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By taking advantage of today&s lower interest rates and watching your pennies, you can reduce the amount you owe more quickly.
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By taking advantage of today's lower interest rates and watching your pennies, you can reduce the amount you owe more quickly.
You're probably all too familiar with enormous debtespecially if you're just out of medical school, smothered by student loans. But take heart: With self-discipline and help from today's lower interest rates, you can shrink the load. Here are some ways to do it:
Since interest on consumer borrowing isn't tax-deductible, ditch that first. If you're carrying balances on high-rate credit cards, see whether you can transfer the debt to one or two lower-rate alternatives. Good places to look for cheaper cards include www.bankrate.com, www.cardweb.com , and credit unions.
If you own a home, you might also consider refinancing your mortgage for a larger amount or taking a home equity loan, then using the extra cash to pay off card balances or other nondeductible debt. The interest will be tax-deductible (within certain limits), and assuming you get a lower mortgage rate, your monthly payment might not rise much. But don't even think about this if you're apt to run up your card balances again or tap equity for other splurges. Likewise, if you can expect to pay off the nondeductible debt within a couple of years anyway, it doesn't make sense to stretch out the debt term by borrowing against equity.
Even if you don't dare tap home equity, refinancing the principal you already owe may be worthwhile, given that mortgage rates recently averaged just 6.49 percent. A percentage point difference can dramatically reduce your monthly payment and your overall debt burden.
Either way, have your banker run refinancing numbers carefully. If you've been in your home for a while, stretching out the loan to 30 years again might not make sense, even at a lower rate.
If you can't tap home equity, see whether your bank, based on your earning potential, will give you a low-rate personal loan to pay off your higher-rate card balances, suggests financial planner Brian T. Dilley, manager of the Young Physicians Group at Mediqus Asset Advisors in Chicago. The bank may consent in hopes of securing future business with you. Also, if you already have a personal loan, look into refinancing it, now that interest rates have dropped.
If you're just out of training, one way to eliminate the debt quickly, says Madison, WI, financial planner Todd Bramson, is to practice in an underserved area, under an arrangement that provides loan forgiveness. The Association of American Medical Colleges provides information about such opportunities at www.aamc.org/about/gsa/stloan .
Also consider consolidating all your student loans into one, particularly if you haven't yet begun repayment. "Doing so within the grace period could get you 0.6 percent off the rate," Dilley says. "But you'll lose the remainder of the grace period, so wait until the last month to file the paperwork." Consolidating also locks in the rate for the life of the loan, he notes.
Even if you've been repaying for a while, combining your loans may still make sense, because consolidation rates in general dropped as of July 1. "You could lock in a rate of 5.5 or 6.5 percent, for the loan's life," Dilley says. "Only doctors whose current loans have vastly different rates10 percent and 6 percent, sayaren't likely to benefit from consolidating. That's because consolidation essentially results in a weighted average of the rates. In that case, pay down the higher-rate loan first."
While you're restructuring, consider having the lender automatically deduct your payments out of your bank account, suggests Dilley. "That can save you 0.25 percent on the interest rate."
Making lifestyle changes is often a critical step toward paying down debt faster. A few changes to consider:
Resist the urge to trade up to a bigger house with a bigger mortgage. And if you're a new doctor who hasn't yet bought a house, consider remaining a renter for now. "If you jump into a big house and fancy lifestyle right away, you'll never get ahead," warns Bramson. Moreover, if you have a load of student debt, you're considered a riskier borrower, which could boost your mortgage rate.
Analyze your spending habits and look for ways to cut back. "I often hear clients say, 'I had no idea I was spending this much on xyz,'" says Newton, MA, financial planner Gayle Buff. Financial planner Mary McGrath of Champaign, IL, has her clients create an annual spending plan for big-ticket items such as a new car, remodeling, or vacations. "Because many physicians have considerable discretionary in-come, they may think, 'I can afford that.' But they can't afford to spend without restraint month after month," she says.
Avoid credit card interest by charging no more than you can pay off monthly. That could save you an enormous amount.
With any additional cash you free up, prepay debts whenever possible. Follow these strategies, and before you know it, your debt mountain will be a molehill.
Diane Weber. Pare down debt. Medical Economics 2001;21:35.