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How Long Does It Take To Pay Back Med School Debt?


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As med school is wrapping up, I am reviewing my accounts and I am starting to feel the burden of a $100K + debt. Considering resident salaries and other expenses, I am finding it really hard to project a less than 5 year pay back time. Does anyone have any advice on how to approach this? Should I have expected this?

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Do you have dependents? 100K is nothing in relative terms. You can pay that back in 1-2 years as a practicing doc if you wanted to. It's all about priorities, and proper financial management.

Even as a resident your still making a decent amount, but you don't need to pay off principal in residency if you don't want to.  

If you're living off of 50K/yr as a resident(which is still a decent amount of money), there's no reason you can't just do that for an extra year or two while working and put the other 100+K of your after-tax income towards paying off your loans.

Again, if you don't have dependents. If you do, then its a different situation.

 

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I recommend meeting with the MD Financial advisors - some people don't like them, but I had a good experience, even though they did sound a bit optimistic.  They have a really good budgeting spreadsheet and go through everything.

 

They told me 3 years after finishing residency, assuming I tried to pay down a little during residency (interest, at least) and paid what they consider average for a new practice physician (I forget what that was).

 

I'm thinking I might not pay down my LoC too much during residency, though.

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I posted on this before :) Just keep in mind when you hear perhaps longer payback times that there are tax implications for paying it too quickly (you are taking money out of your company probably growing with investments at a reasonable rate, to pay a basically 50% tax on it to then pay off a loan that is at 2.85% interest. The alternative is to not pay it off so quickly, avoid to a degree the tax, and let your investments grow at an average rate much higher than 2.85%.)

 

So just because people take longer doesn't mean they are being dumb with their money. There is an entire new world of tax planning, and incorporation to deal with when we become staff etc.

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I recommend meeting with the MD Financial advisors - some people don't like them, but I had a good experience, even though they did sound a bit optimistic.  They have a really good budgeting spreadsheet and go through everything.

 

They told me 3 years after finishing residency, assuming I tried to pay down a little during residency (interest, at least) and paid what they consider average for a new practice physician (I forget what that was).

 

I'm thinking I might not pay down my LoC too much during residency, though.

 

Most people don't pay it off much if at all during residency. Rule of thumb - keep up with the interest and you are doing ok!

 

It is just to balance out the incomes a bit - as much as I like saving and investing really there isn't much point killing yourself saving like crazy in residency only to then at some point shortly thereafter have more money than you know what to do with. To be honest that is really a weakness of mine. I don't really have any strong material desires  (I guess I am a bit of a minimalist - I don't like "stuff", my hobbies are most related to computers and thus actually quite cheap) so while I invest etc it is in part because I don't really have any other specific thing in mind to do with money :) I can take it too far the wrong way and "over save". From a financial planning point of view it is better to start with the end goal in mind and work backwards from there.

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Most people don't pay it off much if at all during residency. Rule of thumb - keep up with the interest and you are doing ok!

 

It is just to balance out the incomes a bit - as much as I like saving and investing really there isn't much point killing yourself saving like crazy in residency only to then at some point shortly thereafter have more money than you know what to do with. To be honest that is really a weakness of mine. I don't really have any strong material desires  (I guess I am a bit of a minimalist - I don't like "stuff", my hobbies are most related to computers and thus actually quite cheap) so while I invest etc it is in part because I don't really have any other specific thing in mind to do with money :) I can take it too far the wrong way and "over save". From a financial planning point of view it is better to start with the end goal in mind and work backwards from there.

Oh boy, I hope I have that problem haha! I'm definitely also a minimalist. 

 

But yeah, I have talked to my tax friends and either way with quick payments or slower payments to take advantages with investements - isn't going to be a deal breaker to the poor house. Slower payments with excess cash flow to investments, just will help you make more money. But if that isn't much of an issue anyways, then you can pay it off quicker for that tax hit, but peace of mind too. 

 

It all depends on personal circumstances. And heck, my financial calculations are based on a worse case scenario that I end up having to go to the US and be 350-400K in debt.  100K as a CMG is a lovely problem to have :P

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I posted on this before :) Just keep in mind when you hear perhaps longer payback times that there are tax implications for paying it too quickly (you are taking money out of your company probably growing with investments at a reasonable rate, to pay a basically 50% tax on it to then pay off a loan that is at 2.85% interest. The alternative is to not pay it off so quickly, avoid to a degree the tax, and let your investments grow at an average rate much higher than 2.85%.)

 

So just because people take longer doesn't mean they are being dumb with their money. There is an entire new world of tax planning, and incorporation to deal with when we become staff etc.

Can you please elaborate on why you would be paying more tax if you were to pay it off quicker? Obviously your investment capital is lower if you do so, hence, you reduce your potential future returns, but how would taxes be affected? 

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Oh boy, I hope I have that problem haha! I'm definitely also a minimalist. 

 

But yeah, I have talked to my tax friends and either way with quick payments or slower payments to take advantages with investements - isn't going to be a deal breaker to the poor house. Slower payments with excess cash flow to investments, just will help you make more money. But if that isn't much of an issue anyways, then you can pay it off quicker for that tax hit, but peace of mind too. 

 

It all depends on personal circumstances. And heck, my financial calculations are based on a worse case scenario that I end up having to go to the US and be 350-400K in debt.  100K as a CMG is a lovely problem to have :P

 

Yeah it is not a huge difference. A lot of stuff like this is really just small adjustments that net say maybe 50K extra over ten years (if my math is right - over more over time I suppose with a pretty normal return). I mean it won't make or break you - but I guess my point is you have to consider this stuff :) You would have to draw an extra approx 150K a year in salary for pay it off in 2 years.

 

As for the piece of mind sure - debit can be an annoyance, ha! Still when your earnings each year are enough that if you wanted to pay the entire thing off at any point there isn't much of a piece of mind aspect.

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Can you please elaborate on why you would be paying more tax if you were to pay it off quicker? Obviously your investment capital is lower if you do so, hence, you reduce your potential future returns, but how would taxes be affected? 

 

marginal rates - to take out enough money faster you will have to up your income if you are taking salary. The marginal tax rate increases as you take more out. Thus you pay ever increasing amounts to of tax per dollar as you increase your income.

 

Doesn't mean much when you earning 50K or less as the rates are pretty low overall. Means something when it is at the approx 48% high earns deal with. 

 

There are ways around it - dividends are different for instance. Still there is a concept of both low of capital to invest and increased marginal tax rate as you take more and more money to pay for things.

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marginal rates - to take out enough money faster you will have to up your income if you are taking salary. The marginal tax rate increases as you take more out. Thus you pay ever increasing amounts to of tax per dollar as you increase your income

 

Doesn't mean much when you earning 50K or less as the rates are pretty low overall. Means something when it is at the approx 48% high earns deal with. 

 

There are ways around it - dividends are different for instance. Still there is a concept of both low of capital to invest and increased marginal tax rate as you take more and more money to pay for things.

Sorry I'm relatively new to investing, so perhaps this is obvious. But, isn't your income tax the same regardless of whether you invest or not? If you're earning 150 per year, you will invest from the taxed salary (e.g. 80k) that goes into your account. Am I missing something? 

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Sorry I'm relatively new to investing, so perhaps this is obvious. But, isn't your income tax the same regardless of whether you invest or not? If you're earning 150 per year, you will invest from the taxed salary (e.g. 80k) that goes into your account. Am I missing something? 

 

most doctors CHOSE their salary as the money is in their corporation. The money left in the corporation is NOT taxed at the personal income tax rate. It is taxed at the corporate interest rate of 18%. Most doctors are business men/women - they have all the extra layer of complicity that having a business has (writing things off, corporate and then personal tax filings, employees, shareholders.....)

 

Each year most doctors leave considerable amounts of money within their corporation - basically their way of saving for retirement, and for exactly this - deferring tax.

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As med school is wrapping up, I am reviewing my accounts and I am starting to feel the burden of a $100K + debt. Considering resident salaries and other expenses, I am finding it really hard to project a less than 5 year pay back time. Does anyone have any advice on how to approach this? Should I have expected this?

 

Yes. Going through my last month of medical school, the financial advisors from different banks trying to drum up future business basically broke it down that you won't get very far on paying down debt during residency.

 

I budgeted poorly in medical school knowing I had a credit line to back me up. Now, my wife and I are serious about reducing the amount of debt we are carrying by doing serious budgeting.

 

As a first year in Ontario, we are making ~$40000 net, without call stipends and tax refunds. An average person will spend $12000/yr on rent or more, $1000/yr for a cell, $500/yr in internet, ON resident pay $450/yr for CMPA, +$1000/yr for parking, +$1500/yr for car insurance, $5000/yr on groceries at a rate of $100/wk. These alone take half your net in first year. That leaves you with $20000 to dole out to other utilities, gas, vehicle payments (for some), pleasure activities, and mandatory interest as below.

 

Paying down debt is costly by interest too. For $200k at the current prime of 2.85%, interest per year without any principle is $5700. At $150k, $4275, and at $100k, $2850. If you are paying down government student loans, interest is Prime + 3.5%, which for ease, say 6% this year. So if you had $40k in gov't loans, >$2000/yr will go to interest, plus the principle they make you pay on top.

 

In my scenario, we gross ~$110k, carry a ~$375 biweekly mortgage, pay a bunch of utilities and property taxes per month, make monthly car payments, and pay down my credit line (which I consolidated my student loan onto). We live fairly modest, went on one major vacation together paid through our tax refunds. I anticipate we will pay down $25000 off my credit line this year.

 

Unlike Moreland, I wouldn't suggest investing your own, or borrowed money unless you have a good basic sense of what investing is, and if you can ensure you will get a good return and have time to monitor them. Worst thing you can do is lose more money and have to pay interest on top of that as well. Basic investing like GIC's has gains less than the interest it would cost to borrow. I've dabbled in stocks and options before, and know it takes some know-how if you think you can do it on your own. I would suggest setting aside a small amount of money every month as savings as a good practice for the future, but also in case you need cash in a pinch.

 

Paying down debt quicker will give you the advantage of having less debt/credit to get you a high mortgage when you are ready to buy a home, or get a good business loan. The credit line can convert to a business loan at the end of residency, and having more flexibility on there would make life easier.

 

Edit: For the amount of money I will pay in interest year over from paying down debt, would be close to equivalent if for example I set aside $10k and made only 7%.

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An average person will spend $12000/yr on rent or more, $1000/yr for a cell, $500/yr in internet, ON resident pay $450/yr for CMPA, +$1000/yr for parking, +$1500/yr for car insurance, $5000/yr on groceries at a rate of $100/wk. 

A yearly cell phone bill equal to a month's rent? My world must be different from other people's...

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marginal rates - to take out enough money faster you will have to up your income if you are taking salary. The marginal tax rate increases as you take more out. Thus you pay ever increasing amounts to of tax per dollar as you increase your income.

 

Doesn't mean much when you earning 50K or less as the rates are pretty low overall. Means something when it is at the approx 48% high earns deal with. 

 

There are ways around it - dividends are different for instance. Still there is a concept of both low of capital to invest and increased marginal tax rate as you take more and more money to pay for things.

 

Like keith mentioned a couple of posts above, you can convert the LOC to the business side once residency is complete, thus you don't have to increase your salary just to pay the LOC off quicker using personal funds.

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Yes. Going through my last month of medical school, the financial advisors from different banks trying to drum up future business basically broke it down that you won't get very far on paying down debt during residency.

 

I budgeted poorly in medical school knowing I had a credit line to back me up. Now, my wife and I are serious about reducing the amount of debt we are carrying by doing serious budgeting.

 

As a first year in Ontario, we are making ~$40000 net, without call stipends and tax refunds. An average person will spend $12000/yr on rent or more, $1000/yr for a cell, $500/yr in internet, ON resident pay $450/yr for CMPA, +$1000/yr for parking, +$1500/yr for car insurance, $5000/yr on groceries at a rate of $100/wk. These alone take half your net in first year. That leaves you with $20000 to dole out to other utilities, gas, vehicle payments (for some), pleasure activities, and mandatory interest as below.

 

Paying down debt is costly by interest too. For $200k at the current prime of 2.85%, interest per year without any principle is $5700. At $150k, $4275, and at $100k, $2850. If you are paying down government student loans, interest is Prime + 3.5%, which for ease, say 6% this year. So if you had $40k in gov't loans, >$2000/yr will go to interest, plus the principle they make you pay on top.

 

In my scenario, we gross ~$110k, carry a ~$375 biweekly mortgage, pay a bunch of utilities and property taxes per month, make monthly car payments, and pay down my credit line (which I consolidated my student loan onto). We live fairly modest, went on one major vacation together paid through our tax refunds. I anticipate we will pay down $25000 off my credit line this year.

 

Unlike Moreland, I wouldn't suggest investing your own, or borrowed money unless you have a good basic sense of what investing is, and if you can ensure you will get a good return and have time to monitor them. Worst thing you can do is lose more money and have to pay interest on top of that as well. Basic investing like GIC's has gains less than the interest it would cost to borrow. I've dabbled in stocks and options before, and know it takes some know-how if you think you can do it on your own. I would suggest setting aside a small amount of money every month as savings as a good practice for the future, but also in case you need cash in a pinch.

 

Paying down debt quicker will give you the advantage of having less debt/credit to get you a high mortgage when you are ready to buy a home, or get a good business loan. The credit line can convert to a business loan at the end of residency, and having more flexibility on there would make life easier.

 

Edit: For the amount of money I will pay in interest year over from paying down debt, would be close to equivalent if for example I set aside $10k and made only 7%.

 

looks like an accurate run down! (I would add that annoying 2500 cost for the MCCQE part 2 in there somewhere). To be clear I never suggested anyone actually invest with the LOC funds specifically - only that you could use it to buy a house with various risks/benefits. Certainly never said put the LOC money in the stock market is a wise move with no flexibility and short term around time!

 

I actually am investing in a rental property yes, but that was a very long thought out process and a relatively unique opportunity. Otherwise I planned to do what I am doing - renting in Ottawa in a rather simple low cost apartment :) I do have other investments as well but I am not borrowing specifically to fund them ( you could argue I could sell them to pay off the LOC though). I have a rather strict budget that I follow.

 

The biggest thing I think people need to understand in residency is the cash flow aspect - yes you will earn good money but that doesn't help you now if you get close to the limit on the LOC - in terms of take home income you don't earn that much with all the various expenses. I have friends in residency that are under financial stress because of this. You have to be protective of your cash flow.

 

Not sure how I evolved into seemly talking endlessly about money on here - ha. People are going to start thinking I am some obsessed money grubbing jerk at this rate :) Actually it isn't really a major focus for me at all.

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Like keith mentioned a couple of posts above, you can convert the LOC to the business side once residency is complete, thus you don't have to increase your salary just to pay the LOC off quicker using personal funds.

 

you can transform it to a business LOC sure, but the money already owed is PERSONAL and not a business expense. You cannot pay off the interest as a business expense for instance moving forward. That still as to be ultimately paid with money after your personal income tax is paid.

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most doctors CHOSE their salary as the money is in their corporation. The money left in the corporation is NOT taxed at the personal income tax rate. It is taxed at the corporate interest rate of 18%. Most doctors are business men/women - they have all the extra layer of complicity that having a business has (writing things off, corporate and then personal tax filings, employees, shareholders.....)

 

Each year most doctors leave considerable amounts of money within their corporation - basically their way of saving for retirement, and for exactly this - deferring tax.

So if you choose to leave a certain portion of what you are entitled to into your corporation, when would you be allowed to take it out? Only at retirement? 

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So if you choose to leave a certain portion of what you are entitled to into your corporation, when would you be allowed to take it out? Only at retirement?

 

It's your company - you can give yourself a raise or dividend whenever. If you die the money is a part of your estate.

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What if you are $100K in debt like OP, and you want to pay it off as soon as possible, even if you pay more taxes?

 

Is it realistic to do this within 2 years post residency? If you do this, what do you estimate you would have leftover to live on, after taxes, debt repayment, etc.?

 

well to know that you need to know their net income I suppose - which is of course very variable. Plus a lot of people do have a ramp up phase - so it takes some time to reach full earnings. In rads for instance you often are kind of on a probation period as it were for a bit before you make partner at an academic centre etc. You may have practise start up costs, moving costs, getting a house costs, furnishing costs... also often there is a delay in billing and receiving the money (3mos) so you have a cash flow limitation as well.

 

Also a total of 100K in debit post residency is rather low I would say (as it would be the combined med school + UG + ?Grad + ?residency spending). Ha ! more variables. A lot of people have closer to 150-175K in loans I would say (4 years of med school tuition alone is almost 100K now. Plus you probably want to eat at some point :) Fortunately things like OSAP and its grant really help )

 

If you magically were earning instantly 230K as a family doctor post graduating after expenses, and took all of that as salary your after income tax income is about 142K in Ontario. roughly you would pay 2K in interest on the 100K (as you are actively paying it off in the year so it is on average less than 100K), and roughly 1K in year two. You would then have about 65K after tax to play with in year one and 66K in year two to rapid fire pay that off.

 

Or roughly 5.5K a month.

 

all of this is just off the top of my head back of napkin style math.

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This is what I would do for sure. Any money lost to taxes would be greatly outweighed by the satisfaction of paying things off so quickly.

 

I agree that $100K is low for medicine, but I also have paid a comparable amount for my tuition. I graduated with less than this in debt and so did my peers, because we had less credit than that available to us (OSAP and banks combined).

 

In fact, I wish I spent less and earned more during school.

 

I think that it's best to keep it as low as possible. I feel like anything over $100K becomes a burden. Sure, it's doable, but it's not something I would want to do if I could avoid it.

 

Thanks for the estimate. It's funny how people mostly talk about gross earnings when this really gives very little understanding for people, especially students who have never worked full time.

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  • 2 weeks later...

This is what I would do for sure. Any money lost to taxes would be greatly outweighed by the satisfaction of paying things off so quickly.

 

I agree that $100K is low for medicine, but I also have paid a comparable amount for my tuition. I graduated with less than this in debt and so did my peers, because we had less credit than that available to us (OSAP and banks combined).

 

In fact, I wish I spent less and earned more during school.

 

I think that it's best to keep it as low as possible. I feel like anything over $100K becomes a burden. Sure, it's doable, but it's not something I would want to do if I could avoid it.

 

Thanks for the estimate. It's funny how people mostly talk about gross earnings when this really gives very little understanding for people, especially students who have never worked full time.

 

just from some extra numbers - if you owe about 200K right now the repayment plan would have you pay back about 2K a month min once you go into repayment and the LOC shuts down etc.

 

that is after the 12 month grace period.

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