Entering MD/PhD with debt

[BananaBoy]

Hi all,
I have been accepted to a MSTP program (MD/PhD) for matriculation in 2008. I will graduate with about 60,000 in debt. The breakdown is:
~50,000 mixture of federal loans (subsidized and non) including federal plus loans
~10,000 credit card debt (yikes! Didn't go on spending sprees, but school loans were not enough for an expensive school in a VERY expensive city).

I am able to live on substantially less than my stipend will provide and may have 7,500-10,000 after living expenses are met.

Could anyone please suggest the best approach to handling this debt with 7-8 years ahead of me before even starting residency. Should I consolidate? Or just focus on paying off credit cards first? And how exactly do I consolidate (do I mix everything together or try to consolidate everything except for the federally subsidized loans)? Thanks for your help!

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[Doctor Bagel]

For recent loans, consolidation doesn't really net you any benefits aside from the convenience of only having one payment. If you can get a consolidation deal that lowers your total interest, it might be worthwhile, but it really depends on when you took out your loans and what lenders are offering now. Consolidation or no, your loans will be deferred while you're in school, so that's good news.

As a general rule, paying off credit card debt is more important than paying student loans, so I'd advocate putting whatever extra money you have toward those. If you can pay those off, then you should target the student loans with the highest interest rate.

 

[Leforte]

I'd pay off credit cards first.

Then max out your IRA. At your income level as a student - go for a Roth IRA which uses post-tax dollars (you'd probably be in the lowest tax bracket). All profits from this account will then be tax free in the future. So when you withdraw from this later in life (and are in a higher tax bracket), you will enjoy the income tax-free.

In addition, you will get the benefits of compounding interest from your IRA that the rest of your medical colleagues will not enjoy while they spend the next 4-10+ years in med school/residency.

You will also get the benefit of a tax deduction on your student loans, too, whether you are paying them or not (capitalized interest is deductible).

Buy a home in your area - will most likely only qualify for a small loan, but depending on where you go, that may be enough to get a nice place. As you'll be 7-9 years in one place, you will be able to buy low in this market and when we get out of this slump, will get the benefits years later. This will also provide a nice downpayment for a place wen you go to residency (should you decide to buy). Or you can rent it later to another med student after you leave - you know they'll be there for 4 years.

To help with your mortgage/utilities in med school, rent out a room or two.

Only once all of these issues are met, would I consider paying off student loans.

 

[BananaBoy]

Thanks!
These are very helpful responses.

 

[SigurRos]

Does the government pay for the interest on subsidized stafford loans taken out during undergrad while one is in med school assuming entry straight into med school following graduation from ugrad?

 

[Leforte]

Does the government pay for the interest on subsidized stafford loans taken out during undergrad while one is in med school assuming entry straight into med school following graduation from ugrad?

Yes. The interest is paid during any deferral period on subsidized loans.

 

[SigurRos]

So theoretically, when (and if) I begin as a resident, the principle amount I took out in Undergraduate will be the total amount that I owe, and interest will then begin to accrue at that date? Also, if I hypothetically paid out the loan in full as soon as I graduate medical school, no interest would have been tagged on right?

 

[TMP-SMX]

So theoretically, when (and if) I begin as a resident, the principle amount I took out in Undergraduate will be the total amount that I owe, and interest will then begin to accrue at that date? Also, if I hypothetically paid out the loan in full as soon as I graduate medical school, no interest would have been tagged on right?

Unsubsidized loans accrue but do not add to the principal during deferment. If deferral is removed for residency it will all capitalize (be added to your principal balance) as soon as you enter repayment. Then you have interest on the new principal balance each month. However, during deferment the interest is racking up but still only on your original principal balance. It just doesn't add to the amount until repayment.

 

[SigurRos]

But for subsidized loans, the interest that has been accrued doesn't get capitalized right (since the government is supposedly paying all interest accrued during deferment periods)?

 

[TMP-SMX]

But for subsidized loans, the interest that has been accrued doesn't get capitalized right (since the government is supposedly paying all interest accrued during deferment periods)?

Correct. There is no interest to capitalize after deferment as there was no interest accruing.