Financial Considerations for the Student Doctor

I first started reading SDN as a medical student, more than a decade ago. In medical education, some of the best advice seems to come from those who are one year ahead of you in the medical education pipeline. SDN allowed me access to more people ahead of me in their training (and the very useful information they would provide) than I could find playing foosball in the lounge at school. As I progressed through the pipeline, I found myself receiving less and less information and dispensing more and more. As residency becomes a more distant memory each year, I can assure you there is light at the end of the tunnel. Residency is survivable. You will eventually feel competent in your specialty. You will make great friends and actually save some lives. Those five-figure paychecks will eventually start rolling in, and if you manage them well, will provide you a comfortable life and retirement.

Get A Financial Education Too

One thing I realized shortly after graduating from medical school was that despite my best efforts, I knew little to nothing about business, personal finance, or investing. These subjects tend to be taught in the school of hard knocks, rather than medical school, and in many ways doctors in the pipeline are completely insulated from the situations that teach this information. Doctors have to actively seek out this information, or like most, stumble through life without it. Resolve now to take just as good of care of your finances as you do of your patients. It will help you to have a happier life, and be a better doctor. I started a free website called The White Coat Investor ( a couple of years ago that will help you to become financially literate.

The Situation Seems Bleak

Many older physicians grumble about their financial situation. They complain about the effects of PPACA, EMTALA, and RAC audits on their income. In many specialties, inflation-adjusted income is down dramatically over the last few years and is projected to continue to fall. To make matters worse, medical school tuition has continued to skyrocket. In-state tuition at my medical school was under $10,000 when I started, but just 15 years later is nearly three times that high. To make matters worse, despite our low-interest rate environment, up until recently it was impossible to get medical school loans for less than 7-8%, and they couldn’’t be refinanced at lower rates after graduation. Subsidized loans have also disappeared for medical students, and deferral of loans in residency is no longer possible. $300,000 in student loan burden is no longer unusual, and two-physician couples may now start their careers with debt burdens approaching three-quarters of a million dollars. Tax rates on high earners have also increased in the last few years, leaving you less net income to pay down those non-deductible loans.

New Changes Are Helping A Little

There are a few recent changes that may provide new physicians with some relief. First, Congress decreased student loan interest rates from 6.8-7.9% to 5.41-6.41%. It isn’t much, but every little bit helps. Second, new options for refinancing at a lower rate (not just consolidating loans at their average rate) are starting to appear, including Darien Rowayton Bank and a Peer to Peer Lending company called SOFI. Third, the Income-Based Repayment (IRB) program (or its new improved version the Income Contingency Repayment – ICR-A) helps most residents to afford their loan payments during residency (although in many cases, the interest continues to compound). Doctors shouldn’’t expect the loan forgiveness from the IRB program that many poorly paid individuals may get after 20 years, but there is the possibility that they may be able to qualify for the Public Service Loan Forgiveness (PSLF) program, which could forgive a large chunk of their student loans as soon as four years out of training. Lastly, some “scholarship programs” such as the military’’s Health Professions Scholarship Program (HPSP) have been offering signing bonuses and increasing stipends in order to attract more medical students. I would never advise someone to join the military or Health Service Corps for financial reasons, but for those inclined to serve, these changes make it less likely that they’’ll need to owe both time and money after finishing training.

Doctors Need To Deliberately Manage Their Finances

Despite these changes, the fact remains that it is remarkably easy to become a physician, receive a five-figure paycheck every month, and still have a negative net worth for your entire career. Most doctors still make lots of money. It is enough to afford a nice car, a nice home, a nice lifestyle, and a nice retirement and still be able to pay off the ever-increasing student loans. But it doesn’’t happen automatically, and it certainly doesn’’t happen all at once. You have to plan for it to happen. There is no get-rich-quick scheme here, but a high-income combined with a good plan can work financial wonders. Here are the keys:
1) Apply to a lot of medical schools and attend the cheapest one. I don’’t even know or care where my partners went to medical school, and it is a rare patient that will even ask. Trust me when I say that there is no accredited US medical school that is $200,000 better than any other one. I see little reason to graduate from college with any significant debt either. There are simply too many scholarships available and plenty of high quality, but inexpensive universities out there.
2) Learn to live frugally in school. A dollar borrowed at 6% that you won’’t be paying back for 15 years will eventually cost you $2.40. If you thought that latte’ was expensive but justifiable at $5, how does it look at $12? The same goes for the rent, the car, the road trip, the clothes, the groceries etc. The most expensive stuff you ever buy will be the stuff you buy on credit. Borrow as little as possible, especially at the still-exorbitant student loan rates currently available.
3) Live like a resident. Just because you’’re a doctor doesn’’t mean you’’re paid like one. Spend the three to five years of residency appreciating how the average American household lives, and stay within your means. You still have to live in an inexpensive house and drive an inexpensive car. Luckily, the hospital will provide much of your clothing and meals! Upon residency graduation, the longer you can continue to live like a resident the sooner you will be on a financially secure footing. It is simply amazing how someone can go from having trouble living on $50,000 per year to having trouble living on $250,000 per year. If you can just manage to hold your lifestyle to $100,000 per year for just a few years (still a very nice increase in lifestyle compared to residency), you can use that extra income to pay off student loans, build up a nice emergency fund, save up a house down payment, and jump-start your retirement savings.
4) Minimize your taxes by maximizing retirement accounts. Most doctors worry about their high tax bills. They also worry they aren’t saving enough for retirement. The solution to both problems is to maximize their retirement accounts. By using 401Ks, profit-sharing plans, defined benefit plans, HSAs, and “Backdoor” Roth IRAs, many doctors can lower their taxable income by $50-100,000 or more each year. Due to your late start, a comfortable retirement will require you to save around 20% of your gross income each year just for retirement. Let Uncle Sam help you by using tax-protected retirement accounts.
5) Minimize investing expenses. Although your savings rate matters more than anything else (financially speaking) during your early years, always remember that any investment expense you pay comes directly out of your investment returns. An 8% return looks pretty good, until you realize that taxes may take 2% of it, inflation may take 3% of it, and investment expenses may eat up 2% more of it, leaving you with just a 1% return. At 1% per year, it will take your entire life for your money to double. You can’’t do much about inflation, and perhaps only a few things to minimize your taxes, but investment expenses can be almost completely eliminated by buying and holding low-cost index mutual funds.
6) Insure against catastrophe. If someone depends on your income, buy a lot of 20-30 year level-premium, term life insurance. Buy as large of a high quality individual disability insurance policy as they will sell you as a resident, and buy some more when you graduate. Increase the liability limits on your homeowner/renter and auto policies, and stack an umbrella policy on top of it. But don’’t insure your fridge, your iPhone, or your vacation, and don’’t mix investing and insurance. As a general rule, you’’ll end up with expensive insurance and a poor investment.
The White Coat Investor recently partnered with SDN to further the cause of helping those who wear the white coat get a fair shake on Wall Street. Managing your finances well will enable you to be a more productive physician, provide well for those who depend on you, and help others financially in the same way you do physically throughout your career. Resolve now to educate yourself periodically on financial topics during your training and throughout your career.