[Editor's Note: This is a guest post by Andrew Rombach. This post was placed with his permission (and suggested by him).]
All too often, student loan debt makes significant headlines. The typical college graduate can expect to leave an undergraduate with tens of thousands in student loan debt, and graduate students usually take on more debt afterwards. Now, keep in mind that these numbers pertain to the average student; medical school graduates can expect even more debt to their names.
According to the Association of American Medical Colleges, med school grads take home a median $200,000 in student loan debt. A higher cost for a profession that earns more is expected, but many do not realize that future-physicians must start out in residency. The average income of a medical resident (nearly $60,000) may not be high enough to deal with their high student debt.
With disproportionately high student debt to income, there is plenty to worry about as a medical resident. However, there are a number of solutions to try. Whether it’s reducing monthly payments, lowering interest rates, or simply repaying loans more quickly, there are several strategies to better manage student loans which can be crucial to a resident moving forward in his or her career.
Try Securing an Autopay Discount
For starters, one of the first things any student debt-ridden medical resident should look into is autopay. Autopay is a great hands-off way to make payments on time, and it’s a fairly simple concept as well. After connecting a bank account to your loan account, autopay will directly withdraw from this account to make scheduled payments.
Depending on the lender or student loan servicer, you may be able to get a slightly lower interest rate by simply signing up for automatic payments. The discount is typically 0.25% or 0.50%. While it seems small, this can make a significant difference in cost on a high-balance loan for a medical resident.
Autopay can be convenient and also make your loans a little cheaper, but it’s very important to keep track of your bank account balance. If a payment is attempted without enough funds, then you may miss a payment or overdraw an account – either way you are penalized.
Most borrowers pay student loans once every month, but paying every two weeks can sneakily speed up repayment. This is a trick that homeowners use to pay off mortgages. In short, you make a half-payment every two weeks which amounts to 26 half-payments throughout the year. As you can see, you will make 13 full payments annually – one extra payment. This can be a serviceable way to pay off your loans sooner. It doesn’t require a huge investment, making it manageable for a resident with high debt and relatively low salary.
There are caveats to consider. Remembering to make a payment every two weeks is a labor intensive way to pay off debt. The frequency may cause problems for the forgetful, but it could also strain your budget if you aren’t careful with your paychecks.
Student Loan Refinancing
Medical residents may want to consider student loan refinancing, especially if they have high interest rates. Briefly, a refinance student loan is a product from private banks and lenders. It is offered to borrowers who use it to pay off multiple old loans; afterwards, they pay off the refinanced loan under new terms.
The main benefit here is similar to the autopay discount. A successful refinance can leave a creditworthy applicant with a lower interest rate on student debt. This may amount to significant savings over repayment for medical residents with high balances – depending on the difference with their old rate. Further, it offers you the chance extend your repayment term, which would reduce monthly payments.
Refinancing has its own obstacles. First, the application is restrictive, so it isn’t just available to everyone. Lenders require applicants to have great credit and established income to qualify. Additionally, medical residents may save money by refinancing now, but they may save more money if they wait to refinance. A key eligibility requirement is income; those with greater income are more likely to get lower rate offers. A medical resident may want to advance in their field and make more money before applying.
Federal Student Loan Consolidation
Federal student loan consolidation is somewhat of a counterpart to student loan refinancing. They are similar, but have key differences. It can alternative for medical residents who need lower monthly payments and cannot take advantage of student loan refinancing.
Like a refinance loan, a federal consolidation loan is taken out to pay off old student loans (only federal loans are eligible). The borrower makes payments on this new loan under a new interest rate and repayment term. By extending the repayment term, you can reduce monthly payments and open up space in your budget.
Keep in mind that federal student loan consolidation does not offer a reduced interest rate. The new rate is a weighted average of all previous interest rates, which does not equate to a reduction. Only federal student loans are eligible in the program, and remember that extending the repayment term will increase the overall cost of the loan.
Income-Driven Repayment Plans
If you’re struggling to repay your federal student loans, consider income-driven repayment (IDR) plans. These are federal program that allow you to pay 10% to 15% of your discretionary income towards your student loans each month. After 20 to 25 years of payments, your remaining student loan balance will be forgiven.
The main benefit is a lower monthly payment, which can be helpful early on in your career. Technically, forgiveness is offered with this plan, but remember that the term is 20 to 25 years. Many borrowers could be repaid before this term is up, especially if their income increases drastically.
Of course, there are some drawbacks to consider. An IDR plan could cost you significantly more over the life of the loan. If capped payments are too low, then you could get stuck with a runaway balance that outpaces payments. Making lower payments through a 20-25 year plan will cost significantly more compared to 10-year standard repayment.
The Positive Impact of Successful Repayment
Effectively managing your student debt and sticking to a plan will have an enormous financial and psychological impact on your life.
For starters, staying current on your debt should improve your credit profile by sending positive signals to the credit bureaus tracking your repayment. Building credit early in your career is important because it is a key factor in applying for other forms of credit such as mortgages or loans. Also, you will avoid any expensive fees when making payments on time.
Additionally, successful repayment can be a crucial influence psychologically. Having student debt has been associated with high stress which can impact all aspects of life including your work productivity. While missing payments can contribute to that stress, adhering to a solid repayment plan can motivate you with positive progress.
Ultimately, taking smart and pro-active steps now to repay your debt will help pave the way for a future where you won’t have to worry about student loan payments ever again!
Andrew is a Content Associate for LendEDU – a website that helps college graduates, student loan borrowers, consumers, small business owners, and more with their finances. When he’s not working, you can find Andrew hiking or hanging with his cat Colby.
Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation.
Please consult with your accountant or tax advisor for specific guidance.