How I Plan to Repay Loans in Fellowship

Credit: free pictures of money, flickr

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.

Credit: stevepb, pixabay

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).

Credit: Skitterphoto, pixabay

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.