Skip to main content

Which debt should you pay off first?

A person looking at a receipt and paying bills.

Many medical school graduates carry a sizable debt. The transition from medical school to residency to new in practice means you’ll be earning income, but may coincide with other expensive life events, such as getting married, buying a home or starting a family. This often means racking up more debt, and paying it off might seem like an overwhelming task.

Where to start? Well, a long-held principle of financial planning is to pay down your most expensive debt first. Remember, though: as you focus on the debt you want to eliminate first, you must still pay at least the required minimum on all other debts, on time, every month. Defaulting on a payment can hurt your credit rating.

Here’s an overview of how best to prioritize these debts:

Credit cards

Credit cards are typically subject to higher interest rates than other forms of loans are — in Canada, the rate is usually around 20%. If you can’t pay off your credit cards in full, use your line of credit to pay them off. That may sound like you’d be no further ahead, but it will reduce the amount of interest you’ll pay. If you pay only the minimum, you will rack up hefty interest charges.

Line of credit

Student lines of credit typically offer interest rates that are around or below the prime rate. During residency, you can often continue borrowing from the same line of credit that you got during medical school. Interest accrues on the amount you borrow and begins accruing as soon as you withdraw funds. As soon as you repay funds, even temporarily, interest stops accruing on that amount.

Many lenders require you to pay at least the interest every month. Some allow you to make no payments at all until two years after completion of your residency or fellowship. Remember, however, that the unpaid interest is added every month to the original amount you borrowed, which increases the amount you will need to repay later.

You can make payments on the principal at any time. You can also borrow again any time, up to your limit.

Tax payments

If you are self-employed and unincorporated, you’re responsible for calculating and remitting personal income tax. You’ll likely need to make quarterly tax instalment payments to the CRA (due March 15, June 15, September 15 and December 15 of each year).

If you fail to pay your required tax instalments or you pay insufficient amounts, you will be charged instalment interest and possible penalties.

For self-employed physicians (and the spouse or common-law partner), the deadline to file your personal income tax return is June 15. Any taxes owing, however, are still due by April 30 and there’s a penalty for filing late if you have a balance owing. For physicians who earn an income but are not self-employed, the deadline to file and pay any taxes is April 30.

If you can’t pay your taxes, the Canada Revenue Agency (CRA) will impose a compound daily interest charge on overdue taxes. (See Why paying off tax promptly matters)

Canada Student Loans

In non-pandemic times, six months after you’ve finished your studies, you would have to start making monthly payments. In April 2021, the federal government announced that Canada Student Loans would be interest free until March 31, 2023. Interest won’t accrue during this period, so you won’t need to think about paying back the federal portion of your student loan for a while.

In a normal year, the interest rate is the same as the prime rate. Each year, you get a 15% federal tax credit on any interest you paid. You can take advantage of this tax credit as long as you owe some income tax; if you don’t, you can carry the credit forward for up to five years and use it when it will benefit you.

If you’re a family medicine resident or physician, you could qualify for the Canada Student Loan forgiveness program, which forgives up to $8,000 per year or $40,000 total in student loans if you work in certain rural or remote communities.

NEXT STEP: Getting organized and simplifying your debt responsibilities might be a good place to start. Your MD Advisor* can help you to reorganize your debt and pay the right amount toward each source of debt, at the right time.  

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.