Should you reorganize your debt?

If you are a resident or new-to-practice physician, chances are you have some debt — likely a mixture of credit card debt, student loans and a line of credit. As you transition from medical school to full-time practice, you’ll have to make decisions about how to pay it off. One strategy to consider is consolidating the debt into one loan (or other credit vehicle) with one monthly payment.

A line of credit is the typical debt-consolidation choice

Debt consolidation involves using one type of credit vehicle to pay off other debt you hold, effectively converting your high-interest debt into lower-interest debt. The most common option for physicians is to use a line of credit to pay off credit cards and/or student loans.

There are several advantages to doing this. First of all, you can reduce the total interest you pay and often your minimum monthly payment. You also create a sense of control for yourself and simplify the management of your debt repayments. That’s because you’ll go from having multiple types of debt — each with its own statement, interest rate and deadline — to one single monthly payment. That reduces the likelihood of missing a payment, which would hurt your credit score and result in you being charged more interest.

For some people, debt consolidation can also be a way to repay your debt more quickly — but that depends on how you go about it.

Get rid of credit card debt

Credit card debt is generally the highest-interest type of debt you can have. For some cards, interest rates run as high as 20%. So when you’re looking at debt consolidation, always pay off your credit card balance. The most common way to do this is with a line of credit.

  • Use your student line of credit: Interest rates on student lines of credit are quite a bit lower than credit card interest rates — usually the prime rate or less. If you have a line of credit from medical school, you can continue to borrow on it as a resident. Student lines of credit also offer some repayment flexibility, which can be important if cash flow is an issue for you. While some lenders require you to pay at least the interest amount every month, others allow you to “capitalize” interest payments — meaning they are added to your outstanding balance. Be aware, though: this means you will be paying interest on the interest you already owe.
  • Convert to a regular line of credit: Once you finish residency and start practising, your student line of credit can be converted into a regular line of credit, but with different terms and conditions. The monthly payments required on regular lines of credit are quite minimal: you typically only need to pay the monthly interest, while you can pay down the principal any time.

Once your credit card debt is consolidated on a line of credit, you may be able to strike a balance between paying down debt and starting to invest. That’s important because the earlier you start investing, the more you could benefit from compounding growth.

Student loans? They actually have advantages

The interest rates on federal student loans are comparable to those on lines of credit. (For Canada Student Loans, the interest rate on floating-rate loans is the prime rate.) However, student loans have two advantages:

  1. Tax credit: Unlike with a line of credit, you get a 15% federal tax credit on the interest you pay. From a purely cost standpoint, that makes them an even more attractive type of debt to hold than a line of credit.
  2. Loan forgiveness program: If you’re in family medicine, there’s another reason not to consolidate student loans using a line a credit. The Canada Student Loan forgiveness program forgives up to $8,000 per year, or $40,000 total, of the federal portion of student loans for family medicine residents and physicians in exchange for working in underserved rural and remote communities.

Note: You are not eligible for this program if you’ve consolidated your student loans into your line of credit — the relief is only applicable to the Canada Student Loan balance. That said, you could always use the forgiveness program first, while it is available to you, and then consolidate the remainder of your loans afterward.

Holding student loan debt, however, can be a problem if you don’t have the cash flow to make the monthly payments. A student line of credit, in contrast, offers repayment flexibility: no payments are required until two years after your residency or fellowship. Consolidating your student loan debt into a student line of credit might make sense in this situation.

MD Advisors* are here to help. Talk to your Advisor before making any decisions about consolidating your debt, and about any relief programs specific to your province.

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

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