10 important overall strategies you can take to minimize student debt, maximize return

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As student loans are the biggest debts that we have facing us after medical school or any professional school, I want to let you know the general strategy that I am going to take to minimize my student loans over the long haul. I’m not planning to live like a pauper during my residency but I’m not going to ignore it.

You know exactly what I mean by wanting or just completely ignoring the debt. For those like me that have more than a quarter million in debt from school, you just borrow and borrow and the numbers just seem so astronomical that its hard to think of it as actual money. What you can do is to think of the debt as a mortgage. Just imagine that you have just bought a house and your loan is interspersed into varying loans from stafford to PLUS to Perkins to private loans.

These are the general strategies that I’ll use or have used that will make you think more about those debts:

1. make a list of all your debts on an excel spreadsheet. What I did was breakdown my debts into 4 general categories
   1. private loans –> then break that down by individual interest rates. ie. I have 40K at 8.x % and 20K at 7.x %.
   2. 2006-2007 stafford loans –> these run 6.8% fixed. This is then subdivided to 30K unsubsidized and 8.5K subsidized.
   3. 2006-2007 PLUS loans –> these run 8.5%
   4. consolidated loans –> these run anywhere from 4.75 and 2.75% broken down into subcategories of subsidized and interest percentage

   The first column I wrote down my principle amounts owed. The interest has not be capitalized so for each following column, I wrote down interests accrued and I update it every month to see interest accrued grow month to month. Thus far I have about 13K in accrued interest alone.

2. call your lender to see if you can align your loans - this basically means to make your loan payment dates start at the same time. If you consolidated your loans, most loan companies have no grace period for consolidated loans. PLUS loans has no grace period also. However, the stafford loans that you borrowed has a 6 month grace. By aligning–> you do a 6 month forbearance on your consolidated and plus loans in order to “align” your no grace loans with your stafford loans so you can submit a “economic hardship deferrment” at the same time for all your loans.
3. apply for economic hardship deferment for your loans before your grace period is over - It is critical to defer or forbear your loans before deadlines because if you don’t YOU WILL CAPITALIZE YOUR LOANS. This means that your accrued interest will turn into principle! The difference b/w economic hardship deferment and forbearance is that in economic hardship deferment, your subsidized loans do not accrue interest. In a forbearance, all your loans accrue interest.
4. apply for economic hardship deferment for you perkins loans before 9 month grace. because perkins has a 9 month grace, you should apply for a separate econ hardship deferment for these loans directly with your school b/c they are your lenders.
5. learn about your private loans, set priorities in terms of pay back - your private loans are probably the only ones with a variable interest rate, meaning that these loans can change interest rate quarterly based on various government interest rates. I know that total higher education has a automatic 42 month grace for private loans and don’t have forbearance after that so plan accordingly. Also, because these loans tend to be the highest rates between all your loans, these ones you want to pay back as soon as possible.
6. know your bonuses and repayment options. every lender has their own benefits. Northstar, my lender has a 1.3 % immediate bonus when repayments begin for stafford loans/ 1% benefit for PLUS loans so PLUS loans go to 7.5%/ consolidated loans drop 0.75% so my loans will range from 2% to 4%/ and 1% for private loans which will drop to to somewhere around 7%
7. what happens if you get disabled or die? again, I’m not sure about lenders (i’ll write an updated article with more info) but federal loans, PLUS + consolidated + stafford loans, will be forgiven upon death or permanent disability. Permanent disability means that you can’t do any kind of work. For private loans, after speaking with northstar, will only be forgiven during residency training period so if I die during my training, then it will be forgiven but if i die after I finish residency then i’m still responsible. In a way, this can be like a life insurance policy b/c don’t worry about getting life insurance to cover your loans during residency and think about paying your private loans as soon as residency is done though.
8. think about paying back some of your loans during your residency training. If you live below your means, you can pay back some of your loans. The general strategy is to pay off highest interest loans first, which means its your private loans. Unless you can get a higher return than 8% on your investments, it makes more sense to pay off your private loans. The issue here though is not to use all your extra money to pay off the loan unless you have some kind of emergency fund in place (which I have)
9. You can deduct student loan interest on your taxes - the least that someone can do about student loans is to pay 2,500 dollars of your loan interest a year during residency to take advantage of the student loan interest deduction. The maximum you can deduct on student loans is $2,500, which is above the line so you don’t need to itemize to take advantage of this.
10. learn as much as you can about student loans - keep yourself updated about interest rates, especially if your rate is variable. ie. your private loans
11. bonus - consolidating your loans usually only makes sense for government loans. Private loan consolidations usually do not lead to lower rates or significant money savings. It also doesn’t make sense to consolidate your 06-07 loans that are at a fixed 6.8% UNLESS, you can consolidate the loan at a lower rate less than 6.8%. I’m not sure what the interest rate is for next school year but I think its either no change or higher. There is a July 1 deadline for consolidation so if you do want to consolidate, remember there is a deadline.

Ultimately though, you need to not feel burdened about your debt, you can and will pay it back at some point. You have the best kind of debt to have, you borrowed money to invest in yourself.

My next post about student loans will be about how to calculate econ hardship deferment and to see if you qualify.

Disclaimer: I am not a loan expert by any means so take this for what its worth.

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