How To Decrease Debt While Still In School: 1 Important Step To Take
We're to the point in this whole grad school journey where you've got your student loans, you've started class, and your only care in the world is making the grades and hustling for school. I know when I was in the midst of pharmacy school, even this felt like a tall order! For medical professionals (and others, I'm sure!), there are incredibly dense classes, extra lab hours, extracurriculars, shadowing/job expectations, and trying to maintain some semblance of sanity on your plate. It's A LOT. But this is the place where I think most of us, myself included, really miss the mark on student loans and future debt repayment.
By that, I mean we're letting interest accumulate while we're in school, with the thought that we'll just pay it back later. I mean, how much interest can really accrue over 2-4 years? Let's lay it out in graph form...
For simplicity's sake, we'll assume the average student takes out $30,000 each year in student loans. Student Loan Hero reported average student loan debt for those graduating from medical and health sciences programs in 2017 was $161,000 (not a typo!), so $30,000 is probably conservative. Either way, that's the amount we'll use for this graphic. [Psst: Federal Direct Unsubsidized loan limits are $40,500 /9 month school year for MD, DO, DMD, OD degrees and $33,000 for PharmD and DC degrees. Just FYI!]
Okay, so you get $30,000 on a day 1, and we'll also assume you need to take out this same amount each year for a 4-year program. We'll say all these loans are at the current Direct Unsubsidized rate of 5.31%, too.
First things first: you're obtaining $30,000 in debt, but you're only going to receive ~$29,680 towards tuition because there's a 1.069% originator fee (basically they take a little off the top to even create the loan). But you still have to pay back $30,000. The federal government uses this formula to calculate interest:
Outstanding principal balance x # of days since last payment x interest rate factor (5.31%/365 days)
At this rate, just one year after you've taken out these loans, you owe $31,593. That's not so bad really!
But keep following me here: after 4 years of letting this first year's loans grow, you now owe $36,372. That's $6,372 more than you originally took out!
For every subsequent year, it looks like this :
year 2 loans: $34,779
year 3 loans: $33,186
year 4 loans: $31,593
TOTAL: $135,930 (!!!!!!!)
To break it down a bit further, you:
took out $120,000
actually received $118,720 for tuition after the fees
So you effectively owe $17,210 more than you ever actually saw.
This is not intended to scare you because this is exactly what I did! I took out loans, focused on school, and told myself I'd take a closer look once I actually had an income. And we made it out just fine! BUT we would have owed FAR less if I had been diligent about paying down the interest as it accumulated.
If instead, I had paid just $130 each month, I would have eventually paid down $6,240 in interest (I know this sounds like a lot, but how often do we mindlessly spend $130 on Target/eating out/a fun outfit? I'm not afraid to say I probably do that at least once a month, and if I took a really hard look at my finances, could have easily made room for $130 monthly!). This would have kept my original loans (the ones I took out the first year) to their principal, which would prevent us from having to eat this cost later.
So instead of owing $135,930, we would have owed $129,690. It might not seem like a lot, but over the course of several months of massive payments, a $6,000+ reduction would have been HUGE for us. It would have saved us from having to make such a giant payment just before the grace period ended (more on this next time), and trust me when I say you'll wish you would have paid just $130/month (or more if you can!) to make things lighter when you're stuck with $800-$1,000 monthly payments.
To put it another way, that original $30,000 loan from the first year of school would eventually cost $46,936 to pay off (if you choose 10-year standard repayment). If you had paid off the interest before you graduated, it would cost $38,714 on the same repayment plan.
My point is this: after you've worked so. freaking. hard. at school, paying back debt is a bit of a punch to the gut. It's enough to cause arguments, uncertainty, and just general anxiety around if or when you'll ever be done. Chipping away at interest early is so, so important and much easier earlier on.
From someone who didn't have that kind of advice at hand, take it from me! You can make the room in your current budget, and you'll be so grateful you did.
Until next time!