In this month’s Finance & Practice Management column, we illustrate the importance of developing and maintaining a budget for physicians at all stages of their careers.
For young dermatologists, the most stressful element of their financial lives is almost always the burden of student debt. Unless addressed properly, these debt burdens may dramatically affect real savings, retirement planning, family planning, and even creditworthiness later in life. High student loan debt is an unfortunate reality for many millennial dermatologists, among whom a balance of $200,000 or more is common.
In this article, we present a few tips for dermatologists facing student loan debt and illustrate the importance of developing and maintaining a budget for physicians at all stages of their careers.
Try to Avoid Capitalization
Although sometimes unavoidable, student loan costs typically balloon the highest during dermatology residency due to a process called capitalization. Capitalization is the addition of unpaid interest to the principal balance of your loan. The principal balance of a loan increases when payments are postponed during periods of deferment or forbearance and unpaid interest is capitalized.
Sometimes, it is difficult to avoid capitalization during residency, because of the high cost of living. However, if possible, paying some, or all, of the interest during residency will allow you to significantly slow runaway capitalization of your debt burden.
Income-driven repayment plans have recently become a solution for allowing repayment of student loan interest during residency with much more tolerable monthly payments. One example is the Revised Pay As You Earn (REPAYE) program offered through the US Department of Education. With REPAYE, the federal government covers 50% of all interest above the monthly payment amount during repayment.
To illustrate, if a resident making $55,000 a year has a student loan of $164,000 at 6% interest, the monthly payment just to cover interest would be $824. Under REPAYE, the resident would only have to pay $300 per month, whereas the federal government would cover $262 of the monthly interest. Although some interest will still capitalize, the amount is much more acceptable.
Refinance Your Student Loans
Start your first job off on the right foot. One of the simplest methods for reducing the burden of student loan debt is refinancing your student loans through a private lender when starting to practice. Refinancing is a relatively easy way to not only consolidate your student loans into 1 lump sum, but also to lower your interest rate considerably. Although you may give up certain loan protections inherent to federal student loans and income-based repayment models, the upside of refinancing is typically a dramatic reduction in the student loan interest rate. It is not uncommon to see interest rates lowered by 2% to 3%, an amount that may dramatically reduce the cost of debt over a 10-year span. In the example above, a $268,000 loan paid back over 10 years at 6% interest would require a monthly payment of $2975.35, with $89,042 in total interest. The same loan at a 4% rate would cost $2713.37 per month, with $57,604 in total interest.
Don’t Forget Disability Insurance
In a previous article (Dermatology Times, August 2022), we touched on the need to protect your greatest asset–your ability to earn income–which could be jeopardized by an accident or health condition. By securing adequate disability income insurance early on in your career, your student loan debt payment plan will be protected, along with your ability to generate future income.
Think About Budgeting
Although time may be in short supply, force yourself to spend a few minutes thinking about your cash flow when you begin your first job out of residency or any new position later in your career. You can efficiently prepare to develop a realistic budget by gathering your utility bills, bank statements, insurance premiums, and credit card statements. Prior tax returns may give you a good sense of how much money you actually earn after accounting for taxes. Finally, a spreadsheet program such as Microsoft Excel or Google Sheets that can be useful for comparing numbers and adjusting the budget in real time. There are also numerous mobile apps such as Mint to help with budgeting by syncing to credit card or banking apps.
Estimate Your Cash Flow
If you know your anticipated salary, you can start to estimate your monthly cash flow amount, after taxes. Your previous year’s tax return may be helpful in estimating how much you may pay in taxes and other costs. Be sure to assess your pay only after you have contributed to your 401k, individual retirement account, health savings account, and other tax-advantaged vehicles available. In addition to lowering your adjustable gross income, maximizing contributions to tax-advantaged accounts allows the larger pretax dollar amounts to give your investments more leverage than after-tax dollars would provide in the same fund.
Keep Your Goals in Front
Write down your short-, intermediate-, and long-term financial goals. Are you focused only on repaying student loans as quickly as possible? Are you trying to buy a house? Are there partnership buy-in costs to save on? Do you want to contribute to your child’s 529 college savings plan? By committing these to writing at the beginning of the process, you will keep your desired long-term picture in mind as appropriate expenditures throughout your career.
Student loan debt is one of the biggest national crises of our generation. Without careful planning, a dermatologist’s 6-figure loan after training can rapidly get out of control. The above strategies may be helpful for mitigating risk during training and for optimizing repayment plans during the first few years of your career. Although the goals for debt repayment and saving and/or investing often create a balancing act for young dermatologists, having a sound budget will help you make great strides toward safeguarding your financial future.
David B. Mandell, JD, MBA, is an attorney and author of more than a dozen books for doctors, including Wealth Planning for the Modern Physician. He is a partner in the wealth management firm OJM Group (www.ojmgroup.com).
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