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The Basics Q&A: Paying Off Grad-School Debt

Q: I’m going to graduate from med school with a lot of student-loan debt. How can I make it more manageable?

A. That advanced degree should pay off financially over the course of your career, but the short-term cost can seem intimidating. In 2012, the typical grad student had accumulated more than $57,000 of student debt, according to New America Foundation research. For medical school, the median amount owed was around $162,000.

You're at an advantage if the undergraduate portion of your student loans is subsidized by the federal government because those interest charges are deferred as long as you remain in school at least half-time. If your loan isn't subsidized—which is the case with all graduate school loans—you'll be charged monthly interest, even while you're in school, and any interest you don't pay will be added to the loan balance. So it's important to at least try to make those interest payments.

Answered by:


Jean Y. Kim-Wall,
Director and wealth strategist,
Strategic Wealth Advisory Group, Merrill Lynch

If you have a federal student loan, you may be eligible for one of the following two federal repayment plans – the "Pay as You Earn Repayment Plan" or the "Income-Based Repayment Plan." Each is tied to how much money you're making. Depending on your financial situation, these programs can cap monthly debt payments at 10% to 15% of your discretionary income. To qualify for either plan, your income generally has to be lower than your outstanding federal student loan debt or the debt has to make up a significant portion of your annual income. To learn about the eligibility requirements of each, visit

If you have a federal student loan, you may be eligible for one of two federal repayment plans.

Whether you have a federal loan or not, you may be eligible for some relief on the tax front. Both before and after your graduation, you can deduct up to $2,500 of qualified student loan interest on your federal tax return, as long as your modified adjusted gross income is less than $80,000 ($160,000 for a married couple filing jointly). The amount you're allowed to deduct begins to phase out once your income tops $65,000 ($130,000 for a married couple filing jointly).

This can seem like a good news–bad news situation after you graduate and get your first job. Your starting salary may not be high enough for you to pay down your debt quickly, but it could still be high enough to disqualify you for the deduction. If it is, talk to a financial advisor and a tax accountant about other ways you might be able to minimize your taxable income. One simple way of doing that is to make a tax-deductible contribution to a qualified retirement plan offered by your employer (such as a 401(k) or 403(b)) or to a traditional IRA. And when you do that, you're getting into the habit of being financially disciplined by getting an early start on saving for retirement.

As for whittling down the debt, the best solution still is old-fashioned budgeting—try to pay more than the minimum due every month.

Good luck with your career!

3 Questions to Ask Your Advisor

  1. What are my choices for financing grad school?
  2. Which debts should I focus on first?
  3. How can I create a budget that fits my needs?

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