Debt Repayment

April 9, 2013

By Lauren Law, Financial Advisor

Any idea what the average student loan debt burden was for physicians who finished their training in 2012? According to the AAMC 2012 report, the median indebtedness for the class of 2012 was $170,000 1. If I were to draw on data from my clients personally, I would have guessed that number was easily over $200k, as I rarely see someone with less student loan debt than that. I had an anesthesiologist I work with describe it to me as his “invisible house” – he couldn’t live in it or enjoy it, but he couldn’t get out from under it. Having a large debt burden is very common for physicians coming out of training, and it is something that is manageable as a part of an overall financial plan with some strategic consideration.

Doctors tend to fall into two distinct categories when it comes to how they feel about debt – either they have adjusted to the idea of having a lot of debt and just want to pay it off in the manner that makes the most long term financial sense, or they despise having debt and want to pay it off as fast as possible no matter what. I tend to take the former approach – saying that if we can earn more by having the money elsewhere than the interest is costing you, then it makes sense to invest extra money as opposed to paying extra on your debt. The reverse is also true - if the debt is costing you more than you can make elsewhere, then pay it off as soon as you can. This means credit cards are priority number one for payoff, usually followed by your higher interest student loans.

So how do you structure the repayment? I’m a big fan of consistent budgeting, so I like to come up with a set amount each month that will go toward paying off debt – this number is the total of your minimum payments plus a premium depending on how fast you want to pay off the loans. For example, let’s say I have three credit cards, a private residency living loan, and then a federal student loan. I have an extra $500/mo in my budget that I want to dedicate toward debt repayment.

Loan/Debt Balance Interest Rate Monthly Payment
Credit Card #1 $4,430 25.99% $115.00
Credit Card #2 $2000 19.99% $42.00
Credit Card #3 $4000 15.9% $120
Residency Loan $15000 12% $400
Student Loan $92,300 6% $765.00
Mortgage $430,000 4.8% $2460

Looking at the above chart, we know we want to pay of the 25.99% card first. So I would take the $500 and apply that sum in addition to the $115 minimum payment, for a total of $615/mo toward the first credit card until it is paid off. Then, I have $615 freed up that is added to the minimum payment on the 19.99% card, for a total of $657 going toward that card until it is paid off, and on down the line. For the duration of the debt repayment plan, I am dedicating $1942/mo toward debt repayment. I would actually drop to just the minimum payment once I got down to the 6% student loan. I am a fairly aggressive investor, and feel reasonably confident that I can average higher than a 6% return on my investments over the next 30 years. The mortgage also falls under that threshold, PLUS I can deduct the mortgage interest on my tax return, so the effective interest rate on the mortgage is actually closer to the 3’s – really cheap money and one of the few tax advantages you will have once you’re in practice. You’d be hard pressed to convince me that I should be trying to pay that off in lieu of investing.

The monthly premium and that interest rate threshold are going to be different for everyone depending on a couple of factors – namely how aggressively you want to pay off your debt and how conservative or aggressive you want to be with your investments. So this is the general strategy, but we definitely want to customize it based on the overall long term goals you have for yourself.

If you fall into the second group I referenced above – the one that hates debt and wants it gone as fast as possible – then you can definitely put every extra penny toward your debt for a few years. An oncologist I work with told me that he couldn’t sleep at night knowing he and his wife owed more than $500k back to Uncle Sam, and I know I have met other physicians who feel the same way. A few words of caution regarding this strategy (not saying don’t do it – just saying be aware):

  1. Once you put a dollar toward your debt, you can’t get it back without taking out more debt. Be sure you have a solid emergency reserve built up ($25,000+) before you start making aggressive payments on your debt.
  2. The trade off for one year spent paying off debt early in your career is more than one extra year working before you retire. Think about it – a dollar that you invest this year will be earning compounding returns over the next 30 years or so. If you pay off debt with that dollar instead, you lose the compound earnings. Say you are 32 entering practice – and you don’t start investing until age 36. Unless you save more aggressively beginning at 36, you’ll have to work probably 6 more years to have the same amount of money to retire than the guy who started investing at 32 and paid off the debt more slowly.

In short, it is great to have a plan that you know you can stick to – whether that plan results in you being debt free in 4 years, 15 years, or 30 years. And the plan needs to factor in the trade-off between debt repayment and investing so that your plan is as efficient as possible over the long term.

As always, if you have questions or want to talk about designing your personal strategy, I can be reached at I’m happy to help!