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There Are No Student Loan Tricks

I have a group of friends/colleagues who are willing to invest their money only if it doubles in value or returns them at least 20-30% annually. This group would consider a 5% profit not worth their time. I would generalize them to have either a lot of cash sitting idle on the sidelines or massive debt burdens.

This group wouldn’t be willing to put in the amount of time it takes to research and execute such high-profit (high-risk) investments in order to realize those profits. But they are certain that such opportunities are out there because they read about them.

Much like these mega-return seekers, there is a similar group of physicians with a high student loan burden who believe that there are student loan tricks somewhere out there by which they can pay off their debt faster or with less money.

This group gravitates heavily towards student loan refinancing, shuffling credit card balances, transferring debt to a HELOC, and other student loan debt tricks advertised on blogs.


There Are no Student Loan tricks

Math is colorblind, it’s not sexist, and predictable.

If you have $300k in student loan debt then at minimum you’ll either have to make 300 individual $1,000-payments or 600 identical $500-payments.

If your interest rate is 5% on $300,000 then every single day you will accrue $41 ((5% ÷ 365) * $300,000) of interest. Which means that $1,232/month would only cover your interest payments and never reduce the balance.

If you take 10 years to pay off a $300k student loan debt at 5% then you’ll pay $81,000 in interest by making 120 payment at $3,180/month.

If you have $300,000 in SL’s and a 5% interest rate and are not paying at least $3,000/month then your student loan debt balance is growing. If you’re paying $2,500/month then you’re not getting a deal, you’re getting shafted.

Your student loan debt isn’t secured by something like real estate property or a Rolex watch which might appreciate in value. And you cannot dissolve that debt unless you die which, come to think of it, is the only trick you can use to not pay that money back.


But, What About…

Nope, that student loan trick doesn’t work either. You might be thinking of 7 or 8 different student loan tricks advertised online but these are meant to make the advertiser money.

Even if you do a loan repayment program by working at an FQHC you’re still trading a higher income for a partial loan repayment. Aggregately you are losing money.

Even if you accept a $100,000 loan repayment bonus with a behemoth like Kaiser Permanente who also pays you a high salary then you are simply locking yourself into a 5-year obligatory contract. You are giving up the opportunity to earn a higher income elsewhere.


Winning The Debt Game

When a hustling entrepreneur borrows $300k from a bank to start their business then they will likely try to drag out the repayment of that debt for as long as possible. They might even file bankruptcy if appropriate.

Unlike a student loan, a business loan is an actual asset, a tool that an entrepreneur can use to make more money. A student loan was the entry ticket to playing the medicine game – it wasn’t an asset that was given to you with which to earn profits.

The entrepreneur who borrows $300k at 8% will owe $24,000/year or $2,000/month in interest payments alone. But they can write this off as part of the expense in their business on their Schedule C. You can’t do that with your student loan interest.

Unlike you, the entrepreneur also gets to pay back their debt with pre-tax dollars. You, as an employee, will have to earn $100 just to have a $60 payback value. Put in another way, you’ll have to earn $635,000 pre-tax in order to pay back your $381,000 – ouch.

The only way a doctor with a $300k student loan will win the debt game is to pay it back dollar-by-dollar. Will you pay it back quickly or will you wait the entire 10 years to pay off the debt?


Paying off Student Loan Debt Sooner

I could make an argument for either path – either taking the entire 10 years to pay off the debt or paying it off as soon as possible. It’s a personal decision.

Naturally I lean towards the latter not only because I would end up with more money in my pocket but also because being debt-free is a powerful position to be in.

One question a physician could ask themselves is what his/her working time horizon looks like. Are you comfortable working full-time for the next 30+ years regardless of how you or medicine changes? Are you confident that a lawsuit or a medical board investigation or personal legal matter won’t threaten your job stability?

If so, then why add the pressure of paying off your debt sooner?

Conversely, is it possible that you might burn out? That your personal life might interfere with your ability to enjoy practicing medicine? Or that the practice of medicine might change enough to make it less pleasurable?

If any of these are possibilities then it might make sense to protect against them.


How Student Loan Interest Works

If you have a $300,000 student loan debt balance at 5% APR then you can divide that 5% by 365 days to obtain your DPR (daily periodic rate).

For 5% your DPR would be 0.0137%. Meaning, every single day your interest is calculated at 0.0137% of whatever your student loan balance is.

Two of my readers are a power couple who together have $950,000 in student loan debt. Their weighted APR (average APR among all their various SL’s) falls somewhere in the 6% range. That’s a DPR of 0.0164%. It comes out to $156/day.

It means that after 30 days they would have an interest burden of $4,684 – just interest alone.

Imagine if they suddenly paid down $100k from this debt and were now left with $850,000. By doing this they now decreased the daily accruing interest down to $139 from $156 – that’s a $17/day savings or $510/month! That’s a ton of money.


Debt Payoff Strategies

I am motivated when I see the needle move on my debt balance. Even if it goes down by $50, it makes me feel as though I made progress. That’s probably because I keep everything tracked in a spreadsheet.

You have to find your own debt payoff strategy which keeps you motivated. A few of my friends recently became debt free and one of them raided her investment savings account to achieve it – she has no regrets.

Life after being debt free is similar to becoming financially independent. A part of you will be excited and another part of you will wonder why you were in such a rush to get there.

Eventually when enough time passes you’ll realize how great it feels to be debt-free, how much freedom you now have, and how many more options you get to enjoy.

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