If you’ve been accepted into medical or dental school, congratulations on this amazing achievement! You’re probably looking at ways to help finance your education. One of the best financial options available is to use a personal line of credit. It allows you to borrow what you need, when you need it, helping to give you control of how much debt you carry while you’re in school, residency, and beyond.
Used strategically, a personal line of credit can serve as a powerful financial tool as you begin your medical or dental career. Not only can it help fund your studies, but it can help set you up for financial success in your healthcare career for years after you graduate.
But when it comes to taking out a line of credit, more isn’t necessarily better — it’s about borrowing what you need and having a financial plan in place so that line of credit can work hard for you in the future. Here are some tips on how to get the most out of your line of credit, so you don’t end up with more debt than you can manage.
Figuring out how much you need to borrow for now, and the future
When deciding on what amount to borrow for your medical or dental career, consider your short and long-term needs. One key advantage of an line of credit is that it’s a revolving form of credit. That means that as you pay down the balance, you gain access to that amount of credit again.
If your financial institution allows you to keep your line of credit open after you’ve completed your studies, that same line of credit can serve you not only throughout your schooling, but also during your residency and into practice. For example, you might use your line of credit to cover tuition during medical or dental school, then use it to help pay for relocation into residency, or to perhaps cover legal or accounting startup costs for your practice.
Pro tip: Not all financial institutions work in the same way. When you’re considering applying for a line of credit, ask about the application process and the financial institution’s terms and conditions that of the lending product(s) you’re considering. Some financial institutions will convert a student line of credit to a personal term loan or other type of personal lending product after completing residency, requiring you to pay back the debt from your original line of credit, and re-apply for a new personal line of credit if you need one. Others are more flexible and allow you to keep your original line of credit open after graduation, so you can use it even after you’ve completed your studies.
Here are just a few of the things to consider when trying to decide how much to borrow:
Your line of credit can help pay for:
In School | School expenses including tuition and textbooks |
Housing and living expenses | |
Residency matching | |
In Residency | Relocation costs |
Purchasing a vehicle | |
Medical association fees and Royal College of Physician and Surgeon exam fees | |
Housing and living expenses | |
In Practice | Relocation |
Down payment for a home or renovations | |
Legal and accounting costs to set up your practice | |
Investments in an FHSA or RRSP to gain tax advantages | |
Practice set-up costs |
Having a debt management plan
Once you have a rough idea of how much money you will need to borrow, it’s important to calculate your borrowing costs. Understanding how much it would cost to carry a balance and how repayment works, allows you to map out a financial plan for how to manage your debt to achieve your long-term goals.
With a personal line of credit, many financial institutions require you to pay the minimum monthly payment of interest only on the portion of the credit you’re using (i.e., the amount you’ve borrowed from your credit line). For example, if you have a line of credit with a credit limit of $80,000 and a balance of $15,000, you’ll only pay interest on the $15,000 balance that you’ve used. Note, however, that in addition to interest, the required minimum monthly payment may also include other amounts, such as credit insurance premiums and taxes, if applicable.
Interest Only
While in medical or dental school, the flexibility to make only the minimum monthly payment required for your line of credit makes sense, since you most likely won’t be working while you’re still a student. For example, if you have an LoC with a balance of $15,000 at a 5% interest rate, the minimum payment each month would be $62.50 in interest (plus any other amounts that are included in your loan’s required monthly minimum payment). After that payment, you would still have a balance of $15,000.
Pro tip: When talking to a financial advisor, ask them to clearly explain to you how the lending product you’re considering accumulates interest, and exactly when/how it will have to be repaid, so that you have a clear understanding of the total borrowing costs, and when you’ll have to pay them.
Interest and Principal
Once in residency, you will be earning a salary, so this is a good time to adjust your debt management strategy to paying interest plus paying down the principal on your line of credit. This means that in addition to the minimum interest payment that you’ve likely been making, you’ll also include a monthly payment in your budget to pay back a portion of what you borrowed.
For example, if you have an line of credit with a balance of $15,000 at a 5% interest rate, the minimum interest payment each month would be $62.50. If you then pay an additional $100 that month, you would then have a lower balance of $14,900.
Pro tip: Making payments consistently and on time can help you to build your credit history as you pay down your debt, and helps prepare for the next phase of life.
Getting help from an experienced professional
We understand that with your medical or dental training, finding time to plan or manage your finances can be challenging, but there are resources available to help.
An advisor with healthcare expertise can work with you to create a plan tailored to your unique circumstances and goals — whether you’ve just been accepted into a medical or dental school, transitioning to residency, or starting your own practice.
Of course, you don’t need to know your financial goals over the next 10+ years, but if you have questions or are looking for support, consider connecting with a Healthcare Specialist who understands the unique needs of your profession.
Tools: RBC Line of Credit and Loan Payment Calculator
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.