Fonzie's Guide to Paying off your STUDENT DEBT

[F0nzie]

Advertisement - Members don't see this ad

OK GUYS

We have 200k in loans.

How are we going to pay them off??

1. You have a 10k loan at 2.3% and a 30k loan at 6.8%

Which loan do you pay off first? The smaller loan or the larger loan?

Answer: Pay off the loan with the highest interest rate! Some folks like the satisfaction of paying off the smaller loan, but do not realize how much money they are losing from the interest capitalizing on the loan with the higher interest rate.

Ok, maybe that was obvious for some of you. Next one is a bit trickier.

2. You have a 10k loan at 6.8% and a 50k loan at 6.8%

Which loan do you pay off first? The smaller loan or the larger loan?

Answer: It doesn't matter! As long as you are making minimum payments on both loans.

Bottom Line:

Pay off your high interest debt first

 

[Doctor Bagel]

Man, it must be nice to only have $200k in debt. Or to have any debt at 2.3%. Still appreciate the sentiment.

Speaking of which, just got a statement regarding interest accrual (I'm doing forbearance right now), yikes -- holy moly, that's what kills you.

 

[vistaril]

Man, it must be nice to only have $200k in debt. Or to have any debt at 2.3%. Still appreciate the sentiment.

Speaking of which, just got a statement regarding interest accrual (I'm doing forbearance right now), yikes -- holy moly, that's what kills you.

? how much more could one have that 200k?

 

[lupinibeanie]

I came out of medical school knowing nothing about the student loan repayment options (in retrospect I take responsibility for this). Logically then, I went directly into forbearance when I entered residency residency and stayed that way for 3 years until I realized that repaying via IBR plans was much more cost effective than sending the lenders a big chunk of change every now and then. Once in IBR the payments can count towards student loan forgiveness payments if you enroll in this program. I wish I had known coming out of medical school about these options because then I would have been 4 years into my 10 year repayment debt rather than only in the midst of year 1. I would recommend looking into options like these if they work for your situation.

Oh Doctor Bagel, I know exactly how you feel 🙂

 

[SteinUmStein]

? how much more could one have that 200k?

From the king of pessimism himself. There are many med students carrying 300k+ in debt. Not advisable, but it happens.

 

[Psychotic]

? how much more could one have that 200k?

I know people with $300k+. Remember it can include college debt, too, not just med school.

 

[vistaril]

I came out of medical school knowing nothing about the student loan repayment options (in retrospect I take responsibility for this). Logically then, I went directly into forbearance when I entered residency residency and stayed that way for 3 years until I realized that repaying via IBR plans was much more cost effective than sending the lenders a big chunk of change every now and then. Once in IBR the payments can count towards student loan forgiveness payments if you enroll in this program. I wish I had known coming out of medical school about these options because then I would have been 4 years into my 10 year repayment debt rather than only in the midst of year 1. I would recommend looking into options like these if they work for your situation.

Oh Doctor Bagel, I know exactly how you feel 🙂

ibr is not 10 years, but 25 years. PSLF is 10 years. Nobody has ever had a loan forgiven based on pslf before, and I would be shocked if when people actually start getting ready to do it the govt doesn't slap some rules that would affect most physicians on it. Hell just last week Obama was throwing around a 57k cap idea...we're a long way from anyone even applying and it's already Teflon.

People- if you owe a lot of money start devising a realistic plan to pay it off. It does suck yes, but you will make at least decent money and you did in fact borrow the money. do the right thing and own up to the rsponsibilities. This pie in the sky idea that 300k is going to be magically wiped out by a program that nobody has ever actually used before is wishful thinking imo for most.

 

[TexasPhysician]

The key is to continue living like a resident. My moonlighting in residency goes to retirement plans - not increased spending.

 

[Euthymia]

? how much more could one have that 200k?

I, and most of my classmates who took out loans, will graduate with around $370k. Scary, huh?

 

[285963]

Point 1 makes sense to me.
Not sure I follow you on point 2.

Hypothetical: You have $5000 cash you can use towards paying off your loans this year.
Option 1: Pay towards the 10k. The 10k loan drops to 5k. The interest accrues and the principal is now $5340. The interest also accrues on the 50k and its principal is now $53,400.
Total loans at the end of the year: $5340 + $53,400 = $58,740.
Option 2: Pay towards the 50k. The 50k loan drops to 45k. The interest accrues and the principal is now $48,060. The interest also accrues on the 10k and its principal is now $10,680.
Totals loans at the end of the year: $48,060+$10,680=$58,740, the same as the total loans from option 1.
I didn't use compounding at all, but I think the result would be the same even if you compounded multiple times per year.

A dollar accruing interest and capitalizing at 6.8% is a dollar accruing interest capitalizing at 6.8%, regardless of whether it sits in a pot of $10,000 or $50,000.
This is just me taking a stab at the concept, correct me if I'm wrong.

 

[vistaril]

My bad. I should have been more specific. By the time you graduate, your loans will have accrued interest. You will most likely have a greater amount of accrued interest on the larger loan.

The idea behind paying off the larger loan with the same interest rate is to quickly pay off the accrued interest so your minimum payments start to be applied to the principal. Once your accrued interest is paid off on both loans then it really doesn't really matter which one you pay off first as long as your payment is applied to the principal.

Also keep in mind that the interest rate always takes priority over the accrued interest. So if you have a low interest rate loan with a bunch of accrued interest...leave it alone and continue to focus on making payments toward the loan with the highest interest rate.

I still don't understand how Nolnoctam's example isn't right and the amounts are equivalent. It seems to me that are if both loans are at 6.8% it wouldn't matter in which order you applied your excess funds. Could you give an example with actual numbers to show that it would make a difference?

 

[Euthymia]

F0nzie, I think you are completely wrong, no offense. At the same interest rate, paying X on loan A, X on loan B, or .5X on both loans would not affect the amount of interest being paid on the principal amount.

 

[Shikima]

I just want to know how to consolodate my loans away from sallae mae.

 

[Chimed]

The key is to continue living like a resident. My moonlighting in residency goes to retirement plans - not increased spending.

Easier said then done. This is tough to do when you're married and have a kid.

 

[notdeadyet]

My mistake #2 is definitely wrong. I made some incorrect assumptions. Also, changing the frequency to biweekly would have no effect on the overall life of the loan unless an extra payment was made.

On a side note compounding interest (paying interest on interest) only happens if you miss a payment. If I am not mistaken.

You might edit your original post by deleting everything after your pay off the higher interest rate comment. Some won't read beyond your original post and it would be a shame to have them go down the wrong path.

 

[TexasPhysician]

Easier said then done. This is tough to do when you're married and have a kid.

With a family of 3, we managed to stick to living on about 50k and putting away 30+k/year. This includes our own house and trips to California. We are cheap.

 

[mgdsh]

Here's another thing worth pointing out. Depending on your interest rates, student loan amounts and mortgage amounts. It is possible that it's better to take out a HELOC (Home equity line of credit) or HEL (Home equity loan) to pay down your student loans.

There are several reasons for this:
- Once we're attendings, we pretty much get screwed out of deducting our student loan interest.
- On the other hand, mortgage interest on loans up to 1 or 1.1 million can be deductible.
- While you're at it, its likely that you can get a better rate on your home loan vs student loans.

 

[F0nzie]

Easier said then done. This is tough to do when you're married and have a kid.

Daycare and child expenses are huge...food, diapers, clothes, toys... The 2 bedroom apt was getting crammed. I guess I could have kept a 2 bedroom by adding more shelves to create space. I've missed a ton of work at the private practice due to my kid getting sick. Plus I have no more PTO left at my other job. It's surprisingly hard to be a parent...

 

[billypilgrim37]

The key is to continue living like a resident buy higher quality whiskey.

Fixed that for you.

 

[Chimed]

With a family of 3, we managed to stick to living on about 50k and putting away 30+k/year. This includes our own house and trips to California. We are cheap.

Good for you. That's extremely hard to do for most of us. My mortgage and student loans alone account for 40K+ a year.

 

[F0nzie]

You might edit your original post by deleting everything after your pay off the higher interest rate comment. Some won't read beyond your original post and it would be a shame to have them go down the wrong path.

Good idea. And done.

 

[F0nzie]

Looking back... I had a 10k loan in residency at 5% that was annoying me because it was separate from the main cluster of loans. I paid it off completely with extra moonlighting money. But I also had several 30k loans at 6.8% that had accrued 5k of interest since the start of medical school. If I could go back in time I would have just kept the minimum payments on the 5% loan and paid off 10k of accrued interest on the 6.8% loans before it added to the principal after the forbearance period ended.

 

[st2205]

We're pretty frugal and don't have any lavish expenses. We plan on being on the more aggressive side of paying down loans (i.e. we own a mortgage and will be staying here after residency for at least a couple years where our expenses will be remain the same but our income will substantially increase). We have a lot of student loan debt from medical school as we're a family of four (and another on the way). That being said, when I moonlight I shan't be saving anything as far as retirement goes. The only debt I may pay off is whatever small credit card debt we have and some very small debt to parents/in-laws when they've helped out with things like boards or when we took over payments on our in-laws van (they paid it off, now we pay them). I plan to use moonlighting money to enhance our quality of life in terms of what it may enable (Disneyworld, etc.) rather than something like an ATV or big screen TV. If it went to things I don't tangibly see as of now (savings, student loans, etc.) then I'd rather just not moonlight and spend more time at home. We live pretty decently off 50k. I wouldn't mind living off 60k.

As an attending, I plan to save and pay down loans, mortgage, etc., but my perspective on this has changed considerably since before starting medical school. I've realized that you only raise a family once and kids are only young for so long. So, I don't have big plans of huge salary jobs if they don't provide good lifestyle and I'm not going to stress if I spend a little more on things like frequent family travel rather than paying down the loans a little more. Don't get me wrong, I plan to do both (as again we don't have extravagant tastes or needs), but I would rather err on the side of using more of my income when we're young and with a growing family rather than having a huge nestegg when I'm demented and in a nursing home.

 

[ferning]

Better to pay off the 10k with the same rate because a paid off installment loan is better than 2 installment loans with a balance on your credit score

 

[Doctor Bagel]

With a family of 3, we managed to stick to living on about 50k and putting away 30+k/year. This includes our own house and trips to California. We are cheap.

Being in Texas, I imagine you also live in a fairly low cost of living area. Where I live, a starter home is $300k, and I imagine you could get a decent starter home for less than $200k in Houston or Dallas (actually I know you can). To me, it's worth it to live here and not there, but it's still something that limits one's ability to save as a resident.

 

[Doctor Bagel]

I came out of medical school knowing nothing about the student loan repayment options (in retrospect I take responsibility for this). Logically then, I went directly into forbearance when I entered residency residency and stayed that way for 3 years until I realized that repaying via IBR plans was much more cost effective than sending the lenders a big chunk of change every now and then. Once in IBR the payments can count towards student loan forgiveness payments if you enroll in this program. I wish I had known coming out of medical school about these options because then I would have been 4 years into my 10 year repayment debt rather than only in the midst of year 1. I would recommend looking into options like these if they work for your situation.

Oh Doctor Bagel, I know exactly how you feel 🙂

Yeah, I think IBR is generally the best for most residents. I started out doing it and then switched to forbearance last year after I started accumulating some credit card debt due to other expenses (namely, several surgeries for my cat). Luckily the credit card debt is gone (including that stupid huge fee for my board exam), and I think I'll probably switch back to IBR for fellowship. For me, one thought that led to switching to forbearance was that I really want to be in private practice within a few years of graduation, so I won't likely be (or at least hopefully be) at a non-profit or government designated place for 10 years.

Either way, my debt feels a little like monopoly money right now -- I'm not in a place to pay it down in any meaningful way, so I try to not let it interfere with my quality of life. Worst case scenario is doing IBR for 25 years, which would likely only happen if I earn way less than expected.

If you guys are curious about this stuff, I'd suggest checking out the financial aid forum.

 

[nancysinatra]

you will make at least decent money and you did in fact borrow the money.

Taxes are high on that decent money though. And I didn't borrow it knowing it would be 9% interest before I graduated.

 

[TexasPhysician]

Being in Texas, I imagine you also live in a fairly low cost of living area. Where I live, a starter home is $300k, and I imagine you could get a decent starter home for less than $200k in Houston or Dallas (actually I know you can). To me, it's worth it to live here and not there, but it's still something that limits one's ability to save as a resident.

True. 200k would have gotten me a pretty sweet pad.

 

[nancysinatra]

Being in Texas, I imagine you also live in a fairly low cost of living area. Where I live, a starter home is $300k, and I imagine you could get a decent starter home for less than $200k in Houston or Dallas (actually I know you can). To me, it's worth it to live here and not there, but it's still something that limits one's ability to save as a resident.

I think you mean to say Amarillo or El Paso or perhaps Lubbock or if you're really lucky, College Station. I highly doubt TexasPhysician was making 50K as a resident in Houston because none of the Houston programs are in good enough financial shape to pay the 50K to residents that TexasPhysician mentioned. Now I'm no realtor, but the two times I've been in Amarillo, I was not tempted to buy a home there.

 

[st2205]

I think you mean to say Amarillo or El Paso or perhaps Lubbock or if you're really lucky, College Station. I highly doubt TexasPhysician was making 50K as a resident in Houston because none of the Houston programs are in good enough financial shape to pay the 50K to residents that TexasPhysician mentioned. Now I'm no realtor, but the two times I've been in Amarillo, I was not tempted to buy a home there.

I'd imagine he's using 50k as a rough estimate, even if he's rounding up a bit for where he's at.

 

[F0nzie]

Taxes are high on that decent money though. And I didn't borrow it knowing it would be 9% interest before I graduated.

9%?? I didn't even know student loans went up that high...

 

[nancysinatra]

I'd imagine he's using 50k as a rough estimate, even if he's rounding up a bit for where he's at.

I still don't think he's in Houston.

Also there are other benefits worth considering, like vacation, maternity leave, the quality of the schools, etc. I don't think I'm stretching here to say that I sort of doubt most Texas programs lead the nation in those respects.

 

[nancysinatra]

9%?? I didn't even know student loans went up that high...

8.73% or something like that. Is there a cap? Wow, thanks for making me feel like I have the worst loans on earth!

 

[TexasPhysician]

I still don't think he's in Houston.

Also there are other benefits worth considering, like vacation, maternity leave, the quality of the schools, etc. I don't think I'm stretching here to say that I sort of doubt most Texas programs lead the nation in those respects.

We lived off roughly 50k with the wife raising our child at home. This is possible in most southern/Midwestern cities but may require moving to the burbs. Moonlighting income made up an additional 30k. 30k+ went to retirement.

There were many times when I debated buying a new F-150 or similar, but I don't need it yet. I may give in this year or next to this craving.

We still took road trips in the state and visited California.

Despite making more money, my family focuses on family time, healthy food, and only purchasing other items at cheap prices. We purchase new clothes at discount/outlet stores and even eBay. We put more effort into finding quality sale clothes/toys than most families, but we do it together and it's fun.

We don't have a desire to spend much more money, and this helped us ditch debt quickly.

 

[Rhayven44]

We're pretty frugal and don't have any lavish expenses. We plan on being on the more aggressive side of paying down loans (i.e. we own a mortgage and will be staying here after residency for at least a couple years where our expenses will be remain the same but our income will substantially increase). We have a lot of student loan debt from medical school as we're a family of four (and another on the way). That being said, when I moonlight I shan't be saving anything as far as retirement goes. The only debt I may pay off is whatever small credit card debt we have and some very small debt to parents/in-laws when they've helped out with things like boards or when we took over payments on our in-laws van (they paid it off, now we pay them). I plan to use moonlighting money to enhance our quality of life in terms of what it may enable (Disneyworld, etc.) rather than something like an ATV or big screen TV. If it went to things I don't tangibly see as of now (savings, student loans, etc.) then I'd rather just not moonlight and spend more time at home. We live pretty decently off 50k. I wouldn't mind living off 60k.

As an attending, I plan to save and pay down loans, mortgage, etc., but my perspective on this has changed considerably since before starting medical school. I've realized that you only raise a family once and kids are only young for so long. So, I don't have big plans of huge salary jobs if they don't provide good lifestyle and I'm not going to stress if I spend a little more on things like frequent family travel rather than paying down the loans a little more. Don't get me wrong, I plan to do both (as again we don't have extravagant tastes or needs), but I would rather err on the side of using more of my income when we're young and with a growing family rather than having a huge nestegg when I'm demented and in a nursing home.

I just want to quote and emphasize this. Saving and feeling great about paying down loans is awesome...but build in quality of life too. You could get hit by a bus tomorrow, and everyone will be super impressed you paid down a bit on your loans (which by the way, has now been wiped clean, due to your demise). Many people take it to the extreme and act like they are going to live lavishly like there is no tomorrow...definitely not something I would advocate. However, I also wouldn't deny yourself a perk or two from making a comfortable salary, in the quest only to pay off loans. To me, that is almost as bad.

And to add to the overall thread, a controversial piece of advice for loans: If you can, hold off on having kids during residency. It's not an option for everyone, but I can tell you, it made a world of difference for me. Dual income + no kids = ability to save money during residency, not increase debt, and still have a blast. We'll have our kids a few years later then some (many of my classmates had them at the beginning of or during residency), but there was the advantage of having things a bit more stable financially. Case in point...I am looking forward to boat shopping in July🙂

 

[F0nzie]

So I am applying for the NHSC loan repayment program this year and I noticed a drop from 60k for 2 year fulltime to 50k 2 year fulltime. And 30k to 25k for part-time.

 

[F0nzie]

I feel like I am getting cheated in intervals. First deferment was changed to forbearance so I subsequently started accruing a ton of interest during residency. Now that I graduate NHSC is paying 10k less. What the heck...I wonder how different things are for fresh med students. Higher tuition? No subsidized loans? Higher interest rates?

 

[vistaril]

So I am applying for the NHSC loan repayment program this year and I noticed a drop from 60k for 2 year fulltime to 50k 2 year fulltime. And 30k to 25k for part-time.

I'll admit to not knowing a lot about hpsa ratings, but why is your area eligible? Is it just because you work in community health? Does that mean basically all such jobs are available, regardless of where?

 

[Madden007]

I just want to quote and emphasize this. Saving and feeling great about paying down loans is awesome...but build in quality of life too. You could get hit by a bus tomorrow, and everyone will be super impressed you paid down a bit on your loans (which by the way, has now been wiped clean, due to your demise). Many people take it to the extreme and act like they are going to live lavishly like there is no tomorrow...definitely not something I would advocate. However, I also wouldn't deny yourself a perk or two from making a comfortable salary, in the quest only to pay off loans. To me, that is almost as bad.

And to add to the overall thread, a controversial piece of advice for loans: If you can, hold off on having kids during residency. It's not an option for everyone, but I can tell you, it made a world of difference for me. Dual income + no kids = ability to save money during residency, not increase debt, and still have a blast. We'll have our kids a few years later then some (many of my classmates had them at the beginning of or during residency), but there was the advantage of having things a bit more stable financially. Case in point...I am looking forward to boat shopping in July🙂

Unfortunately, if one gets killed their private loans are transferred to their estate, aka the spouse 🙁

 

[Doctor Bagel]

I feel like I am getting cheated in intervals. First deferment was changed to forbearance so I subsequently started accruing a ton of interest during residency. Now that I graduate NHSC is paying 10k less. What the heck...I wonder how different things are for fresh med students. Higher tuition? No subsidized loans? Higher interest rates?

One thing that's better is that it looks like the fixed interest rates for federal loans have dropped. When I was in medical school, it was 6.8% for Staffords and 8.5% for GradPlus loans. Now it's 5.4% for Staffords and 6.4% for GradPlus loans. However, according to AAMC, it looks like subsidized Staffords are gone, which adds even more to that interest burden.

Before I started medical school, interest rates were variable, and people were able to consolidate and get super low locked rates (like 2 to 3%). For those of you haven't been paying attention, that's long gone. The loss of deferment was also a bummer, but since the subsidized cap for loans was so low (and since now I guess there are no more subsidized loans), it doesn't make that much of a difference.

 

[SteinUmStein]

Sub Staffords are gone and probably will never return. Many institutions stopped offering their own sub loans through their financial aid departments. Most of our M1s and M2s have entirely unsubsidized loan burdens, which makes a huge difference in your final balance upon graduation.

 

[Rhayven44]

Unfortunately, if one gets killed their private loans are transferred to their estate, aka the spouse 🙁

Private loans, yes. Federal student loans, no. Those go poof, fortunately. Which leads to another consideration for loans...I would pay off any private ones before the federal student ones, even if the interest rate was a little lower, for that very reason.

 

[notdeadyet]

Good advice. In general, a sound strategy is (assuming you are in good health)...

1. Credit cards
2. Highest interest loans first.
3. Interest rates being comparable, private loans before government loans

 

[IamPsychiatrist]

On the general premise of this thread:

Yeah, pay off your loans ASAP. Whether or not to pay off the 5% vs 6.8% loan first - it's not that big of a deal. First it depends on the balance. If we're talking 10k, it's negligible. Guess what 1.8% on 10k is? $180 per year. Yes, that's about $15 a month, or less than people spend on coffee per month. These are the type of financial decisions that don't matter. If it's a 100k loan, it matters more obviously, but it's still small thinking.

We've seen some psychiatrists earning 300k and others earning 95k. Those are big financial decisions - finding a way to bring enough value to the market place that makes a difference in your income. Negotiating a year salary that is 10k more could win you 50k over 5 years. That's a lot of interest on any loan. And that could be working the same amount of hours as the other guy. So focus on the majors.

I've worked a lot with debt and advising on it, I can tell you that this doesn't really matter. Just pay off as much debt as fast as you can. As one poster said, you want to do it living in a way that isn't like a scene from The Grapes of Wrath. Decisions that cost you $200 a year, or even $2,000 a year aren't going to make or break your financial future. Having an intelligent plan to eliminate your debt completely? Yup. That will change your future. Having a smart savings plan and an emergency fund from day 1? Yup. That will do it. Avoiding dumb debt and dumb purchases / credit cards? Yeah, that will help.

Good advice. In general, a sound strategy is (assuming you are in good health)...

1. Credit cards
2. Highest interest loans first.
3. Interest rates being comparable, private loans before government loans

I agree. I wonder why you would pay off a private loan first? As far as I can figure, the government loans are the worst in that: government loans are non-bankruptable (if you owe 1 mil to the government and file bankruptcy, then you still owe 1 mil. This isn't the case with a private loan). Gov't loans supersede all other loans in lien order (this is true on property, a government loan must be paid off before any title can be move, again private loans are different). The government has a much easier time pulling money out of your bank account if you are delinquent on a loan. As far as I know, the government loans would be the best to pay first.

Sub Staffords are gone and probably will never return. Many institutions stopped offering their own sub loans through their financial aid departments. Most of our M1s and M2s have entirely unsubsidized loan burdens, which makes a huge difference in your final balance upon graduation.

Yeah, medical students have no idea. I'm pretty savvy financially yet I even missed lots of details on our borrowing.

Med students most often are so focused at getting into medical school that they ignore the rest. They may see how much they borrow, but they probably won't know how much the loans will capitalize in medical school (unsub gone), how much they will capitalize in residency, the climbing interest rates on grad plus over the basic loans, and on and on. It's the government's best way of pinning people down for hundreds of thousands in debt/interest.

 

[st2205]

Here's another situation I've been thinking about after I graduate:

The interest rate on my mortgage is obviously significantly less than my student loans. However, as a married guy with (at least) 3 kids, it poses somewhat of a challenge in how I plan to put money toward each. From a purely financial perspective, you pay off the student loans and make minimum payments on the mortgage. In the unfortunate circumstance that something would happen to me, it would be tough to have all those student loans I paid down just go poof and leave my wife and kids with more on the mortgage, rather than leaving them with a large amount of equity and obviously no student loan debt.

 

[TexasPhysician]

Here's another situation I've been thinking about after I graduate:

The interest rate on my mortgage is obviously significantly less than my student loans. However, as a married guy with (at least) 3 kids, it poses somewhat of a challenge in how I plan to put money toward each. From a purely financial perspective, you pay off the student loans and make minimum payments on the mortgage. In the unfortunate circumstance that something would happen to me, it would be tough to have all those student loans I paid down just go poof and leave my wife and kids with more on the mortgage, rather than leaving them with a large amount of equity and obviously no student loan debt.

A large term disability plan and private own-occupation disability insurance would cure these worries and allow smart financial decisions.

 

[Shikima]

So, here's the rub..... what is the Government loans are the same rate as the Private loans?

 

[st2205]

So, here's the rub..... what is the Government loans are the same rate as the Private loans?

Do you have a spouse?

 

[Shikima]

Do you have a spouse?

I do. Por que?

 

[st2205]

I do. Por que?

Because of you die the government loans disappear. Can't recall if the same holds true or not for other student loans (i.e. someone else had to pay them).