Why You Should Pay Loans Off SLOWLY

By Mark Reiter, MD, MBA, University of North Carolina

Most medical school financial aid offices will advise you to pay off your loans in the shortest possible amount of time. Do NOT listen to these misguided creatures. You should pay your loans off over as long a period as possible, usually 30 years. With interest rates near 40-year lows, you may be able to lock in an interest rate well below 3% if you consolidate at the proper time and make on-time, automated payments. This is an incredible deal that the rest of the world isn't allowed in on. If anyone could get a loan at this rate, everyone on Wall Street would be tripping over each other to sign up for the largest loan possible, realizing they could be virtually guaranteed to earn a rate of return considerably higher by putting the money to work in safe investments over a 30 year period. So, since we can no longer increase the amount of our loans, we should do the next best thing; pay our loans off over as long of a time period as possible, so we do not prematurely give back our great deal of a rock-bottom loan rate. In the future, when loan interest rates rise to significantly higher levels, such as 6%+, the different between what you expect to earn on the money versus what you will be paying in interest narrows quite a bit, so you should re-evaluate whether extending the loan period is the best choice. However, this may not happen for several years, and your rate will be locked in well before then.

Furthermore, the best payment plan to maximize your financial future in the face of dramatically low interest rates is the "graduated repayment" plan, whereby your payments are lowest early on (only covering interest) and increase over time.

For similar reasons, you should defer your loans whenever possible. Subsidized loans will continue to have interest payments paid by the government during deferment, making this strategy a no-brainer. Also, you will still be eligible for deferment if you choose to consolidate your loans during the grace period (despite a popular myth).

Please note that this strategy is only successful if you have the financial discipline to use the extra cash flow you are saving by back-loading your loan payments, in a manner that will allow for a rising income stream by smart investing (see "A Resident's Guide to Money").  If you blow all your cash on cheap booze and pretty women (or men), you'll just be digging yourself into a hole, and would be better off following the traditional financial aid dogma of paying off loans as soon as you can.

High interest rate (>10%) debt, on the other hand, should be avoided at all costs. Some imprudent residents carry significant amounts of credit card debt, often paying between 10 and 30% interest on the balance. This is a big no-no. You must pay off your credit card debt ASAP through belt-tightening, and if necessary, using the extra cash flow from deferring student loans or extending the repayment period for student loans or home mortgages, which each have dramatically lower interest rates (and may allow you to tax-deduct interest).


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