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I love hearing stories about people crushing their student loan debt in record times and all of the crazy and incredible things they do to speed up the process.
For many pharmacists, it can make sense to get rid of student loans as fast as possible. This lowers the total amount of interest you pay and also frees up your budget to focus on your other goals. Beyond that, there can be an overwhelming sense of peace and freedom.
However, there are some situations where it doesn’t make sense to make extra payments or accelerate the process.
1. You don’t have an emergency fund
If you have typical pharmacist debt load, it will likely take you a number of years to pay them off even if you are being aggressive. During this time, life can happen.
Medical issues, car repairs, kids, and other life events can occur forcing you to come up with a lot of cash pretty quickly. Make sure you have a solid emergency fund in place before you get ultra-aggressive with your student loans.
2. You’re facing a crisis or major life event
Whether it’s a job loss, new baby on the way, or major illness, a number of things can occur with the potential to derail your financial game plan. If you’re faced with or expect something to happen that will require a lot of cash (exceeding your emergency fund), or anticipate a reduction in your income, temporarily putting extra student loan payments on hold and just saving it can be a good idea.
3. You’re seeking loan forgiveness
If you’re committed to the Public Service Loan Forgiveness (PSLF) program, making extra payments won’t make sense. The program requires you to make 120 qualified payments over 10 years and you can’t make the process go any faster. Therefore your ultimate goal is to pay the least amount as possible.
I know this can cause a little anxiety as your balance will actually grow over time due to interest as you make minimum payments. Plus, the news seems to be highlighting the thousands of people who are NOT receiving forgiveness for one reason or another. However, as long as you are following every step in the process, any balance will be forgiven tax free!
To do this you should choose an income-based repayment plan that results in the lowest payment (usually PAYE or REPAYE) and reduce your adjusted gross income.
The best way to minimize your total amount paid is to max out your traditional 401(k), 403(b), TSP contributions and HSA contributions if you have access to a high deductible health plan. You can read more about optimizing PSLF by checking out the ultimate guide to pay back your pharmacy school loans.
Remember, you can also receive loan forgiveness through the federal loan program after 20-25 years of income-driven repayments. This can be a good option for pharmacists who don’t qualify for PSLF and have a very high debt-to-income ratio.
The major difference is that you will have to be saving for the “tax bomb”as the amount forgiven will be considered taxable income. Even in the situation, it will not make sense to make extra payments on the loans.
4. You’re receiving tuition reimbursement/repayment
While not abundantly available, tuition repayment programs essentially provide “free” money typically from your employer or institution in exchange for working a certain period of time. Pretty awesome right?
Others will require you to pay an amount toward your loans and they will match or reimburse you up to a certain amount. The ones that tend to provide the most generous reimbursement are those offered by the federal government through the military, Veteran Health Administration, and the Department of Health.
These programs dictate the terms of the reimbursement and to get the maximum benefit, you will likely either need to make a set amount of payments in exchange for reimbursement such as the Veteran’s Health Affairs Education Debt Reduction Program (EDRP) or be employed for a specific term. Depending on the program, if you make extra payments you may not receive the full benefit of the program and could pay out more than you have to.
5. You have credit cards or other debt with high interest
From a purely mathematical standpoint, getting rid of debts with higher interest rates first makes sense. If you have credit card debt with 12% interest and student loans at 6%, you are going save money by paying off the credit card first. This is known as the debt avalanche method when you pay minimum payments on everything except the one with the highest interest rate.
6. You feel you can get a better return on your money somewhere else
Instead of paying extra on student loans, many people put that money toward retirement, small businesses, real estate or other investment with the rationale of making a better return. This is certainly a valid argument especially if you have a very low-interest rate on your loans like 2-3%. For example, if you have refinanced your loans with First Republic Bank, you can get a fixed interest as low as 1.95%.
With investments such as the stock or real estate market, there’s no guaranteed rate of return. You could actually lose money in that period. But you could also be incredibly successful like Dr. Carrie Calton who now has several income-producing rental properties which she started purchasing while she still had student loan debt.
Whether you choose to do this really comes down to how much risk you are willing to take on and your feelings about prolonging the time you are in debt.
Conclusion
Although paying extra on student loans and accelerating the time to being debt-free can seem like a great idea, there are some instances when that may not make the most sense. If you’re on track for loan forgiveness or receiving tuition reimbursement, make sure you are maximizing these programs to so you are paying the least amount possible.
If you’re not in any of these situations, then, by all means, knock out your loans ASAP. Besides cutting expenses and maximizing your income to throw more money each month at your loans, refinancing can also be a great option.
YFP has partnered with multiple student loan refinance companies in order to get you a nice cash bonus of up to $850 and sometimes more if there is a special promotion running. Yes, we get a referral fee when you refinance through our link, but we have shifted the majority of the payout to you.
Current Student Loan Refinance Offers
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