[Editor's Note: This is a guest post from Amanda Liu, DO, a PGY1. She is a single mother of a young child who owns a home. However, what is remarkable about her story is the tiny amount of student loan debt she has. In this post she shares some tips and the story of her financial journey. She enjoyed writing this post so much, she started her own financial blog! We have no financial relationship.]
I am an ordinary hard-working resident who has been blessed with the motivation to be debt-free. I attended a medical school in a high cost of living area (rent of $1700-1900 per month) with tuition and fees of more than $55K per year. Eight months into my intern year, my financial snapshot looked like this:
Net worth: -31K
Student loans: $16K
Personal debts: $54K
Credit card debt (at 0%):$30K
Home (purchased 2 months before residency) Value: $261K
Children: One 7 year old daughter. (I consider her my asset, as I have put nearly all my disposable income towards her getting lessons/opportunities.)
I have a total non-mortgage debt of 100k and a net worth of -30k eight months into residency,while many of my colleagues have a net worth of -$300 to -$400k. My net worth is negative, but it is only 1/10th the size of that of many interns. This post will explain why.
5 Reasons My Net Worth is Almost Zero as an Intern
- I worked multiple jobs prior to medical school and even had $20K saved up prior to starting.
- I worked 2 jobs in medical school (One federal work study job, one self-employed tutoring)
- I used credit card offers to my advantage (discussed below)
- I responsibly borrowed money from family
- Lived frugally (before, in and after medical school)
It's not like I did everything perfectly, and I would have done some things differently if I had it all to do over again. In retrospect, I would have done the following:
- Started a ROTH IRA prior to medical school and maximized the contribution every year I had earned income.
- Applied to medical school more widely. (I only applied to a few, and all in high cost of living areas.)
- Attended the cheapest medical school I could get into, as long as the education was decent.
- Attended a school in a location with a low cost of living.
The tips that helped me minimize debt apply widely to anyone who is in school or training that leads to delayed but greater income potential. Combine the hindsight that I have now with the rules I lived by and you may be even more successful than I am. If you are about to embark on intensive training/schooling, when you can hardly make a real income on the side, give some thought to my recommendations so that you can start your professional life with minimal debt and perhaps even a positive net worth instead of in a big hole like most of my contemporaries.
Rule # 1
The most important financial rule I followed in medical school was the following:
Minimize and delay borrowing student loans as much as possible
Every dollar you borrow while in post-graduate education, starts snow-balling at high interest rates the second it is dispersed. For the class of 2014 medical school, unsubsidized student loans start accruing interest at 5.8%-6.4% on day one of disbursement, so borrow less than your budget would suggest you need.
There is no reason to let your student loans sit in a savings account paying an interest rate of 0.1% (taxable), while paying the government 5.8-6.4% interest rate for it. Lenders, especially the feds, are EAGER to lend you money. Trust me on this. Even a wise investment in index funds, after expenses and taxes, may not give you a return of 6.4%, especially without taking significant risk. Not to mention that the return you get by avoiding the payment of student loan interest is essentially a guaranteed investment.
With the goal of making money off of borrowers, lenders have made acquiring student loan debt so easy that it's nearly unethical. In some ways, it is predatory lending because you get this “monopoly money” disbursed to you without jumping through any hoops. Meanwhile, the debt burdens creeps up on you while your nose is in a book and you are dedicating your life to your training.
What You Should Do to Minimize Student Loan Interest
From my experience in med school, all you need to do is shoot the school financial aid advisor a one liner email saying, “I need 10k of student loan money.” Within 30 days, you get a $10K (actually slightly less due to origination fees) check to deposit into your bank to buy anything you want or need. It feels like monopoly money, and that's how the debt burden creeps up on you.
However, since it is so effortless to access student loan money and you get it within 30 days, why not just borrow as you go, instead of borrowing a lump sum at the beginning of each semester? The feds and lenders lead you to believe the ONE way to get student loan is to figure out how much you need for the YEAR and request it ALL at the beginning of a school year. This benefits them, not you. They get to start charging you interest on money that you don't need from the begining of the school year. So while majority, if not all, of my classmates requested $80k in August each year as the school year begins, I requested NONE.
Then, I paid my tuition and living expenses with a credit card, usually one I had just opened and had a 0% deal on for 12-18 months. Since my tuition was $15,000-17,000 per quarter, and the cost of living was pretty high, I regularly charged up a large balance on the credit card.
Due to credit card rewards and various promotions for opening a new card, I frequently made $500 per quarter simply off the use of credit cards. But the big savings was delaying the arrival of that high interest student loan debt by 18 months, on $22K of principle per quarter. A year and half of interest at 6.8% on $22K of principle was $2200. When the 0% period promotional period expired, THEN I took out the student loan and paid the credit card off.
This is a conservative estimate of expenses, including tuition, for each quarter, every 4 months.
The more you need to spend, the more you get to save using this method instead of getting student loan the moment you need to pay a bill. Following this recipe, I saved ~$27K in interest during medical school, and made another ~$6K in cash back rewards. And remember, this interest saved is interest not capitalized into principle upon graduation and not snowballing for the life of the loan (or until it is forgiven if that is what you are counting on.) Of course, as you might imagine, I also have a heck of a credit history/score! Here are the step by step instructions as a recap:
- Get your credit report (Experian.com or similar)
- Apply for credit card(s) with promotional 0% APR purchases
- Charge your tuition and as much of your living expenses as possible on to this card.
- Get cash back rewards for as high as up to 500-1000 within 30-45 days of making your charges.
- Ride the balance interest free for 12-18 months, while your classmates are paying 6.8%.
- 30-45 days prior to the end of your promotional period, request a student loan to pay off your credit card. Thus, the credit card company never did get any interest from you.
- Repeat steps 1-6 every quarter, and before you know it, you'll have a high credit score, numerous promotional offers, minimal student loan/ interests, cash rewards, and a degree.
This is how throughout the span of my medical school, not only did I save tens of thousands of dollars in student loan interest, but I also made a few thousand extra in credit card cash back/promotional deals AND built a very good credit score.
[Editor's Note: I am totally impressed. I had never even considered doing this when I read this post. But it's obviously pretty brilliant. I even thought to myself, well, what if you just left all that debt on the credit cards and just declared bankruptcy at the end of medical school? Student loans don't go away in bankruptcy, but credit card debt sure does. By the time you get out of residency 3-5 years later, that bankruptcy is almost off your record. Unethical? Of course. But geez, I can't say it wouldn't be tempting when staring a $400K student loan in the face. Update- Apparently doing this is illegal, not just unethical.
Part of why this worked out well for this doc is that she worked before and during medical school, otherwise she would have never had credit cards with high enough balances to put tuition on them. And if you're not paying them off with student loans it would be very hard to keep getting new ones as you progress through school. At any rate, if you have access to high credit limit credit cards, this may be something to consider to lower your student loan burden, even if you don't take it quite to the extreme that this doc did.]
What do you think? Did you ever consider working throughout medical school? Did you use credit cards to REDUCE your med school debt burden? Why or why not? Do you think this is a strategy that can be recommended to students with adequate credit? Comment below!