The Right Way to Use Debt in Medical School | White Coat Investor

August 24, 2020 Cesar Skaff

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I had an interesting experience the other day that showed how some of you are thinking about your medical school debt. I saw a post on Twitter where an MS1 expressed gratitude to be getting her “FAFSA Refund” soon as she was a little short on cash and had even run up some credit card debt. I had never heard the term “FAFSA Refund”, but have a pretty good handle on both the FAFSA and student loans in general. I could not for the life of me figure out why anyone would be getting a refund. So I decided to Google the term.

How to Think About Medical School Debt

The FAFSA “Refund”

It turns out that lots of borrowers use the word “refund” (FAFSA refund, financial aid refund, student loan refund, whatever) to refer to the disbursement of the cost of living money from their student loans. The student loan is sent to the school, which withdraws tuition and fees from it and then gives the student a check for the rest. The students are calling these checks “refunds.”

Maybe they think it’s like a tax refund or something because they seem to spend it like people spend tax refunds. “I spent my financial aid refund on a trip to Italy,” says one. Never mind the fact that even getting any sort of significant tax refund (much less being happy about it) is a sign of poorly managed finances, spending it like it is some kind of a windfall is even dumber. But a financial aid “refund” isn’t even your money like a tax refund is. It’s just more debt. Debt in a different form. It’s just taking out a loan, not “getting a refund.”

It’s Not Your Money!

Semantics aside, it really provides a glimpse into why I keep running into doctors who owe $450K in student loans. If medical students are looking at student loan money as their money, they’re not treating it the way they should. It’s not their money. It’s the bank’s money.

Even if we get a little deeper, the money you are spending doesn’t belong to you, it belongs to Future You. Is Future You going to appreciate the way you’re spending her money?

Per the Rule of 72, an investment (or a debt) with an interest rate of 7.2% doubles every decade. How many times will your medical school debt double between the time you borrow as an MS1 at 22 and the time you pay them back at 32 or even 42? In reality, most doctors are paying 2-3X the sticker price for everything they buy on student loans in medical school. Spend carefully, my friends.

3 Critical Financial Decisions to Make in Medical School

There are three critical financial decisions in medical school. The rest are small potatoes. Let’s talk about them in the order in which they matter.

#1 Specialty Choice

First is specialty choice, and I’m not just talking about picking the specialty that pays the most. I’m talking about picking a specialty you can get into the first time (or at least the second.) I’m talking about picking a specialty that you will enjoy doing for a long time since career longevity matters more than income. (Run the numbers on how much a preventive medicine doc takes home over 30 years compared to what an ENT takes home in 10 years.)

If you love two specialties equally, for heaven’s sake pick the one that pays the best and offers the best lifestyle. You will certainly care more about both ten years out of residency than as an MS4. And don’t be one of those (25% of) medical students that doesn’t even know how much each specialty gets paid. While intraspecialty pay differences dwarf the interspecialty average differences, this is your career, for crying out loud. Learn something about it.

#2 Minimize the Size of Your Medical School Debt

If you are married, send your spouse to work. If you are not, get some roommates.
Ride a bike and the bus.
If you must have a car, and especially if you must borrow for it, keep the cost to <$5-10K. You can get another one later but you might be surprised to find out that car makes it all the way through residency.
Get a job yourself, even if it is only the summer between MS1 and MS2 and the last few months of MS4. Exhaust personal and family resources before taking out loans.
Pack a lunch and avoid restaurants.
Get used books or borrow them.
You can probably even borrow equipment from a student in another class (look for the military ones; they have all of it, thanks to Uncle Sam.)
Wait until you need the money before borrowing it so the interest clock doesn’t start ticking early.
Don’t build an “emergency fund” with borrowed money.
Avoid credit cards unless you’re using 0% deals to delay how long you can wait to take out your loans.
And for heaven’s sake don’t start thinking your loan disbursements are refunds for something you did or paid.

#3 Match Into an Inexpensive Location

Match into a program in a place you can afford to live. I actually had medical students mocking me for suggesting they had some control over where they match. Kind of funny, considering I’ve been through two matches, and they’ve been through none, but such is life. If you are a competitive applicant in a non-competitive specialty, you are almost surely going where ever you want. Even an average applicant in an average specialty can easily match into a less expensive location if they want. Almost everyone goes to one of their top three picks. If you don’t put places you cannot afford into your top three, you’re probably not going to go to them. Very few medical students truly have zero control over where they match.

If you can get those three things right in medical school, you can treat the rest like small potatoes.

The Right Way to Use Student Loan Debt

Most Americans don’t know how to budget, and medical students aren’t any better. You really only need to know two things–how much you need to borrow and how much you can borrow.

Make a Written Budget

Start by making a written budget of all of your projected expenses. Don’t be too tight or you’ll screw it up. Be realistic and adjust as you go along. By the time you’re an MS3, you should be an expert.

Determine How Much You Need to Borrow

Now that you know your expenses, subtract any income you may have from your partner, your job, scholarships, or regular periodic help from family. Now you know how much you need to borrow.

Determine How Much You CAN Borrow

Now compare this number to the amount of money you can borrow. You can generally borrow up to the Cost of Attendance, which is usually a pretty generous amount. That’s not necessarily all federal student loans, of course. Borrow those first, since they generally have lower interest rates and are eligible for cool Income-Driven Repayment programs you’ll use in residency and Public Service Loan Forgiveness, which you may use afterward.

Is How Much You Need to Borrow LESS Than How Much You Can Borrow?

Great! Borrow that much and treat it just like you would income. Sure, it’s periodic and variable income, but income nonetheless. Don’t just take out as much as they’ll give you and stick it in a checking account making 0.01% while paying 6.8% on it. Remember to include in your MS4 budget your residency interviewing expenses and the costs of moving and supporting yourself until that first residency paycheck comes in.

Is How Much You Need to Borrow MORE Than How Much You Can Borrow?

Uh oh. That usually comes from one of two things. First, you have a spending problem, or, second, you are trying to support other people despite not being in a position to be able to do so. Tell those people you can help them later in life, but not now, because you are broke. If those other people are your spouse and children, see above where I told you to send your spouse to work. That might mean you don’t play foosball and go skiing after class or go hang out with your buddies at night because you are at home watching the kid(s) while trying to study so your spouse can work the evening shift.

Dealing With the Guilt of Living on Debt

I often tell medical students to minimize how much they borrow. Some of them take personal offense to that advice and start defending their latest expenditures (as if I knew what they were or as if they matter to the principle being taught.) I suspect most of them have a guilty conscience because they know they aren’t managing money very well. But there is no doubt that lots of medical and dental students feel guilty about living on debt. They probably shouldn’t. Let me explain why.

First, medical school is still a pretty good investment. The average physician is currently making $275K and that number will likely climb with inflation going forward. The average medical student graduates with $200K in debt ($250K DO), a number that will also likely climb. That’s a debt to income ratio of less than 1X. That’s a good bet.

Second, know where you personally stand. Only you can know what specialty you’re likely to end up in and how much you’re likely to work. And only you can run the numbers on how much you will owe when this is all said and done.

What does your debt to income ratio look like? Are you going to be an emergency physician making $400K with a debt of $150K? You should be able to double your residency standard of living and still get rid of that debt in less than a year after becoming an attending. Quit feeling guilty about going out to Applebees. Are you going to be a part-time pediatrician making $80K who owes $550K in student loans? It’s time for you to re-examine your career goals. Is your life dream to be an academic pediatric rheumatologist and 100% of your student loans are federal? You’re going to be fine (via PSLF). Splurge a little.

Third, you will be able to pay back the debt by working hard and managing money well after residency. That means you have to both work hard AND manage money well after residency, but thousands of doctors before you have done this. Got a 1X ratio? Easily taken care of. A 2X ratio? It’ll take a few more years, but still not an overwhelming task. Only if your ratio looks like it is going to be 3-4X do you really need to be panicking. LIVE LIKE A RESIDENT works people. It’s not that complicated. I get emails every month from those who are doing it. Check out this one:

They even included a cool chart:

Look what happened when they got out of residency. That $400K debt started dropping like a rock. $400K is a lot of debt (twice average) and still…gone in 2 1/2 years. How about this one:

How about this one:

Okay, that one is a little unusual. But these folks all had way above average debt. How fast could they have wiped out a mere $2-300K? Do you really want to be this guy?

Don’t get me wrong, 19 years is way better than 29 or 39, but I want you to be financially independent 19 years out of medical school, not just getting back to broke. Want to hear even more examples of docs who have paid off their medical school debt? Check these out.

Fourth, don’t listen to knuckleheads who say anyone can get through school without debt. It’s BS. Well, not entirely. I actually think it’s true for an undergraduate education. But no one is going to work their way through medical or dental school with tuition of $40-80K/year. And the contracts like HPSP and MD/PhD programs aren’t some mystical way to avoid debt. You’re simply exchanging financial debt for time debt (ask me how I know.) It’s all the same in the end. If you don’t score some sweet, but rare, scholarships, marry a doctor, or have wealthy and generous parents, you’re simply going to borrow some money for school. Make sure you’re making a good investment and then quit worrying about it.

Finally, you need to realize you are on a unique financial trajectory. You are different than the average American, even the average professional. You have a relatively guaranteed pathway to a high income. It requires a large upfront debt and it requires a significant delay, but, eventually, that income is coming. There really is light at the end of the tunnel. It is normal for you to have a negative net worth at 30. Just make sure it’s not still there at 40. But accept this pathway. It’s still a reliable pathway to wealth, so long as you complete the path and manage the income well.

So, dear medical students, manage your money well, quit feeling guilty about living on debt, and please stop calling your student loans a “refund.”

What do you think? How should medical students think about debt? What is the proper amount of guilt about spending borrowed money? What is okay to buy and what isn’t when you’re spending student loan money? Comment below!