Conquering Six-Figure Student Loans and Credit-Card Debt

Q: I graduated with $175,000 in combined student loan and credit-card debt. I don’t know where to begin paying it off, let alone how to get started saving for the future. Help!

A: The first few years after medical school can seem financially suffocating for young physicians. Who can think about saving for long-term goals, such as buying your first home or planning for retirement, when you’re struggling with day-to-day bills and the equivalent of a mortgage in student-loan debt?

The average educational debt of graduates of the Class of 2010 was $157,944, according to the Association of American Medical Colleges in Washington, D.C. (That’s an average — as the reader shows, students in certain medical specialties graduate with far more debt.)

On top of six-figure education loans, many graduates have substantial high-interest credit-card debt. On average, older graduate students (between the ages of 30 to 59) had outstanding credit-card balances of $12,593, according to a 2007 Nellie Mae survey, the most recent data available. That’s almost twice as much as their younger counterparts aged 22 to 29, who carried average credit-card debt of $6,479.

So what’s a struggling physician to do? Don’t panic. By taking a methodical approach to managing your spending and your debt, you can get on the road to financial security by following these steps.

Choose the Right Repayment Plan

If you’re one of the lucky few young physicians with enough income to cover your monthly expenses and your debt payments, with money to spare for saving, choose a student loan-repayment program with the lowest term -- the standard federal loan repayment program extends payments out for 10 years. (Extended and graduate repayment programs allow graduates to expand payments up to 30 years.) If you have higher-interest private loans, pay the minimum owed on your federal loans, and concentrate on making larger payments to pay down the higher-interest debt first.

But if you’re neck-deep in debt, including high-interest credit-card debt, and you expect your current salary to increase steadily over the next decade, consider enrolling in an income-based repayment (IBR) program. Graduates pay 15% of their income over 25 years, and after that whatever remaining balance is left is forgiven. (You can cut that down to 10 years if you work in public service, including jobs in government and nonprofit 501(c)(3) organizations, under the Public Service Loan Forgiveness plan.)

In 2010, the federal rules were changed to make the IBR rules more equitable for married couples. Previously, the formula lenders used to calculate IBR payments didn't combine a couple's total student-loan debt, leading to monthly payments that were up to twice the amount two single borrowers would have to pay, particularly if both spouses had advanced degrees. For married couples who file jointly, lenders now use a formula that factors in the couple's total outstanding federal student-loan debt and adjusted gross income to come up with the minimum monthly payment. Find out if you’re eligible for the IBR program by using this calculator.

Can’t Afford Your Lifestyle? Change It

Many graduates in their late-20s have enjoyed living on their own for many years. When the time comes to finally start repaying those big monthly education bills, however, some may find themselves unable to make ends meet and be forced to make hard decisions about their living arrangements.

Moving back home with one or both of your parents can seem like a drastic -- and humiliating — step for a young physician to take, but eliminating monthly housing costs can allow you to concentrate all your disposable income on repaying your high-interest debts. But don’t just show up on your parents’ front porch, laundry in hand. Instead, create a “rapid debt-reduction plan” that plots out how long it will take you to whittle down your debt to a manageable level, and sets a goal for when you plan to get back out on your own. (This debt-reduction worksheet, based on the “snowball method” of paying the debts with the highest interest first, can help you track your progress.)

If moving home with your parents is not an option (or at least, not a palatable one) consider taking on a roommate to share your monthly household expenses, and perhaps even your commuting costs.

Save for a Rainy Day … Even When It’s Pouring

Once you’ve got the right loan-repayment plan in place, and you feel comfortable that you can afford your monthly household expenses, it’s time to focus on emergency savings. Yes, emergency savings is even more important than saving for retirement at this point. The fact is, small and even big financial crises -- such as a major car repair, or being unable to work because of accident or injury -- do happen to people your age, and you need to plan for it.

Conventional wisdom calls for saving between three to six months of monthly expenses in an emergency account, but even this amount can seem daunting when there are so many other pressing bills to pay. So start small, and stick with it. Open a high-interest online savings account and start socking away, say $25 to $50 a paycheck, by having the funds automatically deposited each pay period. Then once a year, or sooner if your cash-flow improves, increase that amount steadily until your savings would cover at least three months of expenses. Using an online account, and cutting up your debit card to avoid easy access to the funds, will help you avoid the urge to splurge.

Not Saving for Retirement Yet? Start.

With your short-term financial cushion in place, it’s time to think about long-term savings. Younger workers are notorious for putting off saving for retirement early in their careers. In fact, a full third of workers 25 and under don’t contribute to employer-sponsored retirement plans, and only 4% of young workers are maxing out their workplace retirement plans, according to a recent survey by the tax-information publisher CCH Inc. of Chicago.

This is especially true for younger physicians and couples struggling to repay enormous student-loan debt. Most don’t realize, however, that even meager retirement savings in the first few years after medical school can contribution substantially to their retirement nest egg down the road. By the time retirement rolls around, they’ll have missed out on decades of compounding.

The retirement age for those born after 1960 is 67, so a 27-year-old fellow has 40 years to build his or her nest egg before full Social Security benefits kick in. For example, socking away $5,000 a year over 40 years, with a relatively conservative 6% return, will generate savings of $871,667. But if you postpone retirement savings in just that first year alone, your account would end up with $51,429 less.

Again, if you’re struggling financially and even saving $5,000 a year, pre-tax, seems too steep, try at the very least to contribute enough to get your employer’s 401(k) matching contribution, if one is offered. It doubles your return on savings before you even begin investing.

ASK THE EXPERT: Do you have a personal-finance or financial-planning question? Send your questions to tcullen@hcplive.com.