Welcome to the next article of ACOG Rounds' financial health series, brought to you by the ACOG Member Insurance Program!
Catch up on articles you missed—read about smart retirement strategies in the July edition of ACOG Rounds.
Today, we're toppling the tyrant currently enslaving 80 percent of the American population: debt.1
Debt is a prison, locking many of life's opportunities away until the exorbitant get-out-of-jail fees are paid. Yes—some debt is taken on legitimately. Essentials like shelter, transportation, and higher education are often only attainable after diving into the deep pockets of banks or other financial institutions. But no matter the reason for its accrual, debt is an enemy of financial freedom that stands in front of life's many opportunities.
Debt's iron grip is often much tighter on medical professionals than those in other fields. In 2015, the average student loan bill for a med school grad crossed the absurd threshold of $180,000.2 Investing your talents into becoming an ob-gyn comes with great potential for a rewarding and lucrative career—but if you aren't tactical in your approach, the high financial barrier to entry can keep you in a chokehold for decades to come.
If you're already languishing in debt's cage, it's time to plot your escape. Here are four keys to unlock the cell and reclaim the fruits of your labor:
Key 1: Stop extending your prison sentence
Before dreaming of freedom, you must first stop adding to your sentence. Until your current debt is firmly under control, do not entertain the thought of taking on more.
In fact, in order to use one of the two premier debt reduction strategies (detailed in the third key), you will need extra funds each month to put toward your repayments. This means you must not only live within your means, you must live below them.
Fortunately, May's financial health article explored this very topic. If you need a refresher on how maximize your budget, click here.
Credit cards are usually the first place to start cutting, because despite inner-temptations claiming otherwise, they're rarely used for actual emergencies. If you're racking up more expenses than you're paying back each month, it's time to shred the plastic.
Other categories of debt can be more justifiable. Home mortgages claim the biggest share of America's borrowed funds, with tuition in a distant (yet still formidable) second.3 Car payments may also factor in.
But before jumping in on these investments, be absolutely certain you've thought through your strategy:
- Is this the best time for me to buy a house? Are there other, more affordable living options I should also be considering?
- Should I try putting myself through a doctoral program now, or does it make more sense to wait? Should I seek an employer that offers tuition reimbursement or aid as a benefit?
- Is my current form of transportation serviceable, or is it too unreliable to trust? When shopping for a new vehicle, am I placing practicality and affordability above status and prestige?
Take yourself through these types of questions with any new debt you're considering. If, after careful and measured contemplation, you decide additional debt may be the only way to keep pushing your personal goals forward, don't feel guilty over going through another round of borrowing. Just have a plan of attack in place beforehand, so your budget isn't left bruised and bloodied in the aftermath.
Key 2: Consider refinancing or forgiveness
A big reason loans can feel so suffocating is interest; if debt's only requirement was to pay back exactly what you spent, the process would be much more palatable.
Rates can vary wildly by lender, and it's possible—maybe even likely—that you didn't lock down a lean percentage. That's the selling point for third party refinancing groups: they'll buy out your current loans and let you pay them back at a more enticing rate.
Refinancing options are available for most markets, including mortgages and student loans. The savings can be worth it, but there are also tradeoffs.
Federal student loans, for example, include certain protections—like the ability to temporarily defer if your economic support is upended through something like a layoff. These sorts of benefits rarely carry over to the refinancer, so be sure to cross-reference all of your current loan terms with what the third party lender is offering.4
While refinancing might sound good, loan forgiveness undoubtedly sounds even better. Tuition money borrowed through the government can be fully or partially pardoned—but only if you meet the right conditions.
Most medical professionals should be eligible for the public service loan forgiveness program. To qualify, you must have made ten years (or 120 months) of consecutive loan payments and work with a specific organization for a set length of time (usually two years or more). This option isn't plausible for everyone, as it usually requires uprooting your life to serve a distant area in need of medical help. But the financial payoff can be big, and the sense of purpose even bigger.
The Association of American Medical Colleges (AAMC) has a well-maintained list of current public service loan forgiveness opportunities. It's not exhaustive, but it's a good starting point if the idea of gallivanting to a different part of the country to save lives and slay loans calls your name.
Key 3: Roll a snowball or cause an avalanche
It's time to choose your battle plan.
Oddly enough, this is where simplicity finally gets a chance to shine in the complicated world of finance. Over the years, two competing approaches to debt management have emerged as the only options warranting consideration: the snowball and avalanche methods.
Here's a breakdown of each:
Rank your debts by money owed (without factoring in interest rates), and make the minimum monthly payment on all but the smallest. Then, carve out an additional section of your budget to put toward your smallest loan each month. After the first loan is fully paid, begin taking that same extra money and applying it to the loan with the second smallest balance. Repeat until you are debt-free.
Rank your debts by interest rate, and make the minimum monthly payment on all but the highest. Then, carve out an additional section of your budget to put toward your loan with the highest rate each month. After the first loan is fully paid, begin taking that same extra money and applying it to the loan with the second highest rate. Repeat until you are debt-free.
There are plenty of online resources that walk through specific mathematical examples of each strategy in action, but there's one big question to answer when deciding which method is best for you: are you more motivated by logic or emotion?
Logically, the avalanche method saves both money and time. Granted, it may only be a couple months and a couple grand (both relatively minor numbers in debt's daunting timeline), but you're still coming out slightly ahead.
Emotionally, the snowball method has better pacing for moral victories. Loans with high interest rates often have higher balances; it may take half a decade to conquer your first loan under the avalanche method, whereas the snowball method might eliminate a loan in a year or less.
If you want to see how the numbers for each method break down for you specifically, use the supremely helpful online debt repayment calculator at unbury.us.
Remember: the only wrong approach here is the one you don’t follow through on. Pick your poison and go.
Key 4: Commit
Even with a dedicated strategy in place, fully paying off large debts can take a decade or two—sometimes even more. When confronting a chronology of that magnitude, the path of least resistance is giving in to a sense of overwhelmed helplessness. This is, of course, exactly the mindset lenders hope you fall victim to. After all, the longer you pay nothing but the bare minimum, the richer they become.
Look at it this way: if you're capable of succeeding in something as challenging as med school (and by extension, the medical field itself), you are just as capable of achieving financial freedom.
You already know how to stand firm and not give in when times are tough, so don’t let debt rule the rest of your life.
Watch for our next edition of our financial health series in November’s ACOG Rounds. Don’t miss it! This series is brought to you by Pearl Insurance, who provides ACOG low-cost insurance and disability plans for members.
1 "The Complex Story of American Debt." The Pew Charitable Trusts. N.p., July 2015. Web. 5 August 2016.
2 "Debt Fact Card." Association of American Medical Colleges. N.p., October 2015. Web. 5 August 2016.
3 Jasthi, Sreekar. "Credit Card, Student Loans and Mortgage Debt in the U.S."NerdWallet. N.p., 2015. Web. 5 August 2016.
4 Wong, Kristin. "The Complete Guide to Refinancing Your Student Loans." Two Cents. Lifehacker, 2 September 2015. Web. 5 August 2016.
The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the author’s knowledge as of the publication date. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. Any references to external websites are provided solely for convenience. The ACOG Member Insurance Program disclaims any responsibility with respect to such websites.