Borrow Less and Save More

This chapter is geared toward current and prospective students, but there’s still something in here for everyone.


Borrow less to owe less

This is not really the kind of personal finance book where we spend a lot of time talking about spending less and saving more (though of course, you should). We’re also not going to spend much time saying you need to “live like a student” now or “live like a student later.” Besides, for many it’s more like, “live like a student now or be forced to remain in the workplace longer than you want, take a job you don’t want, or work harder than you want in order to pay your bills and then retire securely.”

Your overall net worth—which will almost assuredly be negative for quite some time—will be better if you can live like a student while you’re in medical school and borrow accordingly. Trying to keep up a lifestyle with your former classmates who hold real jobs is a losing proposition when you’re doing it on credit.

Then, when you’re a resident, you’d want to keep living like a student. Ideally. But I’d be lying if I told you that’s what I or most reasonable people I know did during residency. However, you should live like a resident (and not attending). Don’t start or continue spending money you don’t have. Not only can you not afford it now, but it’s a habit trajectory with no happy ending. You can always spend more.

Hedonic adaptation (getting used to nice things) is a real phenomenon. Improvements to your standard of living bring small increases in happiness followed by rapid habituation. On the other hand, even relatively small lifestyle decreases can bring lasting misery. If you must borrow money to buy something, you can’t afford it. For medical school, that was an investment in yourself. For most everything else, it’s just you living the false American dream. If you can’t pay off your credit card every month, you’re spending too much money.

As a student, this means putting serious thought into several things:

1) What kind of school are you going to? Public institution with (relatively) cheap in-state tuition? Private university? Pricey osteopathic school? For-profit Caribbean school?

2) Where is that school located and how much does that city cost to live in? Will you need a car, and if so, how is parking?

A state medical school in an affordable city is going to cost you much less than a private medical school in an expensive city. Most students are so excited to get into medical school that they don’t put a thought to the cost when selecting where to go (if they even have options in the first place). Others, wanting to go to the “best” school possible, may also end up picking one with a much bigger sticker price.

You can use a site like US News to compare tuitions across different institutions.

No matter what sticker price you read, the lag time between the data you use to base cost estimations and what you’ll experience is significant. A college student looks at the average graduating debt of $200,000 and may think it’s doable. But that was for medical students who just graduated, not for students who have yet to start. A student applying in the fall of 2017 will be looking at 2016 data from students who went to school between 2012-16. But they’ll be in med school from 2018-2022. That’s a six-year lag, and—with inevitable tuition increases—he or she will be paying more. According to the AAMC, average education debt was $190,000 in 2016. It was $157,900 in 2010. That’s a 20% increase from what those students might have expected. If the trend continues, we’ll be looking at around $230,000 for the class of 2022.

I don’t particularly want to get into the politics of whether a big-name school is “worth it” or not. There are reasons it might be. But as a future income & residency-competitiveness calculus, I will simply point out two things: One, medical school is not college. College is both much more variable and much more fun. Two, high-earning physicians in highly competitive fields come from every school. You will or have already done whatever you want, but school choice has a huge impact on how much you’ll be investing in your education.

Avoiding PLUS loans

Federal loans for graduate students come in two varieties. The painful Direct Unsubsidized loans and the even more painful Direct PLUS loans, which have higher origination fees and higher interest rates. When you get your student loan information from your school, you’ll find out how much they’ll give you and in what kind of form. Medical students can borrow up to $40,500 per year up to a $224,000 aggregate total (including undergraduate) in Direct Unsubsidized loans, so if you’ll need more than that then you’ll be looking at some PLUS loans.

You’ll always save money by borrowing less, but this is especially true if you can get by without PLUS loans or by minimizing them.

Avoiding private loans

In most cases, private loans are less desirable than even PLUS loans. Rates are frequently higher than government loans. Even worse, these loans lack the flexible payment programs and protections of federal loans and are, of course, ineligible for federal loan forgiveness programs. Seriously reconsider any life plan that requires private loans on top of the usual federal ones.

One potential exception are institutional or organization-based loans, which are often promoted by schools and offered through endowments, foundations, or organizations. These loans often have relatively reasonable rates and are frequently subsidized, but each is unique and must be considered on its own merits. These are especially desirable when extra cash is needed on top of normal borrowing (e.g. fourth year interview travel) but think carefully before utilizing an institutional loan instead of a regular direct loan for primary school expenses: the paper terms are likely better, but they will also be ineligible for federal repayment plans and forgiveness. It’ll depend on your long-term plans if that matters or not. If you have any, you’ll want to wait to refinance them until the end of any subsidized/interest-free period.

The loan from the bank of mom and dad

For a variety of reasons, you may be unable or unwilling to borrow money from family. But there’s no denying that, if your family has the resources, they would probably offer better terms than a bank. Just saying.


Delay Loan Disbursements

Typically, student loans are distributed at the beginning of each semester (i.e. twice a year). Obviously, the tuition must come from somewhere, but you don’t need to take out your entire six months of living expenses at the very beginning of the term and have it sit accruing interest before you need it. Taking out an extra $20,000 in living expenses at 6% half a year before you need it costs you $600. The more non-tuition money you borrow, the more you can save by not taking it before you need it. This can save thousands over the course of school.

You can request the money from your school when you need it. The turnaround time is usually a few days to a few weeks, and the financial office at your school knows what they can do. Find out from your school how fast they turn around disbursement requests and plan accordingly. While it does require some effort on your part, it’s worth it.

Charge your life

Gaming the system of credit card interest rates and rewards is the lifeblood of plenty of point hackers and lifestyle bloggers. Using an extreme form of it to pay for medical school was also publicized by the late physician finance blogger Amanda Liu. Because of previous employment, she had access to credit cards with very high charge limits. Her school also allowed her to charge her tuition to a credit card without a fee. She would charge her tuition to a new card with a 0% introductory rate, then at the end of the term, take out the loan to pay off the credit card. This delayed her taking the loan by several months and allowed her to earn thousands of dollars in rewards/perks.

While very clever, her method won’t work that way for many people. The first hurdle is that many schools don’t allow you to directly charge your tuition to a credit card, and most of the ones that do will pass on a service fee to you, often around 2-4%, wiping away most if not all the benefit.

The workaround to that is a service like Plastiq ( Plastiq is an intermediate payment company. They charge your credit card and then issue a check or ACH transfer to pay your bill. In this way, you can use your credit card for any expense even if the recipient doesn’t accept credit cards directly. Plastiq charges 2.5% for the privilege, so this doesn’t come free, but depending on the bonuses from your card, it can still be worth it. Promotional rates from 1-2% per transaction are not uncommon, and a 1% fee on a card with 1% cash back is a no-cost proposition. Point hackers take this to extremes using specific card perks to manufacture spending, but that’s beyond the scope of this book.

Plastiq example:

  • Delaying $10,000 in loans at 5% by 6 months saves $250.
  • Paying a 2.5% charge on $10,000 also costs $250.

So, you’d break even between interest savings and the fee, but then you’d accrue points, miles, or the cash back on the card and thus end up on top.

Frankly, I think medical students probably have more important things to do than become point hackers. Even with the research and skill to master the craft, given that your entire life is probably financed, it will take serious diligence to use points to pay for expenses you can’t avoid (paying for food staples or maybe traveling home for the holidays) and not to result in extra spending you would otherwise not have undertaken (trip to Europe). That being said, a service like Plastiq can help you reach the mandatory minimums on new cards to get the bonuses that make the whole endeavor worthwhile, particularly if your non-housing non-tuition life expenses are too small to qualify.

But, perhaps more importantly, the average medical student borrows way too much to be able to have enough cards to charge everything. Remember, the point is to have cards with 0% introductory rates. So, you’d have to get a new series of cards every semester or year depending on the various terms of the cards you get. Without much income and a fantastic credit history, getting enough to charge 40k+ a year probably isn’t going to happen.

But you can probably get a new card periodically and charge a lot of your living expenses. Possibly your apartment, either directly or through Plastiq, but at least all of your meals, gas, consumer purchases, etc. The idea is to get a new card with a 0% introductory rate, charge as much of those expenses as you can (but keep track so that you never ever go over your loan limits), and then take out the loan money as late as possible in the semester to pay it all down. This is not an excuse to buy more stuff you don’t need. To do this, you’ll need to be extra diligent and responsible with your expenses. Credit card debt is much worse than student loan debt. If you’re spending enough money to really bank on credit rewards, you’re probably spending too much money.

Imagine someone who needs $40k a year in loans, $25k for tuition, $15k for living expenses. Usually, that $40k would come in two disbursements, one given at the beginning of each semester. Imagine you could delay each $7.5k for living by six months with credit cards. At 5.7%, each delay would be around $214, plus you’d get the points/cash back/perks from the credit card. So, you could shave off a couple thousand just by borrowing when you need the money and not just taking the full lump sum at the beginning just to let it sit around in your bank account doing nothing while the loan accrues interest. In practice, this also depends on how you pay for housing.

There are data showing that credit cards are psychologically dangerous. It’s been demonstrated, for example, that people spend less money when they use cash instead of plastic. It all feels more real when it’s paper in your hand. But, for a generally responsible person, credit cards are not the work of the devil: they’re potentially dangerous tools of convenience.

But, in conclusion, I really don’t believe that the more involved methods are a great idea for most students. However, the basic principle of not borrowing money until you need it is completely sound and recommended: there’s no reason to borrow money to pay for a latte five months in advance.

Consumption Smoothing

Consumption smoothing is the idea that you borrow more now and spend less later to maintain a consistent lifestyle. This runs the risk of hedonic adaptation and lifestyle creep, but essentially everyone practices at least a mild form of this strategy. It’s certainly what happens when you decide to use borrowed money to live somewhere nicer or drive something better than what is strictly necessary to survive.

The most important thing is that you don’t inflate your lifestyle such that you are trying to live as an attending on a resident salary, living far beyond even your comparatively meager salary and paying no attention to the consequences of your spending and debt. Make no mistake: it’s not the absolute values but the habits during residency that matter most. In the grand scheme of things, even doing the “wrong” thing with your loans during residency won’t bankrupt you. But doing that as a first step to a lifetime of overspending and undersaving could easily do the trick.

You know what else will improve your lifetime finances? Marrying rich and never getting divorced. Obviously not everything in life is primarily a financial decision.

Your student loan “limit”

It’s generally considered undesirable to borrow more to finance an education than you can expect to earn in your first year’s salary. That’s because when someone borrows up to their first-year salary, it’s generally doable to pay back their loans over a standard 10-year repayment. Borrow more and the cut on your investment return (in yourself) grows and grows. Ignoring residency, you’ve likely noticed that attending physicians have a wide income spectrum. By this logic, those going into higher-paying specialties should have more leeway when it comes to borrowing for school. Perhaps not fair, but definitely true. Likewise, those considering poorly compensated specialties should be wary about attending expensive private schools unless willing to work at government or nonprofit institutions in order to receive public service loan forgiveness (PSLF). Since many students don’t know what the future holds, a conservative borrowing outlook is the safest.

So, pick a high-paying specialty?

I’ll be the first person to tell you that you should pick something that makes you happy. But, medical school being imperfect, many medical students are still forced to ultimately guess at what specialties they would actually enjoy. What seems exciting and intellectually stimulating for a few weeks during a third-year clerkship might not feel the same after a few years. And then more years. Almost everything in medicine can become routine when you practice long enough, and every field has its pros/cons and layers of BS.

So, if you’re really deciding between two specialties and it feels like a toss-up? Just pick the one with better pay or lifestyle. If it makes you squeamish to have picked for money instead of some noble calling, just don’t tell anyone. After a few years, I’m sure you’ll be able to convince yourself it was because you really loved the pathology.


Previous: Glossary
Next: The Purpose of Money