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Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.


The member’s experience below is not a typical member representation. While their story is extraordinary and inspirational, not all members should expect the same results.

Dr. Christine M. has always been goal-oriented about her finances. That approach worked well when she decided to become a doctor. She stretched an annual salary of $55,000 during her five years as a resident and fellow. Once she became a new doctor in private practice on the East Coast, she made paying down her medical school loans her top priority. By being frugal, she was able to pay them off in three years.

The road to becoming a doctor is long — 11 years at a minimum — and the average cost of medical school is expensive. The median medical school debt for the class of 2021 is $200,000, according to the Association of American Medical Colleges. And that’s not counting undergraduate student loans, credit card balances, or other debt.

But the hard work can pay off. A doctor’s median annual salary is around $208,000. That’s a significant increase from the $60,000 average annual salary a first-year resident earns.

If you’re a doctor, the beginning of your career marks a new phase of your earning power. It’s also a prime opportunity to get yourself on sound financial footing, including paying off your medical school loans. That’s why budgeting is so important for doctors. These strategies can help you reach your financial goals.

Resist the Urge to Start Spending Right Away

After years of hard work and sacrifice, you may be tempted to treat yourself. But don’t go wild. “I think lifestyle creep is the biggest danger we see [among new doctors],” says Brian Walsh, CFP, senior manager, financial planning for SoFi. Leveling up early in your career can wreak havoc on your savings and financial health while setting unsustainable spending habits that are hard to break.

Automate your finances whenever possible. For instance, preschedule your bill payments and set up automatic contributions to your retirement account.

To encourage good spending habits, use cash or a debit card for purchases, Walsh suggests. You may also need to practice extra self-control. Because Christine was thrifty, she was able to triple her loan payments to $4,500 a month. She also made additional payments whenever she could. “You just have to keep reminding yourself what your priorities are because it’s easy to want more,” she says.

Get Serious About Savings

As a new doctor, you may not start your career until you’re in your thirties, which puts you behind the curve on saving for long-term goals. The good news: earning a higher income can help you make up for lost time.

Walsh advises early-career physicians to set aside 30% of their income for savings. Of that, 25% should be for retirement and 5% for other savings, like starting an emergency fund that can tide you over for three to six months. The remaining 70% of your income should go toward expenses, including monthly medical school loan payments.

The sooner you start saving and investing, the sooner you can enjoy compound growth, which is when your money grows faster over time. That’s because the interest you earn on what you save or invest increases your principal, which earns you even more interest.

Consider Different Investments

For investing your retirement savings, you may need to think beyond maxing out your 401(k) or 403(b), though you should do that as well. Walsh suggests new doctors tap into a combination of different investment vehicles. This strategy, known as diversification, can help protect you from risk. Here are some vehicles to consider:

•  A health savings account (HSA), which provides a triple tax benefit. Contributions reduce taxable income, earnings are tax-free, and money used for medical expenses is also tax-free.

•  An individual retirement account (IRA), like a traditional IRA or Roth IRA, can offer tax advantages. Contributions made to a traditional IRA are tax-deductible, and no taxes are due until you withdraw the money. Contributions to a Roth IRA are made with after-tax dollars; your money grows tax-free and you don’t pay taxes when you withdraw the funds. However, there are limits on how much you can contribute each year and on your income.

•   After-tax brokerage accounts, which offer no tax benefits but give you the flexibility to withdraw money at any time without being taxed or penalized.

Two options to consider bypassing are variable annuities and whole life insurance. Walsh says they aren’t suitable ways to build wealth.

Regardless of the strategy you choose, keep in mind that there may be fees associated with investing in certain funds, which Walsh points out can add up over time.

Protect Your Income

There are a variety of insurance policies available to physicians, and disability insurance is one worth considering. It covers a percentage of your income should you become unable to work due to an injury or illness. If you didn’t purchase a policy during your residency or fellowship, you can buy one as part of a group plan or as an individual. Check to see if it’s a perk offered by your employer. Christine’s practice, for example, includes a disability plan as part of its benefits package. Monthly premium amounts vary, but in general, the younger and healthier you are, the cheaper the policy.

Recommended: Short Term vs. Long Term Disability Insurance

Develop a Plan to Repay Student Loans

No matter how much you owe, having the right repayment strategy can help keep your monthly payments manageable and your financial health protected.

To start, consider the types of student loans you have. Federal loans have safety nets you can explore, like loan forgiveness and income-driven repayment (IDR) plans, which can lower monthly payments for eligible borrowers based on their income and household size. The Biden Administration is currently working on revamping IDR and Public Service Forgiveness to make it easier to qualify and to accelerate forgiveness for some borrowers.

Once you’ve assessed the programs and plans you’re eligible for, determine your goals for your loans. Do you need to keep monthly payments low, even if that means paying more in interest over time? Or are you able to make higher monthly payments now so that you pay less in the long run?

Two approaches to paying down debt are called the avalanche and the snowball. With the avalanche approach, you prioritize debt repayment based on interest rate, from highest to lowest. With the snowball method approach, you pay off the smallest balance first and then work your way up to the highest balance.

While both have their benefits, Walsh often sees greater success with the snowball approach. “Most people should start with paying off the smallest balance first because then they’ll see progress, and progress leads to persistence,” he says. But, as he points out, the right approach is the one you’ll stick with.

Explore Your Refinancing Options

Besides freeing up funds each month, paying down debt has long-term benefits, like boosting your credit score and lowering your debt-to-income ratio. And you may want to include refinancing in your student loan repayment strategy.

When you refinance, a private lender pays off your existing loans and issues you a new loan. This gives you a chance to lock in a lower interest rate than you’re currently paying and combine all of your loans into a single monthly bill. Some lenders, including SoFi, also provide benefits for new doctors.

Though the refinancing process is fairly straightforward, some common misconceptions persist, Walsh says. “People overestimate the amount of work it takes to refinance and underestimate the benefits,” he says. A quarter of a percentage point difference in an interest rate may seem inconsequential, for instance, but if you have a big loan balance, it could save you thousands of dollars.

That said, refinancing your student loans is not be right for everyone. If you refinance federal student loans, for instance, you may lose access to benefits and protections, such as federal repayment and forgiveness plans. Weigh all the options and decide what makes sense for you and your financial goals.

The Takeaway

As a new doctor, you stand to earn a six-figure salary once you complete medical school and residency. But you’re likely also saddled with a six-figure student loan debt. Learning new strategies for saving and investing your money, and coming up with a smart plan to pay back your student loans, can help you dig out of debt and save for your future.

If you decide that student loan refinancing might be right for you, SoFi can help. Our medical professional refinancing offers competitive rates for doctors who have a loan balance of more than $150,000.

Photo credit: iStock/Ivan Pantic

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

A high-yield bond, often called a junk bond, is debt issued by a corporation that has failed to achieve the credit rating of more stable companies. Though they tend to be high-yield, they’re also very risky in most cases.

All investments fall somewhere along the spectrum of risk and reward. In order to increase the chance at a higher reward, an investor must generally increase risk. High-yield bonds are no exception and have a higher likelihood of default than investment-grade bonds. That’s why they are also often called “junk bonds.”

Overview of Bond Market

Bonds are popular with investors for being mostly lower risk than stocks. The bond market works in such a way that it’s made up of a wide asset class that are essentially investments in the debt of a government — federal or local — or a corporation.

They are packaged as a contract between the issuer (the borrower) and the lender (the investor). With bonds, you are acting as both the lender and the investor. That’s why bonds are also referred to as debt instruments, and a key component in how bonds work.

The rate of return that an investor makes on a bond is the rate of interest the issuer pays on their debt plus the increase in value when the bond is sold from when it was purchased. You may hear the interest rate on a bond referred to as the coupon rate. Most bonds make interest payments — coupon payments — twice annually.

You’ll also hear bonds commonly referred to as fixed-income investments. That’s because the interest on a bond is predetermined and will not change, even as markets fluctuate. For example, if a 20-year bond is issued with a 3% interest rate, that interest rate is set and will not change throughout the life of that bond.

Although the interest rate on the bond does not change, the underlying price of the bond can change. Therefore, it is possible to experience negative returns with a bond investment. Bond prices may also retreat in an environment of rising interest rates — this is called interest rate risk.


💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

What Is a High-yield Bond?

As you might expect, high-yield bonds are bonds that pay a high relative rate of interest. Why might a bond pay a higher rate of interest? Most commonly, because there is a higher degree of risk associated with the bond. Hence, the “junk bond” moniker.

The trade-off is that “safer” bond investments typically tend to have a lower yield. Therefore, bonds with lower credit ratings generally must offer higher coupon rates.

In addition to classifications by type (corporate, Treasury, and municipal bonds), bonds are graded on their riskiness, which is also known as their creditworthiness.

A default can occur when the issuer is unable to make timely payments or stops making payments for whatever reason. In some cases of default, the principal — the amount initially invested — cannot be repaid to the lender (i.e., the investor).

Credit Rating Agencies and Junk Bonds

There are two main credit-rating agencies: S&P Global Ratings, and Moody’s.

Each has its own grading system. The S&P rating system, for example, begins at AAA, which is the best rating, and then AA, A, BBB, and so on, down to D. Bonds that are ranked as a D are currently in default and C grades are at a high risk of default.

Using S&P’s system, high-yield bonds are generally classified as below a BBB rating. These bonds are considered to be highly speculative. Bonds at a BBB rating and above are less speculative and sometimes referred to as “investment grade.” With Moody’s rating, high-yield bonds are classified at a Baa rating and below.

This means that bonds with better credit ratings are generally the ones that are least likely to default. Treasurys and corporate bonds issued by large, stable companies are considered very safe and highly unlikely to default. These bonds come with a AAA rating.

Fallen Angels in Bond Market

Fallen angels are companies that have been downgraded from a higher investment-grade credit rating to junk-bond status. Diminished finances, as well as a tough economic environment, could send a company from the coveted investment-graded status to junk.

Rising Stars in Bond Market

A rising star is a junk bond that has potential to become investment grade due to an improved financial position by the company. A rising star could also be a company that’s relatively new to the corporate debt market and therefore has no history of debt. However, analysts at credit-rating firms may judge that the company has high creditworthiness due to its finances or competitive edge.

Junk Bonds Pros & Cons

It’s up to each investor to decide if high-yield bonds have a place in their portfolio. Here are the pros and cons of high-yield bonds so you can make a decision about whether to integrate them into your overall investment strategy.

5 Pros of High-yield Bonds

Here’s a rundown of some of the pros of high-yield bonds.

1. Higher Yield

High-yield bond rates tend to be higher than the rates for investment-grade bonds. The interest rate spread may vary over time, but high-yield bonds having higher rates will generally be true or else no investor would choose a higher-risk bond over a lower-risk bond with the same rate.

2. Consistent Yield

Even most high-yield or junk bonds agree to a yield that is fixed and therefore, predictable. Yes, the risk of default is higher than with an investment-grade bond, but a high-yield bond is not necessarily destined to default. A high-yield bond may provide a more consistent yield than a stock–which is a key thing to know when researching bonds vs. stocks.

3. Bondholders Get Priority When Company Fails

If a company collapses, both stockholders and bondholders are at risk of losing their investments. In the event that assets are liquidated, bondholders are first in line to be paid out and stockholders come next. In this way, a high-yield bond could be considered safer than a stock for the same company.

4. Bond Price May Appreciate Due To Credit Rating

When a bond has a less than perfect rating, it has the opportunity to improve. This is not the case for AAA bonds. If a company gets an improved rating from one of the agencies, it’s possible that the price of the bond may appreciate.

5. Less Interest-Rate Sensitivity

Some analysts believe that high-yield bonds may actually be less sensitive to changes in interest rates because they often have shorter durations. Many high-yield bonds have 10-year, or shorter, terms, which make them less prone to interest rate risk than bonds with maturities of 20 or 30 years.

4 Cons of High-Yield Bonds

Here are some of the cons of high-yield bonds.

1. Higher Default Rates

High-yield bonds offer a higher rate of return because they have a higher risk of default than investment-grade bonds. During a default, it is possible for an investor to lose all money, including the principal amount invested. Unstable companies are particularly vulnerable to collapse, especially during a recession. The rating agencies seek to identify these companies.

2. Hard to Sell

If an investor invests directly in high-yield bonds, they may be more difficult to resell. In general, bond trading is not as fluid as stock trading, and high-yield bonds may attract less demand or have smaller markets, and therefore, may be harder to sell at the desired price, or at all.

3. Bond Price May Depreciate Due to Credit Rating

Just as a bond price could increase with an improved rating, a bond price could fall with a decreased rating. Investors may want to investigate which companies are at risk of a lowered credit rating by one of the major agencies.

4. Sensitive to Interest Rate Changes

All bonds are subject to interest rate risk. Bond prices move in an inverse direction to interest rates; they can decrease in value during periods of increasing interest rates.


💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

How to Invest in High-yield Bonds

There are two primary ways to invest in junk bonds: by owning the bonds directly and by owning a pool of bonds through the use of mutual funds or exchange-traded funds (ETFs).

By owning high-yield bonds directly, you have more control over how your portfolio is invested, but it can be difficult for retail investors to do this. Brokerage firms typically allow sophisticated investors to directly own junk bonds, but even then it could be labor-intensive and a hassle.

Investing in high-yield bond mutual funds or ETFs, on the other hand, may allow you to diversify your holdings quickly and easily.

Junk-bond funds may also allow you to make swift changes to your overall portfolio when needed; they might be more economical for smaller investors; and they allow you to invest in multiple bond funds if desired. It’s important to check both the transaction costs and the internal management fee, called an expense ratio, on your funds.

Do Junk Bonds Fit Into Your Investment Strategy?

The only way to truly determine whether junk bonds are a good or suitable fit for your portfolio and investment strategy is to sit down and take stock of your full financial picture. It may also be worthwhile to consult with a financial professional for guidance.

But generally speaking, junk bonds are likely going to be a suitable addition to your portfolio if you’ve already covered all, or most, of your other bases. That is, that you’ve built a diversified portfolio, and are taking your risk tolerance and time horizon into account. In that case, having some room to “play” with junk bonds may be suitable — but again, a financial professional would know best.

If you’re a beginner investor, or someone who’s trying to build a portfolio from scratch, junk bonds are probably not a good fit. If you’ve been investing for years and have a large, diversified portfolio? Then adding some junk bonds or other high-risk investments to the mix probably wouldn’t be nearly as big of an issue.

Other Higher-Risk Investments

Junk bonds are high-risk investments, but they’re far from the only ones. Here are some other types of relatively high-risk investments to be aware of.

Penny Stocks

Penny stocks are stocks with very low share prices — typically less than $5 per share, and often, under $1 per share. While these stocks have the potential for huge gains, they’re also very risky and speculative. As such, they may be considered the “junk bonds” of the stock market.

IPO stocks

Another type of high-risk stock is IPO stocks, or shares of companies that have recently gone public. While an IPO stock may see its value soar immediately after hitting the market, there’s also a good chance that its value could fall significantly, which makes IPO stocks a risky investment.

REITs

REITs, or real estate investment trusts, allow investors to invest in real estate assets without actually buying property. But the real estate market has significant risks, which filter down to REITs and REIT shareholders. That, like the aforementioned investments, makes them risky and speculative.

The Takeaway

High-yield bonds, or junk bonds, are debt instruments issued by a corporation that has failed to achieve the credit rating of more stable companies. Though they tend to be high-yield, they’re also very risky in most cases. That doesn’t mean that they don’t necessarily have a place in an investor’s portfolio, however.

While companies that issue high-yield bonds tend to be lower on a scale of creditworthiness than their investment-grade counterparts, junk bonds still tend to have more reliable returns than stocks or nascent markets like cryptocurrencies.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

What is considered a junk bond?

A junk bond describes a type of corporate bond that has a credit rating below most other bonds from stable companies. The low credit rating tends to mean they’re riskier, and accordingly, pay higher yields.

Are high yield bonds good investments?

Generally, no, high-yield bonds or junk bonds are not good investments, mostly because they’re risky and speculative. Again, that doesn’t mean that there isn’t necessarily a place for them in a portfolio, but investors would do well to research them thoroughly before buying.

Which bonds give the highest yield?

High-yield bonds, or junk bonds, tend to give investors the highest yield. These are risky bonds issued by corporations, and have low credit ratings. As such, they’re speculative investments.

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