On today’s podcast, we answered a question from Ben. Here was his letter:
Can you do an episode on how to deal with medical school debt and high cost?
I’m a second year and already at $140,000 (including undergrad). My school costs $50k/ year and I’m living on beans and rice but I still project graduating with over $280K in debt at around 6.5% interest. How do I deal with this huge mess when I graduate while still building wealth through retirement funds, saving, and investing?
While Thomas Frank from College Info Geek answered Ben on the show, Shannon also weighs in on the topic here:
For decades, the wealth curve of a doctor can best be described as a J curve where they do not build wealth while in school for 8-10 years mastering their skills and then once they start to make the decent incomes they’d been promised, they play catch up rather quickly. It’s easy to catch up when you earn mid to high six figure salaries, and nothing has changed about this curve in decades except for the cost of education.
Student loan debt is something that is common to 64% of graduates; however, doctors in particular face substantially higher debt loads due to longer stints in school and training periods where their income is minimal. It’s easy to get overwhelmed with debt the size of a large home in the Midwest staring you in the face before you even start to earn an income.
I see this fear in a number of my doctor clients, and I think the biggest message I have for Ben and for them is to keep everything in perspective. Yes, the debt burden is high; however, if you manage your lifestyle accordingly, paying it off and saving for retirement are goals that you can accomplish. New doctors today have to remember that their financial path, because of this student loan debt, will look different from their predecessors in some ways; however, in the long run, they might be better served for having their student loan debt.
Doctors have notoriously represented some of the worst financial planning clients to have. They do not make much money in their 20s and early 30s and then once they start making money, they typically experience extreme lifestyle inflation and spend a great deal of their money. They may not have had student loan debt, but doctors have had large mortgages, multiple cars and high credit card balances. Because of the student loan debt in the onset of their careers, today’s graduates actually have the opportunity to have better wealth trajectories than their predecessors.
Advice While You’re In School:
The first thing medical school students need to remember is to use their student loans sparingly. Their predecessors built up large credit card balances while in school supporting their cost of living, instead of credit card balances; today’s medical student is running up student loan debt. The less you draw from student loans, the smaller your burdens will be when you graduate. It seems basic, but it’s easy to forget when you are going to out to dinners and celebrating with your peers every time you hit the next level in your education.
Once You Graduate:
Once you start working and you face the task of paying off the loans, it’s also important to remember that student loans are a “different” kind of debt. If you pay off a credit card, you will have more credit available or if you pay down a home, you could have a home equity line available to you; however, when you pay down a student loan, you will have no other forms of liquidity. 6.5% interest is not appealing; however, it gives you flexibility to have cash and prevents you from going into other kinds of debt like credit card debt.
So where you may want to get rid of that student loan debt as soon as possible, think about your debt in terms of your other life goals, like buying a home and having children. You need cash for those life goals and if you use your cash to pay down the student loan debt, you can’t get it back later.
A good best practice is to pay off student loans while building wealth at the same time. It will have a similar impact on your net worth; however, the wealth that you build will prevent you from other credit woes. As far as retirement, you have to expect that retirement planning will be delayed as long as you have the student loan debt and other life goals you need to accomplish.
Building a base level of wealth and managing the student loan debt will be high priorities upon graduation and then as the debt is repaid, you should apply those payments to retirement. Your wealth building curve, like doctors before you, will look like a J, it will just represent a more prolonged J. As long as you minimize your debt in the beginning and maximize savings once you start working, you will be able to catch up, it is just a longer initial build up process.
Remember that the doctors before your generation did not have as large a student loan debt; however, many got into debt problems afterward due to lifestyle inflation. Don’t go crazy with a big house and expensive car once you graduate! With some planning and focus around your loan repayments, wealth building and lifestyle maintenance, you will achieve your financial goals, it will just take you a little longer than others, but this has been the wealth story of doctor’s for decades.