The Author and WCI before his talk in Tucson
[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
Debts
Student loans: $16K
Personal debts: $54K
Credit card debt (at 0%):$30K
Mortgage: $209K
Assets
Home (purchased 2 months before residency) Value: $261K
Cash: $19K
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)
My Mistakes
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!
Via email from Dr. Liu:
“it’s never too late.
what i did was only an extension of what you already did/knew.
i’m now applying the same concept in residency to max out my ROTH savings.
while credit card is not THE ONLY cash source i’m using to fund 23.5k of ROTH annually, it sure is nice to be borrowing interest free money for 1.5-2 years while making 1%-10% cash back (this literally means during that promotional period, the money you borrowed had negative interest!)
the key also is to stay disciplined and not grow comfortable with too much 0% debt because they will come due at some point, usually after 1.5-2 years.
One must have a solid plan to pay it off or transfer it to another low rate loan/credit card before the interest rate jumps to 20-30%.
i have one excel sheet to keep tract of when my promotional 0% rates expire, and i never ever, knock on wood, pay one day of interest to credit card companies since 2010.
prior to that i paid 2.99% on a credit card balance for a few months.”
This was sent to me 5 days ago, but I’ve been incommunicado at Lake Powell.
This story does not add up. There was already extensive discussion on SDN about it. The reality is this:
http://forums.studentdoctor.net/threads/how-to-manage-student-debt.1125622/page-4#post-16317952
Dr. Liu only ever took out ~$72,000 in loans thanks to a very large work study grant (scholarship?) and family support.
Most of the strategy here is old news. Be frugal, save money before med school have a side income stream if possible, get government/family support, etc. This is not feasible for many of us. I had no family support whatsoever, my state forbade any government assistance for full time students even if working part time, and the med school forbade credit card payments. So the strategy relies on a lot of special circumstances.
What’s new here is the credit cards. I also worked before med school and could not get a balance over $15,000. That SDN thread discusses how you would have to be borderline fraudulent because to get the credit cards you have to report incomes on the credit card applications that you simply do not have. Then you’re turning around and telling the government that you have no income for benefits.
What’s new here is playing the CC companies to not accumulate interest during med school. The number of people this applies to is quite limited. If you have no family support and have to take out $50k/year in loans, can you get CC limits that big? Will you get these limits if you’re honest and put an income of 0? I don’t think so.
Agreed, it doesn’t add up, math doesn’t lie. Her hustles really just decrease interest, doesn’t pay off the principle of the matter which would still be a few hundred grand!
Nonsense. The more you work, the more of medical school tuition and living expenses you can pay for with your income rather than loans. The more help you get from family, government, and scholarships, the fewer loans you have to take out.
I’m not sure what you mean by “it doesn’t add up.” It adds up fine. Dr. Liu’s good ideas include:
1) Having an income in med school. I did the same.
2) Being super frugal in medical school. I did the same and not enough students do.
3) Not receiving disbursements from student loans until absolutely necessary. Way too many medical students screwing this up.
4) Using available credit to decrease amount of interest paid. Difficult to do to the level she did for most, but certainly possible for non-traditional folks, people with working spouses etc.
5) Using any available scholarships, government assistance, and family assistance. Everybody should do this to the extent possible. While I’m sorry that in your situation you weren’t able to get help from any of these sources, I hardly think it correct to criticize that since lots and lots of people can.
Should you lie to banks about your income? Probably not. Did she? I have no idea. That’s between her and the banks. But that’s a fairly small part of the strategy in my view.
Some ridiculous stuff in that thread you linked to. As you can clearly see in the picture at the top of this post, Dr. Liu is indeed Asian. From my interactions with her, she does not seem to have any need for a psychiatric consultation. A lot of rudeness, jealousy, and racism exhibited in that thread. As near as I can tell, the only possible thing to criticize is what she claimed as an income on her credit card applications. Given that she actually had a significant income before and during medical school, I find that pretty minor and it certainly doesn’t take anything away from the rest of the points I listed in this comment. If the credit card companies don’t want to verify incomes, that’s their issue. I’ve never had one verify my income. I don’t recall ever using my actual income on one. I’ve always just ballparked it. It’s like the “Liar’s Loans” mortgage loan phenomenon back in 2006. While credit card fraud has pretty stiff penalties (up to 30 years in prison and $1 Million per instance) as near as I can tell, it’s rarely prosecuted in a situation like this-especially when all the debt is paid back as agreed. It’s more of a tool to use when there are other financial shenanigans going on.
http://www.creditcards.com/credit-card-news/legal-consequences-of-lying-on-credit-card-application-fraud-1282.php
Thank you, WCI for this.
A few things I learned that were surprising to me along the way include
1. work study award actually does not count against you when applying for government assistance. (majority of my med school income was work study, i would have loved to get scholarship where no work is involved, but i’m grateful to have worked at the library and studied and published in research)
2. credit card companies advised me to not only count my work study income, but also the total amount of student loans available to me because both my work study pay check and the student loans I CAN take out are consider sources of money to pay them back. i didn’t count other people’s income or artificially inflate mine beyond the guidelines from the cc companies
3. student loans borrowed and paid back within 90 days will not accrue any interest (even if it were un-subsidized loan) I found this out by surprise when I paid down my loan aggressively with more work right before graduation. so the cost of the student loan was just the origination fee, no interest, albeit only for 3 months.
Other than these 3 things I learned, nothing else is true news.
WCI, thanks again for crystallizing what I was trying to get across via this post and my blog.
What a great exploitation of the no interest credit cards to pay off high interest student loans.
Given that I am now 4 years out of residency, I also had that “I wish I would have thought of that moment”.
My question to the forum and for those in my situation, has anyone leveraged no interest CC to help off set some of the interest burden on current student loans? I will do some research, but thought I’d get the ball rolling on the topic for those interested.
Sure, you could do that with whatever portion of the loans you thought you could have paid off in 12-18 months. What you don’t want to do is convert 6% student loans into 20% credit cards (unless you’re planning to declare bankruptcy- also a strategy, but perhaps not an ethical one.)
Below is an excerpt from my post for my friends turning attending docs this year,
My suggestions to take full advantage of this financially privileged position (IE Attendinghood):
live like a resident until you pay off your debts, giving highest priority to the highest interest debt.
for super savers, aim for more: pay off your debts, your house, and max out your retirement. THEN, upgrade your life style a bit where you see fit.
start monitoring your credit score. I sign up for experian.com $7.99/mo and get access to helpful tools such as the credit score simulator. (I currently have no financial association with experian and make no money if you sign up with them.)
keep your credit profile squeaky clean. dispute anything that is fraudulent (unlikely, but it did happen to me once).
utilize credit for big financial items first (ie. Mortgage, student loan refinancing). The under-writing processes for these large ticket liabilities are much more stringent than those of credit card approvals. So use your high credit score to lock in the lowest rates/terms of mortgage and refinanced student loan interest rate FIRST, before applying and getting inquiries for credit cards.
After your largest liabilities/debts (mortgage, student loans) are settled, now have your cake and candies with the credit card companies.
experien.com come in handy here as well, you can search for the credit cards that best suits your needs/wants easily. do you want cash back? interest free money? airline millage? gift cards?
feel free to apply to several cards at once. Cluster your credit card applications, so the hard inquiries can all fall off from your credit report together in 2 years.
The key is now that you have 5x the cash flow i have in residency, you are in much better position to borrow LARGE amount of 0% short term loan from credit cards to minimize your student loan interest, because before the rate jumps to 20%, you would have already saved up that 50k or whatever amount you used your credit cards for to pay off the cards.
Good luck! It would be great to join you on the other side in 5 years 🙂
http://www.debtfreedoc.com/2015/03/26/for-those-making-the-big-buck-becoming-attending-this-july/
for starter,
“Chase Slate: This card was designed with credit card balance consolidation in mind. has both a lengthy 0% introductory APR and no balance transfer fee. Its 15-month, 0% introductory APR on both balance transfers and purchases translates to interest-free payments until 2016. Plus, there are no balance transfer fees during the first 60 days of card membership. This is a big deal, as depending upon how much you plan to transfer, balance transfer fees can really add up. ” quoted from Top 7 Credit Card Offers For Those With Excellent Credit
I used this card right when I graduated from med school and bit a chunk of my student debt down.
Maxing out and carrying a balance will negatively impact your credit score. One of the factors involved with determining your score is “credit utilization ratio.” It is the amount of credit you use over the amount you are alloted. Generally speaking you want to keep it low as in 10%-20%. Even if you are not acruing interest, this is still dinging your credit score each month when the CC company reports to credit bureaus. Definitely want to do your due diligence before getting in too deep with this especially if you are looking to buy a house in the near future.
Remember the plan is to eventually replace the credit card debt with student loan debt, at which point you should be better off than your peers with even more student loan debt.
I definitely agree.
you’d like to keep you revolving debt/credit limit ratio <15% ideally. That's why it is important to TIME your credit peaks and troughs. You want credit score peaks right before major loan application such as mortgage, and troughs are ok during time you are not anticipating large ticket item purchases, as long as it saves you 10's of 1000's dollars in interest.
The highest credit card revolving debt balance I carried throughout medical school was around 80k-100k i believe, and my credit score nadir was 730 from experian then.
I did use some student loan to bring that credit card balance down prior to getting doctor's mortgage for my first home. When I paid my credit card down some, my credit score went back up to the 760's and qualified me for the best mortgage/rate term given my limited down payment.
here's my post re: timing credit troughs.
http://www.debtfreedoc.com/2015/05/24/timing-credit-troughs/
Thanks for your story! I must have missed something: how are you putting $23.5k into Roth IRA?
5.5k into ROTH IRA
18k into 403b ROTH instead of 403b pre-tax account
Sounds like $5.5K into a Roth IRA and $18K into a Roth 401(k).
The credit card idea seems like a great idea to pay off student loans as well but the problem I have is whether or not the loan company takes credit cards. I refinanced with sofi but I am paying them directly through my checkins account. Same with DRB and nelnt. Anyway around this?
3 ways around this that I know of.
1. I charge all my expanses that are chargeable onto my credit cards and funnel my (limited) cash flow towards debts with interests. There are lots of variation in terms what can be charged on a credit card. Some people’s circumstances even allow them to pay for rent on credit card. For example, before medical school, I would pay my landlord by buying whatever she needs on my credit card, including gas, grocery etc. This takes a little more effort than just writing a check.
In my current situation, I will buy grocery gift cards in the 1000’s of dollars (for 6 months to 1 year because there’s once a year 10% discount on gift cards)… and pay my electricity 1 year in advance. Funneling this way, often gets me NEGATIVE 1-5% interest for 1-1.5 years. That makes my savings for paying down my student loan even higher. but there’s a limit to this.
2. this 2nd method usually allows for more aggressive pay down of a higher interest debt. balance transfer checks. the cheapest balance transfer checks i got was with travelocity american express at 1% transaction fee for 0% APR for a year. So by writing a check of 15k towards a debt at higher interest (at least point for me, it would be my 3.375% mortgage), I would be saving 2.275% for the next 12 months. the balance transfer transaction fee is charged up front, just be sure that if your limit is 15k, that you write a check in the amount lower than the limit enough to pay for the fee or the check may not go through or worst still they charge a fee of some sort (over limit fee. i have never gotten a fee before, cuz always err on the safe side).
3. some banks allow you open a new checking account by funding with your credit cards. NOW YOU need to be very cautious with this. You need to know that the action of FUNDING is equivalent to a PURCHASE, not a CASH advance. The big difference between how the act of funding a new account is processed by your credit card company is that purchase will bring you CASH BACK (if your card has that reward), but cash advance will charge you interest @ 20-30% from the day the transaction posts. So this method DOES not work if your credit card company process your funding a banking account as a Purchase.
Hope this helps. There may be even smarter way around this out there.
ps. since i have no more student loan and my most expensive debt is 3.375%, i’ve been funneling my cash flow towards ROTH (23.5k/year). the post gives more details on how to use credit cards to build your net worth (be it reducing debt or increasing asset)
http://www.debtfreedoc.com/2015/05/03/best-of-both-worlds-how-to-truly-maximize-your-roth-funds/
I don’t think those guys are going to take a credit card, no.
I totally agree with WCI on “Increase Fulfillment by Eliminating Financial Worries.” In fact, thanks to many pearls he shares on this website, I’m doing better than I would have otherwise!
Also, I notice a typo above, which may be confusing.
Here’s the correction.
3. some banks allow you open a new checking account by funding with your credit cards. You need to be very cautious with this. You need to know that the action of FUNDING is equivalent to a PURCHASE, not a CASH advance.
The big difference between how the act of funding a new bank account when processed by your credit card company is that purchase will bring you CASH BACK (if your card has cash back features), but cash advance will charge you interest @ 20-30% starting the day the transaction posts.
“So this method ONLY works if your credit card company processes your funding a banking account as a Purchase.” This sentence is corrected.