Let’s Talk Strategy: Tackling Student Loans
February 3, 2020
by Jerek Petrous, DDS, MS
If you clicked on this post, I can almost guarantee that you have student loan debt. It’s a topic that hits home. It can be scary and possibly even overwhelming to think about, especially if you’re reading this as a current medical or dental student. What you need, though, is a well thought out plan. A treatment plan for tackling your debt. It’s part of being a good steward. So, what do you need to know?
If you’re reading this, you already know this is a big and extremely relevant problem for the vast majority of dental and medical graduates under the age of 45. It’s not uncommon these days to graduate dental school with $300,000+ in debt. Heck, I have friends who graduated with close to $500,000 in debt (and when I say friends, I may or may not be referring to myself). This isn’t news.
Student loan debt in America: $1.5 trillion
Median debt for the medical school graduate: $175,000
Median debt for the dental school graduate: $287,331
Student Loan 101
Student loans are different from any other type of loan:
- They are offered at rates significantly higher than mortgage rates, especially for graduate/professional school (typically in the 5 to 10 percent range).
- They are generally only discharged in the event of death or total disability, NOT bankruptcy.
Student loans are divided into two main types: federal loans (also called direct loans) and private loans. Federal loans generally have lower rates, and they also have special income-based payment plans and forgiveness plans. So, the general rule is to max out what you can borrow in the federal loan programs before taking on any private loans.
Strategy for Students and Residents
- Live frugally to minimize loans. I can’t stress this enough! Live at home. Get a roommate. Ride a bike. Bring your lunch. Minimize vacations. Buy books and equipment used.
- Don’t take out loans until you have to. Most student loans begin accruing interest immediately.
Strategy for After Graduation
As a general rule, doctors are going to pay back their private student loans, so minimizing the interest that accrues is key. The best way to do this is to refinance those student loans as soon as you get out and then again every one to two years after. If you haven’t refinanced in the last two years, do so right now (especially while interest rates are at historic lows). There are so many companies that can help with your refinance. Here are a few that I personally checked out:
When deciding on how long your repayment term will be, I suggest choosing the shortest term that you can realistically afford (five to 10 years is ideal), since this will save you thousands (perhaps even hundreds of thousands) in interest expenses.
Pay It Off Early or Invest the Difference?
Some people with low-interest rate student loans wonder if they should really pay their loans off quickly versus paying the minimum and investing the difference. While the idea of borrowing at a low rate and earning potentially higher rates from the stock market sound very appealing, this concept often ignores two main factors.
First ignored factor: Most people don’t invest the difference, they spend it.
Second ignored factor: Paying off your student loans has a guaranteed rate of return. Investing could potentially improve your net worth more than loan payoff assuming perfect discipline when “investing the difference,” but it also could potentially lose you money. Personally, the only way I would invest the difference over paying down student loans would be if I wasn’t maxing out my retirement accounts (HSA, 401k, Roth).
You can slay the student loan monster! Build your battle plan. Sit down and get started today. Be a good steward. We are rooting for you.
The above post is not financial, legal or accounting advice. For professional advice, talk to a professional. For more detailed info on this topic, please refer to The White Coat Investor.