Debt Dilemmas for Dental Specialists | White Coat Investor

I spoke recently at a conference for orthodontists.  For the most part, a doctor is a doctor, but there are a few unique things about dentists, particularly dental specialists, that are worthy of their own post.  Due to the way the numbers work out, the bottom line is that the “Live Like A Resident” period is very different for them than it is for the typical physician.  Before we get into that, and the dilemmas they face, I thought we’d take a little side journey and point out that while a dentist may have it a little worse than a physician, they’re certainly not the worst off among the high-income professionals!  Let me explain.

Professional school is expensive stuff.  But the cost varies significantly by the profession.  The anticipated income when you start practicing that profession also varies highly.  Not only between professions, but between specialties, and even within specialties.  In fact, I’ve honestly been more impressed by the intraspecialty income differences than the interspecialty differences for physicians.  The debt from school also highly varies.  25% of physicians graduate from medical school debt-free.  Yet others manage to leave residency with over a half-million dollars in debt.  But we can work with the averages to see who has it the worst, and frankly, as bad as physicians have it, they’re probably one of the best off.  Let me explain.  This chart is worth at least a few hundred words.

First, a caveat about this data.  This isn’t super scientific data.  This just comes from me Googling around and taking what seemed to be the best free data I could find within a few minutes.  In addition, as noted above, the range of both income and debt can be quite wide.  So don’t post a bunch of complaints in the comments section that the data in this chart isn’t perfect.  It’ll do for the purposes of this post.

 

What Is an Acceptable Student Loan Debt to Income Ratio?

Now, let’s put these ratios into perspective.  My general recommendation is to keep your student loan debt to income ratio to 1X. (Incidentally, I think 2X is fine for a mortgage.)  At 1X, that education was a good investment.  At 1X, living like a resident for 2-3 years will eliminate your debt just fine and you’ll go on and have the financially awesome life you expected.

Moving up to 2X, this is still doable but will require more sacrifice.  Perhaps a 5 year “live like a resident” period.  If your parents couldn’t help you pay for school, if you had undergrad debt too, if your spouse couldn’t work during your school, you could easily end up in this place.  You’ll still be okay, but won’t build wealth as quickly as your peers.

At 3X, extreme solutions become required.  This means things like carrying debt your entire career, living like a resident for 10 years, or just accepting that retirement isn’t going to be very comfortable.

At a 4X student loan debt to income (DTI) ratio, this whole thing just becomes pretty much impossible.  Consider a dentist making $100K with a $400K 7% loan on a 10-year payment plan.  The interest alone is 32% of her gross income.  The total payment is $60K a year, which might be 75% of net income!  You want to argue that going to school was worth that?  No, of course not.  It was a bad investment if it leads to a DTI ratio like that.

As you can see, the ratios are fine for all professions so long as you’re average.  Average debt.  Average income.  But those with higher than average debt, or lower than average income, or both, can get up to the extreme and ridiculous ranges pretty quickly.

 

The Issues Dental Specialists Face

I used to have this image in my mind of orthodontists just absolutely killing it.  I think that comes from many orthodontists I’ve met with 7 figure incomes.  These folks came from the top of their dental school classes.  They ran a tight ship in their practice, saw tons of patients, and had great results, leading to even more patients.

The average incomes, however, are sobering.  And they’re nowhere near 7 figures.

Not only are the dental specialist incomes way lower than you’d expect, but they’re not exactly trending upward, at least on an inflation-indexed basis.  Meanwhile, tuition is going through the roof and giving them the big squeeze.

Want to see something even more sobering?  Go talk to a bunch of young orthodontists.  Like at most of the talks I give, after I finished there was a line of 10-15 people waiting to talk to me about their personal financial questions.  Most were young, within a few years of their residency.  Most of them had an income of something around $200K as an associate, and didn’t anticipate an income over $300K any time soon.  And most of them had dental school debt of $600K+.  A 3X (or at best in a few years a 2X ratio)!  These weren’t the extreme cases that end up in journalists’ hands.  These were just run of the mill orthodontists who hadn’t made any particularly bad financial decisions other than going to dental school and orthodontics residency and paying for it mostly with debt.  I spoke to a group of endodontists a month earlier, and it was basically the same story.  Incomes in the $200-300K range and student loans in the $600-800K range for anyone who didn’t have significant family or spousal assistance.

It seems appalling that the situation is so much worse for the dental specialists than the physician specialists.  Specializing for physicians typically IMPROVES your debt to income ratio (why I jokingly say “pray you don’t fall in love with pediatrics”).  Specializing for dentists doesn’t really do that, and may even make ratios worse.

 

How Does That Happen?

Well, three factors come together to cause this phenomenon.

The first is that dental school is really expensive.  It costs more than medical school.  Tuition is higher and debts are higher.  They don’t get as favorable terms on the additional loans.

The second is that many dental residencies not only do not pay a salary, BUT CHARGE TUITION.  I tell this to groups of physicians, and they think I’m lying.  Nope, that’s the way it is.  Dental residents are actually taking out more student loans, both for the tuition and for living expenses.  In some ways, it’s like going to dental school twice.

Finally, there is just the factor of deferring payments on the debt.  For a typical medical resident, the student loan burden goes up by 30-50% during residency because any payments made aren’t even covering the interest.  Dental residents have that factor going against them, too, in addition to the new loans.

 

But Wait, There’s More

Many physician specialists come out of residency and take a job and are essentially at or very close to their peak earnings capability.  So the average income for the specialty can be used to calculate a reasonable debt to income ratio.  However, the ramp-up in income seems to be much longer for a dental specialist.  If it takes you 5 or 10 years to boost income from $200K to $400K, it can be tough to wipe out $800K of student loans in less than five years.

 

Some Thoughts on the Dilemmas Faced by Dental Specialists

I’ll be discussing the Return On Investment (ROI) of doing a dental residency in another post.  In this post, I’m just going to focus on the issues those who already made the decision to specialize are facing and make some recommendations.  Although the chart above shows the DTI ratio for specialists being much better than that for generalists, that’s misleading because it doesn’t account for the higher debt we know specialists will have.  In reality, the DTI is usually similar and sometimes worse.  It is not uncommon for a new dentist to have a $500K student loan, a $500K practice loan, and a $500K mortgage, all on an income of under $200K.  This happens to specialists, too, just with somewhat larger numbers.  Here are some guidelines.

# 1 You Still Need a “Live Like a (Medical) Resident” Period

I don’t expect you to live like a broke student, but I do think you can live like the average American household for a few years.  I tell physicians that this period should last 2-5 years.  All the questions I get seem to be some variant of “How much should I invest?” and “How much should I put toward my student loans?”  That’s the wrong question.  The answer to that question doesn’t matter all that much.  The question that should be asked is “How much of my income can I put toward wealth-building?”  Once you fix the question, you’ll end up with the right answer to all of your questions.  Paying down debt is good.  Investing is good.  At the extremes, the pay debt or invest question has right answers, but not in the middle of the spectrum.

# 2 New Debt Better Lead to Higher Income

When it comes to borrowing money to do a residency or to buy a practice, it had darn well better lead to a higher income.  Are you better off sticking with a $250K associate job or taking out a big loan and opening a practice that will allow you to make $350K and maybe more in the future?  What if that means I only make $100K the first year and $200K the second year?  Well, I’m partial to ownership, so in those situations, I’ll usually advocate for owning the business.  That assumes, of course, that you don’t suck either at your specialty or at running a practice.  You’ve got to analyze the decisions like a businesswoman – am I going to get a good return on my investment?  That becomes especially important when the investment is paid for with debt.

# 3 You Can Skip the Fancy House

There are typically three big debts a generalist or specialist is balancing — student loans, practice loan, and mortgage.  But guess what?  You can completely avoid one of those or at least make it so small that it is trivial.  Now you’ve only got two to wrestle with, and that’s a lot better.

# 4 Be a Serial Refinancer

Assuming you’ll be paying back your loans like most dentists, you should be contacting these student loan refinancing companies every six months to try to get better rates and terms.  Your income, your debt, and your credit score should all be gradually improving, and unless interest rates are skyrocketing, you can usually leverage that into a better loan.  Moving from a 10-year loan to a 5-year loan or even taking on variable interest rate risk can also lower your rates, making it so more of your payment can go to principal instead of interest.

# 5 You Don’t Get a Pass on Math

The worse your debt to income ratio and the longer it takes you to ramp up your income, the longer your live like a resident period is going to be.  A doc with a 0.5X DTI may only have a 2 year period.  With 2X it might be 5 years.  With 3X it might go out toward 7 or even 10 years.  I’m sorry.  You’re the one who chose this career and this method of paying for it.  You’re going to have a harder time than someone whose parents paid for their school.  Some docs without the means to pay for school sacrificed by agreeing to serve in the military.  You might not have realized it, but you also signed up to make some sacrifices to pay for school.  Live your net worth, not your income.

# 6 Moderation Versus Focus

Now, for the questions that everyone seems to have.  Now that we’ve maximized your discretionary income by boosting income and limiting spending, what should you do with it?  Should it go toward a down payment, toward the mortgage you already have, toward a tax-deferred retirement account, toward Backdoor Roth IRAs, toward the practice loan, or toward the student loans?  There’s no right answer here, so if you don’t like my answer, do whatever you like short of buying a fancy car.

Personally, I would first make sure I was getting any sort of an employer match.  If you have a practice loan, presumably you’re the employer.  Why not just NOT put a 401(k) in place for a while? It’ll make the business even more profitable (since you don’t have to match any employer contributions or pay any administration costs).

Next, I’d come up with a plan to get rid of my student loans.  You make too much to deduct the interest on them, and even if you could deduct that $2500 a year in interest, you’re probably paying a heck of a lot more than that.  I would start with the end goal for that plan and work backward.  If I wanted to have them gone in 7 years, then I would figure out how much I would need to pay each year to be rid of them in 7 years.  If I knew my income was likely to gradually increase over that time period, I might backload the payments a little bit.

Then, I’d figure out a plan to get rid of the practice loan.  At least the interest on this one will be deductible.  It is probably at a higher rate than your mortgage and maybe even higher than your student loans if you’ve refinanced them, so it is still a reasonably high priority.  Maybe a 10 year plan on it.

Now, you’ve earmarked money toward the student loans and practice loans.  With those two loans hanging over my head, I probably wouldn’t save up a down payment.  When it comes time to buy  (stable social and professional situation), then I’d buy using a doctor loan.  If you’re still in the “live like a resident” period, that means buying a “resident house” and staying there for at least 5 years.  If you’re out of that period, then buy the doctor house.  If you have less than 5 years left in your “live like a resident” period and still don’t own, then you may consider renting for a little while longer so you can go straight to your “doctor house.”

The rest of your discretionary income should be invested.  If you can’t max out all available retirement accounts, choose the ones that will provide the most significant benefit.  That usually means HSA first, then tax-deferred accounts with low costs and good investing options, then tax-free accounts, then anything else available.  Chances are you’ll run out of discretionary income before you get to the end of the list.  Notice 529s aren’t on the list.  I see no reason to start paying for your kids’ education until you’re done paying for your own.

This approach is what I call the “moderation” approach.  There is an alternative – the “focus” approach.  With this approach, you focus all your energy and money on one goal and knock it out as soon as possible.  Perhaps you start with the student loans.  You refinance them into a 5-year variable loan and start sending 50%+ of your paycheck to the lender.  When that’s gone, you move on to the practice loan.  Then the mortgage.  Then retirement.  Focus is a good thing for many of us and if that appeals to you, then feel free to do that.

# 7 What About IBR/PAYE/REPAYE Forgiveness?

If you’re an academician or otherwise employed by a 501(c)(3), be sure to take a careful look at PSLF, although without a period of time where you make a whole bunch of tiny payments like a medical residency, it may not result in much being forgiven.  That’s not an option for most dental generalists or specialists.  However, the IBR/PAYE/REPAYE forgiveness option is available to everyone.  The problem, however, is that it isn’t a very good option.  Not only does it take 20-25 years of payments to get forgiveness, but any doc with a reasonable DTI ratio will also pay off the entire loan well before 20-25 years.  So what did you get for being in the program?  Probably a higher interest rate than what you can refinance to.  But wait, there’s more!  You also get to pay taxes on the amount forgiven, which in some cases, could be as much or more than you initially borrowed (not counting the time value of money).

This is really only an option for those in extreme situations like 4X DTIs, and not something I advocate frequently.  But even in those situations, I have no idea how that doc is going to save up enough to pay off the tax bill upon forgiveness.  As bad as it is to owe a student loan servicer, it is even worse to owe the IRS!  But if you have that much debt, it’s worth running the numbers and knowing exactly what your options are.  If you need help with that, these folks can assist you.

What do you think?  What tips do you have for dental specialists?  Did you realize how badly new grads have it these days?  What do you think early career financial priorities should be for these folks?  Comment below!