Podcast: Physicians and Debt

You’re listening to The Financial Literacy Podcast, brought to you by MD Financial Management.

Canada’s only national financial services firm dedicated to helping physicians and their families with their unique financial needs.

TR: Hello listeners! Thank you so much for tuning into this week’s episode. My name is Tanis Roadhouse. I am so excited to be your host today as we dive into the wonderful world of debt – more importantly medicals students’ debt and how to pay it off. Joining us today to share some of their professional advice is  Aimee King, Early Career Education Specialist. Welcome to the podcast Aimee.

AK: Thank you so much Tanis. It’s great to be here. I am really excited to, hopefully, help some of our future physicians and their families listening today feel better about their debt.

TR: Absolutely, because a lot of people feel uncomfortable when it comes to talking about their finances and debt, even if it a result of pursuing their passion.

AK: Exactly. It’s really hard for students nowadays to avoid going into debt, particularly medical students. So, our goal today is to guide you through the different options you have when it comes to managing and repaying your debt and get you on the right track as early as possible.

TR: And with that, let’s start by talking about some of the differences between the amount of debt that medical students should expect versus other students.

AK: That’s actually a great place to start, because the more prepared you are, the easier it will be to plan for and the less overwhelmed you will feel later on.

So, in Canada, in the latest stats we have available, the undergrad students with debt owed an average of 28 thousand dollars.

Medical students, on the other hand, can see upwards of 140 thousand dollars of debt. And that doesn’t include the additional debt incurred in residency and fellowship.  Nor does it consider that a medical student may be married or cohabitating with someone that also has debt.

So, by the time they start practicing, it’s not uncommon for physicians to have racked up over 200 thousand dollars of debt.

TR: Those are some big numbers.

AK: I know, I know, and I don’t want anyone to get discouraged. It sounds overwhelming when you look at those numbers alone, but the good news is that just as medical student debt is different from regular student debt, so are the options to pay it off.

A couple of things to keep in mind right off the bat is that when you get to your residency, you’ll be earning a salary while continuing your training. Now, everyone’s situation is unique, but depending on your borrowing situation and your living expenses, for example, whether you are a single or dual income household, if you have children, and where you are located, you may be able to allocate some of your salary toward paying down you med school debt. Even if you start out with small payments, it is helpful to start establishing good habits and keep the interest from growing your debt even more.

TR: You said depending on your borrowing situation. I assume you mean whether you borrowed using a loan or line of credit.

AK: Yes, exactly. Student loans and lines of credit have different payback terms and schedules. They can even be different in terms of how much interest you are paying. So, depending on which one you have, when you need to begin paying back your funds and what those payments look like can vary.

TR: Well, for those listeners who haven’t started on their med school journey yet, knowing what these differences are might help them decide what borrowing method they want to go with. So, if that’s the case, could you take us through how each of these methods work.

AK: Yes, of course. Like you said, for those listeners who are at the very beginning of their journey, or parents who might be preparing for their children, understanding the difference between a student loan and a line of credit can help you make your relationship with your debt a little bit better down the road.

So, before we look at the repayment differences, let’s briefly talk about the borrowing differences.

With a student loan, you are given lump sum of money all at once. You will have to pay back the entire amount of the loan, plus interest, whether you use all the funds or not. Unfortunately, with student loans, you cannot use them towards your residency expenses, because it’s not considered full-time study. A line of credit might be a better option for you to cover all your expenses at this point.

A line of credit is similar to a credit card, in that it is revolving, meaning that you are approved for a certain amount of funds, and you can use them as you need them. You are only charged interest for the funds you use, and whatever you pay back becomes available for you to use again later. Plus, you can use your line of credit through your residency. Once you’ve completed you training and your repayment grace period has passed, most financial institutions will let you convert your student line of credit to a regular one. Keep in mind though, that depending on the institution, your fellowship may or may not be included in what is considered your training. So, the timing of when you can convert your line of credit may vary.

If you don’t convert your line of credit, it will most likely be changed to a loan with a regular payment schedule.

TR: Ok, so it sounds like a line of credit offers a little more flexibility and can be used for a longer period of time. Are there any major pros that might make students lean more towards a loan?

AK: There are advantages to both, but generally speaking, when paying for your medical school, you want to use your funding sources in the order that you will accrue the least amount of interest. So, once you’ve used your savings and any free money, such as grants & bursaries (as these don’t need to be repaid), you would use your student loans, and then your line of credit.

The big difference comes down to how the interest is calculated, despite the interest rates being very similar. Your student loans don’t accrue any interest while you’re in medical school, typically these loans would go into repayment 6 months after you complete your full-time studies, and your interest would start to accrue then. However, since Covid hit, the government has put a pause on charging interest on the federal portion of your student loans until March 2023. The provincial loans may differ, and you’ll have to confirm with your lending office as some may be able to delay interest while you are completing your residency training as well. Once your interest starts accruing on the federal portion of your loan, you are also eligible for a 15% tax credit on the interest.

The interest on your line of credit kicks in the moment you withdraw the funds. You’ll be charged a monthly interest payment; however most banks will capitalize this payment while you’re in medical school. Which means it’s borrowing from your line of credit to pay the interest. This is also why your debt will grow more quickly on your line of credit. The nice part is that you have access to this throughout your residency training as well, as you can use these funds for anything! The grace period on your line of credit can be anywhere from 6 months to two years depending on your bank before you need to start repaying down the capital.

The repayment terms of each will come into effect later and then you’ll be able to weigh the options available to you including loan forgiveness programs and debt consolidation to come up with your personalized debt repayment plan!

TR: Ok, so each option has some clear advantages. A line of credit, like I mentioned, offers a bit more freedom, but a loan is useful if you don’t have a steady cashflow to stay on top of those interest payments. It’s a tough call.

AK: It is. And everyone’s personal financial situation will also impact that decision. I would say if you’re really unsure, talk to a financial advisor and they will be able to analyze not only what will work best for your current circumstances, but what will help you in the long run as well.

TR: And advisors at MD Financial are especially helpful because the specialize in medical students’ circumstances and the impact these circumstances can have on the whole household.

AK: Exactly. MD advisors will know all about the special rates and borrowing limits and programs designed specifically for a medical student’s financial plan. And that plan extends beyond school, beyond residency, and into your career. It also includes your partner or spouse and how your finances impact one another. This means that your debt doesn’t stop you from enjoying the other important things in your life.

TR: Right, because becoming a physician is a long road, and many families will be experiencing, and paying for, those big life events, like getting married and buying a home and starting a family, while still training. So, staying on top of your debt will help you avoid sacrificing those important moments. And with that being said, let’s shift into some of the best strategies for starting to pay down your debt.

AK: Absolutely. The advantage for medical students is that there are options available to you to help pay down your debts. It's great to meet with an MD advisor to make sure that you are aware of all of the debt relief or loan forgiveness programs that are available to you.

After you've made sure to take advantage of any of those - When it comes to debt products, it's important to know that each debt product that you have will have its own monthly minimum debt payments and you want to make sure you are making all these payments to avoid any penalties or negatively impacting your credit score. When you start paying down your debt, whether it's while you're still in training or once you're grace period is over, the basic rule of thumb is to pay off your most expensive debt first. By this, we don't mean your largest balance, but your debts with the highest interest rate. This is costing you more money the longer it goes unpaid. This is where you would want to allocate any extra cash after all of your monthly minimum payments have been made. After that, then you move on to the next highest interest rate and so on, this is called the snowball method.

TR: Now what if you don’t have the cash flow to be making larger payments on your expensive debts, plus the monthly minimums on your loans, plus all your other expenses?

AK: Those monthly minimum debt payments can definitely add up quick!  Your MD advisor will also be able to crunch the numbers to see if consolidating your debts onto your line of credit makes sense. Essentially paying off your other debts with your line of credit.

TR: Isn’t that like robbing Peter to pay Paul?

AK: Well yes and no. You are using borrowed funds to pay off other borrowed funds. But the key difference here is that since the interest rate on your line of credit is so much lower than the rate on things like your credit cards, it’s actually more cost effective in the long run.

However, this is mostly recommended for things like credit card debt. You can leave other low interest debt, like your student loans, independent so that you can continue to take advantage of things like deferred interest and tax credits I mentioned, if the math makes sense.

By consolidating your debt onto your line of credit, this can free up some cash in your monthly budget by only having one monthly minimum debt payment. This then gives you the flexibility to either pay down more debt or fund other goals like retirement.

TR: Well, that’s great. I think a lot of people forget that physicians don’t have a pension or retirement fund and have to save up for those things on their own. So, the earlier that can get started the better.

AK: Absolutely. I know a lot of people are hesitant to put money aside or start investing while they still have large amounts of debt. They might think to themselves, “Well, why would I hold on to this large amount of savings if I can just put it toward my debts?”

But once you start earning income, deciding to start saving or investing even while you still have a lot of debt, can have quite a few benefits.

Whether you decide to open up a TFSA or want to start a small investment portfolio, the earlier you start the better. The biggest benefit to successful investing is time, so starting early, even with small amounts will grow your wealth significantly by the time you reach retirement. This also helps you gain experience with the ups and downs of the market.

It’s also a great way to start establishing good saving habits. Even if you’re starting with small contributions at first, a good savings strategy is to allocate a portion of every paycheck to your savings or investments. Then, as time goes on and your income increases, and your debt get smaller, you can just increase that amount. The main point is that you’ve gotten into that habit and have built your expenses around that expectation.

TR: Yes, those are all really great points. I feel like the main take away is to focus on the future. We know that can be hard for medical students because your studies and your training is going to be very stressful and demanding. And seeing all that debt grow and grow can feel overwhelming.

But we are here to reassure you, that there is nothing wrong with leaving your low interest debt a little bit longer if it allows you to save some funds in preparation for your future.

AK: That’s exactly right. There’s this big misconception that any debt at all is bad, and that's just not true. Debt, used effectively, can be a useful tool towards your overall financial plan.

Unless your debt is causing you to lie awake at night in a panic, I’d say it’s better to have those savings or investments for when you need to put a down payment on a house, or in case of emergencies. Because you don’t want to have to borrow even more for those things later.

TR: Right. Now, on the topic of those big life moments and the expenses that come with them, one of those moments that many physicians want to prepare for is starting their practice. What do you think is the best way for those physicians to approach that step while also managing their debt?

AK: So, just like any business, you need to think about any potential start-up costs in comparison to your income.

The increase in income you will see as a practicing physician will definitely help you begin to make significant payments toward your debt. But you will have to evaluate whether you have enough spare funds to cover the startup costs or whether you are comfortable borrowing more funds.

This is also why it is important to leave room in your line of credit and refresh yourself on its terms and conditions. You will need your grace period to have enough access to your line of credit to help you navigate any startup costs and a potential delay of income as you get into your billing cycle rhythm.

Then, for any self-employed physician, there is the question of whether or not to incorporate.

TR: Well, what does incorporate your practice mean?

AK: Incorporating your practice means that you have created a corporation, a separate legal entity, that now owns your practice, and you become a shareholder.

The main benefits of incorporating are tax deferrals, which allow you to speed up your retirement savings and pay down business debts more efficiently. By having the money you leave in your corporation be taxed at the small business rate it gives you more money per dollar to put towards these things.

Timing is an important consideration when it comes to incorporation, there are some initial set up costs and additional yearly administrative expenses, but the main part is making sure that you can leave some money within your corporation at the end of year. In other words, if you don't need every dollar that you are making to pay for your living expenses. It's best to discuss this with your with your accountant and MD Advisor to know when the timing is right and how to work it into your overall financial plan.

TR: Excellent.  Now, before we wrap up today is there any final advice you have for our listeners in regard to dealing with their debt as physicians.

AK: Yes, just again, don’t be ashamed about your debt and definitely don’t let it discourage you from the amazing career path you’ve chosen. Have patience and have a plan and everything will be alright in the end. And of course, don’t be afraid to reach out to professionals for advice. Like we said earlier, financial advisors like the ones at MD are your best friends throughout your journey. They will help you make you plan, change your plan, and change it again as your goals change. But they know your field and they know what can work best for you.  And with all that said, good luck to you all.

TR: Awesome. Thank you so much for joining us today. It’s been a pleasure having you on and getting some inside perspective. And who knows maybe we can have you on again soon.

AK: Thank you. This has been fantastic.

TR: And a very big thank you to you, listeners. We hope today’s episode has answered some of your questions and eased some of your worries and we wish you all the best on you physician’s journey. Once again, I’m Tanis Roadhouse and we hope that you will tun in again soon. Bye for now.

This has been The Financial Literacy Podcast brought to you by MD Financial Management.

For more information or to speak to an advisor today, visit our website at md.ca