Secrets To Managing Student Debt

A mountain of student debt can be intimidating but this author says the right approach toward debt and savings, careful planning, and a sound knowledge of loan consolidation and refinancing can go a long way toward improving one’s finances and net worth.

The requirements for application to medical schools include courses in advanced mathematics and physics. I mention this because it seems incongruent that as a group, doctors appear to go “brain dead” when a number has either a dollar sign in front of it or a percent sign following it. This shortcoming often results in poor financial decisions, especially when those decisions involve taking on debt, decisions for which all of the numbers involved have either dollar or percent signs attached to them.

Understanding debt in general and student debt in particular is critical to the future financial success of all doctors. Making decisions regarding student loans is particularly challenging. The impact of making a bad or uninformed decision is magnified due to the fact that (1) payback of these loans stretches over decades and (2) loans cannot be “set aside” or forgiven based on financial hardship or even bankruptcy.

Significant too is that the tactics used for collecting in default student loans are particularly aggressive. These debts often go to collection agencies. When this occurs, the borrower is not only responsible for the amount of the loan but can be held liable for the costs associated with collection of that loan. Borrowers may have wages garnished, credit history may be damaged (impacting purchase of a car or a home), and a myriad of other unpleasant outcomes may occur. There have been a host of “horror stories” posted by unfortunate students who defaulted because they had no strategy for managing student debt.

Regardless of whether you are currently a student, in your residency, just starting out in practice or are a decade into practice, a better understanding of debt in general — and student debt in particular — will help you better manage the challenges of debt “payback.” While I am sure that those reading this are well-read and up to date on the many “standard” issues related to student loans, let us take a look at some of the strategies based on my experience that you may or may not have considered, the understanding of which could help guide you through this challenging situation.

Why Every Dollar You Save Is Really Two Dollars

For current students and residents, remember that there is no disgrace in “living like a starving student.” Every dollar that you do not borrow as a student saves two over the lifespan of a 20-year loan. Any family help, part-time job or grants that you can secure enable you to borrow less while continuing to live like a starving student. Even if you are no longer a student or resident, but are starting out in practice, there is no guilt in living at home if this is an option. That is how my oldest daughter, who is a teacher, saved money for a down payment on her first home.

There are things I still do today that are typical of a starving student’s lifestyle. In particular, my wife and I share a car, a 16-year-old minivan. I walk or take my bicycle to most destinations. While this has saved money over the years, an even greater benefit for me has been the ability to fit in exercise on a regular basis, even on my busiest days. I know young doctors who are driving luxury cars while struggling to pay off student loans and many of those doctors tell me they do not have time to exercise. This is a lose-lose scenario. With no car payments and having to maintain just one car, I have more cash to put to use for better purposes, cash that we would have otherwise “wasted” on a depreciating asset.

When you first go from paying tuition for education to being paid as a resident, you should be careful not to increase your cost of living just because you suddenly have more money. Instead, maintain focus on your education and invest any amount possible with the goal of seeing how much you can save before you enter practice or employment.

Correspondingly, once you are employed at a salary higher than that of a resident, you do not want to quickly expand your cost of living in direct proportion to your new higher salary. With each salary increase, pay yourself first by saving 50 percent of your “new money.” This leaves 50 percent of the increase for spending or investing as you choose. It would seem that once one is in full-time employment, setting aside some money each time salary increases would be easy. However, a 2015 GOBankingRates.com survey, involving 7,000 adults from all 50 states, found that 62 percent of American adults have savings accounts totaling less than $1,000 and 28 percent have no savings at all.¹ Obviously, most people do not seem to possess this skill or self-control for planning ahead.

Fostering A Healthy Approach And Perspective Toward Debt

It is good for one’s mental well-being to develop a healthy approach and perspective toward paying back debt. For many people, debt payments can slowly become a negative monthly ritual. Over time, borrowers can begin to resent each payment. The growing needs of a family can magnify that resentment because there are always multiple things competing for those same dollars. Given that payments on student debt can stretch out over 20 years, the negative impact of this resentment builds over time with the mental health of the borrower and even his or her family suffering.

One way to cultivate a healthier mindset is to create a more positive attitude toward debt payments. A good way to accomplish this is to develop the habit of tracking your net worth on a regular basis. Unless you are from a very wealthy and generous family, the odds are that your net worth is a large negative at the beginning of your career. An example: If you have $200,000 in student loans and no assets, your net worth is a negative $200,000.

A positive approach is to recognize that each loan payment you make increases your net worth by the principal portion of that payment. If $1,000 of your first payment goes toward the principal, this payment increases your net worth by $1,000 and you now have a net worth of negative $199,000. In other words, paying down $1,000 on the principal or putting $1,000 into a savings account impacts your net worth in exactly the same way. Adopting this perspective gives recognition to the fact that each payment on any type of debt increases net worth. Approaching debt payments in this manner helps demonstrate the value of accelerating principal payments as your income increases. Every dollar paid toward the principal increases your net worth.

It is also important to realize that the portion of a monthly payment that goes toward the principal amount of the loan increases each month and correspondingly, less goes toward interest. For example, if you owe $200,000 on a 20-year loan at 6 percent, the monthly payment will be $1,433. If your first payment was due in October of 2016, $1,000 of that payment would be applied to interest and $433 to principal. Of the next payment, in November of 2016, $998 would be applied to interest and $435 to the principal. The amount applied to interest decreases each month while the amount applied to the principal increases.

This is a slow process. However, if you have the means, you can accelerate the amount applied to the principal even faster by making additional payments toward the principal on each payment as you begin to earn more. If you make no additional principal payments on this $200,000 loan, $717 would be applied to interest and $716 to the principal in March of 2025. This is the “tipping point” from which, going forward, more of each monthly payment will now be applied to the principal than to interest.

Does Your Degree Have A Good Return On Investment?

Undergraduate, graduate and professional degrees all have a cost, and when you start using these degrees to launch your career, you may want to determine your return on the investment (ROI). The financial ROI for most undergraduate degrees is less significant than it is for a graduate or professional degree because advanced degrees are generally directed toward specific careers. One could certainly consider “finding more interesting work” or a “job about which you are passionate” as being part of the ROI for an undergraduate degree. When undertaking a masters or professional degree, the hope is that it will also lead to work which, at least, creates enough cash flow beyond an undergraduate degree salary to make payments on these additional student loans.

According to Student Loan Hero, in 2016, an average student accrued $37,000 in college loans ($19,548 for four-year, public, in-state schools versus $43,921 for private, four-year, non-profit schools).² The average loan payment for this college debt is $351 a month. Even though the financial ROI is less important for an undergraduate than a professional degree, a study reported by US News and World Report showed a salary gap of $17,500 a year between millennials with a college degree and those without.³ The reported average salary for those with a college degree was $58,000 a year. Even though there exists a wide range around this average salary, the $17,500 gap between having and not having a college degree certainly has an ROI that is greater than $351 a month for the life of the loan.

The question for us is whether a DPM degree has an ROI that is worth the additional investment necessary to obtain that degree. Given the wide range of (1) the tuition and living costs incurred by students over the four years of podiatric medical school, (2) the amount actually borrowed to cover those costs and (3) the amount of the salary after residency, a method for calculating the ROI that gives a precise answer is not totally possible.

However, a practical answer is possible. I will use four years for the length of the DPM education. I am not including residency since the average resident’s salary is $56,500, virtually the same as the average salary earned by a college graduate (according to Medscape).⁴ In that same report, 40 percent of medical students reported having greater than $200,000 in student debt. If we use the example above (a $200,000 loan at 6 percent interest over 20 years), the monthly payments on the debt would be $1,433 a month. If the loan amount were $300,000, the monthly payments would increase to $2,149 (with $1,500 going to interest and $649 to principal on the first payment). Factoring into these numbers is the fact that the DPM student also has given up an opportunity to earn the average college graduate’s yearly salary of $58,000 during the four years of medical school. Due to this, one might argue that such a student had lost the opportunity to earn $232,000 over the four-year time period necessary to complete medical school. One must also account for this when determining the ROI.

I researched podiatric salary surveys conducted by Podiatry Management, the American College of Foot and Ankle Surgeons (ACFAS), the American Podiatric Medical Association (APMA), Medical Group Management Association (MGMA) and the Bureau of Labor Statistics.^5-9 The average podiatrist salary ranged from a low of $136,180 (the mean reported by the Bureau of Labor Statistics) to a high of $280,714 (the average in large groups reported by MGMA). The ACFAS reported the mean at $211,723 with those who had obtained rearfoot and ankle certification at $261,755.⁵ While these numbers demonstrate both means and averages, a wide range of potential salaries certainly exists. There are DPMs making over $400,000 a year. For our purposes here, I will present an argument as to whether or not a DPM degree is worth foregoing the aforementioned $232,000 in “lost salary” while taking on monthly student loan payments of $2,149 (assuming a student debt of $300,000).  

Beginning with the student loan payments or $2,149 a month, or $25,788 a year, and assuming a 35 percent tax payment on the amount of additional money needed to earn to make the loan payments, a DPM would need to earn $39,674 more than the average college graduate’s salary of $58,000 a year to make the loan payments and be no worse off than that college graduate. To break even on the student loan portion of the ROI, a DPM would need to earn $97,674 a year. At this salary, he or she could make payments on a 20-year, $300,000 student loan at 6 percent interest, and clear the same $58,000 salary earned by the average college graduate.

Using the $136,180 lowest reported average DPM salary, after making the loan payments, paying the additional tax on that income, and subtracting the $58,000 average yearly college grad salary, this lowest DPM “average” salary shows an annual “surplus” of $38,506. If we also want to consider the $232,000 earnings “lost” over the four-year period spent in podiatric medical school in our calculation, we could consider the annual “surplus” of $38,506 as repayment of those “lost” earnings. I feel that this evaluation is actually conservative because given that the vast majority of DPMs entering the workforce in recent years have had at least two years of residency with most having three, their compensation levels are likely to be in the higher ranges, such as those reported by ACFAS ($211,723).⁵ Based on this expectation, the ROI for the DPM degree is certainly well worth the investment. This means that future practitioners should be able to do well financially in spite of having significant debt as long as they live within their means.

Pertinent Considerations With Consolidating And Refinancing

Personal financial management centers on meeting a monthly schedule. There needs to be enough cash flow available from your monthly compensation to pay all bills and living expenses, and even save a little. As when buying a car or a house, the total amount of the purchase often matters less than the amount of the monthly payments. For example, payments for the same automobile could be $300 or $600 a month, depending on the length of the loan and its interest rate. The student loans you take out each year are often from different entities, each having different terms and interest rates. Obviously, you want the lowest interest rate possible but you are more or less “stuck” with what you are able to get.

What you should seek to do is select the longest payback term possible so your monthly payments are the lowest possible. You can always accelerate that loan by making higher than minimum payments each month but you cannot pay less than the minimum payment in a month when cash flow is tight. Regardless of what the loan rates and terms were when you borrowed, going forward, there should be opportunities to consolidate loans into ones with new terms and hopefully lower interest rates. Again, when consolidating, get the longest term possible at the lowest interest rate. Remember that you can always accelerate your loan by making extra principal payments each month as your income increases. This is a significant opportunity because each additional dollar paid to reduce the amount of principal on your loan can save two dollars over the life of the loan.    

A survey conducted by Google Consumer Surveys on behalf of Student Loan Hero revealed that many millennials who have student loans have decided not to refinance their loans despite the fact that they are in a position to secure lower interest rates.¹⁰ The poll, conducted between June 30 and July 3, 2016, surveyed 1,001 individuals with student loans. Almost 62 percent said that although they knew about the option to refinance their student loans, over two-thirds of these had not yet done so. Perhaps this is because refinancing student loans can be complicated. Some students have both private and federal loans, and the federal loans have a number of benefits that private loans do not, benefits they would lose with refinancing. These benefits may include income-based repayment plans and forgiveness programs for those who work in qualifying positions in the nonprofit or education sectors for 10 years.

An additional caution when refinancing and consolidating loans is to make sure there is no prepayment penalty or fee if you pay off the loan early. Generally, there is no prepayment penalty fee on federal loans but there can be on private loans.

What is important is that you research and understand all options before making a consolidation decision. If you have a loan at 6 percent interest or higher, it is important to run the numbers to understand the impact that a lower interest rate will have on your loans. For example, if you have a $300,000 loan at a 6 percent interest rate and 20-year loan, refinancing at 3 percent would convert a $2,149 monthly payment to $1,664, a savings of $485 a month.

More significantly, when we consider net worth tracking which we discussed earlier, it is important to recognize that with the 3 percent loan, a much greater amount of the payment goes toward principal reduction. For example, when we analyze the first payment made on the 6 percent loan, we see that $1,500 goes to interest, whereas a 3 percent loan would only entail $750 in interest. Similarly, instead of $649 going toward principal with the 6 percent loan, $914 of the 3 percent loan goes toward the principal. One payment increases net worth by $649 while the other increases it by $914. This demonstrates how net worth increases faster at a lower rate. After refinancing, it would also be smart to accelerate your loan payback by applying some of the money saved by the lower rate to the principal each month.  

Final Notes

As you are probably aware, finances can be a significant source of relationship strife. Given that student loan debts can be relatively large, take years to pay off and limit the amount of money available for discretionary purposes, one might wonder how student debt might impact the future of a relationship. Sixty-nine percent of respondents to a TD Bank survey said student loan debt has no impact on their willingness to date versus the 26 percent who said they were less likely to date someone with student debt.¹¹ This contrasts with the 44 percent who said they were less likely to date a person who had credit card debt. My take on this is that people differentiate between debt incurred from buying “things” and that incurred investing in one’s future.

Managing debt and maintaining good credit are essential skills that everyone needs to develop if they are to succeed in today’s world. It is important to understand that when you take on student debt, it is to enter a fulfilling career for which the cost can be justified. Paying back that money might result in stress for some individuals but having a better understanding of the “secrets” for dealing with that debt can make a difference in the level of stress associated with its payback. Have confidence that sooner or later, you will fully repay the money, at which point you will be in the enviable position of deciding how best to allocate the money that you had dedicated to those loan payments as you proceed in the future. At that point, I am hoping you will see the value of having saved 50 percent of your salary increases along the way while “spending” the other 50 percent any way you choose.

Dr. Hultman is the Executive Director of the California Podiatric Medical Association. He is a consultant for Medical Business Advisors and the former CEO of Integrated Physician Systems (IPS). Dr. Hultman is the author of Reengineering the Medical Practice (1994) and The Medical Practitioner’s Survival Handbook (2013).

References    

1.     Kirkham E. Sixty-two percent of Americans have under $1,000 in savings, survey finds. GOBankingRates. Available at https://www.gobankingrates.com/savings-account/62-percent-americans-under-1000-savings-survey-finds/ . Published Oct. 5, 2015.
2.     A look at the shocking student loan debt statistics for 2016. Student Loan Hero. Available at https://studentloanhero.com/student-loan-debt-statistics/ .
3.     Kurtzleben D. Study: income gap between young college and high school grads widens. US News and World Report. Available at https://www.usnews.com/news/articles/2014/02/11/study-income-gap-between-young-college-and-high-school-grads-widens . Feb. 11, 2014.
4.     Chesanow N. Residents salary and debt report 2016. Medscape. Available at https://www.medscape.com/features/slideshow/public/residents-salary-and-debt-report-2016 . Published July 20, 2016.
5.     American College of Foot and Ankle Surgeons. 2015 Annual Compensation and Benefits Survey Results. Available at https://www.acfas.org/compensation/ .
6.     Hultman J. Podiatric salaries. Podiatry Manage. Available at https://www.podiatrym.com/pdf/2016/6/Hultman616web.pdf . Published June/July 2016.
7.     Medical Group Management Association 2016 Physician Placement Starting Salary Report. Available at https://www.mgma.com/Libraries/Assets/Industry%20Data/Survey%20Reports/8935-PSRS_2016_Table-of-Contents.pdf .
8.     American Podiatric Medical Association. Available at https://www.apma.org/workingforyou/StudiesList.cfm?navItemNumber=708 .
9.     Bureau of Labor Statistics. Available at https://www.bls.gov/ooh/healthcare/podiatrists.htm .
10.     Bond C. Our latest survey finds a third of borrowers don’t know about student loan refinancing. Student Loan Hero. Available at https://studentloanhero.com/featured/refinancing-survey-2016/ . Published July 11, 2016.
11.     TD Bank. Available at https://mediaroom.tdbank.com/surveys?cat=3565 .