Medical Student Perspectives: Basic Money Management for Medical Students
Most of us remember medical school orientation. The feeling of ecstatic happiness of finally making it to medical school and embarking on a path of our dreams with our newly formed friends is unforgettable. Somewhere intertwined within these happy memories is a painful afternoon session hosted by the financial aid office: the mandatory entrance interview. We were told how much debt we will accrue by the end of our 4 years of medical school but were rest assured that there will be help along the way, and that we will be able to earn enough salary when we graduate to pay it back. Despite the threatening debt of $162,000 (on average) at the time of graduation (1), we bravely and eagerly marched on to memorizing the steps of the urea cycle, locating the internal thoracic artery, and learning Sterling's law. The session gradually became an afterthought, and the huge financial aid booklet we were given collected dust on our bookshelves as we got busy with school. However, the issue of money and debt resurfaces each holiday season when friends ask how expensive medical school is and in March when the FAFSA forms are due. Today, we face a heavy financial burden that is unrivaled by those who traveled this road before us. Choices we make today will affect our lives even 20 and 30 years from now. Understanding your financial situation and preparing yourself accordingly will go a long way toward achieving a life of financial health and stability. Here are some basic tips to help you manage your finances.
Tip #1: Budget Your Money
Although you may feel financially well-off at the beginning of the semester after receiving large lumps of money from various sources, fight off any temptation to immediately spend that money on an LCD television that you have been eyeing, or a pair of designer jeans that is out of your usual budget. Unlike work, where salary is distributed either monthly or biweekly, money for medical school is distributed twice a year. It is therefore extremely important to budget your money so that you will have enough money for food, rent, and entertainment during the last few months of the semester. In addition, make sure to put aside some funds for unexpected expenses like car repairs, a new computer, and higher-than-expected fancy restaurant bills.
Tip #2: Look for Scholarships and Grants
Everyone loves free money, but not everyone makes the time to apply for it. Medical school is busy, and free time can be hard to find, but if you put in the effort, scholarships-in the range of hundreds to thousands of dollars-can be within reach. Although it may not necessarily seem like a lot in comparison with the loans you take out, think of this: $500 of debt with 6.8% interest compounded annually will cost $1,341 in 15 years. So, spend some time and look for some Benjamin Franklins that are sitting around, waiting for you to pick them up. Sources to locate scholarships include:
Tip #3: Avoid Private and Unsubsidized Loans if Possible
Federal subsidized loans provide only a fraction of the cost to attend medical school, but they have fixed interest rates, and the government pays for the interest while you are in school. Most students will need to take out additional loans to cover their costs. In general, borrowing from the federal government is a safer option. Avoid private loans, where small prints can lead to unfixed interest rates that may balloon to greater than 10%. For unsubsidized loans, you will be paying interest even while in school, and interest will accrue and be added to your principal. Most students will have to take out unsubsidized loans, but you should stay on top of at least paying the interest every year. If you do decide to take out a private loan, make sure to read the fine print carefully to understand terms and conditions, such as origination fees, annual fees, interest rate, and requirements for repayment.
Tip #4: Tackle Your Financial Problems Head-on
It is sometimes a headache to think about educational loans, but it is important to not avoid them. Unlike mortgages or credit card debt, student education loans will always be with you. Not even bankruptcy can save you, as education debt can almost never be erased in bankruptcy court, even if the loan is from for-profit lenders. It is considered a nondischargeable debt, and you must pay for it, just like legal fines and childcare support. Furthermore, do not ignore that the interest rate for medical school loans is usually at least 6.8%, which is the rate for the federal direct loan. Other private loans probably have even higher interest rates than 6.8%. When compared with the 3.89% interest rate for a 30-year fixed mortgage that house buyers can acquire (2), 6.8% is a lot more. To put things in perspective, $100,000 compounded annually over 15 years is approximately $268,267 and $177,258 for interest rates of 6.8% and 3.89%, respectively. Therefore, do not take your medical school debt lightly as it is more daunting to pay back than purchasing a home for the same price. Take initiative and start to pay off your educational debt as soon as possible instead of waiting for the problem to become larger and less manageable.
Tip #5: Pay Principal Early and Often in Addition to Interest
Education loans have compound interest, which is not a mere high school math class calculation. When it comes to debt, compound interest should not be taken lightly and is said by Albert Einstein to be the "most powerful force in the universe" or "the greatest invention in human history." To illustrate the issue, consider a $162,000 federal direct loan with a 6.8% interest rate and a 15-year payment plan (1). With income based-repayment during the 3 years of internal medicine residency, you will pay about $400 to $480 per month, and then $2,100 for the next 12 years with the assumed starting salary of $170,000 after residency (1). At the end of the 15 years, you will be paying a total of $308,000, with $146,000 being paid toward interest (1). With the way that banks collect your debt, that means for 8 or 9 years, you will be making very little dent on your principal of $162,000; all the payments made until that point will be primarily toward your interest. Therefore, do not be content with paying solely what appears on the statement, save money and pay extra toward your principal so that less money gets compounded over time.
Tip #6: Options for Extra Money from Financial Aid
Because the estimated medical school attendance cost is usually more than what a student actually needs, there might be a few thousand dollars left over in your student financial account. So, what are your options with that money? First of all, you could invest, but most of us are not well-versed in trading nor do we have enough money to make it worthwhile to risk a hit on our already cash-strapped pockets. If you are knowledgeable about investments, you are probably doing that already with some money. Keeping it in a bank account is not a smart option right now, and the interest rates on short-term certificates of deposit are so low that they may be less than the inflation rate, meaning your money is actually worth less over time. Second, you can use it to pay back your existing loans. Remember that you do not have to finish school to start paying back your loans-you can do that at any time. The advantage of paying off debt while in school is that you can make a large dent in your principal and avoid the compound interest that accrues on it. Third, you can use it on entertainment, and that is not a bad idea. We are all overworked and a nice vacation help you rejuvenate, so don't hesitate to splurge on yourself a little bit.
Tip #7: Learn More about Managing Your Money
This article is not meant to be a comprehensive guide on managing medical school loans but to serve as a starter for those who are interested in gaining some basic knowledge and ideas on the issue. Other informative Web sites that I encourage you to explore are:
I hope that you have found this article to be helpful. Please do not hesitate to contact me with questions, or send me your suggestions on how medical students can manage their finances.
Hao Feng
Northeastern Representative, Council of Student Members
Yale University School of Medicine, 2013
E-mail: hao.feng@yale.edu
- AAMC FIRST Debt Fact Card. October 2011. 2011 Medical Student Education: Cost, Debt, and Loan Repayment Facts. Accessed January 2012. www.aamc.org/download/152968/data/debtfactcard.pdf
- Associated Press. Rate on 30-year mortgage drops to record 3.89 pct. Accessed January 2012. www.foxnews.com/us/2012/01/12/rate-on-30-year-mortgage-drops-to-record-38-pct/
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