Student-Loan Debt: Taming the "800-Pound Gorilla"

It's a burden most graduates fresh out of medical school carry: Six-figure student-loan debt. As physicians move through residency and fellowship, one of their common concerns is how to best transition from suffocating debt to investing income. Here are some strategies for conquering the beast.

It's a burden most graduates fresh out of medical school carry: Six-figure student-loan debt.

Nearly 80% of medical-school grads in 2009 had at least $100,000 in educational debt, with an average debt load of $156,456, according to the Association of American Medical Colleges. Not surprisingly, as physicians move through residency and fellowship, one of their common concerns is how to best transition from debt to prudent investment of their accelerating income.

Do I pay back my loans right away, or over time? What is the psychological impact of educational debt versus the financial impact of carrying student loans? What insurance protection should I purchase? These are just a handful of the many questions that new doctors ask.

First, as a physician begins to see an increase in cash flow, it is critical to balance saving with spending, and debt-reduction with building an investment portfolio. While each individual’s situation is unique, and different specialties provide a variety of income levels, generally it’s recommended that physicians pay off their student loans within 10 years, and invest 20% or more of their income.

Typically, the above trajectory allows doctors to raise their standard of living after many years of sacrifice, take advantage of the compounding available to those who start investing early, and shore up their balance sheet at a reasonable pace. Physicians should also pay down their highest interest-rate loans first, and consider paying off their loans by borrowing on their home equity to deduct the interest.

Physicians’ earnings generally are too high to continue deducting student-loan interest from their income taxes. If, however, the doctor’s income is relatively low, and he is able to deduct a large chunk of the interest (capped at $2,500 per year), borrowing against his home may not be a prudent strategy. (Consult your tax advisor.)

Second, the psychological impact of educational debt should not be underestimated. Even with the remarkably low interest rates today, few physicians regret paying off their loans early. Similar to an individual paying off his mortgage several years before retirement, doctors tend to feel very satisfied after eradicating their own “800-pound gorilla.” In terms of the financial impact of carrying student loans, it depends on the after-tax rate of return that the doctor realistically expects to earn on his investments. Consider consulting with a financial planner or tax advisor for assistance with such estimates.

Third, it is imperative for young doctors to carry sufficient “own occupation” long-term disability income insurance; and, especially if they are married or have dependents, a decent amount of life insurance. If, for example, a physician with large student loans gets injured in a car accident and can no longer practice medicine, without adequate insurance to replace the lost income he leaves himself and his family in a precarious position. Even worse, if a young doctor suddenly died, leaving a spouse and two children, the millions of after-tax income that would have been available to help send the kids to college and provide financial security to the spouse would vanish.

Often medical school debt is a heavy psychological burden, and new doctors get “stuck” feeling that it will take forever to extinguish. As a result, they seldom look at their options early in their careers. It’s important to consult with an experienced financial advisor who can help develop strategies to eradicate medical school debt, protect your family, and build an investment portfolio based on your investment objectives, risk tolerance and financial position.

Evan Welch, CFP®, is a financial advisor with Sohn & Associates, a financial advisory practice of Ameriprise Financial Services, Inc. He works with individuals, families and physicians, to help them achieve their financial objectives through a long-term relationship based on knowledgeable advice. His office is located at 80 Central Street, Suite 150, Boxborough, MA. He can be reached at (978) 263-3336 and evan.p.welch@ampf.com.

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