[Editor's Note: The following guest post was submitted by Barbara Hamilton, MD. There are some great quotes in this inspiring article about decimating student loan debt — with my favorite being the very last sentence. I have no financial relationship with Dr. Hamilton, but one of my student loan refinancing partners, CommonBond, just increased their cash back bonus for WCI readers to $550 when you refinance with them!]
There is No Fairy Godmother to Wish Student Loan Debt Away!
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I mean, your godmother might be a wonderful person, but don’t imagine that your attending salary will rescue you, from rags to riches, like Cinderella. This is just too easy a trap to fall into, and interest rates on student debt are far higher than they used to be (sorry). It used to be educational debt was subsidized to 2 or 3%, but now grads are facing interest rates of 6% and higher.
Not only that, but overall debt burdens have risen in the last decade. At my public medical school, in 2008, the average student debt balance was around $135,000. This included some who graduated with no debt, so the average for borrowers was a bit higher. At that time, students who graduated from for-profit medical schools in the Carribean were the only ones I knew sporting loan balances of $250,000 or higher. Sorely, this is the current reality for many in our profession.
I Paid Off My Student Loan Debt and You Can Too
Have you heard the expression “Pay yourself first?” It’s a personal finance adage meant to convey the idea that you should contribute to non-negotiable expenses and savings first, before using the remainder as disposable income, i.e., for new things or luxuries. I consider educational debt repayment in the “pay yourself first” category, and I focused on it keenly.
You’re carrying a debt of $150,000, $300,000 or $1,000,000 on what’s inside your brain. That’s crazy, right? I thought of my student loans like a mortgage on the mind. Makes you want to wear a helmet at all times, doesn’t it?
If you find yourself with a huge student loan balance, throw that fancy school name around whenever you get the chance, you are paying for it! If, however, you find yourself reading this at the beginning of your medical journey, think about what a school’s name really means to you, and how much financial sacrifice it’s worth, relative to your other available options.
Barbara Hamilton, MD
For people that claim student debt is “good debt,” I’d argue that point. Say you graduated in the early 2000's and had an interest rate of 2%… that’s cool for you. That’s not the reality any longer. At current rates, interest compounds, and the principal loan balance won’t move much, as you pay chiefly interest. There are simply better things to do with your paycheck and your headspace than to amortize your student loans for thirty years.
What’s wonderful about paying down your debt, is that it’s a guaranteed return on your money. When you invest in the market, you hope for an average return, and pray the value of your holdings doesn’t plummet. When you pay down a 6% loan, it’s like getting a guaranteed 6% return on your money.
When you finish training, your income will increase suddenly, you will lose the ability to deduct student loan interest. So when you repay your loans, you pay in post-tax money. If you’re paying a third of your income in taxes, you have to earn $30,000 gross to pay back $20,000 in loans. It’s sad but true. You have reached a higher tax bracket, and the government is not going to give you a break for it once you’ve attained an attending level income.
If you’re aiming for public service loan forgiveness, there is great advice on how to deal with the uncertainties of the future of this program. Basically, use incredible discipline to save a large loan pay-off fund in case the program evaporates, or you don’t qualify. Since I don’t work for a non-for profit entity, I didn’t qualify. Further, since my principal was average, I was not going to make any major life or job decisions based on my debt. It was up to me to pay off, and I did it! You can too.
I Paid My Student Loans Off By Bucking Tradition
If you find yourself living an average life, and struggling to get by, examine the big expenses. I’ll offer an example.
My Wedding
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Consider the example of an average wedding. If you have hundreds of thousands in student loan debt, you do not have to have a fancy wedding. You do not have to have a wedding fitting of a doctor. Have a humble wedding.
Growing up in the Northeast, everyone I knew spent thirty thousand dollars or more on a wedding, whether they could afford it or not. It’s cultural. Coming of age, I never knew that people in the west, in states like Montana, commonly have barnyard weddings, with simple food served at picnic tables. Where I come from, there is a four-figure donation to a church, and a huge family to feed. There is a cocktail hour that could feed a small nation. There are too many courses to count. While having a large wedding is valued by many with large families, the fancy factor is often excessive.
I bucked tradition by getting married in California, where I was living. Since my extended family lives in NJ, many people declined to come, slashing our guest list. Therefore, instead of hundreds of guests, we had about 75. We got hitched on the front lawn of a little hotel, officiated by a long-time family friend. Our reception was a mid-century modern pool party. We celebrated under string lights and palm trees. Instead of an expensive band and disc jockey, talented guests played music and sang all night.
When a local catering estimate threatened to consume half our budget, my fiance found a two-woman catering outfit in a nearby desert suburb. For a fraction of the cost, they prepared a delicious buffet, better than many of the wedding meals I’ve had. The smaller catering team came with a bartender, so we bought our own booze. Guests enjoyed high-quality vodka, champagne, and garnishes, all from our local price club. It was delicious, concocted into signature drinks by our caterers.
Floral arrangements were likewise steep, and my husband-to-be balked at the cost of decorating. There was a $1600 minimum to work with a Pinterest-worthy florist. Instead, my Mom, Maid of Honor and I made a trip to the Los Angeles flower market. We walked the stalls with cash, spending just under $500. We were tickled when asked if we were industry professionals. It was a fun experience to buy, then arrange the buds, flexing our creativity. I acquired glass vases from a craft store and tied leather sashes around each one.
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The wedding was a far cry from that expected by my family, but with student loans, I simply couldn’t afford more! Despite the irked Aunts and Uncles, in terms of money, time, and stress, we chose the better option. Social pressures are powerful, and they can ruin your financial life if you allow it. After all, it’s normalized in our culture.
Maybe you’re already married, and realized you overspent; that ship has sailed. Or maybe someone else paid for the wedding; good for you. The point is that sometimes you have to break the “rules” to meet your financial goals. This way of thinking can be applied to other expenses in your life. Don’t let other people dictate what you can and can’t afford.
Sometimes, women are especially susceptible to these social forces, which push us to care for everyone all the time. You’re asked to help your brother’s family with financial trouble, i.e., enable your brother’s gambling addiction? You think, “Maybe I can help them out a little bit…” You’re asked to pay for your sister’s kids’ private school education. “Sure, I mean, I don’t have kids of my own…”
These scenarios are built on the myth of the (automatically, effortlessly) rich doctor.
In my view, the rich doctor is the one who has empowered herself. She has paid herself first and chased down her financial goals. Consider that you could actually control your interest rate or your student loan balance. You can!
#1 Refinance
I re-fi’ed with Sofi, and found the process transparent and motivating. You can choose a fixed or variable rate, depending on your balance and risk tolerance. To get a truly fantastic rate, I chose a variable rate, and I was motivated even more, each time I received notice of a small rate hike.
#2 Lump-Sum Payments
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The loan term you choose will determine how quickly the principal balance goes down. Making a lump sum payment is a powerful move: your principal decreases by the amount you contribute, not less. It’s beautiful!
Decimate Your Student Loans!
I developed a passion for decimating my student loan debt and felt empowered as my balance got smaller. I battered it with lump-sum payments. The loan servicer automatically decreased my monthly payments to reflect the five-year term I’d agreed to. Still, I paid the balance down ahead of schedule. Now, that monthly payment is history.
If you marry rich, or have a windfall, maybe you’ll be rescued from your student loans, like a fairy tale. More likely, you’ll combine debts with a partner. For most of us, there’s no fairy godmother to wave the student loan debt away. Since you don’t practice medicine in a fantasy world, empower yourself!
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How have societal pressures influenced your spending, investing, savings, and student loan debt management? What societal “rules” did you break to reach financial goals? What advice do you have for docs that are struggling with societal pressures? Sound off below!
Another great example of what can be done when you are your own trend setter and have a desire to destroy your debt. Just because it’s always been done one way doesn’t mean it has to keep happening the way it always has.
Strong work on decimating your loans!
TPP
Thanks TPP!
I like how you write about intentionality with money. Some people won’t appreciate when you cut the budget in ways that affect them. But it has to be done!
Many good points. Live like a resident extends to all aspects of life. We always talk about houses and cars, but weddings, vacations, and other expenses need to be addressed too.
Using loan money to get married in med school is not very different then using the money that should be paying off your loan in your early career.
Getting married while in training has the advantage of your family expecting less if that is important to you.
Good post. Thanks!
Thanks so much Lordosis! It’s amazing what people expect, even when they know your huge loan balance. This kind of spending is so engrained, it can be painful to resist
What a great way to cut costs from your wedding and who cares what others think, it is YOUR day, not theirs. And if it is anything like how I feel when I DIY something at home (repair a toilet, etc) there is a pride of ownership that comes with doing it instead of paying someone else.
Indian weddings are notoriously excessive. It is essentially families trying to outdo each other in a show of wealth (The Joneses (or should I say Patels) taken to the extreme). Indian weddings can be multi-day events and have costs that can enter the 6 figure range if you let it (with 600-750 guests as standard). Coming in on horses (and I even heard an elephant) are part of the grand spectacle.
I wish I knew of your advice when I did my student loan repayment. I kept kicking the can down the road for over 17 years. With interest rates back then at 7-8% I know I probably paid 6-7 dollars for every dollar I borrowed (I graduated with $160k debt back in 97).
Great post and like WCI said, you do have some noteworthy quotes in there. 🙂
Thank you Xrayvsn. I love what you said about your loans, because we all have to own our financial mistakes. And I’m betting we all have some we could name.
It is an immense responsibility to manage the kind of income we manage as doctors. When I realized the gravity of my actions, I dove into learning about personal finance.
The reminder that ” you pay in post-tax money. If you’re paying a third of your income in taxes, you have to earn $30,000 gross to pay back $20,000 in loans. It’s sad but true.” is a gem!
I am also from new England, and had a smaller wedding there, with 60 guests. What amazed me was that even with flowers from the supermarket, decorations we made ourselves, playing music from a cassette (dating myself here) in the church, making our own little almond favors, etc , the wedding still came to $15,000 once the venue, alcohol, photographer, dj, church, etc was paid for. It made me seriously wonder how much other people’s weddings cost. I can’t imagine.
Thank you so much. It brings me joy to write this.
Your DIY wedding efforts sound truly noble! I remember those almonds used to be everywhere. The little pastel ones?
Great post! But aren’t all the democrat candidates going to cancel student loan debt?? I bet lots are just going to wait because if you pay them back then they cancel them, I’m quite sure you’re out of luck.
Bernie Sanders is the only one with a plan that would apply to very high incomes. Other plans phase forgiveness out at milestones such as Household Income of $100k and ineligible above $200K. And, as far as I can tell, they are basing the numbers on FY 2018 earnings (otherwise, most high income people could structure their salaries to have a low income in FY 2019, FY2020, or FY 2021). My wife’s company allows for up to 85% of compensation to go into deferred comp plans.
Employers would figure out the system and structure contracts to maximize benefit to new hires with student debt. For example, new contracts could pay $50K/yr with a $200K/yr bonus to accrue and be paid out after 5 year of service (or whenever the debt is actually forgiven); along with the option to borrow $200K/yr at 2% interest.
If the market knew you were getting $250K in loans forgiven, an entire industry of lawyers and advisers would spring up to serve these debt laden students with the goal of keeping your income as low as possible. Who knows, maybe sabbatical year post residency with loans offered at 5%. Borrow $100K, pay $5K interest, have $0 gross income, and have $250K debt wiped away completely.
Ultimately, the ability to game the system makes it unlikely to come true.
That’s a heck of a gamble to make. I certainly wouldn’t advise anyone to plan on universal student loan forgiveness. Think of everything that has to happen for that to take place:
1) A democrat has to win
2) A democrat advocating universal student loan forgiveness has to win
3) Universal student loan forgiveness has to get through the House
4) Universal student loan forgiveness has to get through a Republican controlled Senate with a filibuster proof majority.
I’d put the odds of that at less than 5%. Maybe less than 1%. You really want to take that bet?
Agreed, I’m BEYOND skeptical of any forgiveness programs, and if I was relying on one, I’d probably be losing clumps of hair from the stress of the will-they-won’t-they come through dynamic.
I did find it interesting to see Elizabeth Warren’s plan which was to cancel just 50k of debt for each student, which would still put many people with private educations or advanced degrees in the debtor category. I think that would have been a very moderate approach actually. The people who chose a public education might get most of their debt erased, while people making larger debts would still be responsible for the rest.
And Sportsdoc, thank you!
Completely agree with paying off the loans as you detailed. However with the continued love affair with free stuff, I wouldn’t be super aggressive about paying them off before the 2020 election. The US has reached a tipping point where greater than 50% of the population pays little or no taxes or actually gets money back. Deficits don’t matter to politicians, only re-election and most voters want and depend on the freebies. Lots of responsible people who paid their loans will be quite upset when student loan debt is cancelled for those who made little or no effort to repay them.
That seems so unlikely to me (especially for higher income folks) that I would not change a student loan management plan based on sound bites from a few of 20 candidates running for office.
I have heard lots about free undergrad tuition, or forgiveness for undergrad debt, but NOTHING about graduate school or medical debt- except for PSLF, an established program whose fate is yet to be determined.
As far as NYU offering free med school tuition, that is something you either get into now, or you’ll have to swallow it if you’re already out of school. I’ve seen people get REALLY upset about kids getting free tuition now when they have a debt to pay. When I was in med school, a couple of the smartest kids got a full ride each year. Good for them! Those students could have gone anywhere in the country, and they chose to attend Rutgers for free. It seems to me what NYU is doing is the same on a larger scale: this action will make NYU incredibly competitive.
Sadly the estimates for the amount of student loan debt aren’t true for a growing percentage of students. Throw in a student with a family during medical school and residency and you can easy add over 100k to the average. I know too many people, including myself, who entered residency with over 400k in debt. In my situation I married another physician with almost the same amount of debt. We joke that we own a million dollar mansion. We’re also in our late 30s so retirement is a top priority. We are trying are hardest to live like residents but we work hard and life is short, so we take ourselves and the kids to the occasional trip to Yellowstone or the beach. Things just add up. Outside of home and car we are avoiding other debt. Our current strategy, if you want to call it that, is to let our loan pace through the 20-25 year forgiveness, balance the interest with interest that works for us and hope things change along the way that will relieve some of the burden. Hoping for a golden candidate who waves a wand and eliminates all the debt is a fairy tale. But finding a way to balance that large of a debt load also seems magical. The two student loan debt officers (Docs without Quarters and a local CPA) seem to come to our same conclusion and plan to ride out the years. It doesn’t feel right but this article unfortunately doesn’t either as I would have loved to have been single at a Med school that left me with less than 200k in debt but that’s just not my reality and sadly not the reality of a rapidly growing number of students.
I’m confused. You mention you have high debt due to having a family then note your family was a physician with similar debt.
That presumably means the two of you have a large combined shovel. The average doc is making $275K these days. If both of you are making at least the average salary, that’s an income of $450K. Seems pretty easy to wipe out $800K on that in less than 5 years to me. What isn’t adding up that makes you feel overwhelmed by it? Is there some reason you can’t throw $20K+ at it each month?
That was exactly my point, that many students, regardless of school choice are seeing much higher debts than what I saw just a decade ago. And the interest rates are higher, so the lackadaisical attitude toward educational debt many held in the past is not appropriate now.
Two medical students starting or supporting a family while going into debt is a weighty scenario, and remains a choice. For families like yours, the hope is that your double physician income will allow you to rescue yourselves.
With a 2 physician income family, you are not powerless!
My wife just started residency so I’m making about what you said and she’s making a resident’s salary for the next 3 years. When’s she’s finished we’ll re-examine what we can afford to pay per a month. Not to get too personal but provide some detail I pay $63,000 a year in child support and alimony. After that, 401k, emergency savings, church donation, taxes, mortgage, cars, utilities, etc. it leaves about 2-3k month. I just got out of residency and I’m new to this hence the overwhelming feeling. I gave general student loan debt numbers in my original post, we’re closer to the $1 million dollar mansion I joked about. At any rate you’re right that once she finishes residency we can live off one salary and use the other to pay down the debt. I suppose the question I have is why not pay income based for the next 20 years until forgiveness? Calculated out it seems the amounts are about the same. Instead of 20-30k a month for 5 years it’s 2k a month over 20 years. It’s an honest question not a plan at this point. We’re still trying to come up with a plan. Thanks.
$63K! Ouch!
One thing to keep in mind if you go or IDR forgiveness is that you also need to save up for the tax bomb in 20-25 years. You’re right that you may come out ahead doing that though. Best to pay for some formal student loan advice in your situation and really give PSLF a close look.
https://www.whitecoatinvestor.com/student-loan-advice/
Great post!
I want to empathize with those who are struggling and provide some encouragement. About 4 years ago I remember feeling completely overwhelmed. I just finished fellowship with about $430K in debt (with 3 kids and twins on the way…). Just looking at the statements brought cold sweats. Some of it was a private loan at 19%!! But I found this site and used most of the tips here – lived like a resident, rented, beater-ride, budgeting etc.. 3.5 years later it’s all paid off. So it is possible. My wife and 5 kids still had a great quality of life – Disney trips, vacations (carefully budgeted), summer camps, scout trips, mommy vacations etc. . It helped to have a plan with an end date – we actually finished 6 months earlier by sending all excess (tax refunds, bonuses, pay increases, 3rd paycheck months) to the loans. Physicians are fortunate to have big shovels, and sharp minds. Plan well and you will succeed.
Wow! Congratulations! We ought to get you on our upcoming podcast. Email cindy (at) whitecoatinvestor.com about getting on the loan payoff podcast.