When Dr. Sarah Liu (not her real name), 26, graduated from the School of Medicine at Queen’s University in 2019, she was shocked to find her debt had grown to $100,000. While this was in line with the national average,1 more and more of her medical colleagues are dealing with larger debt loads.
Dr. Liu is just starting her first year of residency in family medicine in the Greater Toronto Area. She estimates that her $100,000 debt is costing about $5,000 a year in interest payments (that’s based on a borrowing rate of 5%) — not to mention any principal amount that needs to be repaid.
Earlier this year, Dr. Liu made an effort to organize her finances. But she realized that with all her competing priorities, it might be easier and more efficient to work with a financial advisor who understands the challenges that physicians in training face.
To get financially fit, here’s what Dr. Liu’s financial advisor recommends.
- Take advantage of student-loan forgiveness programs
If she chooses to work in certain underserved communities in Canada, Dr. Liu could apply for the federal student-loan forgiveness program. She would be eligible starting in the second year of her family medicine residency.
The Canada Student Loan Forgiveness for Family Doctors and Nurses program will forgive the federal portion of an outstanding student loan, up to $8,000 per year for a maximum of five years, or $40,000.
- Maximize tax deductions/credits
On her income tax return, Dr. Liu can deduct her membership dues for the College of Physicians and Surgeons of Ontario, as well as union dues for the Professional Association of Residents of Ontario.
She can claim federal non-refundable tax credits on tuition, education and textbook amounts, as well as on her student loan interest and on public transit passes. Provincial credits are also available for tuition amounts and student-loan interest.
- Understand cash flow and how to manage it
If she wants to pay off her student debt, Dr. Liu needs to analyze her cash flow and make a plan. Like all first-year medical residents in Ontario, she will earn $60,398 for the full year. After taxes and deductions, she will have $44,483, or $3,707 a month.
Dr. Liu’s living expenses — housing, food, transportation, phone and Internet, clothes, entertainment and miscellaneous costs — add up to approximately $2,900 a month. That leaves just over $800 a month, an amount that would be very easy to spend. To put this money toward her debt instead, Dr. Liu could set up automatic loan repayments that would come out of her account on payday.
- Pay down debt and invest
Dr. Liu is eager to pay down her debt using the $800 extra per month. However, her financial advisor suggested a combination of debt repayment and investing: $600 toward debt and $200 for saving and investing.
Saving $2,400 a year may not sound significant, but it adds up — and it is money Dr. Liu can access if she needs it later.
Given her current income, it may make more sense to save in a tax-free savings account (TFSA) than an RRSP. Investment earnings in the TFSA can grow on a tax-free basis, and she can withdraw the funds any time without penalty.
By saving and investing early, Dr. Liu can benefit from the potential power of compounding. Investing early also gives her a chance to get more comfortable with personal finance and to start building her investment knowledge. Once Dr. Liu starts practising and has more income, she will have a better idea of how she wants to invest her money.
Learning how to take control of her debt now will go a long way in helping Dr. Liu become financially fit. As she progresses through her career, she can find more ways to optimize her financial health, whether her priorities are buying a home, starting a family, establishing a medical professional corporation, or saving for her retirement.