How to manage student loans
Most Physicians/professionals have enormous amounts of student loan debt just from medical school. The average amount of medical school debt is around $200,000. This does not include undergraduate loans if they were taken. Without steady income from working or other avenues of earning revenue the student loans will increase with interest over the years while you’re studying.
Most people obtain government based loans. These rates range from 3% to 5% interest. Previously some of these loans were as high as 7% to 9%. They’re actually not very many differences between private graduate student loans vs. a government loan. A government loan is usually easier to place in forbearance or to not pay it if you have financial struggle. Generally it is not needed to be paid while you are a student where some private loan companies will require this. After you graduate from medical school and begin residency you may start paying on these loans as you now will have some income. This is where it will be important to decide what to do with your cash. I am generally flabbergasted when I see articles about how important it is to pay off student debt and perhaps this is because these people do not understand the mathematics or they are in the pockets of the banks. Depending on the circumstances there are really only three reasons to pay down debt.
- You are trying to improve your debt to income ratio so that you can purchase a property or obtain some other type of loan.
- The interest rate you have with the loan is higher than you would otherwise earn from some type of investment.
- You have high interest credit card debt that needs to be paid off.
If your student loan has a relatively high interest rate such as 7 to 9% I would highly recommend refinancing at that point to obtain a lower rate this will definitely need to be thought about if you have a troubling credit score. If you have a great credit score then you should reduce the rate to around 3% to 4%. Sofi is the company I personally used. You can also consolidate all of your student loans into one loan amount potentially and not have the hassle of paying multiple companies.
If you have high interest rate credit card debt you need to pay this off immediately this can be as high as 22%. There is almost no type of investment that will recuperate that type of interest rate.
If you have decided to primarily focus on paying down debt to improve your ratio then you can stop reading here.
If you have chosen to reduce your rates and use your cash in another way, continue reading.
Once you have reduced your interest rates as low as possible you should only pay the minimum amount required each month. Why you may ask? To play the money game that everyone else is playing by increasing your leverage and making your money work for you. Even if you are risk-averse and not interested in investing in the stock markets or other types of investments as long as the interest rate that you were earning is higher than the interest rate on the loan you should come out ahead in the end.
For example:
You consolidate all your loans that are at a 7% interest rate into a 4% interest rate private loan. The total you have to pay every month is about $1,000. You could choose to pay $2,000 every month there for paying down your loan faster or you could choose to invest the extra $1,000 into something that would earn you a higher yield.
Some Bond markets are paying approximately 7% which are relatively low-risk. Calculating the math; you would have an extra $70 in your pocket on that $1,000 extra that you used to make money versus paying off your loan. (1000×0.07=70). This is just a per-year example. This will accumulate over time and also be much higher if you had more to invest. generally you should be able to earn about 10% yield in the stock market and also could use other investment opportunities such as Fundrise which has a yield of about 9%.
Let’s put this in a cash perspective:
If you say you have a $100,000 loan and the interest rate is 4% per year, the minimum is $1,000 a month. You are paying $4,000 in interest alone per year. If you pay an extra $1000 each month you save yourself $480 per year. You will be able to write off payable interest in your taxes.
If you invested the extra $1,000 you had each month that would be $12,000 for the year. Had you invested it and yielded a modest 7% you would have made $840 for that year. That is $360 more than you would have had had you paid off your loan more aggressively. There is one caveat here and that is that you will pay taxes on this, but even if you do you will still come out ahead, paying 30% of tax on $840 is only $252. 30% tax is considerably excessive by the way.
My personal example is looking for mutual funds that yield approximately 20% per year. If I have additional funds I may invest in individual stocks which can be fairly volatile and risky. Some of my investments are actually earning almost 50% or more. Some funds that I have include: SPAXX, BGSAX, FBSOX, FSMEX, FSRPX. Other than these yielding approximately 20% yield they have to have been through a massive recession and still make money for me to invest in them. Of course there are other types of ways to invest in something and earn income but that is a topic for a different article.
Never invest your emergency fund and never invest more than what you are willing to lose. This is gambling no matter what anyone tells you.
If you enjoyed this content please feel free to check out my other articles.
I am not a professional investor, just highly interested in personal independence from employment and you should always be cautious with anyone that says anything is a guarantee in terms of financial Improvement or gain. Always be cautious with investing.