Now, first of all, I have to admit, I did have some help to pay off student loans. When I was still a resident in NYC, my dad helped me pay down my principle. This made me really angry given that, with my earning potential, I would definitely be capable of paying off my loans anyway. According to him, he felt guilty that I had to deal with all that and he now had the ability to help…blah blah blah etc etc.
So while I cannot claim full responsibility for being able to pay it ALL back within a year of being an attending, I still did pay off a substantial amount. Plus, with my method, I think I would’ve been done within 3 years or so anyway, which is still super quick.
For those of you on the loan forgiveness plan, this won’t apply, but for everyone else, I hope my story helps you to pay off student loans and be free!
My Method to Pay Off Student Loans
Apply for Income Based Repayment
I started off with over 250k in loans when I entered residency. I had consolidated my loans prior to starting and landed with an average interest rate of 6.75%. I also applied for and was granted to use the Income Based Repayment (IBR) plan (also referred to as the Income Driven repayment plan). For those unfamiliar with it, IBR calculates how much you owe each month based on your income. So as a resident, I obviously wasn’t making much and as such would not have been able to afford a full monthly payment plan. With IBR I was able to make the minimum monthly payment and keep my loan payments alive.
The advantage to this plan is that you’re able to work on decreasing your student loan balance versus deferring your loan payments (as many in training may do). With deferment you may end up still accumulating interest on your principle (something you definitely do not want). In addition, there are student loan forgiveness programs in place. As a physician, for instance, if you work in a government or not-for profit institution you can qualify for Public Service Loan Forgiveness (PSLF). With PSLF, your federal student loan balance left will be forgiven after 10 years. The caveat is that in order to qualify, you have to make 120 consecutive payments.
Most residency training programs qualify as public service jobs. As a result, participating in IBR as a resident in training (and average training length is 3-5 years), is a great way to help you pay off your student loans faster once you graduate into you real job.
Another advantage is that while you’re in IBR you can still send in extra payments if you want, or if you are unsure about your ability to continue the loan forgiveness program.
With me, I was unclear about it. I hadn’t heard any success stories from the program and so I was hesitant to depend on it. So instead, when possible, I would send in a little extra. I did this because my IBR payments did not cover the interest that was accumulating every month. Meaning, I was barely making a dent in my loan and it was still increasing DAILY.
Making extra payments
As I mentioned, I chose to go ahead and work on paying off my debt. I didn’t want it hanging over my head any longer than possible. PLUS, I wanted to save money on interest accumulation.
One way to think about it is this:
Every payment saves you in student loan interest accumulation. For instance, a $10,000 payment at an interest rate of 6.75% (let’s just use 7% to keep it simple), will save you $700 in interest.
Even if you invest in the stock market, earning a solid 700 dollars, or getting a 7% return is no guarantee. However, the 700 dollars you save when you pay off your student loans IS a guarantee. And over time, this can add up to make a huge difference.
So, whenever possible, I made every effort to keep sending in extra money to expedite my ability to pay off my student loans. This came in the form of money I saved over time and I’d send in a bigger check and I used my federal and state income tax returns to make extra payments. Given that I had a resident salary in NYC, it didn’t happen often, but I did make it a priority when possible.
Once I Graduated Residency…
My paycheck made a huge jump and with that extra payments became a more realistic possibility. I will admit, it was nice to see my bank balance go up and it was initially difficult to convince myself to make those extra payments. However, knowing that I would be able to save on interest is what kept me at it.
So each month:
- My account was auto-debited ~$1400 for my usual monthly payment (your loan payments will jump up once your salary does too to reflect a standard repayment plan)
- I would pay all the bills (rent, utilities, credit cards, etc).
- Then I put money aside into retirement
- and a little bit into an investment account.
In addition, I had a goal to keep only a certain balance in my bank account for emergencies/rainy day, and anything in excess over that (after all expenses paid) I sent into my lender. So for instance, if you decide to keep a balance of 40k in your account, once all bills are taken care of, anything over 40k should be sent to the lender as an extra payment.
Put the extra payments towards your principle
It’s important to remember, that you want your extra payment to take effect immediately, and you want it to go towards your principle. You don’t want it to carry over and replace your payment for the following month (that would be pointless).
Plus, you don’t want it to go towards your interest. Interest is basically a small percentage of your loan principle and as you accumulate it, it gets lumped together and becomes a part of the principle. So, the only way to pay off student loans quickly is to make sure your extra payments affect the principle. This is what helps to reduce your interest accumulation.
A comment on Student Loan Forgiveness
If you want to qualify for student loan forgiveness there are strict rules to abide by. This website has more detailed information about different types of forgiveness plans and what you need in order to qualify. This program is not necessarily the best decision for everyone, and if you don’t qualify from the get-go, then it’s important that you have a repayment plan in place!
The Argument to Pay Off Student Loans Now Versus Investing
I’ve heard plenty of people (friends, investment professionals) state that loan payments should be kept to a minimum and instead extra cash should focus on investing in the market or real estate etc., as there is potential for greater returns (some high-risk investment funds have a return rate of over 10%).
I think it’s important to keep in mind with this argument….the greater return is only viable in the long term. Seeing that 10%, or higher, earnings is unlikely to occur right away. And if it does? The volatility of the market will likely have you losing it all again (in the short term)
In the meantime, the interest on your loans in still accumulating! The longer you delay paying off your student loans, the higher the final amount will be that you repay. I started with 250k. Even with paying it off quickly, I paid back more than that (a little over 300k) due to interest accumulation just from a few years of residency. Think how much higher than final amount would be if you delayed paying it off even longer.
The caveat to all of this is if you have lower interest rates. In this case you can truly choose which avenue, either pay off student loans or invest, is right for you. This is because your interest accumulation is so low that your return in investments would truly be much more beneficial.
Free Yourself From the Burden
There are several articles and opinions out there that I have noted lately that state how much debt can affect our happiness. (see below to name a few)
Especially this kind of unforgivable debt. It’s as if we are being punished for pursuing higher education, for having goals, for having ambition and for working hard. It’s frustrating to have to give so much money away as soon as you start earning a real salary. But if you put off when you pay off your student loans, you’ll end up spending even MORE.
So, in my opinion, if you have high interest rate loans, or have the ability to pay off student loans in totality and just be done, then do it. It might be a very frugal few years, but you’ll BE DONE at a much younger age, after which your ability to save and invest will increase exponentially.