Debt Interest is the Dark Side

Definitely one of my better halloween pumpkins.

One of my better halloween pumpkins.

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.

2 comments on “Debt Interest is the Dark Side”

  1. Jose Espada Reply

    Educational Debt is means to a degree (MD) and a potential income. Especially, a physician’s income is in the top 5% of wage-earners in the U.S. The over-arching thing to keep in mind is that the educational debt along with its relative debt, is the investment a physician makes for the privilege of being able to make a 38-58% annual return on that investment. There is no investment on wall street that can claim that robust of a return on an annual basis.

    A resident can opt to forgo student loan payments while in residency, but by doing do they significantly minimize their potential opportunity to achieve Public Service Loan Forgiveness (PSLF). With residency training and fellowship training being not-for-profit training and then, on top of that 80% of hospitals and their networks being not for profit, the opportunity to reach and benefit through PSLF is real. Of course, a person who is uncomfortable with debt may want to focus on repaying back student loans once they begin making the physician’s income. Some will be better off than others in being able to do this. But, really, the likelihood of that happening is not common.

    • Mr. DebtAnatomy Reply

      Thanks for your comment! I certainly agree that physicians make a good living. I also agree that it’s still financially worth it to become a doctor, even with high tuition prices.

      However, comparing the return of educational debt with the return on wall street is incorrect. Wall street investments generate passive income. The only cost is your initial investment, and then you are free to travel, work, or just sit on your couch while your invested money generates more benjamins. On the other hand, educational debt is the exact opposite of passive income. Paying tuition by itself doesn’t generate any money. The average physician not only spends hundreds of thousands of dollars on tuition and interest, but also must put in approximately 124,800 hours of work and study throughout medical school, residency, and a lifelong career in order to get the “return” on their “investment”. If you really wanted to compare wall street investments to educational debt returns, you’d have to calculate the opportunity cost of hours invested (big negative number), as well as the cost of delayed savings (another big negative number). Don’t get me wrong, I think doctors make great money. But sometimes we use the term “investment” a little loosely. In this case it’s apples to oranges.

      You make some really good points about PSLF. I definitely encourage readers to consider keeping their options open with PSLF. However, I also strongly caution everyone to hope for the best but plan for the worst. To date, nobody has collected PSLF. The first wave is supposed to occur in 2017. However, efforts are already underway to cap the amount of money that can be reimbursed, and the PSLF fine print explicitly states that there is no existing contract, and the rules can be changed at any time. It would be wonderful if PSLF works out, but students shouldn’t bet their financial future on it.

      I agree with you that the likelihood of new physicians focusing on paying off their debt is not common. That is the whole point of this post and this site. With increasing tuition costs, threatened reimbursement cuts, and high interest, the need for new physicians to buckle down and pay off their loans is vital in order for their education to still be a good financial decision in the long run.

      Thanks again for your comment! Obviously this is looking at things purely from a financial view. In the end, I love medicine for medicine’s sake. There are many intrinsic benefits this field offers that aren’t preceded by a dollar sign.

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