Until now, I’ve written a lot about very personal aspects of my financial life and overall life. I’ve used actual numbers as much as possible. I want to be completely transparent. We’re in this together and it’s not fair to you if I am not totally forthcoming. However, so far, I have not revealed my strategy for paying back my massive student debt.
I have shared some information about my student debt
Here are some refreshers:
- I took out student loans to pay for just about every cent of my private undergraduate and medical education
- During my 7 year residency and fellowship training, I deferred all of my loans
- Upon graduating training in June 2020, I owed over $450,000 in student debt
And here are some other random factoids about my debt situation:
- My wife and I also had credit card debt upon graduating. In fact using our credit card was one of our biggest financial mistakes.
- However, we paid off all of our consumer credit card debt (>$20,000) within 4 months of my finishing training
- My wife is a smarty-pants. Because of this, she had full scholarships for her undergraduate and most of her graduate education. So, she has very little student debt
- So, this post will be pretty much exclusively about my strategy to pay back my student debt
Why haven’t I shared my student debt strategy until now?
It’s a fair question.
As I reflect back, I think it is for a few reasons:
- I think I was still figuring out my plan and didn’t want to share half-baked advice
- A small part of me was still embarrassed about how much student debt I had and how badly I had mismanaged it
- There are a LOT of opinions out there on how to best pay back debt. And most people feel very strongly one way or the other.
But now here I go into the crossfire!
My loan pay back strategy
First, some baseline facts:
- My current student loan burden as of this writing (1/19/21) is: $438,787
- Approximately 2/3 of these loans are federal and the remainder are private
- The average interest rate on ALL loans is currently 6.1% (some of the private rates are variable)
- The interest rate for federal loans in 6.8%
- The average interest rate currently for my private loans is 5.34%
- I have not yet refinanced any loans
And now some general tenants of ours:
- Paying back debt is one of the highest priorities on our financial priority list in our written financial plan
- Our current budget (please, please get one if you don’t have one…it’s easy!) calls for $6,675 be allocated towards student debt each month
- Any monthly budget surplus goes towards student debt pay down
- This has general ranged from $2,000-$6,000/month
Ok, ok…now for the actual student loan strategy
I’ll keep with the theme and share this in bullet form as well:
- Selenid and I organized my private student loans by lowest to highest amount
- If two loans are very similar in size, we prioritize the one with a higher interest rate
- We also organized all of my federal student loans from lowest to highest amount due
- Currently, we pay off the minimum amount due for all of my private loans each month
- The remainder of the monthly allotment for student loans plus any monthly budget surplus then goes to pay the private loan with the lowest amount due
- Once that loan is paid off, we move onto the next one on the list of private loans
- We currently are NOT paying back any federal loans given the current 0% interest rate forbearance
- I have NOT refinanced no private loans yet. Once I know if the federal loan forbearance will be extended, I’ll examine rates and may refinance the private loans
“Ok Jordan, that’s all well and good. But what about when the 0% federal interest rate is lifted?”
Great question, Jordan.
As of this writing (1/19/21), I am still adhering to the above strategy. It has been intimated that Biden will extend the 0% federal student loan interest rate forbearance for some more time before it expires on 1/31/21.
If he does extend the forbearance, I will keep going as stated. I will likely refinance my private loans.
But, eventually, the interest rates on my federal loans will go up and they will start coming due.
Once federal student loan forbearance is ended, my amended strategy will be one of two options
This is the most likely option.
Once I have to start paying back my federal student loans, I will refinance all of my loans for 5 years with a variable rate. I plan to pay back all of my loans in 5 years or less and the 5 year variable is the best rate in most cases.
Currently, I qualify for a 5 year variable rate of 3.06%. This would amount to monthly payments of $7,896. This is less than what I currently pay most months and fits very well within my budget and financial plan.
This would be the scenario if interest rates for some reason go back up and my current student loan rates are more favorable.
In this case, I would keep my loans separate and pay them back in the “snowball” fashion that I described above. Basically, I would organize them by lowest to highest amount, make all minimum payments, and pay lump sums based on my monthly budget to each loan progressively down the list.
If refinancing some or all of the loans then becomes beneficial down the line, I would pursue it at that point.
My student debt advice for you
This was a run down of my student debt circumstances and my plan to address them.
However, I think most of it is very much applicable to any physician with student debt. My student debt:income ratio is roughly 1:1.
Some may have a lesser ratio. A few of you may even have a greater ratio, but probably not by much. Regardless, these techniques work.
I also want to emphasize again that paying off debt is the most important thing that you can do to boost your financial well-being and advance towards financial freedom.
That’s because this really is the first step to financial freedom. You need to stop taking on new debt and get rid of any and all debt you have. Look, when you are in a hole the first step is to stop digging. Then start climbing out. You can’t run until you get out of the hole.
So, this is a huge thing that should definitely be at or near the top of your financial priority list that will go in your financial plan (more on this in future videos). Each $1 you use to pay off debt is $1 that your net worth increases.
Here are the actionable steps you can take NOW to manage your student debt
- Create a list or table of all of your debts (including mortgage)
- Decide how to prioritize them (highest to lowest interest, lowest to highest amount, etc)
- Rearrange list so that they are in that order
- Make lowest required payments on all debts
- Take the remainder of the monthly amount budgeting for loans as well as any extra discretionary savings from that month and pay it to the first loan on your list
- Keep doing this until that loan is paid off
- Once that first loan is eliminated, repeat for the second loan and so on. Each time you eliminate a loan, you will be adding that required monthly payment to the rest of the allotted monthly amount for debt paydown, increasing the size of the snowball and the speed at which you pay off your debt
An ode to PSLF [All of this could have been avoided]
I could have taken advantage of the PSLF program because my training was 7 years, during which I could have made small income based repayments. Then I would only need 3 more years of repayments at a qualifying hospital to have the remainder of my loans forgiven. But I was ignorant and didn’t take advantage of this as a trainee. Now that my salary is much much higher, income based amounts are very high and any forgiveness, if at all, would be minimal.
Could have planned that better with just a little bit of financial education.
But no reason to live in the past!
In general, if you have a longer training period and/or have a low income/debt ratio (<1), PSLF likely will be a good option for you. If neither of those are true, a student debt strategy like the ones I covered above are likely your best options.
Well, there you have it! That is my student debt pay down strategy revealed
Most importantly, just keep remembering to break these concepts up into their most important tenants. Don’t get lost in the weeds.
What do you think about my student loan strategy? Am I doing it right or wrong? How are you dealing with your student debt? What would you do if you were me? Let me know in the comments!
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