The burden of student loan debt can feel persistent and the appeal to financial freedom more tempting than ever – especially when factoring in the impact student loan debt can have on your personal finances as a doctor.

But does it make sense for a doctor to pay loans off early? Let’s weigh the pros and cons of paying off student loan debt early to determine if it is the right financial decision for you.

Understanding Your Student Loans

Before making the decision to pay off your student loans early, be sure you understand what type of student loan debt you have and what this means. There are two main types of student loans: federal and private. Generally speaking, there are no prepayment penalties for federal or private student loans.

How Interest Rates Affect Your Loan Repayment

Your interest rates are a significant consideration when choosing to pre-pay for the following reasons:

• Fixed vs. Variable Interest Rates: Fixed rates remain the same for the life of the loan, so your monthly payment will as well. Variable rates change based on the interest rate environment meaning your monthly payment can fluctuate.
• Compound vs. Simple Interest: Compound interest is calculated based on your loan amount as well as any outstanding interest that has accumulated. Simple interest is calculated based on the loan amount you originally borrowed only. Most student loans, including all federal loans and the majority of private loans, utilize simple interest.

While there can be benefits to both variable interest rates and compound interest if interest rates are lower, there is also risk associated with the two if interest rates rise. If you have a variable interest rate or if your loans are subject to compound interest, you will want to consider the impact of interest rates over time as this will affect your monthly payments.

Identifying Your Loan Repayment Plan

There are a few different types of repayment plans for federal student loans:

• Standard Repayment Plans: This plan serves as the standard repayment option for federal student loans, requiring fixed monthly payments for a duration of up to 10 years. While payments under this plan are generally higher than other options, you end up paying less interest and can complete your repayment more quickly.
• Income-Driven Repayment Plans: IDR plans can lower your monthly payment based on your income and family size. Additionally, after 20-25 years of repayment, any remaining balance may be eligible for forgiveness. The catch with this plan is it will take longer to pay your loans off which can mean you end up paying more interest.
• Loan Forgiveness Programs: The most common program is Public Service Loan Forgiveness which forgives any remaining balance on your direct loans after you’ve made the equivalent of 120 monthly payments while working full time. However, only doctors who work for qualifying employers (such as non-profits) are eligible for forgiveness.

It is important to discern what type of repayment plan you are on to better understand your options. If your current monthly repayment feels unmanageable, it might be worth considering another repayment plan or refinancing your student loans if paying off your student loans doesn’t make sense for you at this time.

Benefits of Early Student Loan Repayment

• Interest Savings: Reducing overall loan cost by paying less interest.
• Financial Freedom: Reducing monthly financial obligations and creating the ability to reallocate funds to other financial goals such as saving for retirement, investing or buying a home.
• Improved Credit Score: Reducing debt can positively impact your credit score.
• Emotional and Psychological Benefits: Reduced financial stress and a sense of accomplishment and security.

Drawbacks of Early Student Loan Repayment

• Opportunity Cost: Missing out on potential investment gains. It is important to compare investment returns vs. interest savings.
• Loss of Tax Deductions: The impact of losing the student loan interest deduction tax benefit.
• Cash Flow and Liquidity Concerns: Tying up funds in loan repayment and risk of financial flexibility in case of an emergency or other purchases you need to make.
• Possible Loan Forgiveness: Risk of paying off loans that could potentially be forgiven (if they are federal and you are eligible).

Factors to Consider Before Paying Off Student Loans Early

Now that you know what type of interest and rates you have, what your repayment plan is, and the advantages and disadvantages of early repayment, the final and most important things you will want to consider are your financial goals and current situation.

Determining Your Financial Goals as a Doctor

Understanding your short-and long-term financial goals are key components to deciding whether or not early repayment makes sense for you. You may need that money for other purposes. Here are some questions to consider:

• Is acquiring or creating a practice something you are interested in?
• Are you hoping to buy into a practice?
• Are you interested in pursuing further education?
• Are you looking to relocate?
• Do you want to buy a home?

Contemplate how repayment will affect your credit history in the eyes of a financial institution if any of these questions apply to you.

Assessing Your Current Financial Situation

You can begin to assess your current financial situation with the following questions:

• Do you have funds on hand in case of an emergency? This can apply to auto repairs, unexpected medical costs, home improvements, etc.
• Do you have existing debt and the cash flow needed to cover it?
• Do you have the income stability you need?

While early repayment can be beneficial as we covered earlier, you don’t want it to set you back if it doesn’t suit your goals or overall financial situation.

Is It Worth Paying Your Student Loans Off Early?

Determining whether you should pay your student loans off early or not is unique to your circumstances. Weighing the pros and cons and understanding your current situation and financial goals are a great place to start. We encourage you to research and evaluate your personal circumstances before making a final decision.

If paying your student loans off early doesn’t seem like the right option for your needs but you want to simplify your payments or reduce your interest rates, student loan refinancing could be a good option for you. While you take the necessary time to decide whether early repayment works for you, here are some resources for managing your student loans:

• Understanding Student Loans: Frequently Asked Questions Answered
• Guide To Repaying Private Or Refinanced Student Loans
• A Doctor’s Guide To Refinancing Student Loans