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Doctors face a unique set of financial challenges and opportunities. From managing the hefty burden of student loans to planning for retirement, financial decisions can feel overwhelming, especially in training or early in practice.
Once into practice, many doctors begin to feel more comfortable with their finances and may even have a little extra after their normal bills and expenses. At this point, they might consider if they should contribute extra to their debt to pay it down faster.
One common question in this line of thinking is: Should I pay extra on my mortgage or student loans? In this article, we’ll look at both options, plus consider if your money is better put elsewhere.
5 Places to Consider First
Before deciding to pay extra on your mortgage or student loans, it’s worth reviewing other financial priorities that may offer better returns or increased security:
- Emergency Fund: Ensure you have an emergency fund covering 3-6 months of expenses. This provides a financial cushion for unexpected events like medical emergencies or job changes.
- Retirement Savings: Max out contributions to tax-advantaged retirement accounts, such as a 401(k), IRA, 403(b), or 457(b). You can benefit from compounding interest over time, which significantly boosts long-term savings.
- High-Interest Debt: Pay off any high-interest debt, such as credit cards or personal loans, before tackling lower-interest debt like student loans or a mortgage.
- Insurance Coverage: Review your insurance policies, including disability and life insurance, to ensure your income and family are protected.
By addressing these areas first, you can build a strong financial foundation before focusing on paying extra toward your debts.
Understanding Your Financial Landscape
If you have your financial foundation set, it may be time to consider whether student loan or mortgage repayment makes sense.
Before deciding which debt to pay down, take a holistic view of your financial situation. Doctors often graduate with significant student loan debt, sometimes upwards of $200,000 or more, and start earning a substantial income later than peers in other professions. This delayed financial start can make prioritizing payments feel like a balancing act.
Consider these factors:
- Interest Rates: Federal student loans typically have lower interest rates than private loans or mortgages, but this isn’t always the case. Check the rates on your debts to identify which is more expensive.
- Tax Implications: Student loan interest may be tax-deductible, though this phases out for higher earners (like most doctors). Mortgage interest is also deductible but becomes less impactful as you pay down your loan.
- Loan Forgiveness Options: If you’re pursuing Public Service Loan Forgiveness (PSLF) or other forgiveness programs, paying extra on your student loans may not be the best strategy.
Reasons to Pay Off Debt Early
Paying off debts early can offer several financial and personal benefits. Here are some reasons to consider it:
- Interest Savings: Paying off debts early reduces the total interest paid over the life of the loan, saving you money in the long run.
- Financial Freedom: Eliminating debts frees up monthly cash flow, providing more flexibility to pursue other financial goals.
- Psychological Benefits: For many, being debt-free offers peace of mind and reduces financial stress.
- Increased Net Worth: Paying down debt increases your net worth by reducing liabilities.
Reasons Not to Pay Off Debt Early
On the flip side, there are valid reasons to hold off on paying off debts ahead of schedule. Consider these:
- Opportunity Cost: The extra money used to pay off low-interest debt might earn higher returns if invested elsewhere.
- Liquidity Concerns: Allocating extra cash toward debt payments reduces your liquidity, which could be a problem in emergencies.
- Inflation Advantage: With fixed-rate loans, inflation erodes the real value of your debt over time, making it less costly to carry.
- Tax Benefits: Certain debts, like mortgages and student loans, may offer tax deductions that reduce the effective cost of borrowing.
Should I Pay Extra on My Mortgage or Student Loans?
Which is the right choice? Unfortunately, there’s no “right answer.” The right answer for you depends on your unique circumstances. Let’s look at reasons for both options:
Student Loans
Focusing on student loans first can be a smart strategy for some doctors. Here’s why:
- High Interest Rates: If your student loan interest rate is higher than your mortgage rate, it makes sense to focus extra payments here.
- No Forgiveness Opportunities: If you’re not on track for loan forgiveness, paying off student loans faster can free up future cash flow for other priorities.
- Emotional Relief: For many doctors, the psychological burden of significant student loans can be overwhelming. Paying them off can provide peace of mind and a sense of accomplishment.
Mortgage
Alternatively, paying down your mortgage might be the right choice. Here’s why it could work for you:
- Lower Debt-to-Income Ratio: Paying down your mortgage can improve your financial flexibility, especially if you’re considering buying another home or refinancing.
- Building Equity: Extra payments on your mortgage reduce the principal balance, building home equity faster and potentially saving thousands in interest over the life of the loan.
- Long-Term Wealth Building: Once your home is paid off, you free up substantial monthly cash flow, which can then be redirected toward investments, retirement, or other financial goals.
A Balanced Approach
Often, the best strategy involves striking a balance. You might choose to make extra payments on your student loan debt or mortgage while still contributing to retirement and maintaining liquidity for emergencies. Alternatively, splitting your extra cash between the two debts can also help you make steady progress.
Building a Strong Financial Foundation
The decision to pay extra on your mortgage or student loans depends on your unique financial situation, goals, and values. Doctors have the advantage of a strong earning potential, which means these decisions can significantly impact long-term wealth building. Consulting with a financial advisor familiar with doctors’ financial journeys can help tailor a strategy that’s right for you.
Remember, the goal isn’t just to eliminate debt but to build a solid foundation for a financially secure future.
For more information about student loans or mortgages, visit our Resource Library or check out one of our curated articles below:
