It's common for doctors to take on debt, both throughout their years in medical school and as underpaid residents — and in the years immediately after. Like any other financial instrument, debt can be a tool to propel you toward financial freedom or a drag that makes it harder to meet your goals. This course will give you a better understanding of physician debt and put you in a position to make smarter decisions when considering different types of loans.

When it comes to managing your personal finances as a physician, one of the keys to success is having a smart approach to debt management. The first step is understanding the role that debt can play at different points in a physician's life and career, and how to best use it as a tool to improve your overall financial security.

After all the time that you've spent in med school and residency, once you finally start earning a physician's salary, it can be alluring to spend it to give yourself the lifestyle you've been working toward for years. Managing that lifestyle jump often includes taking on additional debt, in order to keep up with your new circle of peers or just to reward yourself.

It can also be tempting to classify different types of loans as "good debt" or "bad debt," but the reality is more nuanced than that. A mortgage that allows you to move into your family's first house, for example, can be a great tool — but one with a monthly payment you can't afford that leaves you "cash poor" can hurt your finances in both the short and the long term.

Carrying too much debt, regardless of the type of debt, can create cash flow issues that make it harder for you to meet other money goals or take advantage of other financial opportunities that present themselves. It can also leave you with a lower credit score, making it harder or more expensive to borrow money in the future.

Here's a look at several types of debt that physicians may incur throughout their life.

More than 30% of physicians have college or medical school loans, according to the Medscape Family Physicians Wealth & Debt Report 2021. That number is far higher among younger physicians: More than three quarters of recent medical school graduates finish school with debt, according to EducationData.org. Medical school graduates owe an average of $241,600 in total student loan debt.

What You Need to Know

No matter what type of loan you have, you'll need to know the interest rate and type as well as other basic information about your loan. Here are some important terms you'll need to understand:

• Loan servicer : This is the company to whom you make your loan payments. It's typically a federally contracted company whose mission is to manage student loans.

• Fixed-rate loans : A fixed-rate loan charges a single, fixed interest rate that does not change over the life of the loan.

• Variable-rate loans : The interest rate on variable-rate loans fluctuates over time based on the market. That means you could pay less interest in the years that interest rates are low and more in the years that rates are high.

• Capitalization loans : Some student loans have a capitalization structure, which may kick in if you defer loans during residency or fellowship. During this time, any unpaid interest gets added onto the balance of your loan, increasing the amount that you owe overall. You may pay more interest on top of the interest already accrued.

• Amortization : Most student loans are amortized, meaning that some of your payment each month goes toward paying down your principal and some goes toward the interest. Over time, a larger share of your payment goes toward principal and a smaller share goes toward interest.

Understanding Public vs Private Loans

Public loans backed by the federal government (eg, Stafford loans and Direct PLUS loans) have many features that loans from private lenders do not have. Federal student loans have a fixed interest rate that will not change over time. Those benefits include access to flexible repayment programs, the ability to postpone payments during a residency or fellowship, and potential eligibility for loan forgiveness programs.

Private student loans have fewer benefits but may offer lower rates for borrowers with good credit. Private loans may have variable interest rates, which could change over time, or may require a cosigner. Refinancing your student loans will convert any public loans into privately held loans. Although it may make sense to refinance loans to get a lower rate, refinancing public loans into private loans means giving up the federal protections that come with the former.

Your Debt Management Plan

For federal student loans, you'll want to look at the various income-driven repayment plans for which you could be eligible, which generally limit the amount that you have to pay on your loans on the basis of your income over time. If you work for a nonprofit or government institution, you may also be eligible for Public Service Loan Forgiveness, which provides tax-free forgiveness of your loans after 10 years of payments.

One quarter of physicians currently carry credit card debt. The speed and ease with which you can pay for bills or purchases with credit cards make them a great tool for overworked physicians. However, the high interest rate and payment fees can make it challenging to dig yourself out of this debt, if you're not able to pay it all off at the end of the month.

What You Need to Know

With interest rates that average more than 16%, credit card balances are typically variable rate debt, meaning that the rate that you owe may change over time. If you're paying lower (or no) interest thanks to an introductory or balance transfer offer, for example, it's important to understand when that special offer expires and how your interest rate will change when it ends.

Pay off credit card debt as soon as possible. If you have multiple cards with high interest rates, it may make sense to consolidate them into one lower payment that you can pay off more quickly. A personal loan can also be used to consolidate credit card debt into a single loan with a lower interest rate. Given the high interest rate on credit cards, it's best to avoid carrying balances on them at all. Instead, use your credit cards only for purchases that you can pay off when the bill comes each month.

Consumer loans are the second most common form of debt held by physicians — nearly 40% of physicians owe money on an auto loan, for example. Doctors may also take out personal loans to pay for everything from vacation homes to a child's college education or to fund residency relocation.

What You Need to Know

You should know the interest rates and the terms of the commercial loans you've taken out.

Your Debt Management Plan

Incorporate payments for your consumer debt into your overall budget. Before taking on additional consumer loans, consider how they will affect your cash flow.

Some physicians must take on significant commercial debt to join a practice or surgical center or to build their own business.

What You Need to Know

Commercial loans may be secured, meaning that you've pledged some collateral against the loans, or unsecured, meaning that they're not tied to an asset that you already own. You may need to provide a personal guarantee, meaning that the lender can come after your personal assets if you default on the loan.

Your Debt Management Plan

You'll want to incorporate the payments on your commercial loans into your business budget.

Home loans are the most common type of debt held by physicians. More than two thirds of doctors have a mortgage on their primary residence and 15% have a mortgage on a second home. Chapter 2 goes into more depth about physicians and mortgages.