Dealing With Debt – Medical Residents

Debt is an issue faced by most at some point – governments, businesses and individuals including, of course, medical students and residents.

Becoming a doctor is an expensive venture, but it is an investment in yourself which will pay you many times over in the future.

Each resident is in a different situation. Some may have completed medical school with little or no debt. But for those with debt, the question is how best to manage it through residency and beyond. Some will reduce their debt during residency while others will maintain or even increase it.

If you have debt from multiple sources, consider consolidating the loans. Most banks offer substantial lines of credit at prime to medical residents. These lines usually require payments of interest only during the residency term, but additional payments can be made as your financial circumstances allow. Consolidation will simplify the repayment process and will reduce your required monthly payments. You should compare the lines of credit offered by each of the major banks as there are usually differences in the borrowing limits, conditions and repayment terms.

Many financial planners, bankers and accountants mistakenly advise residents not to refinance government student loans as the interest is tax deductible. Government student loans in BC bear interest at prime plus 2.5%, and are eligible for a combined federal and provincial income tax credit of 20%. However, at today’s low interest rates, prime rate from the bank is substantially less than prime plus 2.5% combined with the tax credit. Compared to the current prime rate of 3%, the tax credit adjusted rate for the government student loans is 4.4%. Government student loans will be cheaper than the bank loans only when the prime rate is 10% or more.

If there is the possibility that you will practice as a family physician in a remote area, do not refinance your government student loans. Loan forgiveness programs exist but only apply to outstanding government student loans, not to lines of credit that have been used to refinance the government loans.

The provincial government will forgive ⅓ of the outstanding BC student loan balance each year a physician practices in an underserved community in BC, eliminating the loan after 3 years. The federal government has announced a program beginning in 2012 where the outstanding Canada student loan balance will be forgiven at $8,000 per year, up to a maximum of $40,000 over 5 years, for family physicians who practice in an underserved Canadian region.

Once the loans are refinanced, you can choose to pay down the balances or simply pay the interest. Some people cannot stand the thought of debt and will do everything they can to eliminate it. Others have a more cavalier attitude and know that it will be taken care of in the years after residency. The best course of action is to take a moderate approach. Don’t live beyond your means, but at the same time, you have worked hard and deserve some rewards.

For those looking to earn extra income to reduce debt or pay for extra expenses, moonlighting is an option available to residents in certain programs. However, consideration needs to be given to maintaining a balance between work, education and life. If you choose to moonlight, ensure you budget for income taxes on this additional income. As a resident, income tax is automatically withheld from your pay cheque. Income from moonlighting is not subject to automatic deduction of taxes. Instead you must pay the income tax at the end of the year when you prepare your income tax return. The same advice applies when you leave residency and begin practicing – unless you are working as an employee, you will be responsible for paying your own taxes on your income.

Although investing is not generally a high priority during residency, some residents question whether they should concentrate on reducing debt or begin saving for retirement by contributing to a Registered Retirement Savings Plan (RRSP) or a Tax Free Savings Account (TFSA). There isn’t a definitive answer as each option improves your financial position. Many advisors recommend putting money away for retirement as soon as possible, but psychologically it is difficult to put money aside for savings when there is such a large debt. Reducing your debt will give you a guaranteed return equal to the interest you save, but contributing to an RRSP will give you some savings and provide a tax refund. I recommend waiting until your residency is completed and you are in a higher tax bracket before contributing to an RRSP. This strategy will give you a higher tax reduction (44% of the contribution as compared to 25-30% while in residency) and the contributions can then be used in conjunction with the RRSP matching program administered by the BC Medical Association.

The above article also appears in the February 2012 Money Issue of the PAR-BC Pulse

John Moore, accountant for doctors, dentists, lawyers and other business professionals, Vancouver, British Columbia

About John Moore

I am a Chartered Professional Accountant (CPA,CA) based in Vancouver, BC who helps doctors, dentists, lawyers and other business professionals keep more of what they earn. I provide tax, accounting and financial planning services for professionals and business owners.
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