a good understanding of what how much debt you have and who you actually owe you can start thinking about managing and repaying that debt.
Deferment versus Forbearance
Let’s also clarify the difference between deferment and forbearance. Both deferment and forbearance postpone payments during a certain period of time. The biggest difference between deferment and forbearance, mainly applying to some but not all federal loans, is that during deferment the interest is paid for by the Federal Government. Forbearance also postpones payments but usually because you cannot afford to make payments or because of other reasons such as being in residency. During forbearance, the interest on private and Federal subsidized and unsubsidized loans will accrue. This means that if you go with the forbearance route you’ll be not only postponing payments but also accruing interest during the same time which can also capitalize. Capitalization leads to larger principal balance. To read more about deferment versus forbearance, check out the Federal Student Aid website.
How Much Do You Owe? What are the Interest Rates?
These are two important questions as they’ll really make a difference on what next steps we suggest you take. Remember that these are suggestions and every situation can be different. Don’t forget to check with an accountant or other financial counselor as needed.
The two questions overall go hand in hand and will help you decide whether making loan payments earlier is a more wise choice than postponing payments and, instead for example, investing. The more important of these two questions is what are the interest rates for each of your loans. This is important because when you know your interest rates you can compare these rates to what would be considered a good return on investment (ROI) if you were to take money and invest it. Some financial analysts will tell you that an annual ROI of 10% (usually averaged over the entire period you’re investing before you retire) is a common and probably somewhat conservative number. So, to keep things simple, if you have a Federal PLUS Graduate loan (one of the most common loans people use for medical school) currently accumulating interest at 6.8% and you decided to take money during residency and invest it while delaying payments on your loans, there’s a theoretical gain of about 3.2% (this amount is probably less because the loan amount you’re accumulating interest on is initially higher than how much you start investing with).
The other part of the question is how much do you actually owe? Obviously the greater the amount, the greater benefit it is to you to start paying off those loans as you’re accumulating more and more interest on these loans which will likely even offset the gains you may have from investing during this time. The lower the amount, the less interest accumulated and the greater potential for better gains from early investments. Despite all of this, nearly each situation for each individual is different. A handy website that can help you determine if investing or paying off loans is a better option is Student Loan Hero. We haven’t begun to discuss loan repayment options, budgeting, and more.
Check out Part Two where we’ll discuss how to find all your student loans and what current repayment options are available, which are especially important during residency.
Dr. Melamed MD MPH
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