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The Medical School Loan Dilemma

Written by: Corey Janoff

It’s no secret that the cost of medical school has increased over the decades and therefore the student loan balances for many young doctors has also increased.  Since 1986, the average inflation-adjusted debt balance for graduating medical students has almost tripled.  By the time residency/fellowship is completed, many doctors who have medical school loans are carrying a balance in excess of $250,000.   I have seen some with balances over $500,000.  This definitely creates a dilemma for physicians as they are looking to begin their careers after training.  

Student Loan to Income Ratio

The medical school loan balance you carry relative to your income will play a major factor in the ability to achieve your financial goals.  Think of it like your mortgage.  The larger your mortgage, the less money you will have to spend on other things.  The smaller your mortgage, the more flexibility you will have.  

If you are a family practice physician earning $200,000/year and you have a medical school loan balance of $350,000 at 6.8% interest, it will cost over $4,000/month to pay off the loans in 10 years.   If you stretch it to 20 years, it will cost about $2,700/month.  Do you really want to be paying student loans for 20 years though?  That 2,700/month payment might be more than the mortgage payment on your house!

If you are able to refinance the student loans to a 5% interest rate, the 10-year payoff will be just over $3,700/month, or approximately $300/month less than at the original rate.  That is $44,400/year in after-tax payments.  Almost a quarter of your salary before taxes and possibly over 1/3 of your take-home salary!  

After taxes, potential employee paid costs for workplace benefits, and retirement contributions, a $200,000/year salary probably results in a monthly take-home paycheck around $10-11k (will vary based on family size, itemized deductions, and state income taxes).   After student loans are paid, that only leaves around $6,000-7,000/month for everything else.  Housing, food, utilities, car payment, insurance, childcare, clothing, entertainment, vacations, charity, and saving for future goals.  

$6-7k/month is still more than the median household income in America, but it’s not a lot of money for a doctor to live that doctor lifestyle they are expected to live and still save the recommended 20% of gross income for retirement.

On the other hand, if an orthopedic surgeon earning $500,000 has a $350,000 medical school loan balance, it will be much more manageable.  That $3,700 minimum monthly payment represents 9% of their gross income.   After taxes, they are probably taking home around $23k/month (give or take).  This means they still have close to $20,000 remaining after student loans are paid to cover all of their other bills and expenses and save for future financial goals.  The nice house and vacations are no problem.  They could even pay off those student loans a lot faster than 10 years if they want!

Some good advice to any pre-med students you may be mentoring is to consider the potential income of the medical specialty relative to the student loans needed to pay for medical school.  This will help determine what specialties to pursue and even where to attend school.  The specialty is somewhat predicated on where med students match for residency – not all medical students match to their top choice for residency.  However, if you know you want to be a pediatrician in private practice one day (lower income specialty) and you know you have to borrow money to pay for 100% of your medical school tuition, attending the most expensive medical school you get into may not be the best idea.  Try to get into the in-state public school if possible.  Or consider making some sacrifices in those early years after residency to eliminate the student loans quickly (more on that in a little bit).  

As a general rule, if your estimated student loan balance will be equal to or less than your expected income as an attending doctor, then proceed as planned.  A 1:1 (or lower) student loan balance to income ratio is good.  

Remember, the student loan balance will increase during residency/fellowship as interest accrues.   Let’s say you graduate medical school with an average student loan balance of $200,000 at 6.8% interest and do four years of residency.  If you make income-based payments on your student loans for the entire four years of residency at $300/month, your student loans will swell to about $250,000 at the end of the four-year training period.  If you do six years of training (residency + fellowship), your student loan balance will grow to $275,000 before you become a doctor in practice.  So be sure to factor that into the calculation of debt-to-income.

If your estimated loan balance is between 1-2x your expected income, proceed with caution.  It’s definitely doable to tackle those medical school loans and still accomplish your other financial goals.  Know that some lean years may be necessary after residency, or you may want to look at employment opportunities that you wouldn’t have sought out if student loans weren’t a factor.  

If your estimated medical school loan balance will be greater than 2x your anticipated income, brace yourself.  Start looking into loan forgiveness opportunities and know that you may need to live on a tight budget for the first decade in practice.  Or marry another doctor, or other high-income earner, who doesn’t have student loans!

Employment Opportunities

There are numerous employment opportunities for physicians that include some student loan repayment assistance.  Most of you have heard of the Public Service Loan Forgiveness program (PSLF).  We wrote a handy blog post on how to qualify for PSLF – check it out here.  Long-story short, if you work at a non-profit employer or government entity and make 120 qualifying monthly payments on your qualifying federal student loans, you are eligible to have the remaining balance forgiven.  

In another post we discussed other avenues for getting loans forgiven or repaid.  Working in a rural area (aka “less desirable”) is often financially attractive.  Many employers in this category will offer some form of student loan repayment or reimbursement for each year you remain working there.  I have seen some doctors get their six-figure medical school loan balances wiped out in as little as three years by working in a small town in the middle of nowhere.  

medical school loan

In addition to the student loan assistance, working in a rural setting often commands a higher paycheck.   They need to pay up to get doctors to work at the only hospital in a 100-mile radius.  As the only player in town, they can often negotiate higher reimbursements from insurance companies, which can work out well for the providers.  

Spend a few years working in an underserved area and hammer away at the student loans, while stashing money aside for retirement and a future home down payment.  While it may not be the dream you envisioned when you were accepted into medical school, this route can be a great way to get the student loan monkey off your back early in your career.  

Housing Costs

In last week’s post we discussed how housing costs are a major determining factor in whether or not you will be able to significantly grow your wealth over time.  Another major advantage to working in a rural setting is the housing costs.  Not only is the pay often greater, but the cost of living is often a fraction of what it would be in a major city.  This high-income-low-cost-of-living effect is what many refer to as geographic arbitrage.  

Your housing costs will play a major role in your ability to repay your medical school loans in a timely manner, too.  If you continue to live like a resident or med-student in your early attending years, you can take all that extra income you earn as an attending and hurl it at your student loans.  You’ll still want to get in the habit of saving a healthy amount for retirement, but if you keep your cost of living low, you will have extra money to work with.  

In the earlier example of the family practice physician with $350,000 of student loans, if they keep lifestyle and housing costs low, they could realistically have an extra $2,000+/month to pay back the student loans with.  That would have the loans paid off in six years (or less) instead of 10.  And at that point, they would now have close to $6,000/month of money freed up to do other things with!  

Competing Financial Goals

I have mentioned numerous times before; we can’t do everything we want in the timeframe we want. We can’t have the nice house, drive the nice cars, send the kids to private school, fly first class on vacation, stay in five-star hotels, and retire at 45.  Unless you are really good at Fortnite, or hit it big in the lottery, it’s probably not going to happen.    

medical school loansThis 16-year-old just won $3 million in a Fortnite tournament

If you have a large medical school loan balance and want to pay that off quickly, you are going to have to make sacrifices in order to accomplish that goal.  If you want to do other things with your money and drag the student loans out for the duration of your career, that is fine too.  To each his own.  

If you have a large medical school loan balance and want to pay it off in a reasonable timeframe, while planning for retirement and college for the children, you will need to sacrifice some of the luxuries in life.  

From experience working with physicians over the years, most of them don’t like seeing that medical school loan balance after they have been in practice for a while.  If you can devise a strategy early on to eliminate them in a timely manner, it will keep the anxiety surrounding them at bay.  Once they are eliminated, you can enjoy the rest of your life free of student loan debt!  

doctor student loan