Author Topic: Reader Case Study - Surgery Resident w/ tons of student loan debt  (Read 4651 times)

Jorski

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Hi all,

Thanks for checking out my post. Im a second year surgery resident living the dream. Ive been lurking on the site for a year or so now and really embrace the idea of minimalism and anti-consumerism and being efficient with less. Now that I have a steady paycheck as opposed to living on loans I have gotten serious about the financial side of things and have hit a roadblock. Here is the breakdown of monthly income/expenses:

Income (net)      
Pay

- $2,958.00    
      
Expense      
Rent   
- $400.00    
Utilities   
- $125.00    
Gas   
- $40.00    
Car Insurance   
-$90.00    
Cell   
- $12.00    
Food   
- $300.00    
Medical school loan
- $65.00    
Undergrad loan   
- $200.00    
Total    Expense
-$1,232.00    
      
Difference   
+ $1,726.00    
      
Student Loans      
AES (undergrad)   
- $21,996.00  3.46%
Med Unsub   
- $252,115.00  6.75%
Med Sub   
- $27,308.00    6.75%
Total   
- $301,419.00    

I have no credit card debt or other loans aside from the school loans. I guess my questions are, from my spending trends, what do you see as modifiable? From the way I see it, I could find cheaper car insurance, reduce my food spending (this is by far the hardest because after working a ton of hours, I dont want to cook!), reduce my gas spending. Rent can't be modified and my utilities are variable and somewhat out of my control as there are three other people here in a large 5 bedroom/4 bath house. My second question is, what would you do with that extra money every month? Ive started an emergency fund which will have 6 mos pay in it; after that, would you start paying down those loans or do something else with that money? Currently I am on income based repayment through the government for the medical school loans. I paid 3k one month, and I put something like $10 toward the principal and the rest toward interest. After that I was like "well, with the measly amount of money I have at the end of the month, I just feel like Im pissing in the wind and not really doing anything to pay that loan down." But that could be a stupid way of thinking, I dont know.

Any other suggestions appreciated.

Thanks in advance!

Jered
« Last Edit: February 05, 2015, 07:11:36 AM by Jorski »

YTProphet

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #1 on: February 05, 2015, 07:46:37 AM »
How long is the residency? The usual 4 years or is it longer since you're in a specialty?

I think that the key, BY FAR, for someone in your shoes is not so much how you're spending your money right now but how you'll spend your money 10 years from now. Get your frugal habits in place and keep them there, even 10 years from now when you're making $500,000 a year. When you're making the big bucks, live like you're living now until those loans are paid off. Most people in your position, when they land their first high paying job post-residency, will go buy a BMW and a McMansion. But what they really should do is rent a tiny place and drive a beater car until the loans are gone. If you're making a few hundred thousand a year when you're done, you should have them paid off in no time. In the meantime, I'd just save your excess income for either a downpayment on a very modest house or put it in a Roth.

Just FYI, I have a professional degree and went into $160K of debt getting it. On a $110k salary (average during debt payoff), I paid it off in 3.5 years. You should be able to pay your debt off in a similar amount of time since your income potential will be much higher.

One more random note - apparently there is a LinkedIn/Glassdoor type website for doctors that allows you to know how much other doctors make at different hospitals around the country. Might want to look into that in order to maximize your earnings when you're finished with your residency.
« Last Edit: February 05, 2015, 07:50:10 AM by YTProphet »

ShoulderThingThatGoesUp

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #2 on: February 05, 2015, 09:24:31 AM »
You could try cooking a big set of meals on a day off and reheating them on days you're working. I don't know how long your workdays are, but having a few things in mind that you can throw in a crock-pot with plenty of water, turn on, leave, and come back to dinner made from scratch also helps.

What's the difference between your "Unsub" and "Sub" loans - is only one on income-based repayment?

skunkfunk

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #3 on: February 05, 2015, 09:32:40 AM »
I'd stick the excess in a Roth while your income is still low. Gut reaction. You're doing very well.

Sblak

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #4 on: February 05, 2015, 10:00:45 AM »
You have a hair on fire emergency.  You have a monster on your back.  Your unsubsidized med loan of $250k loan at 6.75% according to my napkin math is accruing at a minimum $1420 per month in interest.  What is going on there?  Income based repayment is not your friend, but is a way for the lender to put you deeper and deeper into slavery.  The only time it is worth undertaking is when you have a guaranteed debt forgiveness at the end of some period of payments, say ten years.  Since you did not mention that, and are currently not paying it off, you should know what it is doing to you. 

You very likely won't be making a sure 6.75% on any investments you can find, so anything else you choose will lose you money at the difference in rates.  The best way to spend your extra is to try to pay down that loan.  If you let that thing sit for just 3 years, at the rate you are paying it, it will be a $305,000 loan with interest of $1,720 per month instead of just $1,420.  If you let it sit for 5 years, it will become a a $350,000 loan with $2,000 of interest per month.  Then when your income changes and you can finally start to make real payments on it, it will be a monster.  In ten years of your current payments it would be a $500,000 loan.  Letting that happen is the exact opposite of the soul of this forum.

By just paying the interest every month, in five years you will be better than saving $100,000 elsewhere and will shave $100,000 off your loan PRINCIPAL.  In ten you will have "saved" $250,000.  That is not "pissing in the wind" and your thinking that there is any other option for investing is very stupid thinking.  While I know that you may have a bright future as a surgeon, so as a result spending all of your "now" money on a debt toward the future may not be wise, since now money is tight, and paying it down is 100% of your disposable income, whereas paying it in a couple years would only take a portion of the same, you seem to be missing something if you think there is any other form of investment worth pursuing. All investing is simply paying toward the future.  For you, the best way to pay it forward is to pay whatever you can toward the loan because you get a guaranteed 6.75%.  That is a huge rate of investment.

By the way, I know personally what I am talking about.  I went to law school and took out loans.  My friends did too.  Some went the deferred route.  They now have $300,000 to 500,000 loans and are on the thirty year plans to pay back their loans.  I will be student loan free this year, just a few months from now.  It sucked, but now all my money is my own.  I am free from worry.  They are trapped slaving away.
« Last Edit: February 05, 2015, 10:19:42 AM by Sblak »

frugaldrummer

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #5 on: February 05, 2015, 10:34:56 AM »
One suggestion - spend some of that extra money on vacations.

I know, not very Mustachian advice on the face of it.  But surgery residencies are exhausting, and if you burn out and crash out of your program, you'll have the boatload of debt without the high income to go with it.  I suggest you make the most of your vacation time - it doesn't have to cost a fortune, but take relaxing vacations at some nice tropical beach (or go skiing in Utah, or whatever relaxes you).

I would NOT pay extra on your loans at this time.  I know, they're massive, and the interest rates are awful.  But I agree with the poster who said put some money into Roth IRAs while you can.  Having that interest-free income in retirement could be a real boon, as you'll likely be in a relatively high tax bracket in retirement.  And build up your emergency fund.

As for the loans - the real key is not what you might eke out to pay on them now, but simply sticking to your current low spending for the first two years after you finish.  I expect you will easily get a starting salary of $300k or better - if you just live like you do now you could pay off the entire loan within 2 years. Most are so eager after med school to begin living like their peers (nice cars, buying a house etc) but delaying that stuff just a little bit longer would enable you to get out of all that debt in short order.

caliq

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #6 on: February 05, 2015, 10:43:08 AM »
You have a hair on fire emergency.  You have a monster on your back.  Your unsubsidized med loan of $250k loan at 6.75% according to my napkin math is accruing at a minimum $1420 per month in interest.  What is going on there?  Income based repayment is not your friend, but is a way for the lender to put you deeper and deeper into slavery.  The only time it is worth undertaking is when you have a guaranteed debt forgiveness at the end of some period of payments, say ten years.  Since you did not mention that, and are currently not paying it off, you should know what it is doing to you. 

You very likely won't be making a sure 6.75% on any investments you can find, so anything else you choose will lose you money at the difference in rates.  The best way to spend your extra is to try to pay down that loan.  If you let that thing sit for just 3 years, at the rate you are paying it, it will be a $305,000 loan with interest of $1,720 per month instead of just $1,420.  If you let it sit for 5 years, it will become a a $350,000 loan with $2,000 of interest per month.  Then when your income changes and you can finally start to make real payments on it, it will be a monster.  In ten years of your current payments it would be a $500,000 loan.  Letting that happen is the exact opposite of the soul of this forum.

By just paying the interest every month, in five years you will be better than saving $100,000 elsewhere and will shave $100,000 off your loan PRINCIPAL.  In ten you will have "saved" $250,000.  That is not "pissing in the wind" and your thinking that there is any other option for investing is very stupid thinking.  While I know that you may have a bright future as a surgeon, so as a result spending all of your "now" money on a debt toward the future may not be wise, since now money is tight, and paying it down is 100% of your disposable income, whereas paying it in a couple years would only take a portion of the same, you seem to be missing something if you think there is any other form of investment worth pursuing. All investing is simply paying toward the future.  For you, the best way to pay it forward is to pay whatever you can toward the loan because you get a guaranteed 6.75%.  That is a huge rate of investment.

By the way, I know personally what I am talking about.  I went to law school and took out loans.  My friends did too.  Some went the deferred route.  They now have $300,000 to 500,000 loans and are on the thirty year plans to pay back their loans.  I will be student loan free this year, just a few months from now.  It sucked, but now all my money is my own.  I am free from worry.  They are trapped slaving away.

+1

Have you looked into refinancing at all or is that not a possibility until you're done with residency?  I think Sofi is a good option for people trying to refi professional school loans. 

Sblak

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #7 on: February 05, 2015, 11:02:56 AM »
Thanks Caliq for backing me up. 

I hope you make it big, and that things turn out great.  I am writing this to help you, and because my friends who are in similar situations won't listen to me.  You realize that when you are a surgeon making huge amounts of money, you will be paying back you loans with after tax dollars right?  Let's imagine the future.  You delay paying your big loan.  Say you make it big as a surgeon in 4-5 years.  Say you make $300,000 and decide to start paying the loan down.  Because you are in a high bracket, you pay maybe an average of 35-40% of your gross income toward state and federal taxes.  With the loan having grown to $400,000, you decide on a 30 year repayment.  That is choosing to pay $2,600 per month or $31,000 per year in after tax dollars to that loan.  That is equal to $52,000 of pretax money or approximately 17% of your gross income toward loans FOR 30 YEARS.  In other words, for the first 30 years of your working life, the first two months of the year, every year, will be spent working as a slave for no pay in order to pay back your past debt.

You will be a 17% debt slave for 30 years.  That sounds terrible to me.  Bearable, but terrible.  I would do anything I could to shorten the sentence you have to serve.  Think of how you will feel in 20 years when you want to relax, but have 10 more years of debt to pay off.  Let that motivate your now self.  Saving 10 years of future debt slavery is worth scrimping and saving now.
« Last Edit: February 05, 2015, 11:17:13 AM by Sblak »

thingamabobs

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #8 on: February 05, 2015, 11:48:19 AM »
I would pay interest up to the max deduction and then stick the rest in the Roth. Also look into whether your hospital offers a match on their 401K.

Mari

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #9 on: February 05, 2015, 11:55:45 AM »
Congratulations on discovering this blog while you are still in training; you will be able to manage your med school debt all the more efficiently as a result.

I am 1.5 years out from anesthesia residency and fellowship and finished with a total of $180,000 in med school loans ranging from 5% - 12% interest plus some credit card debt I had incurred moving across the country for residency that I never had managed to pay down. 18 months since starting as an attending, that debt is down to $24,000; I will have it paid off by May of this year, less than 2 years after beginning the repayment process.

My approach throughout residency was to keep my life as simple as possible, maximizing joyful (inexpensive) experiences outside the hospital. I live in New York City, and learning to commute by bike to work everyday instead of taking the subway was enormously beneficial to my well-being as it served as exercise, meditation and transportation all at once, and was only a bit slower than the train commute (1hr 10mins vs 55 mins for a distance of 12 miles). I surprised myself with how much I looked forward to my rides. I reserved train rides for post-call mornings and really terrible snowy weather. Cabs were out of the question. I was even able to ride to work 2 days after Hurricane Sandy when the MTA was still shut down. With all that bike riding, I didn't need a gym membership and I felt like the luckiest person in my program to start every day with an invigorating ride along the Hudson enjoying a bit of nature every day.
Cooking is a must. It requires some planning and practice, but it is time well spent and is a skill that will continue to serve you for the rest of your life. Preparing your meals for the week will become second nature. Your small income as a resident is too important to be squandered on takeout.
Your living situation sounds very frugal; I wish I had thought to share with several roommates. Your rent is cheap, you can keep the cost of furnishings and utilities down, and perhaps you can devise a plan to split groceries and cooking duties?
Once you're finished with training, continue to enjoy a similarly frugal lifestyle while attacking those student loans like your hair is on fire! I still bike to work (now a blissful 2 miles instead of 12) and still pack my lunch (and also dinner if it's going to be a long day) with me. It is incredibly satisfying to direct substantial payments to those loans and see them continue to shrink and shrink.
Best of luck to you! Focus on your patients, focus on your education and know that you are in control and you will be okay.

Jorski

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #10 on: February 05, 2015, 11:57:43 AM »
How long is the residency? The usual 4 years or is it longer since you're in a specialty?
I think that the key, BY FAR, for someone in your shoes is not so much how you're spending your money right now but how you'll spend your money 10 years from now. Get your frugal habits in place and keep them there, even 10 years from now when you're making $500,000 a year.

This won't be a problem at all; there are countless examples of doctors walking around with fancy cars and ridiculous houses who are stuck slaving away to pay those bills and for that second wife; that won't be me. I am in my second year of a five year long residency.

What's the difference between your "Unsub" and "Sub" loans - is only one on income-based repayment?

They are both within the IBR.

One suggestion - spend some of that extra money on vacations.

I tend to do staycations which are pretty cheap and allow me to catch up on all of the things I haven't been able to do because of work :)

You have a hair on fire emergency... 

I know, every time I log in to Mint and see those loans Im like 'holy shit man'. The problem is, while the math probably isn't that hard, I dont know the proper calculations to see interest accumulation at the current interest rate and payment amount vs. an increased payment amount over time and how that affects the overall balance in the long run. Your calculations certainly put things into perspective; do you know of a link to an online calculator or the formulas you used to come up with those numbers?

The problem with refinancing is (at least near as I can tell), you are committed to a loan term. Even on a 20 year term, I couldn't afford the monthly payment.

What you say makes sense. One of the nice things about residency is I dont have free time to spend money, and it makes no difference to me where the extra money goes every month as long as it is going the smartest direction possible. Which is why I came here :).

Thanks for the suggestions everyone. Keep them coming.

Sblak

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #11 on: February 05, 2015, 12:42:44 PM »
I use these calculators to play with scenarios for accelerating your payments. 

http://www.bankrate.com/calculators/college-planning/loan-calculator.aspx

As far as what is happening to your loans and how they grow if you don't pay them, the simple compound interest formula can tell you the answers.  This calculator allows you to enter in any variables and it tells you the others and allows for negative amortization.  So you can enter your payments you are making and it will tell you the final increased amortized amount after a period you choose.

http://bretwhissel.net/cgi-bin/amortize
« Last Edit: February 05, 2015, 12:52:22 PM by Sblak »

Briarly

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Re: Reader Case Study - Surgery Resident w/ tons of student loan debt
« Reply #12 on: February 05, 2015, 12:43:34 PM »