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Financing medical school and residency: Understanding your borrowing options

Many medical students and residents need to borrow funds to get through their training, often using government student loans or a line of credit — or both. When you’re thinking about borrowing to help finance your medical school education and residency, it’s important to understand how different borrowing options work at each stage.

Reviewing borrowing basics

No matter which one you choose, there are a few basic concepts common to all borrowing options:

  • The principal is the amount you borrow or owe, not including the interest. If you take out a $100,000 student loan or borrow $100,000 from a line of credit, for example, that is the amount of the principal. If you pay off $40,000 (not including interest payments), the $60,000 left to repay is also called the principal. The amount of principal you can borrow on a line of credit is called your “borrowing limit.”
  • Interest is the cost of borrowing funds. The amount of interest you pay on a loan or line of credit is determined by the principal amount and the interest rate. For instance, if your student loan has a principal amount of $10,000 and an annual interest rate of 5%, you will pay $500 in interest for every year the full amount of the loan is outstanding.
  • Payments reduce the amount of both the principal and interest over time. When you borrow to help finance your med school education, residency or transition to practice, you must make payments to satisfy the borrowing requirements (once the repayment period has started). The amount and frequency of your required payments will depend on the terms and conditions of your loan or line of credit. We recommend speaking with your loan or line of credit provider to confirm the details.

Investigating your options for borrowing to finance your education

Your borrowing needs are likely to be significant when you’re in med school, and your options typically include both government student loans and a professional student line of credit.

If you use government student loans:

  • The loans are interest-free while you’re in full-time studies, and you won’t need to make any payments until after you graduate.
  • Governments set the interest rate for their student loans, and the repayment period is long, usually 10 years after the completion of your studies.

If you use a line of credit:

  • Unlike for government student loans, interest on the amounts you borrow (up to your line of credit borrowing limit) accumulates immediately.
  • There are generally two payment options for the interest on funds borrowed from a line of credit.

1.  pay only the monthly interest owing;

2. “capitalize” the interest, which means adding it to the principal you owe. This might help with your cash flow crunch, but it increases the total size of your debt because you are paying “interest on interest.”

Transitioning from med school to residency may change your borrowing requirements

After you’re done with full-time studies, you’ll need to start repaying the funds you’ve borrowed to finance your education, at a time and on a schedule that has been set under the terms of your loans or line of credit.

If you use government student loans:

  • After you’ve completed med school, there is typically a “grace period” of a few months before your first payment is due. Your payments, when they start, will include both principal and interest on your outstanding balance.
  • Until recently, interest on Canada Student Loans was added to your loan balance during the six-month grace period after you finished school — but beginning November 1, 2019, the federal government will eliminate the interest during the six-month grace period and reduce the interest rate charged.1
  • Interest on government student loans other than Canada Student Loans may still accrue on your outstanding balance during any grace period before the required payments start.
  • Your personal repayment requirements will depend on various factors, such as your province or territory of residence when you borrowed through government student loans, as repayment requirements differ among jurisdictions. Also, government student loans may allow you to qualify for various forms of repayment assistance, depending on your circumstances, and may be interest-free.

If you use a line of credit:

  • Even though you will be earning a salary at this stage, you may have to rely heavily on a line of credit to meet your financial needs, including the costs of such things as exams and conferences.
  • During residency, you will be able to continue borrowing from the line of credit that you got during med school, up to the specified borrowing limit.
  • Although interest costs start accruing right away, you can usually defer interest and principal payments until up to 24 months after you finish residency — meaning that just like with student loans, you may have a grace period before any payments have to be made.

Integrating your debt and the transition to practice

Once your studies and residency are over, you may be looking to start a new practice or join an existing one. At this stage, a line of credit can help bridge the gap before your regular earnings start.

This is also the point at which payments on your professional student line of credit begin. If you’ve had a line of credit since you were in full-time studies, its terms may change as you transition into practice. Your line of credit may be converted to a loan with new terms and conditions, or into a professional (not student professional) line of credit that will allow you to continue to borrow.

Your MD Advisor* can help you develop the financial plan you need to focus on debt minimization and strategies to optimize your savings while paying down debt. Having a plan in place can help you manage and reduce the debt you accumulate, and provide a strong financial footing for your career as a physician.

If you have questions about borrowing to complete your training, an MD Advisor can be an invaluable resource in navigating your options.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.