I had an interesting conversation with a physician a while back, one who spends a lot of time giving advice to pre-medical students. He wanted to know what should be said to pre-meds who were worried about how expensive going to medical school is these days. I told him those pre-meds were right to worry. That's not because EVERY physician is going to be in trouble. Most are not given current physician incomes and current tuition levels. But the number of physicians in trouble due to a terrible debt to income ratio is is definitely climbing. I would guess the number was <5% 20 years ago, but now is probably in the 10-25% range. The percentage is far higher for some of the other high income professionals such as dentists, veterinarians, and attorneys. However, the average physician is making something in the low 200s and the average debt of students leaving medical school this year is also in the low 200s. Even by the time that average doc finishes residency, her debt should still be less than $300K, which is only 1.5X gross income and should be manageable with some smart financial decision-making.

Does Medical School Still Make Financial Sense?

The problem is that is an average. On one side is the guy whose dad paid a bunch of his tuition and whose wife worked while he was in school and so he got out only owing $50K. On the other side is the lady who took her stay-at-home husband and two kids to New York City to attend Columbia and paid for all of it with borrowed money. She may very well finish residency owing $600K. If she chooses family practice or pediatrics, and especially if she stays in New York to practice, she is in serious trouble with a debt to income ratio of more than 3X.

Try to Get Out of Undergrad Debt Free

The physician made two other comments I found interesting. The first was a comment referring to undergraduate debt. It reminded me that not everyone is aware that you can get a good undergraduate education without any debt at all. Since you can do it without debt, why would you do it with debt? If you're going to rack up $200K+ just going to medical school, you certainly don't want to start with $100K+ from undergraduate.

Dragging Out Student Loans?

The second comment was basically “What's wrong with just paying your student loans off over 30 years?” Wow! Can you imagine being 60 years old and STILL owing student loans? How depressing would that be? It's so depressing that I actually recently refused to announce to my readers that one of my advertisers had a new 20 year student loan refinancing product. If medicine does not pay well enough to pay off your loans before you qualify for Social Security, maybe it is time for a different career choice. Student loans don't go away in bankruptcy and if you go into retirement with them, you will discover that your Social Security checks will be garnished to pay them. Don't believe me? Would you believe the Social Security Administration Handbook?

“If you have any unpaid Federal taxes, the Internal Revenue Service can levy your Social Security benefits. Your benefits can also be garnished in order to collect unpaid child support and or alimony. Your benefits may also be garnished in response to Court Ordered Victims Restitution. SSI payments cannot be levied or garnished. Treasury’s Financial Management Service can also offset, or reduce, your Social Security benefits to collect delinquent debts owed to other Federal agencies, such as student loans owed to the Department of Education.”

Now, if you graduated in 2003 with me and refinanced your loans at 0.9%, then fine, drag them out over 30 years. I don't care. Mathematically you'll almost surely come out ahead given that you're borrowing at less than the targeted rate of inflation. But ask current medical students and residents and young attendings what their rate is. The answer is likely something between 5.5% and 10%. There's a good chance paying that down is their best available investment, at least on a guaranteed basis. Even most people with a good debt to income ratio and credit who have refinanced their student loans are only getting into the 3-4% range for a five year fixed loan. Given that the best guaranteed investment out there is only paying something like 2% these days, 3-4% isn't too bad.

Beware of “Future You”

But the main problem with borrowing money for 30 years is that it limits your freedom. In reality, you're not borrowing from a bank or even the federal government or its taxpayers. You are borrowing from a nice fellow that I like to call “Future You.” He seems really nice when you're 25. He'll lend you all kinds of money. Then at 35, he seems a little grumpy. By 45 he's an angry neighbor throwing bits of hamburger stuffed with acetaminophen and warfarin over your fence. Do you really want to see what he's like at 55?

You're really not done with your medical education until you've paid for it. I assure you that you WILL regret borrowing more than you had to as a medical student. There is a good chance you will want to take a less lucrative job, go part-time, or even retire early at some point and a huge student loan burden would prevent that.  So do yourself a favor and pay off that debt within 5 years of graduation. Barring some extreme situation (which will require an extreme solution) there is no reason the vast majority of doctors cannot do that if they'll live like a resident for a few years after residency. Here's what the numbers look like with some basic assumptions (living on $50K a year until debt is gone, effective tax rate of 25%, 3% refinanced student loan rate.)

Doctor with $180K income

  • $100K Debt: 15 months
  • $200K Debt: 29 months
  • $300K Debt: 44 months
  • $400K Debt: 60 months

Doctor with $250K income

  • $100K Debt: 9 months
  • $200K Debt: 18 months
  • $300K Debt: 28 months
  • $400K Debt: 38 months

Doctor with $400K income

  • $100K Debt: 5 months
  • $200K Debt: 10 months
  • $300K Debt: 15 months
  • $400K Debt: 20 months

None of that looks too bad, right? I mean, the worst case scenario (the doctor with the low income and high debt) is still out of debt within 5 years. So what happens? Why are so many doctors still in debt who are a decade or more out of training? Several reasons and the problem usually isn't that they just did one of these things. They usually did two or more of them.

  1. Didn't live like a resident. In fact, they often just made the minimum payments on their loans as an attending.
  2. Never refinanced the student loans.
  3. Racked up huge debts.
  4. Chose a low paying specialty.

In addition, given how low the pay-off time is for many of these hypothetical docs (most under 3 years and many under 2 years), some will reasonably choose to slow down the process slightly by giving themselves a little raise after residency, directing some of their wealth building money toward maxing out retirement accounts (which further lowers their tax bill) or saving up a little down payment for a house. As you can see, most doctors can still do all of that stuff and still be done with medical school debt by 5 years out.

So, what advice can be given to the pre-med student? I think it can safely be said that, yes, becoming a doctor, even if you have to borrow to attend medical school, still makes financial sense. BUT, you will have to live like a resident for a few years after residency. The more poor financial decisions you made, the longer you will have to live like a resident.

Quit taking selfies and get on the chairlift!

Math and Behavior

Let me give you a tip if you haven't yet figured this out already. Be assured that I am fully aware that the mathematically correct thing to do is often to borrow at low interest rates and invest the money. But if you want to FEEL wealthy (in addition to being wealthy), I would recommend a different approach. Try to maximize the amount of disposable income you have each month. How do you do that? By eliminating fixed expenses one by one as rapidly as you can. You wouldn't believe how awesome a life you can have while spending just $100K-150K when you have minimized your fixed expenses. No student loan payments. No car payments. No mortgage payments. No time-share payments. No second house payments. No private school payments. Eventually not even life and disability insurance payments. After covering property taxes, paying for some basic utilities and insurance, and putting food in the fridge, you might still have $10K a month to do whatever you want with. You can invest it with some pretty awesome results. You can give it away and make a huge difference in the lives of others. You can spend it and have a very good time. And when the next month rolls around, there's another $10K you get to decide what to do with. It's a pretty good life. And it's yours for the taking. The only cost is living like a resident for a few short years after training when you really don't even know what you're missing yet (but it rhymes with jelly-peeing.)

What do you think? Do you think it's okay to borrow for undergraduate? How much? Do you think borrowing to pay for a medical education still makes sense? Why or why not? Do you think it's okay to drag student loans out for 30 years? Why or why not? Comment below!