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Tackling debt

Article-Tackling debt

For most physicians, debt is like a chronic condition that can linger for decades, influencing everything from specialty choice to what kind of car they buy. And like a chronic condition, if treatment options aren’t followed, it can get significantly worse over time as mortgages, college funds, and credit card expenses pile onto existing medical school debt.

A recent Medical Economics poll of doctors of all ages showed that 66 percent were more than $90,000 in debt upon graduating medical school, and 30 percent had more than $200,000 in debt. The American Medical Student Association says that the average medical student in 2016 graduated with $190,000 in debt.

Vishal Patel, MD, a fourth-year internal medicine resident at the University of Central Florida College of Medicine, has accumulated $132,000 in debt over 11 years of schooling and is paying more than $600 each month in interest. “When I finish, I hope it won’t be any more than it is now,” he says. Despite the debt, he feels fortunate because he received financial assistance from his family so that it didn’t have an undue influence on his decision-making about specialty choice.

“Quite a few of my friends gave up on their dreams of being a cardiologist or pulmonologist just so they could go out and get a job as a hospitalist,” says Patel. “They just needed a paycheck because they had too much debt accruing.”

Laura Rathe, MD, an internist in Crosby, Minn., just paid off the last of her medical school debt after 26 years of practice. Like Patel, she received financial assistance from her family. To minimize the impact on her life, she lived frugally, opting for cheaper vacations and buying an average home. “I was told a lot of times that I should be stressed out about the debt, and I did a little dance in the office the day it was paid off, but I was never worried I was going to end up on the street,” she says. 

Financial experts say doctors who are burdened by debt—whether from education, lifestyle, or both—can take multiple approaches to tackling the problem. The more aggressive strategies require more sacrifices, but there are options to chip away at it that don’t require giving up everything. And no matter where a physician is in his or her career, it’s never too late to start attacking debt.

The basics

Debt problems start early on. “Medical students are told during school not to worry about it, because they’ll be a doctor making a six-figure salary, so they decide it’s not the time in life to worry about it,” says Nate Reineke, a student loan specialist for Physician Family Financial Advisors in Eugene, Ore. “Doctors are not shielded from the burden of debt just because they have a big income. They shouldn’t let debt follow them for 30 years.”

Reineke says to start by taking advantage of better interest rates on loans. Many doctors took out loans while students that have interest rates in the 6 percent to 8 percent range, while private refinancing offers might lower that to 4 percent. “A few percentage points on a $20,000 loan isn’t that huge, but for someone that might have $400,000 in debt, the math shows a savings close to $100,000 over the term of the loan. Rates are really good right now, but they don’t always realize it’s a $100,000 choice.”

For younger doctors, Public Service Loan Forgiveness (PSLF) often sounds inviting. After 10 years of payments on federal loans and service with a qualified public service provider, what remains of the loan is forgiven. “By the end of 10 years, there is not always a lot left to be forgiven,” says Reineke. “What they don’t think through is, do they really want to work at a qualifying institution for 10 years? If they are confident they are not going to go into private practice, then it’s a good option.”

Physicians who choose this option should check to be sure that loan servicing companies are accurately tracking progress toward PSLF and keep their own records. “There are a lot of PSLF error calculations in payments,” says Daniel Wrenne, CFP, founder of Lexington, Ky.-based Wrenne Financial, an advisory firm that helps physicians and dentists. He’s seen cases where balances have been off by thousands of dollars, and says that any discrepancies should be reported immediately. 

Understanding student loan terms is important, because payment plans vary. For some loans, the payments may increase at a rate that exceeds the physician’s ability to pay. Known as graduated loans, the payments tend to double every few years, because the loans are designed to be a short-term solution and the escalating payments are an incentive to pay back the loan sooner. If physicians aren’t aware of this escalation, it can create financial stress. For instance, one physician Reineke worked with was paying $1,500 a month on $300,000 in loans, and was comfortable with that. However, by the end of the loan, the payments would be $6,000, and she wasn’t in a field that would support that much growth in income. “For her, the better option was refinancing to flatten the payment out at $3,000 a month spread over seven to 10 years,” he says. 

Other student loan payment plans are based as a percentage of income, so payments increase only as the physician’s salary increases. “What I’ve seen is doctors who are asleep at the wheel when it comes to their loan terms,” says Reineke. “They think they will just continue down the same financial path, not realizing the terms of their loans may change.” 

For example, PSLF programs always use an income-based payment plan, but Reineke says physicians need to understand that if they get married and file taxes jointly, it will affect their payment rates because their spouse’s income is counted in the payment calculation. And privately refinancing the loans immediately means eligibility for PSLF is lost. “It may sound good to be on these plans, but you usually end up paying more,” he adds.

Reducing debt can feel great, but being overly aggressive about it can create risks if cash becomes tight. For example, a three-year refinancing term might sound good, but if the rate isn’t that much better, Reineke suggests extending the term over five to seven years instead. This results in a lower monthly obligation and the loan can always be paid off early if the practice is doing well. He says it’s better to make a higher payment than necessary when possible, but not to be contractually obligated to do so to preserve flexibility.

Doctors with multiple loans should follow consumer debt-reduction strategies, says Dan Johnson, CFP, founder of Akron, Ohio-based, Forward Thinking Wealth Management, which specializes in advising medical professionals. “If you have multiple loans, you may be in a situation where you haven’t even thought about which loan has the highest interest rate,” says Johnson. “Your biggest payments should go to the loan with the highest rate, and once that is paid off, focus on the next highest rate loan.”

Lifestyle choices

Medical school loans usually constitute the bulk of doctor debt, but experts say lifestyle choices often exacerbate the problem. Societal pressure plays a role in physicians adding to an often already-daunting debt load.

“Everyone knows they are a doctor, and the expectation is that they not roll in driving a 12-year-old minivan,” says Johnson. “They are expected to have a nicer house and car.”

Adding to the pressure to spend money is that after a decade or more in school, physicians are ready to reward themselves after making so many sacrifices. “They go from making $50,000 to five or 10 times that amount,” says Johnson. “They’ve got $50,000 sitting in their checking account and decide to go out and buy whatever they want as opposed to thinking about the $300,000 in debt they may have and paying toward that.”

But lifestyle choices are what will ultimately determine how long a doctor is saddled with debt. “Cash flow is the gasoline that drives the engine,” says Wrenne. “If you are a few years out of school and bought a nice house and have settled in but have no excess cash flow to put toward debt, you have to change big time.” Some doctors may try to work more to generate extra income to both maintain their lifestyle and pay off debt quicker, but that contributes to burnout, Wrenne says. 

The better way is to live like a resident until the debt is paid off. “Don’t live like you have a $300,000 income; live like you have a $60,000 income,” says Reineke. “If doctors could just hold off two to three more years after residency before spending a lot of money, they can leverage their high income to tackle that mountain of debt.” 

For physicians who are well into their careers, lifestyle changes can be painful, but effective. “It’s difficult to live on $500,000 a year than decide to get serious and spend $100,000 of that on student loans,” says Reineke. “It’s an emotional decision and not just about the math. A lifestyle change would make all the difference for them.” 

After student loan payments, a mortgage is usually the biggest expense and one of the main problem areas because doctors buy a house that is too expensive or use a mortgage with too long a term that carries over into retirement. Wrenne says a good benchmark is not buying a house that is more than two times total income. Any more than that and the physician will not have enough cash flow to make a significant reduction of student loans. “Too many doctors have 30-year mortgages; more should have 15,” he says. “They are starting out later in their career than the average person, so a shorter mortgage works better.”

Cars are another lifestyle choice that can have big financial consequences. Wrenne says that because auto loans are often spread out over several years and payments are low, physicians don’t see how their vehicle is affecting their total financial picture. “I like to look at the true cost to own that shows depreciation and maintenance costs,” says Wrenne, who adds that total cost of ownership calculators are available for free on automotive sites like “There might be a $1,000 a month difference between owning a luxury car and an old car,” he adds. “If you take that savings across multiple years and applied it to your student loans, you can pay them off earlier.”

One source of potential extra money is from the recent tax cut. A physician making $250,000 should see an extra $5,000 to $7,000 in income, and Wrenne says that money should either be used for loan payments or be invested.

Lifestyle choices don’t have to be an all-or-nothing proposition, says Reineke. Doctors just need to decide what their overall financial goals are and then look at what it would take to get there. The more aggressive the goals, the more aggressive the sacrifice that will be required. 

Loan payment versus investing for retirement 

For some doctors, investing money for retirement may be more advantageous than paying off student loans. If the interest rate on the student loans is low or provides tax advantages, then investing might be a better use of available funds, if the return is higher. “If you’ve got a solid, locked-in rate on your student loans, it may make sense to be more aggressive with a 401(k), 403(b), or a Roth IRA and set up for the long-term,” says Johnson, who adds that doctors have to make up for lost time because they have a shorter period before retirement because they start their careers later than most other professionals.

This also means they often delay starting a family, which can mean selling the house may not be realistic now, but can still contribute to a long-term retirement plan. “They may have a large family that won’t allow them to downsize their house, but maybe the equity in the home can help them fund retirement down the road when they do downsize.” he says.

Reineke says that like lifestyle choices, retirement planning comes down to personal preference. “[Physicians] need to decide how much they need for retirement and how much they can save every month,” he says. “I like the psychology of not owing anything to anyone and paying off loans, but if you have a loan rate that is so small, there is no point in making anything other than minimum payments because investments are doing great.”

Experts say that physicians are never too old to start getting serious about reducing their debt. “The later it gets in your career, the more you should be fired up to take care of it,” says Reineke. “Don’t take debt into retirement. But never lose hope no matter where you are in the game.”