Finally, I’m a doctor! I have $400,000 in loans. Can I ever live
like a doctor?
My immediate response for how to pay off your debt:
Since some of the above is slightly unrealistic, I offer
- Don’t own a car newer than when leaded was outlawed.
- Don’t dine out anywhere except Taco Bell and then only
original crunchy tacos and bean burritos.
- Work within biking distance of your parents’ house,
because that’s where you’ll live... for a very long time.
- Use only hand-me-down electronics, such as Atari for
gaming, a cell phone that weighs more than the above
burrito, curved-screen TV, any computer that still takes
floppies and no iNothing.
- Marriage, house, new car, iStuff, the cloud and any dental
gear that doesn’t have belts attached will have to wait.
The Scary Part of Debt
A classic Dentaltown post begins, “I will be graduating from
school in May and am absolutely terrified of my debt right
now... $337,000. The debt is all I can think of and I have
become fairly depressed over the past few months as graduation
and repayment looms.” Signed: BigTimeDebt.
There are a number of these posts on Dentaltown.com and
many seasoned dentists offer ideas and strategies to overcome debt.1
BigTimeDebt is not alone. In 2011, graduates of public dental
schools often have $200,000 in debt while those from private
institutions often owe more than $400,000.
Let’s first look at repayment options:
For the sake of example, I assume seven percent average
interest for all loans.
For debt of $400,000:
25-year repayment: $2,800 per month
15-year repayment: $3,600 per month
10-year repayment: $4,650 per month
Five-year repayment: $8,000 per month
For debt of $200,000:
10-year repayment: $1,750 per month
Five-year repayment: $3,000 per month
A newbie dentist can expect to have an associate income
of between $100,000 and $150,000, depending where one
practices and the type of practice. With a starting dentist
income of $125,000, all federal and state taxes will be about
$35,000, leaving $90,000 to attack loans and live. Can a
dentist live on $30,000 per year and pay off $60,000
($5,000/month)? Yes, indeed.
Yet can’t a dentist lengthen that $400,000 student loan to 25
years and pay $2,800 per month, buy a house with a payment
of $2,200 per month, and live better than the dentist paying off
loans at $5,000/month?
The Psychology of Debt
Let’s take a look at the psychology of debt. Psychotherapist
Phil Tyson2 writes of two factors.
First is a psychological principle called future discounting.
An example is planning your day thoroughly, and then finding
that you rarely finish all tasks. We often underestimate our ability
to accomplish all.
With debt, we often take it on with little thought of the
details of changes needed to accommodate it. We look to the
future and discount the pain of making payments. Credit card
companies, banks and especially car dealers recognize this principle
For a dental student, tuition, fees, supplies and books are
non-negotiable. Most live in less-than-ideal circumstances
during those four years. To work part-time during school is normally
not an option, so the young dentist is stuck with a large
Dr. Tyson’s second principle is the relationship between consumption
and personal identity. Advertising has brainwashed us
all to consume brands that provide us an identity. As adults, we
wish to become a part of something bigger, to promise us the
narrative of youth, beauty and health. Our selfesteem
becomes captive to products.
According to Tyson, “On their own, each of these two
psychological processes are dangerous; put them together, and
they are toxic.”
For the young dentist with a $400,000 albatross following
four tough years of sacrifice, the lure of autos, homes, nice
clothes and cool electronic devices to prove one’s worth is
extremely powerful. Many new docs buy the Beemer and
upgrade their lifestyle to match the “doctor look” with little
attention paid to future financial struggles.
I have personally encountered dentists in their fifties who
still are paying off re-re-consolidated student loans. This is in
addition to auto leases, home mortgages, college loans for
kids and credit card debt, all of which can explode to well
over $150,000 per year! An income of more than $225,000 is
necessary just to service that debt! And this income does not
pay for mortgage, car payments, food, shelter, vacations,
clothes and flat screen TVs.3
Hang in there docs! All the news is negative for a while yet,
but in the end, BigTimeDebt can retire with wealth by age 55.
Let’s now look at methods to handle large student debt.
Dave Ramsey and “Doc-itis”
Dave Ramsey, a popular radio and TV host, has published
several books on debt and its destructive influence on personalities
and families. The Total Money Makeover and Financial Peace
Revisited are both easy reads.
Ramsey tackles debt head-on. His methodology is to attack
all debt except one’s home loan aggressively until it is
stone-cold dead. Yes, there are mathematical approaches
that occasionally show one can pay down debt slowly,
invest the difference and create more wealth over time, yet
Dave knows Tyson’s psychology. He has worked with thousands
who didn’t invest “the difference” for retirement and suffer years
later. There is no such thing as “good” debt to Ramsey.
Ramsey’s books are must reads for anyone graduating from
college, graduate or professional school. Ramsey’s intellect, common
sense and math IQ are off the charts.
Below is an abridged version of a phone-in call to Dave’s show.4
I’m 33 and a resident doctor with $250,000 in student loan
debt. Next year I’ll finish my residency and increase my income dramatically.
The interest rate on my student loan is just 3.5 percent,
so I’d like to postpone paying it off and
make house payments and begin saving for
retirement instead. I’d put off paying the
student loans as long as possible. Is this a
good idea? – Derrick
That loan hanging over your head is
unbelievable. I’ve worked with many doctors
over the years where 20 years later
they are still playing math games with the
student loans like they’re a stupid pet!
I’m thrilled that you’re going to be making
that kind of money. You’ve spent most of your
life going to school, training, living on nothing
and working yourself to death. But if you’re
not careful, you might catch a nasty disease
“Doc-itis” is an ailment that afflicts lots
of new doctors. Some of the symptoms include
two or three leased BMWs and a fully furnished
house with a pool on the golf course. That student
loan can just wait a while to be paid. It’s a financially
You’ve been used to living on nothing (less
than $40,000) for a while now. Just keep on
doing that for a little bit longer. With the kind of
money you’ll be making, you can have that student
loan debt knocked out in a few years.
I’d postpone any retirement savings and
buying a home until you’ve completely
knocked out the loan and have an emergency
fund ($50,000+) in place. If you stay smart
and play this right, Derrick, you’ll have no
problem living well and retiring a very
wealthy man! – Dave
Additional comments from a Dentaltown thread read:
Get out of debt! My wife and I had the same story. We got her
loans out of the way first and are just about done with mine. We
threw big chunks at hers, knocked it out really quick. There is no
better feeling than getting that debt behind you… Some will say
that the interest rates are good and I can understand their reasoning
(to delay paying down quickly), but there is no better feeling than
pulling in a great double income and no loan payments... Read Financial Peace by Dave Ramsey; it is an easy read and will change
your outlook on debt and wealth building. – Dr. AK
Charles Farrell and Money Ratios
If you are a young dentist, how much debt can you really
afford? How much savings should one have at a given age? A book
released in 2010 by attorney/certified financial planner Charles
Farrell, JD, LLM, is called Your Money
Ratios: Simple Tools for Financial Security.5
According to Farrell, any education
debt that totals more than 75 percent
of one’s initial income is onerous.
BigTimeDebt, mentioned at the beginning
of this article, assuming he will have
a starting salary of $125,000, will have a
ratio of 337/125, or 270 percent! I don’t
include Farrell’s Student Debt to Income
chart, as BigTimeDebt (BTD) is far off
it! If BTD can tackle his student loan at
$5,000/month, he will be able to pay off
the loan in about seven years. If he is 28
now, he will be able to buy a home and
start significant savings at age 35.
Let’s look at capital to income (savings)
ratios. Table 1 shows the ratio between
retirement savings and one’s income needed
over time to retire by age 65.
Capital (savings) includes the current values
of all tax-deferred and taxable investments,
including all IRAs, profit sharing, brokerage
accounts, the fair market value of any investment
real estate and the value of your practice.
This does not include the value of your home,
autos or personal possessions.
Using Farrell’s Capital to Income chart
above, we find that BigTimeDebt should
normally have $60,000+ in savings by age 30.
Because he is just out of school, zero is
expected now. If he starts to save in earnest by
age 35, he will be fine.
Farrell’s Savings Ratio column indicates to
save 10 percent of one’s income early, increasing
to 13 percent later on. Because dentists are not able to save
much before age 35, the proper savings ratio to retire by age 65
is 15 percent from age 35 on. To retire in his 50s, BigTimeDebt
(BTD) will need to save at a 20 percent ratio.
How much of a home loan can BTD afford when his student
debt load is gone? Farrell’s Mortgage to Income Ratios
are in Table 2.
At age 35, assuming BTD has paid off his student loan and
increased his income to $175,000, he can afford a mortgage of
about $330,000, according to this table. To provide a 20 percent
down payment, BTD will be able to purchase a $400,000
home by age 35 or so. And he will begin saving for retirement
I know you are probably thinking “doctors at age 35 should
be able to afford more than a $400,000 home!” $400K will buy
a 1,500 square-foot older home in Costa Mesa (Orange County)
California or New Rochelle, New York, yet will grab a 3,500
square-foot beauty in Plano, Texas, outside Dallas.
As I’ve preached for years, the expensive home provides the
biggest obstacle to achieving real wealth. Later on, I’ll reveal the
secrets of those that retired by age 50.
Note that I have not mentioned practice purchase yet.
Farrell doesn’t include it in his calculations, assuming that it is
short-term debt that will eventually result in a profit. This is
true, yet practice debt might interfere with net income and stall
one’s ability to save. Make sure practice debt never interferes
with your ability to either pay off student loans quickly or save
15 to 20 percent per year!
A Look at Those Able to Retire by Age 50
There is a very small and quiet group of dentists who amass
wealth early and then fall off the radar before the rest of us even
notice. Yet, they are the ones who were able to work – or not
work – on their own terms. I outlined characteristics of this
group in an article published in 2007 called “Retire by 50.”6
Additional characteristics not listed in the article:
- All bought one home and remained in it until retirement.
- All were massive savers – more than 20 percent of net
income per year after student loans were fully paid.
- All paid cash for cars, and kept the cars for more than five
years, usually for eight to 10 years.
- All paid off any credit cards monthly.
- All attacked debt mercilessly, having paid off student loans
and practice loans as quickly as possible.
- All paid cash for everything but their home and practice.
- All had their homes paid off well before retiring.
- All started to save for retirement by age 35 or earlier.
Dr. Howe, an early retiree, comments on his ability to retire
early. He says, “Any decision to spend capital is a decision to
work longer to pay for that decision. Your retirement age will be
extended accordingly. Don’t get caught in the sizzle of the
moment. People use shopping as a recreational activity. They
become addicted to the next big thrill and purchase.”
Howe’s mantra: “The ability to discipline and delay gratification
in the short term in order to enjoy greater rewards in the
long term is the indispensable prerequisite for financial success.
Those greater rewards provide less stress with the ability to purchase
items for cash that one only dreamed about in dental
school, without worrying about financing or credit.”
This is your key to wealth, docs. It’s simple, yet requires living
like no other dentist for 25 years so you may live like no
other dentist afterward.
A Plan for BigTimeDebt and a Possible Early Retirement
Can BTD survive, and even thrive with the $337K burden
of debt to start his career? Yes, indeed, with the following plan:
An alternative posited by various dental financial advisors
would be for BTD to invest $1,000 per month for retirement
now and pay off his loan at $4,000 per month (adding up to
the same $5,000 per month as above). They feel the jump
start on retirement savings is crucial. In working out the
math, BTD would then have his student loan paid off in 10
vs. seven years. Having BTD invest $12,000 per year for 10 years, then $50,000 for 17 years, provides only $1,700,000 at
age 55! And BTD is stuck living a Spartan life for three years
longer! Even the math doesn’t add up for stringing out the
- Make massive payments on the $337,000 student loan at
the rate of $5,000 per month.
- The psychological effect of paying off such a large debt is
huge. Paying cash in the future for all purchases, except a
home and practice will become automatic.
- Meanwhile, BTD will live like a dental student until the
student loan is gone. It’s easy to do now and will be impossible
at a later date.
- As soon as the student loan is paid off, save at the rate of
20 percent of income per year. $50,000 per year saved in
a conservative mix of 60 percent stock index funds and 40
percent bond index funds, starting at age 35 and ending
at age 55 compounds to more than $1,800,000 in real, or
age 35 dollars. With the sale of an average practice netting
$400,000, total retirement savings would be $2.2 million
at age 55, within the $2 million to $2.5 million range the
average dentist needs to retire.
The early retirees and I have found no good reason to ever
carry debt. Yes, it’s unavoidable at times, yet should always be
paid off as quickly as possible. After graduating and paying off
student debt, only your home loan should have long-term payments,
and a 15-year loan is best. Leveraging debt is a very slippery
slope. Please listen to the docs that created wealth early.
You’re entering a wonderful profession full of wild new
equipment, crazy staff members, weird patients and the occasional
hug or note that makes it all worthwhile. Is it worth
$337,000, BTD? You bet!
You can contact me at the information given below and I
love to give seminars on financial topics.
|1. To read the entire thread, go to www.towniecentral.com/MessageBoard/thread.aspx?a=11&s=2&
|2. Phil Tyson, Ph.D., “Do You Understand the Psychology of Debt?”, downloaded at www.mens-well
being.com/2010/02/do-you-understand-the-psychology-of-debt.html on April 28, 2011.
|3. For a more complete view of a spending disaster view my Dentaltown article “A Visit to Dental Camelot?”
|4. You can listen to the full encounter at http://a1611.g.akamai.net/f/1611/23575/9h/dramsey.
|5. Charles Farrell, J.D., LL.M., Your Money Ratios: 8 Simple Tools for Financial Security. New York, NY:
|6. Doug Carlsen, DDS, “Retire by 50”, downloaded at www.dentaleconomics.com/index/search.html?
si=+&collection=&keywords=retire+by+50&x=21&y=12 on April 29, 2011