I usually refrain from using fear to drive readership. I’m a happy optimist who prefers to see the world through rose colored glasses while sipping lemonade. But if there is one thing I encourage a healthy dose of fear for it is this: INTEREST. And no, I’m not talking about the kind of interest that causes me to check online everyday for new star wars 7 trailers. I’m talking about debt interest. If you thought Donald Trump’s hair was scary then think again. Debt interest will cling to your back and follow you the rest of your life, constantly sucking the life out of your wallet until you’re an old and shriveled physician who finally has money to enjoy but not enough life to enjoy it. How scared of debt interest should you be? Consider this statement an emergency medicine resident made to one of my friends:
“I worked harder than I ever have for 2 full years (during residency), and the interest that I accrued during residency meant that I netted exactly nothing.”
But surely this is hyperbole. After all, don’t residents make a decent salary? This has got to be just a product of rich whiny doctors being disconnected from the public, right? Not so fast. Let’s set the stage. The average yearly tuition for medical school is $38,500, plus roughly $25,000 for living and books, costing $63,500 per year. If the debt accrues interest at 6.8% this leads to a grand total of $300,217 at the time of graduation. At many schools, such as my own, the cost will be significantly higher.
Scenario 1: Delaying Payment During Residency
You are starting residency and you finally have a job! The average resident salary of $52,000 seems like a mountain load of cash after taking out loans to make it through school. For a married couple this equals roughly $41,645 post taxes. You decide to delay any loan repayment until after residency. The next 4 years are the hardest working years of your life, sacrificing time with family, friends, and sleep. One of the small consolations is that you’re at least making money at this point… or are you? Skulking in the background this whole time is the demon of debt interest. Even while you’re working the floors at 3 am with bloodshot eyes, debt interest is working against you. You started residency with $300,217 of student loans, but after 4 years this number has swollen to $390,589. Your debt increased by $90,372 during residency!
So let’s re-examine this resident’s claim. “I worked harder than I ever have for 2 full years (taking home $83,290), and the interest that I accrued during residency ($90,372 over 4 years) meant that I netted exactly nothing!
HOLY COW! Not only did this resident net exactly nothing for those 2 years, but she came out $7,082 in the negative!!! This is insane! The income from your first 2 years of residency doesn’t even equal the amount of interest you will gain during those 4 years. Now can you see why your student loans are a HOUSE-IS-ON-FIRE-CALL-911-EMERGENCY?!?!
And to top it off, when you finally start your new job as an attending, that $390,589 debt load is gaining $26,560 in interest alone!
Scenario 2: Making Small Payments
In this scenario, you graduate medical school with a healthy fear for your debt interest. You and your spouse determine to keep your expenses capped at $28,000 (this is a $3,000 raise). This allows you $13,645 to pay toward your loans yearly. At the end of four years, your total debt load will be $330,183. It still increased by over $30,000! While this is surely better than the previous scenario, any resident with a small family will tell you that paying $13,645 each year during residency is just not feasible when there are mouths to feed.
The point of this is to show that even great sacrifice during residency cannot completely overcome the grinding power of debt interest. It will certainly slow it down, and any dollar spent fighting against it is worthwhile, but your debt load will continue to increase even during the hardest working years of your training.
The Bright Side
That’s enough doom and gloom for one post, so let’s end on the bright side. Compound interest doesn’t always have to be your enemy. By setting solid goals and maximizing your disposable income after residency, you can destroy your debt load in 2-3 years. Once you’ve defeated your student loans you can recruit compound interest onto your side through investing. By taking the money you were previously spending on debt repayment and investing it, this powerful force will be fighting on your side, bringing in tens of thousands of dollars, while you pile more money on top of it.
So in closing, an MD is still financially worth it, as long as your healthy fear for debt interest causes you to use the first few years after residency pounding your debt into oblivion.