I meet many doctors each year and get lots of “thank yous” for helping them, both in-person when I go around and do speaking gigs or conferences, and by email from others. Frequently they share their success stories with me, which makes me happy. Occasionally I hear of their struggles, which makes me sad. I often wish I could connect those who are struggling with those who have been successful to show them how taking control of their finances and getting their financial ducks in a row can make them better doctors, parents, and partners. It would be even better if I could make that connection BEFORE the “strugglers” start struggling. Today I'm going to attempt to do that, at least in a general way.
Although The X Factor does come into play in a big way, one big difference I see between the “succeeders” and the “strugglers” is that the succeeders wipe out their student loans in just a couple of years and the strugglers add the minimum student loan payments to their long-term monthly budgets (if they have a budget at all.)
7 Steps for Doctors to Pay off Student Loans Fast
In this post, I'm going to teach you how to avoid doing that; i.e. how to pay off your student loan debt very quickly, in less than two years in most cases.
# 1 Make Smart Financial Decisions in School
Obviously the best student loan is the one you never took out. About 1/4 of MD students graduate without any student loans at all. While most of those people are in that situation due to family help or a contract (HPSP, MD/PhD etc), far too many medical students assume their peers are just borrowing every dime their professional schools charge and they can spend on living expenses. That is definitely not the case. Keeping the total loan burden down is a major part of wiping out your student loans quickly afterward. Going to the cheapest school (including both tuition and cost of living) you can get into is a major factor. Luckily, it is often the case that the cheaper school actually provides the better education! Ensuring you match to avoid the financial catastrophe of having a doctor debt burden without a doctor income is another critical factor. Living frugally matters. Get roommates if you are single or send your partner to work (preferably for the university) if you are not. Don't take out your student loans until you need to (and maybe even not them.) Maybe even have a part-time job some of the time.
Perhaps the most important financial decision in medical school is your specialty choice. Unlike Dave Ramsey, I see attempting medical or dental school on debt as generally a good investment, despite the risk of not matching. But it is only a good investment up to a certain debt to income ratio. At 1X (student loans at completion of training are less than or equal to starting income), it's a good investment. At 2X, it may not be. At 3-4X, it definitely is not. So if your dream is to be an occupational medicine doctor or a part-time employee dentist, borrowing the entire cost of attendance at an expensive school in an expensive city is not a very good financial decision. You'll likely end up with $400K+ at medical school graduation and $500K+ at residency graduation for a job that might pay $200K or even less. That's not smart. Don't do that. If borrowing to pay for your dream will lead to a debt to income ratio of 3-4X, you need to consider alternative methods of paying for it. Those include:
- A military contract (USUHS/HPSP)
- Public Service Loan Forgiveness (PSLF)
- A decade long Live Like a Resident strategy
- Marrying a high earner without significant debt
If none of those, with their associated risks, are acceptable to you, then you should really consider whether your dream is worth the incredible financial stress it will bring on. Based on the doctors I talk to who have made that decision, it isn't.
# 2 Make Smart Financial Decisions in Residency
The need for smart decision making continues in residency. While you are a very rare doctor if you can wipe out your student loans in residency (although some do accomplish it), making a few decisions right can make a big difference. For example, your private student loans can be refinanced as soon as you are out of school. There's no reason to keep these at the 6-10% interest rate you borrowed them at. They aren't eligible for the federal income-driven repayment plans nor public service loan forgiveness. You can probably refinance them to something in the 5% range while limiting monthly payments to just $100 AND get $300-500 cash back by going through the WCI Refinancing Links. Heck, that cash back will cover your payments for several months! The following companies have resident programs:
- SoFi ($500 cash back through this link)
- Laurel Road ($300 cash back through this link)
- Splash ($500 cash back through this link)
# 3 Refinance Your Student Loans
The succeeders refinance their federal loans too, just as soon as they realize they're not going for Public Service Loan Forgiveness (PSLF) nor receiving any subsidy through REPAYE. That usually means about the time of residency graduation. Refinancing gives you a few hundred dollars cash back (at least when you get the WCI negotiated deal), but the primary benefit is lowering your interest rate from 6-7% to 2-4%. Taking a $300K student loan from 7% to 2% means that $15,000 that was going toward interest that year is now going toward principal. That's probably most of a month's paycheck for you, and well worth the 30-60 minutes you'll put into refinancing. In fact, the succeeders refinance early and often. As your debt to income ratio and credit score improve, you will likely qualify for better and better rates and perhaps even an additional cash bonus if you end up switching companies. If nothing else, you get a heck of a lot better service than you were getting from student loan servicers like Navient or Fedloans. Those guys can't even count to 120 as evidenced by the PSLF debacle.
How do you get down into the 2-3% interest rate range? If you're really committed to crushing your loans in less than 2 years you can afford to run the interest rate risk of a variable 5-year loan, which offer the lowest interest rates.
If you are an attending who isn't going for PSLF and hasn't yet (or hasn't lately since rates have dropped) refinanced your student loans, what are you waiting for? How many days do you have to work to make $15K after-tax? You can't spend 30 minutes to save that amount of money? Really?
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# 4 Live Like a Resident!
Unfortunately, just refinancing your student loans isn't enough to get student loans paid off in just two years. But if you've been following the steps above, you only need to do one more thing to pay off your student loans in less than 2 years – live like a resident! Live like a resident means that you earn like an attending while living a lifestyle very similar to what you were living as a resident and use the difference to build wealth–in this case to pay off student loans.
Now, if you did a nice job with numbers 1-3, you probably owe $250K and perhaps you make $300K, just a little more than the average physician income. A resident makes $60K these days (pre-tax), but let's give you a 25% raise AND make it post-tax, so you get to spend $75K. That raise would be HUGE in corporate America. You're now paying perhaps $75K in taxes. $300K – $75K – $75K = $150K you can use each year to build wealth. Well, let's say you pay that $150K toward your student loans in year one. What do you owe now? Well, just over $100K. You'll be done in something like 21 months total. You're now free of that burden.
I recommend you live like a resident for 2-5 years after residency, but now you can move that $150K a year toward your other wealth-building goals like saving up a down payment on your dream home, saving for retirement/college, or perhaps even buying that supercar you've always wanted.
# 5 Let the IRS Help
If you're in a really good position (let's say an income of $400K and student loans of $150K) and self-employed, you might consider another method white coat investors have used— using your taxes to pay off your student loans thanks to the safe harbor rules. The safe harbor rules say if you, as a high earner, pay at least 110% of what you owed in taxes the year before in estimated tax payments, then you can pay the rest of the taxes due with your return in April with no penalties or interest.
Since a resident or fellow barely pays taxes, and taxes were withheld for the first half of the year by the residency W-2 job, you would only have to make two tiny estimated tax payments for the rest of the year. That gives you 9 1/2 months from completion of training until the lion's share of your taxes are due. Essentially, the IRS is letting you borrow your tax money for 0%. Why not take advantage? Instead of putting 20-35% of your income into a savings account to cover that tax bill, why not pay it toward your student loans? If you can wipe them out by December or January (should be no problem if living like a resident and not paying taxes), you can then save up for the big tax bill by April. In less than 10 months, your student loan burden is gone.
# 6 Realize You Probably Won't Invest the Difference
A lot of doctors feel like they can earn more than their student loans are costing them, especially if they've refinanced the loans to a rate of 2-4%. Aside from the obvious mistake of not accounting for risk (paying off a loan provides a guaranteed rate of return and you usually must take significant risk to beat that rate), these doctors frequently make a more subtle mistake–they don't account for their own behavior.
While it makes sense mathematically to borrow at 3% and invest at 7%, the truth is most of us don't actually invest. We borrow at 3% and then spend the difference. While we can focus our efforts on paying off debt for a year or two, we can't keep that same level of focus for 10 or 20 years and so we slack off while interest robs “Future Me” of money he should have had. There's a reason that you don't know very many (any?) doctors who have become multi-millionaires by keeping their student loans around. The same motivation that leads someone to save and invest well also leads them to pay off their debt quickly.
# 7 Build a PSLF Side Fund if Going for PSLFPSLF Side Fund“, and there are three scenarios where you may use it:
- If you leave your PSLF-qualifying job for a non-PSLF-qualifying job
- If the government changes the PSLF program and you are not grandfathered in
- If you get sick of fighting the government to give you what they owe you
If none of that happens and you actually receive PSLF 4-7 years after completion of training, great! You just got a nice boost to your nest egg and accelerated your path to financial independence. But since your PSLF Side Fund was equal to your student loans just two years out of training, you've really had those loans “virtually paid off” for years by the time PSLF kicks in.
Imagine how much wealth you could build if you didn't have any payments at all. Imagine how much you could buy. Imagine how much you could give. Imagine how much less you would have to work. How many days a month do you work now just to make your payments? How much better would your life be if you could spend those days doing something else? Get those student loans out of your way and get on with the rest of your life. You're not really done with medical/dental school until you pay for it.
What do you think? Are you one of these succeeders? Did you pay off your loans in less than 2 years? How did you do it? What was your debt to income ratio? Comment below!