Becoming better borrowers isn’t on the list of really any doctors (future or present) that I talk to. But it should be. The problem is that we (myself included) often overlook it.
Tale for example, the importance of saving in the wealth building equation. That can never be overstated. Remember, you build wealth by increasing and investing the margin between what you earn and what you spend. And what you spend is always 100% in your control. Thus, saving becomes the variable that you hold the most influence over.
But saving is only one component of the wealth creation equation. You can see it above. You need to increase your margin. And you do this by investing i.e. using compound interest to your advantage. Getting your money to make money (like these top 11 investing strategies for doctors).
However, for pretty much all doctors, it is first necessary to take out debt
That’s the only way we can afford the education needed to practice as a doctor, with its associated income which we can then save and invest. We therefore have to stop compound interest from working against us (via debt).
Put simply, beyond being a prodigious saver, being an informed and sophisticated borrower when you need to take out a loan can save you thousands of dollars.
Many people underestimate the importance of this side of the wealth building equation. That’s in part because they do not have the financial training to know how to find the detailed terms. We often also lack an appreciation of how extensively the punishing shackles of drawn-out payments, penalties, fees and higher interest rates can compromise our wealth building potential.
Being uninformed in this arena can have a material impact on your future financial wellbeing. For doctors, this is especially important because, like mentioned above, most of us end up with a sizable amount of school loans.
Every dollar we spend on repaying our loan obligations is that much less that can be devoted to saving. And one dollar less that we can use to otherwise build our net worth (which you can do here). So, the goal is to pay as little as possible for borrowed money. That’s a step to becoming better borrowers.
There are many different types of loans
And even within each category, there are vastly different loan terms. Loans will vary considerably in the amount of interest they charge, payment due dates, methods of repayment, late fees, penalties, collateral, personal guarantees, etc.
If doctors are better, informed borrowers, they can make strategic use of debt and avoid paying any more than necessary. Without a detailed understanding of loans, they cannot protect themselves and preserve cash flow.
Indulge me in a story
Recently, Carol Clark CFA, strategic partner here at PPS and managing partner at OnCenter Financial Advisors, told me this story regarding a doctor client of hers.
It’s disturbing. And angering. But that’s what makes it worth telling.
In Carol’s words…
A client recently asked me for advice when he unexpectedly received notice that a new company would be servicing his student loans. He was a PGY2 resident and wanted to continue making the same payments. But, he was having problems arranging this with the new company.
In my opinion, all large, reputable lenders are honest. But they are not all ethical.
What I mean by that is if you make a $500 payment, they will apply $500 to your loan account. But the way they apply payments, create system impediments, determine past due payment dates, calculate late fees, assess penalties all differ between institutions.
One thing is clear.
Their primary interest is to earn profits. And your primary goal is to keep your borrowing costs as low as possible. So, there is an inherent conflict of interest.
If they are putting a roadblock in front of you to prevent you from making payments, it probably means this is to their financial advantage and de facto your financial disadvantage. Their goal is to have your loan balance as high possible when you leave residency when the interest rate more than doubles (going from 3% to 6.5% or higher). The higher your loan balance, the more interest they collect. All very good for their profitability. But highly disadvantageous for you.
The responsibility lies with us to protect ourselves as better borrowers
In my client’s case, the new loan servicing company went to great lengths to prevent borrowers from making payments. The company preys on the fact that doctors are busy and many have not had the financial training to understand the detailed terms.
In this case, the new servicing company told the resident he couldn’t set up “auto payments” because the government was not requiring payments at this time, so they would not allow auto payments. After much research, I uncovered that he could set up “scheduled“ payments. So I assumed this was how he could continue his recurring monthly payments going forward.
But in the fine print, they disclosed that they would only allow borrowers to make one scheduled payment at a time. So, each month now, he must go in and make another payment. It’s not that this is impossible to do. It just takes time. And busy professionals could easily forget thereby extending the repayment calendar and ensuring that greater amounts of money remain outstanding when finishing residency. This is what the company is hoping will happen. They love to receive more interest payment, late fees and penalties.
Recent headline news reported that more than 2 million student loans will soon be notified that they have a new loan servicing company.
If you are among the 2 million, you too may encounter changes in the way the new company handles your loan.
If you do not have the time or have not had the training to uncover the details of the way they will process your student loan obligation, turn to an advisor with deep finance training to avoid the crippling impact of detrimental loan terms and to ensure that you are set up for future financial success.
This whole thing makes my blood boil. (This is Jordan here again.)
Listen, I get it. Loan companies need to make money. That’s how they stay in business. And their business actually does help us. It funds our (really over inflated) education costs. And our high income allows us to overcome this when we enact a good debt pay down plan like this one.
But that does not mean that these companies aren’t predatory. Because many are. Like the one in this story. There is no reason to attempt to take advantage like this. You can provide a good service honestly, care for your customer, and still make money.
A good analogy would be real estate investing like Selenid and I do. The most hate we get from others about REI is that we are somehow taking advantage of our tenants. In reality however, we provide good, clean, and safe homes for people who need it at affordable prices who otherwise would not have access. And work honestly, prioritize their experience and comfort, and in exchange our investments do well.
Same should go for loan companies.
Unfortunately, with our loans getting bought and sold, we don’t always get to choose our loan service companies and can get stuck with bad ones.
So what is the solution?
Well, if you have your private, non-federal loans, just refinance using a service like Credible (a loan company supermarket) to get better rates, cash back, and a better company. That’s what I’ve done twice so far with my private loans.
And really, this problem shouldn’t happen with federal loans because Mohela, the new federal loan servicer, is actually pretty great and straight forward.
In the end, like Carol says, borrower beware. So check up on your loan situation. Make sure you aren’t paying unnecessary fees or building up more interest debt because your payments aren’t going through. And take the time to create your own loan pay back plan!
And once you all become better (even the best!) borrowers, here are some investing tips and tricks for doctors!
- Top 11 Ways That Doctors Should Invest Their Money
- 5 Reasons Index Fund Investing is Better than Stock Picking
- Building Your Investment Waterfall
What do you think? Are student loan companies predatory? Have you heard any horrible stories like this? How can we become better borrowers? Let me know in the comments below!