Debt Management Basics

Debt Management Basics

Unlike many undergraduate college peers, who get jobs and begin paying off student loans in their early 20s, doctors incur even greater amounts of debt during medical school. Furthermore, doctors are often unable to make debt payments as interns, residents and fellows, which can lead to unpaid interest being capitalized (added to their outstanding principal). The result in many cases is a mountain of debt.

In addition to student loans, many doctors take on sizable home mortgages and auto payments. Some young couples face a dizzying amount of debt. I’ve spoken with dual-physician couples; dentist married to physician; physician married to attorney, who have combined school debts in excess of $500,000! Add a home mortgage and two car loans and you’ve got a million-dollar barrier which could take decades to overcome.  

The best advice is: (1) avoid debt to begin with, and (2) live within your means. The former minimizes your debt burden. The latter allows you to generate excess cash to pay down debt, which in turn means you can invest any excess cash.

Your loans are either government-issued or offered by private-sector banks or other lenders. Each comes with its own considerations, and interest rates may vary widely. Recently issued federal government loans to professional graduate students have interest rates in excess of 6%. Private-sector loans may be higher or lower, depending on your field of study, circumstances, and credit history. Federal loans are more flexible and forgiving, and they can be a better choice for many borrowers. Do your homework in advance and research available loans to determine which is best for you and your circumstances. Some features of federal and private loans are described here and here

If you're contemplating loan repayment, you have several options in the two broad categories known as Traditional and Income Driven. The most up-to-date information is available at studentaid.gov. If you wish to pursue Public Service Loan Forgiveness (PSLF), you must abide by all program rules. There are some very useful FAQs on the government's Public Service Loan Forgiveness site, addressing employer qualification, loan eligibility, qualifying payments, and the process itself. I strongly recommend reading through all this information. While that may seem like a pain, keep in mind that doing this properly could mean having a massive amount of your loan debt forgiven, so all your learning is time well spent.

DoctoredMoney.org observes that many graduating medical students would be best positioned by selecting REPAYE or PAYE repayment plans if they are interested in PSLF. This does not mean these are automatically the best choices for all graduates, but these are likely to be solid choices for many. Rather than reinventing the wheel here I recommend you visit DoctoredMoney’s Student Debt resources, which explain which repayment plans are advantageous under certain circumstances.

If you find yourself unable to make federal student loan payments you may be able to avoid default by seeking forbearance or deferment. Either will allow you to temporarily stop making payments or to make reduced payments. In the case of forbearance you will still be required to pay accrued interest on your federal loans. In the case of deferment, the federal government may pay the interest on your loans during the deferment period. Whether the government covers your interest or not depends on your loan type. See studentaid.ed.gov to determine whether your loan type is eligible for such government assistance. If you’re responsible for interest payments but elect not to pay them, those required payments may be capitalized—they will be added to your loan principal—and it will take you longer to pay off the loans.

When it comes to student debt you may consider two strategies: consolidation and refinancing. Consolidation refers to combining multiple loans into a single loan with a single interest rate and one monthly payment. Logistically this is much easier than managing an entire portfolio of loans. You can easily consolidate federal loans at studentaid.gov. If you plan to pursue PSLF, read eligibility information carefully to ensure your consolidation plan will work as intended. Refinancing refers to converting your loans to lower interest rates using private lenders.    

If you purchase a home you will most likely end up carrying a home mortgage loan

Other debt-related considerations include buying vs. leasing a car, the responsible use of credit cards, and the importance of managing your credit score

Some important debt-related questions:

Which debts should I pay off first?

If I have some excess cash this year, should I invest or pay down debt?

Must I live like an intern forever to overcome my debt?

Does checking my credit score lower it?