Being in debt is a way of life among physicians.  After all, it’s difficult to get through 8 years of school without accumulating student loan debt.  Over time, one gets desensitized to debt and it becomes easier and easier to acquire more. All too commonly, student loan debt sets physicians on a road to acquiring other kinds of debt to the point of over-indebtedness—and it can be difficult to escape its destructive impact. 

Maybe you’re thinking, is it really that big of a deal?  

Well, yes. Debt plays a major role in personal financial problems, which contributes to high rates of divorce, bankruptcy, burnout, and suicide among doctors.  Debt can also significantly postpone the time to retirement.  Make no mistake, debt can markedly influence the course of your life (and not for the better).

This and the next post will focus on how physicians can avoid and limit debt.

Minimizing debt is not just relevant to students, trainees and junior physicians—some senior physicians are also still paying off student loans and even retire before paying them off (either their own or that of their children). Yikes! 

Below are some strategies for limiting student loan debt throughout your medical education journey and beyond—but first, a little debtucation (debt + education = debtucation; in other words, I’m going to give you some basic info about debt):

Debt culture

With some exceptions, incurring debt is a choice one makes in order to purchase something now instead of waiting to save up enough to pay with cash. Debt is a deferred payment, or series of payments, that is owed in the future (and a means of using future income before it has been earned to make purchases). Today, it is accepted and even expected when buying a house, for example, to take out a mortgage. This is especially true for younger or first-time home buyers. It’s commonplace to take out a loan to buy a car. 

Americans live in a society where debt is normal and part of the culture. When family, friends, neighbors, and colleagues all live with debt, people learn that debt accrual is “just a part of life.” Heck, even the U.S. government is deep in debt!  All of this strongly influences an individual’s spending habits.  

Combine that with societal expectations of “how a doctor should live” and the outcome is often unmanageable debt that limits one’s ability to live with financial freedom and choose the circumstances of one’s retirement.

Americans live in a society where debt is normal and part of the culture.

If you have a crystal ball, you don’t need to read this section

Debt can have detrimental effects, particularly when households make spending decisions assuming income will increase, or remain stable, in years to come. When households take on credit based on this assumption, life events can easily change indebtedness into over-indebtedness. Such life events include unexpected unemployment or underemployment, divorce, illness accompanied by escalating medical bills, or catastrophic events not protected by insurance (e.g., death of a provider, disability, home destruction, or a costly lawsuit).  Radiologists are not immune to any of these events. In other words, assuming debt is “spending your future.” The biggest risk with this is that no one knows what the future holds. What if it turns out there is no future money to spend? Unless, of course, you have a crystal ball or other means of clairvoyance. 

How loan debt works 

Compound interest (friend or foe?)

“Compound interest is the 8th wonder of the world.  He who understands it, earns it; he who doesn’t, pays it.”  

-Einstein (debated)

“Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels . . . it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands nor orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.”

-J. Reuben Clark Jr.

With few exceptions, money is borrowed at a price.  That price is interest (often in addition to other fees) and it compounds over time. Compound interest is great if you’re earning it, not so great when you owe it—it means you end up owing more than you originally borrowed. 

Different types of loans can impact the amount you have to ultimately pay back. 

This can be illustrated with student loan debt.  In 2018, the median medical student loan debt was $200,000.  The interest rate for Direct PLUS Loans first disbursed on or after July 1, 2019 and before July 1, 2020 was 7.08%.  

Unlike other forms of debt, such as credit cards and mortgages, the interest on Direct Loans accumulates daily.  When interest accrues on a loan, such as during a period of deferment or forbearance, the unpaid interest may be added to the principal amount of the loan (called capitalization).  

Unpaid interest may also accrue while repaying loans under an income-driven repayment plan when the required monthly loan payment is less than the amount of interest that accrues between payments.  Interest is then charged on the higher principal balance, increasing the overall cost of the loan.  

For example, on a $10,000 Direct Unsubsidized Loan with a 6.8% interest rate, the amount of interest that accrues per day is $1.86.  During a 6-month deferment the loan accrues interest totaling $340. At the end of deferment, the accrued interest of $340 is capitalized, and future interest charges are based on a principal balance of $10,340.  This causes the amount of interest that accrues per day to increase to $1.93. A principal balance of $200,000 that is in forbearance over a 6-year residency/fellowship period will result in a new principal balance of  $281,468.  Note: think twice before placing loans in deferment or forbearance.

Minimizing student loan debt

Choosing the right medical school

Many decisions made as a premedical student and in medical school can have a dramatic effect on one’s ultimate ability to accumulate wealth and “live the good life.”  One such decision is the choice of medical school. There is very little correlation between the price of the school and the quality of the education [1].  

Is Ivy for me?

Going to a state school is usually much less expensive than a private school.  Future employers will also care little about where a doctor went to medical school.  The exception may be if a doctor wants to pursue an academic career at a well-known academic medical center.  In these cases, past educational experience may influence hiring decisions. But only 20-25% of radiologists enter an academic practice [2] and many of those will find a good job at an academic center without having gone to an ivy league school.  If money is no object, paying for an expensive education is not an issue.  But one should think carefully about going to a private school that costs twice as much as a state school if it means taking out massive medical student loans.  Note: because of financial aid, the tuition a student pays is often less than the published sticker price. Most students do not pay the sticker price.

Applying to a wide swath of quality medical schools, including lower cost in-state schools, will increase the chance of being accepted to at least one school with lower tuition costs.  Obviously, choosing the cheapest school in the lowest cost of living area (LCOL; most of these will be in the Midwest) will decrease tuition and living expenses and require less in student loans.  

 

One should think carefully about going to a private school that costs twice as much as a state school if it means taking out massive medical student loans.

 

Financing options

In an ideal world, the best way to pay for medical school is to use money that your parents or other relatives saved up for that purpose.  Of course, that’s not an option for everyone (if it is for you, I suggest you take a few moments to conjure up some nice feelings of gratitude and appreciation).

When using your parents’ money isn’t an option, don’t worry,  there are still other ways you can help limit, or even avoid, heaps of student debt when attending medical school. One avenue you might consider is government or public service related MD/PhD programs where free tuition and a stipend are provided. Some of these programs include the military’s Health Professions Scholarship Program (HPSP, which pays tuition, fees, and a stipend), the Uniformed Services University of the Health Sciences (USUHS, the military medical school, which pays the student as she attends), the National Health Service Corp (NHSC, which offers a scholarship), or agree to work in a town where it is hard to recruit physicians in return for medical school loan payback.  

Keep in mind, though, that each of these options is going to have strings attached, like post-training service obligations for a defined length of time at a lower than average salary.  Students should weigh the pros and cons very carefully before signing any dotted lines. None of the above options should be chosen based solely on financial reasons.  

Recently, several medical schools have announced that they will be tuition-free.  

The newly formed Kaiser Permanente School of Medicine, located in Pasadena, California, will welcome its first class of students in the summer of 2020. Those students, as well as the four following classes, will attend the school for free for all four years of their medical education.  

Kaiser’s medical school follows in the footsteps of New York University’s School of Medicine, which in 2018 began waiving tuition fees for all students.  NYU will also be opening a three-year medical school on Long Island.  NYU Long Island School of Medicine will focus on training primary care physicians and will be tuition-free.  

In April 2018, Columbia University Vagelos College of Physicians and Surgeons announced a new financial aid policy guaranteeing debt-free graduation for its students, making it the first medical school in the country to institute scholarship-only financial aid.  

Since 2008, the Cleveland Clinic has offered all Cleveland Clinic Lerner College of Medicine of Case Western University (CCLCM) students (32 per year) tuition-free education.  

Some medical schools offer full tuition waivers for some but not all of its students.  Washington University School of Medicine in St. Louis has committed $100 million over the next decade to provide scholarships allowing as many as half of its future medical students to attend tuition-free and many other students to receive partial tuition support.  The scholarship program will begin with the 2019-20 entering class.  

About 20 percent of students at the David Geffen School of Medicine at the University of California, Los Angeles, are awarded scholarships that cover all expenses, including tuition, room and board, books and supplies, and more. The scholarships are awarded based on measures of academic merit, not financial need.  

The University of Arizona (UA) Colleges of Medicine in Tucson and Phoenix will offer free tuition starting in the spring semester of 2020 to Arizona residents enrolled in one of the UA Colleges of Medicine (full-time) who agree to practice primary care in a federally designated underserved community in Arizona for at least 2 years after their residency.  Nearly 100 students or about 10% of the student body could get free tuition at the two medical schools.

These announcements are encouraging, especially as they prompt other schools to follow suit.  However, until a greater number of schools start offering free tuition, most students will continue to borrow money to pay for their medical education.

Student loan strategy

Seventy-six percent (76%) of medical students graduate with debt, and while that percentage has decreased in the last few years, those who do borrow for medical school face big loans: the median debt is $200,000. At private schools, 21% of students have debt of $300,000 or more. The average four-year cost for public school students is $243,902. For private school students, the cost is $322,767.

Students should borrow as little as possible, and not until the money is needed.  Every dollar borrowed in medical school starts accumulating interest as soon as it is dispersed.  While the convention is to borrow the maximum amount allowed at the beginning of the school year, it makes more financial sense to borrow the money just before it is needed.  Doing so will limit interest accumulation and take away the temptation to spend money just because “it’s in the bank” for things like eating out, clothes, road trips, buying Christmas and birthday gifts, etc.  Also, it doesn’t make sense to let a large amount of student loan money sit in a savings account, paying 1.6% – 2.05% in taxable interest (the best online savings account rates in January 2020) while paying the government 6.08% to 7.08% in interest for it.  Note: an update in August 2020 shows the best online savings account rate to be 1.05%.

The government makes it easy to borrow money for medical school.  Often, all it takes is a call to the school financial aid advisor and within 30 days, a check can be deposited into a bank account to buy anything the student wants or (doesn’t) need.  

‘Borrow as you go’ strategy

There’s an old saying: “borrow as you go, and too much dough you’ll never owe.” Okay, that’s not really a saying, but perhaps it should be.  Point in case, the following real-life anecdote. 

One student (who went on to become a radiology resident) took advantage of this philosophy to borrow as she went instead of borrowing a year’s worth of funds in one lump sum.  Because students were advised to figure out how much they needed for the year and request it all at the beginning of a school year, the majority of her classmates requested $80,000 in August each year while she requested none.  She paid her tuition and living expenses with a credit card that charged 0% interest for 12-18 months. 

Since her tuition was $15,000-17,000 per quarter, and she was in a high cost of living (HCOL) area, she regularly charged up a large balance on the credit card.  Due to credit card rewards and various promotions for opening a new card, she frequently made $500 per quarter simply off the use of credit cards. But the big savings was from delaying the arrival of high interest student loan debt, by 18 months, on $22,000 of principle per quarter. A year-and-a-half of interest at 6.8% on $22,000 of principle was ~$2,200.  When the 0% promotional period expired, she took out a student loan and paid the credit card off. She saved ~$27,000 in interest during medical school, and received about $6,000 in cash back rewards. The interest she saved was not capitalized into principle upon graduation and did not compound for the life of the loan.  

This scenario won’t work for all medical students, who can’t qualify for new 0% interest credit cards every 12-18 months.  Also, many schools won’t allow payment of tuition with a credit card. But neither of these obstacles prevents students from borrowing only what they need when they need it.

Enroll in an income driven repayment plan ASAP

Most physicians should enroll in an income driven repayment plan as soon as entering residency and then refinance their loans as soon as they finish training.  An exception will be the doctor who will work in an academic practice, or otherwise be employed such that she qualifies for public service loan forgiveness (PSLF).  

411 on PSLF 

To qualify for PSLF, one must work for a government agency or for certain types of nonprofit organizations (including academic medical centers), work full-time for that agency or organization, have Direct Loans (or consolidate other federal student loans to qualify), repay the loans on an income-driven repayment plan, and make 120 qualifying payments.   One advantage of being in a longer residency/fellowship program, such as radiology that lasts 6 years, is that those 6 years count towards PSLF. That means that only 4 more years of making qualified payments are required after training, and after that the remainder of the loan is forgiven. That could equate to huge savings in cases of massive student loan debt.  If PSLF is not applicable, physicians should immediately refinance their loans after training in order to pay as little interest as possible until the loans are paid off. Of course, paying the loans off quickly reduces debt even faster. 

Only government loans qualify for income-driven repayment plans and PSLF, so any private loans should be refinanced as soon as possible (e.g., upon entering residency).  The available rates for a resident physician will generally be much better than the current rate on a loan that was obtained prior to residency.  

Refinancing private loans after training, as a practicing physician, will yield an even better rate.  The rate will depend on the amount of the loan and the borrower’s income. Debt can be refinanced multiple times.  By doing so, one can take advantage of better rates due to an improved credit score or because interest rates have gone down.  Note: there are no fees for refinancing student loans and many lenders will even pay you a cash bonus if you refinance with them.

Choosing the right specialty (or $$$ vs. $$$$$ vs. your passion)

After first deciding to go to medical school and then where to go to medical school, a student’s next big career decision is choosing a specialty.  The most important factor to consider in making this decision is how enjoyable the work will be (for decades). The next most important factors are the salary and lifestyle associated with that specialty.  The choice of specialty will have a larger effect on future income, wealth, and control over lifestyle than almost any other decision made during medical school.  

The American Medical Association includes salary in the list of considerations when choosing a specialty, in addition to the competitiveness of each specialty, the challenges faced in each specialty, and the residency and post-residency work environment and work-life balance.

The Medscape Physician Compensation Report of 2019 reported that orthopedics and cardiology were again among the five top-earning specialties, as they had been every year for the past 5 years.  Radiology ranked 6th out of 29 specialties, with an average salary of $419,000. The average salaries for all specialties ranged from $482,000 (orthopedics) to $209,000 (public health & preventive medicine).  Of course, these numbers do not reflect a wide range of salaries within a single specialty. Salaries are higher in certain parts of the country, in private versus academic practice, and for partners rather than employees.  Senior physicians are generally paid much more than those right out of training. All specialties pay an average salary that is 4X or more what an average U.S. worker earns.  

Figure.  From Medscape Physician Compensation Report of 2019

Someone with a passion for taking care of children should not dismiss a career in pediatrics just because it is a traditionally lower-earning specialty.  However, salary becomes a more critical factor in making a specialty decision when a student has higher than average student loan debt. Someone owing $500,000 in student loans, for example, could not realistically pay off those loans in 3-5 years on a pediatrician’s salary like someone could with an orthopedic surgeon’s salary.  The combination of higher debt and lower salary will mean paying off debt and living like a resident for a longer period of time.  

Massive student loan debt not only is hard to pay off, but it can also delay important life goals like buying a home, getting married, and starting a family.  This is why minimizing medical school debt is so important – so that it doesn’t limit one’s specialty choices.    

Coming up next – how to avoid debt (think “doctor loans” and credit card debt) and develop a habit of “thoughtful spending.”

References

  1. Tsugawa Y, Blumenthal DM, Jha AK, Orav EJ, Jena AB.  Association between physician US News & World Report medical school ranking and patient outcomes and costs of care: observational study.  BMJ 2018; 362:k3640
  2. Bender CE, Bansal S, Wolfman D, Parikh JR.  2018 ACR Commission on Human Resources workforce survey.  J Am Coll Radiol 2019; 16:508-512