How to Save For Your Future When You Have Veterinary School Debt
With the right plan in place, it’s possible to pay off your student loan debt, save for your future and have money to spend on the things you love.
Most veterinarians in the early years of their careers have student loan debt that surpasses $100,000. How can you plan for the future when you owe more money for your education than many people do for their mortgages?
Three Steps on the Path to Financial Success
The first benchmark is to put aside $10,000 in a savings account and pay off any outstanding credit card debt. If you’re not there yet, put your energy into hitting this milestone. This step protects you against short-term emergencies that notoriously wreck families’ finances.
The second important step is to participate in your employer’s retirement plan, especially if they offer matching contributions. To begin with, put at least 5 percent of your income into your 401(k). If your veterinary clinic doesn’t offer access to a 401(k), start your own Traditional IRA or a Roth IRA.
Third, you’ll want to minimize the number of fixed expenses in your monthly budget to have residual funds to pay off debt and invest. Ideally, you should drive a car that you own — not lease or make payments toward — and live in a modest house that is relative to your income.
For housing expenses, I suggest limiting your mortgage or rent payment to no more than 20 percent of your take-home pay. Even though banks will approve loans for one-third or more of your income, and most real estate agents make more money when you buy a more expensive home, it’s important that you determine your own conservative housing budget and stick to it.
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Depending on your local real estate market and the price of homes in your area, renting might be a wiser financial choice. Don’t be too proud to live with roommates.
If you’re frugal with your housing and car choices, you can still maintain disposable income for going out to eat, traveling and socializing while still having money for savings and investments. I’ve yet to meet a veterinarian having financial trouble who followed these guidelines.
Once you’ve accomplished these three milestones, you’ve established awesome financial habits by maintaining an emergency fund, paring down your largest expenses and having a portion of your monthly budget allocated for other uses.
Tackling Your Student Loans
There are a number of variables that contribute to how you should best plan to pay off your outstanding student loans. For instance, if your loan debt is less than two times your household income and you work in the private sector, consider refinancing. If you cannot afford a 10-year monthly payment yet, use the Revised Pay As You Earn income-driven repayment plan for its temporary interest subsidies for a year or two after graduation.
Once you can afford a 10-year payment plan, refinance and pick up a cash back bonus. You’ll save thousands of dollars in interest by now being able to pay toward the principal instead, resulting in a faster payback period. Know that you’re allowed to refinance more than once, and you should as you pay off debt. You may even be able to move to a shorter term with a lower interest rate.
If you anticipate that your debt will be double your annual income for most of your career, you need to open an investment account that is separate from your retirement plan and put away $500 each month for the future tax penalty associated with loan forgiveness. You’ll pay 10 percent of your income for 20-25 years, and then pay the IRS a lump sum on the forgiven amount.
Once you’ve paid off your student loan debt, increase your 401(k) contributions to the maximum annual contribution of $18,500 to play catchup. If you are planning on loan forgiveness, you want to save the $18,500 right away to lower your income and increase the forgiven balance.
Any extra funds you do not need after these goals are met can be allocated to index funds in a taxable brokerage account. The earlier you start investing and paying down your debt, the greater the rewards. Your future, richer self will thank you.
Travis is the founder of Student Loan Planner, a consulting company that makes custom student debt repayment plans for veterinarians who owe more than six figures of student loans. He has helped almost 200 veterinarians eliminate anxiety about their student loans. He lives with his wife Christine in St. Louis, Missouri. To celebrate paying off her $124,000 student debt, they’re sponsoring a veterinary school scholarship.