Refinancing Student Loans

Student loans

Becoming a doctor or a dentist is an expensive venture, however this investment in yourself will pay many times over in the future. Each student doctor or dentist is in a different situation. As accountants we have been asked many times what is the best way to manage the loans through residency and beyond. Some doctors or dentists may have completed 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.

Investing money

Although investing money is not a priority during residency, some doctors or dentists question whether they should reduce their debt or start saving for retirement by contributing to a Registered Retirement Savings Plan (RRSP) or a Tax Free Savings Account (TFSA). Many accountants recommend putting money away for retirement as soon as possible, but this may be hard when there is such a large debt. Reducing debt gives the doctor or dentist a return equal to the interest saved, but contributing to an RRSP will provide a larger tax refund.

Astute accountants recommend waiting until your dental or medical residency is completed and you are in a higher tax bracket, before contributing to an RRSP. This strategy gives you a higher tax reduction, 39% top marginal tax rate in Alberta as compared to around 25% tax rate while in residency.

Consolidating loans

If you have multiple debts, consider consolidating loans. Most financial institutions offer lines of credit at prime to doctors and dentists. Consolidation simplifies the repayment process and will reduce the required monthly payments. You should compare the lines of credit offered by each of the major banks as there are usually differences in conditions and repayment terms.

Some accountants advise doctors and dentists not to refinance government student loans as the interest is tax deductible. However, at today’s low interest rates, the prime rate from the bank is substantially less than the student loan interest rate combined with the tax credit.

Additional consideration should be given when student loans and personal loans are refinanced. As accountant for dentists and doctors we advise repaying / refinancing the loans that are providing no interest deductibility first (i.e. personal loans).

Loan forgiveness

If a doctor considers practicing as a family physician in a remote area, we recommend not refinancing the 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 student loans.

Starting in 2012, the Federal government has announced a program for doctors and residents in family medicine who practice in an underserved Canadian region. The outstanding Canada student loan balance will be forgiven at $8,000 per year, up to a maximum of $40,000 over five years. This applies to communities with a population less than 50,000. Similar programs may be available under the provincial legislation.

Your trusted Chartered Accountant provides student loans tax advice to doctors and dentists.