In this chapter we focus on the debt side of the balance sheet, with emphasis on the toughest challenge faced by many medical practitioners—the burden of student loans. We also cover car purchases, home mortgages, credit cards, and credit scores.
Unlike many undergraduate college peers, who get jobs and begin to pay off student loans in their early 20s, doctors incur even greater amounts of debt during medical school. And they're often unable to make debt payments as interns, residents and fellows, which can lead to unpaid interest being capitalized (added to their outstanding principal). The result in many cases is a mountain of debt.
According to the Association of American Medical Colleges (aamc.org), the median education debt for indebted medical school graduates in 2018 was $200,000. The American Dental Education Association (adea.org) states that the average indebted dental school graduate in the class of 2018 had $285,184 in debt. The main message in these numbers, and in numerous articles dealing with the subject, is that medical practitioners, weighted down by massive debt burdens, live on a razor’s edge where any misstep can lead to harsh consequences.
One such consequence is that medical practitioners who default on student loans made by the U.S. Department of Health and Human Services may have their licenses revoked or suspended. This, in turn, can disqualify them from participation in programs receiving Medicare and Medicaid reimbursements. Adding insult to injury, a government program dating back to the 1990s set out to publicly shame delinquent medical practitioners by including their names in a Medicare Exclusions List.
In addition to student loans, many doctors take on sizable home mortgages and auto payments. Some young families face a dizzying amount of debt. I’ve spoken with dual-physician couples; dentist married to physician; physician married to attorney, who have combined school debts in excess of $500,000! Add to that more debt for a home mortgage and two cars and you’ve got a million-dollar hole which could take decades to overcome.
Now introduce a surprise variable: what if one spouse, clutching that first newborn, decides s/he wants to stay home with the baby? That mountain of debt is suddenly much harder to scale.
Here’s another all-too-common example. A doctor calls his accountant and says he needs to talk, urgently. When they meet face to face, the doctor says: “I made around six-hundred thousand dollars last year. This year it looks like I’m only going to make four-hundred thousand.” Then the doctor sighs heavily, and says, “That’s not enough, I can’t make it on four-hundred thousand. I’m not making enough money. My income is not high enough.” The accountant stifles the urge to shout out, “You don’t have an income problem—you have a spending problem,” and instead politely points out that annual income of $400,000 puts the doctor in the 99th percentile of earnings.
High earning doctors become accustomed to spending on real estate, cars, fancy gym memberships, travel, private schools, and a variety of other products and services. In fairness, after many years of studying doctors should be able reward themselves. But while some of these expenditures may be justifiable, others are likely unnecessary and inadvisable, and result in higher debt.
The best advice is to live within your means and generate excess cash to pay down debt and invest. If you must borrow, opt for the smallest amount of debt. Instead of the $800,000 palace to compete with your peers, go for the $300,000 starter home. Instead of the sports car, choose something more modest with good gas mileage.
Real Example of Living Within Your Means
Let’s turn now to a real-life example of good financial decision making. In the early stages of their marriage, Dr. Jones and his wife were on a typical financial trajectory: upon graduation from medical school he had a large amount of school debt, and when they initially settled into a new home in Massachusetts, a sizable mortgage. Several years later they found themselves in New Hampshire, with a bigger house, a bigger mortgage, and three children.
Around this time Dr. Jones began to question the usual approach of borrowing to fund all major purchases. When it came time to replace the family’s two cars, he decided to pay with cash. This led to a bizarre situation in which the car salesman wasn’t sure how to proceed, never before having had to process a car purchase that wasn’t financed with debt.
Soon, the family found itself moving to Virginia, and the couple made an explicit decision to avoid debt wherever possible. They bought a house at a price that was well below their purchasing power, requiring a very small mortgage which was soon paid off. By this time they’d also paid off all school debt.
A decade later, they’re still driving the same two cars, two of their children have completed post-secondary education, their daughter is married, and there’s enough saved up in a college savings plan for the youngest child to attend college.
The family is debt-free. Other than replacing the two cars, there are no major expenditures in sight. All the family’s excess cash is now directed into retirement savings.
The key to being in this favorable position was the family’s explicit decision to live below their means. This allowed them to pay off debts, ensure high quality education for all (Dr. Jones graduated from an Executive MBA program), and put some money away for retirement. Over this entire period the family donated 7-10% of gross income annually to causes such as the Salvation Army, Doctors without Borders, and Mercy Ships.
The key lesson here is that there’s no magic to financial planning. All progress hinges on earning more than you spend and using that excess cash to pay down debt and build pillars.
If you have significant debt, or just want to turbocharge your retirement planning with early investments, commit to a few years of modest living after you get your first real job. Use this time to generate a lot of excess cash and put it to good use.
Once your debt load is under control and/or you’ve seeded a few investment pillars, you can expand your spending. The easiest time to enforce “austerity measures” is when you are still accustomed to living under similar circumstances as a trainee, and before you’ve become accustomed to a more luxurious lifestyle. It’s much harder to scale back expenses once you and your family become accustomed to them.
This advice must be tailored to your family’s circumstances. It’s relatively easy to live like a resident for a few years when you’re single. If you have dependents, such as small children or elderly parents, living like a resident may not be an option. In such cases it’s even more important to plan carefully and use the family’s scarce financial resources most efficiently to preserve an acceptable lifestyle while successfully meeting all financial obligations.
Minimize loan rates
It’s very common for student borrowers to have loans with interest rates in the 6% to 8% range. Such rates are ruinously high and must be avoided.
If you already have interest rate debt, look into refinancing. Providers who offer student loan refinancing include: Earnest, Laurel Road, Splash Financial, and SoFi. An Internet search yields other options as well. Check carefully to ensure your loans are eligible for refinancing. Be on the lookout for scams which are quite common in this space. I recommend doing an online search for information on the latest scams and how to avoid them. Government sources are the most reliable for federal loan related information and include studentaid.ed.gov and studentloans.gov.
In recent years students at some schools have banded together to seek lower-rate loans as a group for medical or business schools. Some founded companies to offer such deals to larger audiences. You may wish to search online for such groups.