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.

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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.