Long believes it is wiser to allocate resources to student loan repayment than to investing. “The stock market is volatile and mostly favorable to long-term and patient capital,” he said. “On the other hand, loan repayment contributes positively to net worth immediately, has favorable tax deductions attached, and lowers the overall risk that debt entails.”
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December 2014Many physicians believe that they can make higher percentage gains in the stock market than they pay in debt interest. “While this may be true at certain times, it introduces a new level of risk into the doctor’s finances,” Long said. Financially, student debt loads hurt one’s credit, which adds expense to purchases such as house mortgages and insurance. Pouring cash flow into stocks instead of paying off debt is essentially doubling down one’s risk, the same basic concept as borrowing $100,000 to invest with, because you are merely investing with leverage. “It has the potential to work out, but it also may result in losing not only investment monies, but personal assets as well. There are also taxes to pay should you make gains, plus the costs or fees incurred from investing,” he added.
The bottom line is that debt loads can limit your options, such as taking a new job or saving up for retirement. “In today’s economic environment,” Long added, “it is increasingly imperative for physicians to unburden themselves from debt loads to protect their families and provide greater freedom of choice.”
Karen Appold is a freelance medical writer based in Pennsylvania.
Student Loan Repayment Options
- Standard repayment: Eliminates borrower debt in 10 years if the amount owed at graduation is lower than the starting salary after college.
- Graduated repayment: Extinguishes the debt in 10 years with smaller initial loan payments that gradually increase over time. This makes sense for physicians during residency because they’ll stay on top of their interest before their annual earnings spike.
- Income-based repayment: These plans will reduce your monthly payments by extending the repayment term from 10 to 20 years. This is also a practical option for residents, especially those living in high-cost areas, because payment is linked to the borrower’s income and not to their debt level.
- Extended repayment: These plans stretch the repayment term to 25 years.
Source: Larson Financial Group, larsonfinancial.com
Just How Bad Is It?
According to a report by the Association of American Medical Colleges, the average student loan debt among indebted medical school graduates in 2012 was approximately $170,000 for students with medical degrees. That averages out to 25% of 2012 graduates owing more than $200,000 and 5% owing more than $300,000. Required payments on this debt can be more than $3,600 per month.