The Key for Student Doctors to be Debt Free
Created May 31, 2016 by Timothy Ulbrich, PharmD
With loan debt for students in graduate health professions rising exponentially, the conversation around choosing the right student loan repayment option and/or opting for the public service loan forgiveness (PSLF) program is becoming much more popular. Instead of focusing on what repayment plan gives a graduate the lowest monthly payment or whether or not he/she should pursue loan forgiveness, why not focus on minimizing expenses and working hard to pay off the debt as fast as soon as possible? This will allow for moving on to other financial goals with more intensity and focus such as buying a home, saving for retirement, and giving to name a few…all without any student loan debt getting in the way.
While the loan forgiveness program can be a very good decision if only looking at the numbers, it may not be the best option for three main reasons. First, there is an obligation (in my opinion) to pay back borrowed money when terms were agreed upon at the time of borrowing. Second, what if the borrower wants to change jobs and the desired employer does not qualify in the public loan forgiveness program? Career choices should not have to be dictated by student loans. Third, while it is painful, there is much learned through grinding it out and paying off loans that will benefit the borrower well beyond the savings from the balance of the loans that are forgiven. Maybe the borrower will have $50,000 or more forgiven but the lessons learned during pay off that debt will return more than $50,000 down the road. When my wife and I made a commitment to pay off $200,000 in non-mortgage debt, it was hard. Really hard. It required sacrifice, budgeting, difficult conversations, and compromise. I don’t think we would have learned these lessons if we had our loans forgiven. Also, something happened that when we got in the mode of grinding down our debt payments: we started to appreciate what we had a whole lot more. It is hard to put a dollar amount to that feeling.
How Fast Can You Do It?
If a new graduate is getting ready to pay off debt at an accelerated pace and therefore sacrifice his/her lifestyle to some degree, it is important for that individual to visualize what it will feel like not to owe a single penny of student loan debt. What would you do if you didn’t have to send a large portion of your income to loan repayment every month? Visualizing these goals will help tremendously when grinding it out each month and sacrificing some fun today for a future reward.
Let’s look at an example of a student pharmacist that graduated in 2015 with $150,000 in loans (most of which are at 6% interest or higher). According to the 2015 Graduating Student Survey conducted by the American Association of Colleges of Pharmacy (AACP), $150,000 was the median student loan debt in 2015. Instead of debating whether or not a forgiveness program will work or which repayment option is best (e.g., 10-year standard versus extended), he/she could focus on paying these loans off in 3 years. Let’s assume this individual is single and makes the median pharmacist salary of $121,500 (Bureau of Labor Statistics, 2015) and approximately 35% of his/her salary goes to state and income taxes. The result would be a take home pay of approximately $78,975 ($6,581 per month). If he/she could live off of $30,000 per year (which is reasonable with a scaled back lifestyle!), there would be $48,975 available to throw at the debts. With $150,000 in loans, this could be paid off in just over 3 years depending on the interest rates.
What would happen at the end of these 3 years where there would be no student loans and a lifestyle that is manageable because expenses haven’t risen (since he/she had been focusing on paying off the loans)? A clean slate to focus on home buying, retirement, giving, and other financial goals that are a whole lot more fun that paying off student loan debt.
For those that are debating whether or not it is possible to live off of $30,000 per year, it can be done as long as there is a strong desire to get out of high-interest rate debt. After all, most students are living off little to no income now so some positive income would be a bonus and certainly livable. For some more encouragement, check this out. In 2014, the US Census Bureau reported the median household income in the US was $53,657. If the median family in our country can live off of $53,657, many new graduates could live with $30,000 of income (after taxes) for a few years.
If any extra motivation is needed, run a student loan calculator to see how much will be saved by paying off a loan in 3 years versus 10 years. For example, if someone has $150,000 in debt at 6.8% interest and decides to pay this off over 3 years, he/she will pay out a total of $166,243 ($150,000 original balance + $16,243 in interest). In comparison, if he/she were to decide to pay this off over 10 years, he/se would pay out a total of $207,145 ($150,000 original balance + $57,145 in interest). That is over $40,000 in savings!
The Key to Success
Here is the key. One should figure out how fast he/she wants to pay off the student loans and then make that a part of the monthly budget. Build out other expenses around this amount rather than waiting to see if anything is left over at the end of the month to pay extra on the debt. Budgeting is not a sexy topic to talk about, but neither is being in six-figure debt. For my wife and I, budgeting was hardest yet most impactful part of our journey to pay off $200,000 in debt. The budget we used to do this was pretty intense but allowed us to make significant progress in a short period of time to keep us motivated along the way.
The Case for Fast Debt Repayment
There are two main reasons why paying off debt as soon as possible coming out of school is advantageous compared to making payments over 10+ years. First, this will result in gaining some momentum with early financial wins to build confidence in realizing that achieving long-term financial goals is possible. Second, it often forces the borrower to get serious about making a budget to avoid adjusting a lifestyle up too much when he/she starts earning income. What do minimum payments do for a borrower? For someone that isn’t disciplined, it may give him or her the impression they have more room in their monthly budget than they actually do if they were paying these loans off faster. The result? Often living up to a higher income by making a significant home purchase, buying nice cars, clothes, etc. because there is more cash flow ‘available’ on a month to month basis. There is nothing wrong with enjoying some income but it is important to recognize that the lifestyle maintained in the first 5-7 years out of graduation will set the stage for the lifestyle maintained in the long run. Therefore, if there is a commitment to pay off loans faster, the borrower will be more likely to set a budget and keep expenses down over the long run.
So what about low-interest non-mortgage debt (e.g., student loans at 3%, car loan at 2%, etc.) For these, there can be an argument made to pay minimum amounts on those loans to also focus on saving for retirement where there may be a higher return on the investment. However, if a borrower is facing high interest rate loans (6-7%), that argument falls flat and it would be in his/her best interest to get out of debt before focusing heavily on achieving other financial goals (e.g., retirement savings, buying your dream house, etc.)
Why all the fuss about getting rid of debt? If not managed properly, it can hinder one’s ability to save for the future and give the feeling of not making much momentum towards achieving other financial goals. For example, according to the 2015 Consumer Financial Literacy Survey, 58% of those paying off their own student loans or children’s loans noted being unable to establish emergency or retirement savings or purchase a car due to the financial commitment those loans required.
For the regular readers of my blog (www.yourfinancialpharmacist.com), I suggest ‘financial homework’ with each post. These are 1-2 actions items that the reader can start to work on. The ‘financial homework’ for this post is to reflect upon your own projected student loan debt situation and do the math as to how much you may save if you opt for a forgiveness-based program (whether that be PSLF or another income-based repayment plan outside of the PSLF program) compared to a paying the loans off in full in a shorter period of time (say 3-5 years). Are those savings worth it? For some, the answer may be yes. For others, maybe not.
Timothy Ulbrich, Pharm.D. is an associate professor of pharmacy practice and associate dean at Northeast Ohio Medical University College of Pharmacy. He lives in Rootstown, OH with his wife Jess and three boys Samuel, Everett and Levi. After paying off over $200,000 in non-mortgage debt, he is motivated to empower health professions students to take control of their financial future. He is the author of the blog Your Financial Pharmacist and The Path to Debt Free: An E-Guide for Pharmacists. You can follow him on Twitter (@FinancialRPh) and Facebook at www.facebook.com/yourfinancialpharmacist