In 2019, the average new doctor began professional practice with over $250,000 in medical school debt.
A silver lining for medical professionals who accumulate six-figure student loan debt is, of course, the likelihood of earning a very high income. Still, many physicians are then left wondering:
Should you pay off student loans early?
There are essentially two schools of thought on this issue:
- Pay off your medical school loans ASAP. It will free up your income and help you sleep better at night, among other benefits.
- Instead of paying off more than is required in advance, use any extra money to save or invest for the future.
In this article, we help you weigh the benefits of paying off student loans early versus investing, homeownership, and more.
Should you pay off student loans early?
There is no right or wrong choice, provided you do one or the other. What you should avoid is a common third option: Pay only your minimum payments on your student loans while spending your salary on material things.
Do this and not only will you still carry a huge debt load, you will also have little to no savings to fall back on. Plus, it’s easy to accumulate more debt by overspending.
Ultimately, the decision will be based largely on your personal circumstances and comfort level. For some, carrying that much unsecured debt creates psychological pressures and they will feel liberated by paying it all off. Others would rather put aside extra money and watch it grow instead and can handle the minimum payments on student loan debt.
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Here is an overview of the main arguments for and against early repayment of student loans:
The return on investment
Advocates for making minimum student loan payments say you can earn a better overall return by investing your extra money instead. This argument is based on the notion that student loan interest rates are low compared to other types of debt. Therefore, you’re not saving as much by repaying student loans early.
For example, if you pay 6 percent on your student loan debt and can earn 8 percent on an investment portfolio, the argument goes that you’ll benefit more by saving extra money.
Many financial experts also advise people to build up at least an emergency savings fund before paying off loans to avoid going into further debt. If you allocate more money to student loan repayment, you lose the liquidity of having extra cash on hand.
The flip side of that argument is that no investments, especially those earning high rates are interest, are guaranteed. You can just as easily lose money by investing it.
Paying off debt, on the other hand, offers a guaranteed return. By eliminating debt, you increase cash flow and your net worth just as you would by acquiring assets. And you can use that “asset” to invest and build wealth. Plus, those who are careful with their money can save for emergencies and accelerate student loan repayment.
Payoff student loans or buy a house?
Some would argue that your extra cash would be better used to save for a downpayment on a house. Having a larger downpayment can lower your interest rate, create instant equity and earn you better loan terms.
On the other hand, special mortgage loans for physicians enable you to get a mortgage today with little to no money down. Furthermore, they make it easier for doctors with massive student loan debt to qualify by recalculating the impact of student loan debt or dismissing it altogether.
Student loans vs. disability and life insurance
Rather than using more of your budget to pay down student loan debt, some would argue you should instead buy both disability and life insurance.
Disability insurance can help insure your income against the financial effects of suffering an injury or illness that affects your ability to practice medicine. Life insurance helps ensure your loved ones can replace some of your income if you pass away unexpectedly.
On the other hand, having a large student loan balance means you’ll have to allocate much of your benefit toward repaying that debt because in most cases it will not be discharged in the event of disability.
Is the student loan interest tax deduction worth it?
Another argument for allocating extra money away from student loan debt is the income tax deduction the IRS allows for interest paid on school debt. Since you’re saving a little on your taxes, the argument goes, why be in a hurry to repay it?
For doctors, this deduction does not offer much incentive. For starters, it’s only available for those who earn less than $80,000 a year for single filers and $160,000 for joint filers. And you don’t get the full deduction if you make more than $65,000 ($130,000 for joint filers). Plus, the maximum deduction you can take is $2,500.