Doctor debt is crazy!

[corn18]

Saw this on bogleheads.org and thought it was interesting. Two doctor household going through residency. Carrying $700k+ of student loan debt. Plus a car loan. Seems the juice isn't worth the squeeze from a financial standpoint.

"Household Income
2 physician household, currently in last year of residency
Income: $110k through this June,
Increasing to $200k next summer.
Summer 2020 should increase to $350k range when I am an attending, and then $500k+ after Summer 2022 when she is an attending.

Debt:
-His student loans: $464,000 at 6.4%
Monthly payment $450 now, with expected increase to up to $2,200 in 2022
Plan to aggressively pay this down to the tune of $6000-10,000 per month over 5 years
-Her student loans: $252,000 at 6.0% (will qualify for PSLF)
Monthly payment $250 now, with expected increase to up to $1,100 in 2022
Plan to use PSLF, but save enough in a safeguard fund to be able to pay if off after 10 years if necessary.
-Car loan: $8,000 at 4.6%

Assets:
-Total Assets: $78,000
-Emergency fund (checking + high yield savings at 2%): $24,000
-Roth IRA: $44,000 90/10 in Vanguard. We contribute $11,000 a year to this.
-403b: We will finally have access to a match this year, so we'll both be contributing to 403b at the max amount ($36k yearly) starting this summer.
-PSLF safeguard fund: $5,000 in a CD at 3%."

[disneysteve]

And your point is?

Yes, going to med school is horrendously expensive. So this couple borrowed $716,000 and expects to make at least $500,000 their first full year in practice. So big hole but big shovel, too. That's equivalent to someone graduating with a first year income of $60,000 and debt of $86,000. The first example sounds worse because the numbers are so much larger but percentage-wise it's the same. And the physician couple is far better positioned to attack that debt if they are smart about it.

If they can continue to live on $110,000 or so for a couple of years after their income is at that 500K mark, they can clean this up pretty quickly.

[greenskeeper]

takes money to make money

[LivingAlmostLarge]

How old are they? 32? The problem is that yes they borrowed only $700k and will make $500k after she starts working and $350k when only he is. And they don't have children so the costs will go up more than $110k.

That Mr Money Mustache and other frugalistas (not me) are retired by age 32 with $1m or $720k because they worked from 22-30 and earned say $120k/year for 8-10 years and then wham they are done working before this couple even got started on saving let alone paying down debt. They won't ever catch up to a frugal engineer or finance major (thinking financial samurai guy) who made bank and saved it.

As long as they didn't go to medical school for money. Personally DH and I made a mistake going to graduate school. But looking back it's okay. We probably should have both just worked and saved every penny and retired at 35. But heck instead we were broke, poor and had a lot of fun and met a lot of cool people and did a lot of cool stuff in our 20s.

We got lucky we were frugal and are still able to retire by age 50 considering we didn't earn MD money and had kids and make a good living now. But then again we made a good salary for working 9-5 and never working MD hours and no stress. So maybe we are coming out ahead.

[Singuy]

Big shovel yes, but most MDs coming out with those kind of debt and income will just end up getting two new Mercedes (or Teslas nowadays are the go to car for MDs) and a 1.2 million dollar house. How many people are willing to live on rice and beans for 2.5 years to pay off 800k worth of debt when 35k are constantly deposited into their bank account every month?

[disneysteve]

Big shovel yes, but most MDs coming out with those kind of debt and income will just end up getting two new Mercedes (or Teslas nowadays are the go to car for MDs) and a 1.2 million dollar house. How many people are willing to live on rice and beans for 2.5 years to pay off 800k worth of debt when 35k are constantly deposited into their bank account every month?

You hardly need to live on rice and beans. Let’s say they bump up their living income to 200K, nearly double what they earn now. That still leaves 300K (minus taxes) to throw at the debt. Pay 150K/year to the debt and it’s gone in 5 years.

[kork13]

Is it crazy? Yes. Is it a reality for most doctors? Yes. Does this couple have a plan to deal with it? Yes. Could their plan be better? Yes.

I'm honestly just fine with his plan to pay off his debt in 5 years. Looks totally doable, and it strikes a middle ground between ignoring it & going Dave Ramsey bananas on it. The plan for her debts (wait 10 years & rely on loan forgiveness), I'm not such a fan of.... Student loan forgiveness programs (especially PSLF) are unreliable & restrictive at best, and a 10-year trap at worst. I have a few friends who were counting on it, and are finding out only now (after 10 years of lower-paying public service jobs), having applied for loan forgiveness & been denied, that they accidentally disqualified themselves years ago, and they're now stuck with their full student loans, having only paid minimums up to now. No thanks.

These docs could easily (seriously--very, very easily) knock out their debts in 3 years or so. If they were to do it in 5, I'd say well done. Dragging it out for 10 years? That sounds horrific.

ETA: A couple articles about the non-success of the PSLF program:

https://www.npr.org/2018/10/17/653853227/the-student-loan-whistleblower

https://www.cnbc.com/2018/10/10/heres-what-can-go-wrong-on-your-way-to-student-loan-forgiveness.html

Bottom line: Fewer than 1% of people who think/have believed that they qualified for PSLF have actually been approved for it.

[Singuy]

You hardly need to live on rice and beans. Let’s say they bump up their living income to 200K, nearly double what they earn now. That still leaves 300K (minus taxes) to throw at the debt. Pay 150K/year to the debt and it’s gone in 5 years.

Taxes hit these health professionals the hardest. A 500k income is pretty much a 350k take home. You need the debt to be gone asap. Depending on the cost of living, one shouldn't need more than 40k/year to live comfortably. I would knock those student loans out quick, then spend another half a year saving up for a down payment..then pay off the house before the first child is born. Lots can be done in a matter of 3-4 years with that kind of income..and then you're set for life.

[disneysteve]

The plan for her debts (wait 10 years & rely on loan forgiveness), I'm not such a fan of.... Student loan forgiveness programs (especially PSLF) are unreliable & restrictive at best, and a 10-year trap at worst. I have a few friends who were counting on it, and are finding out only now (after 10 years of lower-paying public service jobs).

I totally agree, and especially the bolded part. Yes you might possibly get loan forgiveness but you will have spent 10 years at some low paying public health clinic in the middle of nowhere. You could have been in a private practice and earned considerably more and just paid your loans instead.

[disneysteve]

Taxes hit these health professionals the hardest. A 500k income is pretty much a 350k take home.

Great. Take home 350K. Live very nicely on 200K. Put 150K/year toward your loans and in 5 years you're debt-free. Or keep living on 110K like you are now and put 240K/year toward the loans and you're debt-free in 3 years.

Again, these numbers are big but easily dealt with. This is far less of a problem than the folks coming out of college owing 100K or more and earning 30K.

[Singuy]

Great. Take home 350K. Live very nicely on 200K. Put 150K/year toward your loans and in 5 years you're debt-free. Or keep living on 110K like you are now and put 240K/year toward the loans and you're debt-free in 3 years.

Again, these numbers are big but easily dealt with. This is far less of a problem than the folks coming out of college owing 100K or more and earning 30K.

No doubt they can dig themselves out of a hole very fast, but it needs to be fast. At 7% interest, they are paying 60k worth of interest/year. Then it's the time factor...most MDs end up coming out making money late, so they want a house and children ASAP. Add a nice house and property tax, that's another 40k worth of expenses with nothing to show for. So all of a sudden, that 350k turns into 250k/year and we haven't start paying for any principle yet. This is also under the assumption of no new cars.

[disneysteve]

No doubt they can dig themselves out of a hole very fast, but it needs to be fast. At 7% interest, they are paying 60k worth of interest/year. Then it's the time factor...most MDs end up coming out making money late, so they want a house and children ASAP. Add a nice house and property tax, that's another 40k worth of expenses with nothing to show for. So all of a sudden, that 350k turns into 250k/year and we haven't start paying for any principle yet. This is also under the assumption of no new cars.

Absolutely. The key is to stay on the resident lifestyle for the first couple of years. That's really all it takes.

Of course, I know from experience that a great many of my peers didn't do that. In fact, living frugally was so unusual that as a result of a letter I wrote to a major national physician financial journal on that topic years ago, they ended up doing a multi-page feature article on me and my family, highlighting how we were living below our means, paying off my student debt, and investing for the future.

[LivingAlmostLarge]

I tend to agree with Singuy the real problem is by the time they start making money at 32 it's time to buy a "home", start a family and then it's hard to live the resident lifestyle when you've been so deprived.

[~bs]

That's normal. Doctors make up for it with a higher income. Once their debt is paid down, they can save at an accelerated rate compared to the average person. But the amount of time it takes to ramp up their income to a decent 6 figured salary and pay off the debt means they'll probably be 40 before they're debt free.

You can either get a "normal" career and be able to invest for 40 years until you hit 65 or become a doctor and have a shorter career (again assuming until 65) and pay off debt until you're 40, so able to invest for 25 years BUT at a much higher income level.
------------------------------------------
edit: Carrying huge loads of debt as doctors isn't as bad as for "regular" degrees because it should be relatively easy for doctors to make high amounts of income. bigger income numbers are better, even with the heavier debt load because it allows you more option I imagine the struggles of a dual income doctor household to be pretty tough at first, but once the debt is paid, their discretionary income and ability to save will be ridiculous.

[~bs]

Saw this on bogleheads.org and thought it was interesting. Two doctor household going through residency. Carrying $700k+ of student loan debt. Plus a car loan. Seems the juice isn't worth the squeeze from a financial standpoint.

"

what is the link? I'd be interested in checking it out.