How I Plan to Repay Loans in Fellowship

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Sorry if all the financial posts are not interesting to you. Just one more answer to a question and then I'll get back to medical ethics. In my defense, financial solvency is a part of my vocation!

After reviewing how I repaid small college loans in residency, I wanted to answer questions about my more aggressive plans for fellowship, presuming I match into an MFM seat. My remaining loans are all direct Stafford loans at a fixed rate of 6.55%. Listed from smallest principal to largest, there is a $8500 loan (the only subsidized one), a $15,175.53 loan, a $17,974 loan, a $19,959.60 loan, and a massive $41,000 loan (#fourthyearinterviews).

Many physicians are motivated to repay loans early (i.e. residency, fellowship, early attending years) and aggressively before investing because they're still in low tax brackets. Debts are paid in post-tax dollars and $2500 of interest on student loans is deductible with a resident's or fellow's salary (under $60,000). For residency and fellowship it would seem wise, then, to pay off (at minimum) at least as much debt as you could deduct.

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What about your attending years? By putting money into pre-tax accounts like 403b/401ks, traditional IRAs, backdoor Roth IRAs (if you exceed the $107,000 limit for contribution to a Roth IRA), and HSAs you could place yourself in a lower tax bracket for years while working. Although this still doesn't allow me to deduct interest paid on student loans, it does make payback less painful. (The government is taking away less of each

However, I have an extra concern: I'm not sure how much I'll be earning as I start a practice, so I'd like to minimize my debt as much as possible for two reasons. First, I would hate to default as a young attending; in residency, you're still eligible for deferment because you're (technically) in training. As a young attending, the only option when you're unable to pay loans is default, which is terrible for credit scores and future interest rates. Second, the more you pay off the lower your monthly payment, which prevents defaulting.

Even so, if I invest my (projected) surplus of $9,000 per year in a low-cost index fund that represents most of the U.S. market, I can grow $1,000,000 in 37 years. (That number came from a start age of 30 with zero savings and $750 in monthly until I was 67, growing at 8%, in Dave Ramsey's retirement calculator. That seemed optimistic to me, simply because there are two commas in a number that pertains to me. But I ran it through MMM's calculator and I actually got two million with the same variables.) In comparison, my $120,000 in debt grows to $200,000 over 10 years (in this calculator and in this one, treating the loan as an asset; note the difference in number of years, since the government would never let me continue repayment for 37 years).

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I plan to behave proportionally, more because I can't find a better way to do it. I'll put one-fifth of my surplus into debt repayment (or whatever minimum the federal government extracts of me) and one-fifth into investment.

How I Repaid College Loans in Residency

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I have been asked how I paid off college in residency. The answer is mostly preventative medicine: I didn't go after an expensive school, I got good need-based aid, I worked during college to avoid as much debt as possible, I lived frugally, and I borrowed a large amount from family ($11,000, which is not acquiring interest and is not being collected until after my federal loans are paid off). I don't know whether it's possible to pay off $100,000 of Ivy League undergraduate debt in residency, although perhaps extreme frugality could help you hide away $25,000 per year.

Now, to nitty gritty: I will have paid off about $13,200 of college loans during residency (and $12,000 of medical school loans) in addition to monthly payments on all my federal loans. TAC does not offer merit-based financial aid. As a result, I took loans from Navient. During the academic year that I was an intern (AY15-16), I earned $51,360 pre-tax. AY16-17 it was $52,380 and AY17-18 it is $54,308.

My first year of residency, I paid my two smallest loans: a $491 direct unsubsidized Stafford loan at a fixed rate of 5.96%, and a $3000 direct unsubsidized Stafford loan at a fixed rate of 5.16%. At the time of payoff, these cost me $524.37 and $3,356.85, respectively. This required savings of $325 monthly. My second year, I paid off a $3904 subsidized federal Stafford loan with a fixed rate of 5.35%. At the time of payoff, this cost me $3851.31. For this, I projected a need to save $340 monthly and had some left over. This year, I plan to pay off a $4500 unsubsidized direct Stafford loan at a fixed rate of 6.55% by saving $500 per month.

These were not my highest interest rates. Paying high-interest loans first makes more sense with math, but Dave Ramsey pioneered a technique called the Debt Snowball that helps you pay off small debts first and accelerate towards quickly paying off large debts. While I didn't exactly snowball, I chose to pay off the small debts first for two reasons. First, I knew my intern-year salary would be the smallest I'd earn in residency, and I'd already spent a chunk of it with moving and furnishing costs. Second, I thought the psychological benefit of paying the smallest debts first was valuable (and I was right).

An unexpected benefit of loan payoff is a lower monthly payment. December of my intern year, I paid $180.56 monthly. Despite my higher salary, I now pay $86.13 monthly, just by paying my smallest loans. You might argue that my true loan payment was $180 + $325 ($505), compared to $86 + $500 this year ($585), and point out that my payment is not truly lower. While my total amount put towards loans is about the same, the amount that the federal government requires me to pay is much lower, which protects me. Suppose, for instance, that I have a car accident or an unexpected medical expense; the government doesn't know about the $500 per month that I've earmarked for loan payoff, allowing me to use it for emergencies.

Img credit: 401(K) 2012, wikimedia commons

Looking back at my decision, I wonder whether it would have been better to direct that $13,000 to one of the higher rate loans. (The remaining loans are 6.55%; nothing to freak out about, but definitely higher than the 5% loans discussed above.) I wonder whether I should've maxed out a Roth IRA in the first three years of residency, rather than waiting for my PGY-4 year.

I think psychology trumped math in my case, but I also don't think losses were major during these three or four years. Was paying down debt a bad choice? Certainly not. Was it the most dollar-efficient choice regarding my future net worth? Maybe not; but honestly, I'm not sure. I certainly don't have enough expertise about the market's fluctuations, my 403b, and Roth IRAs. I certainly didn't have the expertise (or the time) as an intern to figure this out. I have more knowledge now, because I've spent some vacations and car trips listening to podcasts, but I'm still a financial novice. So did I do the right thing? Maybe or probably so. Am I upset about it? Not really. I'm happy that my parents provided me with some financial literacy and that I've picked up some more since then, and happy that all my federal college debt is paid off.

The Usefulness of Bank Accounts

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Putting money in traditional bank accounts is equivalent to stuffing it under your mattress. Mattresses are fine, but they won't grow. However, both checking and savings accounts still have a useful role in the highly-automated but still human (read: emotional) financial life.

My checking account is part of my software secretary. My bank automatically sends checks to pay my rent, phone bill, and all my various dues to professional organizations. I just check the amounts of the dues when I get an email to make sure organizations haven't raised them, and then I just forget about it.

Savings accounts are tools to protect and manipulate money for small recurring expenses. I have several small or medium expenses each year that I distribute over twelve months. For instance, I pay $150 for an NCBC membership every January 1, and the rest of the year I set aside $12.50 each month to distribute the cost. To protect this money from myself, I send the monthly total for all these small expenses (monthly total for all my annual dues, annual renter's insurance, car insurance paid every six months, etc is $688) and use direct deposit to siphon that off my paycheck and place it into my savings account. Then, the bank automatically transfers a certain amount out of the savings account and dumps it into the checking account, from which dues (etc) are automatically paid.

Financial Independence

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I grew up in a financially aware environment. My mother taught me about frugality, savings, and long-term goals. My father taught me about low-cost investments, buying the whole market, and avoiding emotion-based decisions. I also believed that credit cards were inherently disastrous and that all debt was evil. I no longer believe the last two, because I've fallen in with the FI/RE crowd, who aren't as anti-debt and who feel free to use credit cards, especially for travel hacking.

Briefly, FI/RE (financial independence/retire early) is a combination of two choices involving discipline for freedom. People who want to be financially independent invest enough capital to live off of non-earned income. This allows them to retire early, "coast" with a job they enjoy, pursue more risky endeavors with security (e.g. start a business or non-profit), travel the world, or just continue to build wealth. 

I've already applied some good habits to my student loan debts. I went to a state medical school, where I lived frugally and only took out the maximum loans my senior year. The other years, I took only what I budgeted and I returned any extra principal, rather than take it on and pay it back with interest. By this June, I will have paid off--during residency--all of my college loans. (As Dave Ramsey advises, I paid the smallest one first. There really is a psychological benefit to that method when you're new to paying back debt.) By next June, I will have paid off $12,000 of private medical school debt. I'll have $125,000 of federal student loan debt left, which I'll hopefully pay off in 5 or 10 years. I'm saving enough to avoid change in my retirement savings as I approach a $7,000 interview season and a $2,000 board exam cost and (maybe) relocation cost. As soon as I pay off my senior year of TAC, I'm going to max out a Roth IRA. I plan to balance investing with slow repayment of these federal loans.

Img credit: James Petts, wikimedia commons

You can rapidly acquire a bunch of knowledge with a day or two in the FI/RE community, especially if you have an elemental financial vocabulary, like my parents gave me. I learned a lot about tax sheltering by maxing out 403b/401k accounts, traditional IRAs, Roth IRAs, and HSAs. I learned the names of the funds that my dad taught me to look for. And as I approach interview season, I want to travel hack! (This requires the use of credit cards but does not include plans for credit card debt. Sorry not sorry, Dave.)

Unfortunately I think FI/RE has a lot of advantages for intentionally single people and childfree couples. Having children is a big challenge that this community discusses, although it's positive (see Mr. 1500, Go Curry Cracker, ChooseFI). I am reminded of St. Gianna Molla's quote, "we were too happy," and I'm aware of the dignity of work. Although a lot of financially independent people start businesses, write, and give back, others really use their funds selfishly.

I would like to use the principles of FI although I might not retire early. A high savings rate comes naturally to me as a consecrated person, and my income will be relatively significant. I can see using the principles of FI two ways: one, I can spend a lot of money in the first ten years of my career (starting a practice offering a lot of in-office gynecology) and start at 40 with a 90% savings rate to catch up to a modest retirement. Alternatively (and I like this better), I can max out savings early and become financially independent by 50, then ask very little in earned income, allowing me to subsidize low-income patient populations. I love the ideas of tax sheltering to avoid paying for chimeric research, abortion, and contraception. I love the idea of freedom to avoid traditional healthcare insurance and subsidizing contraception, participating instead in healthcare sharing ministries (and perhaps putting in a little more than I take out, since I'm not having babies) and paying ACA fees.

More to come. My finances have not been very exciting during the lifetime of this blog. Basically, college was "Acquire Debt and Work a Few Nominal Jobs for Med School Resume." Medical school was "Exclusively Acquire Debt." Now I'm repaying debt aggressively and I'm going to start investing more formally. I'm in a very important period for my future financial life: I'm beginning to acquire enough capital to start investing, I'm moving my net worth to zero, and I'm preparing to (possibly) start a practice. Expect to see more financial posts in the future!

I post fireworks when I publish something in a peer-reviewed journal. This is partially to celebrate, and partially to explain why I didn't do anything for the blog for these two weeks. The impressiveness of the firework attempts to be proportional to how important this publication is to me.