A couple years ago, actually as I was interviewing for jobs at the end of my training, I had a conversation with another plastic surgeon friend of mine. He was already an attending for a few years. Somehow the conversation got on student debt. And he told me, “I want to die with my debt. That way the loan companies don’t win.” At the time, I was new in my financial education so I kind of assumed he was on the right track. But let’s examine, should doctors plan to die with their debt?
Some historical background
Honestly when my friend said this I didn’t dismiss it outright. I actually thought it made some sense.
The first thought that popped into my mind was how it used to be a sign of wealth or something to die with debt. I feel like I even recall from middle school learning that Thomas Jefferson died with some enormous amount of debt.
So maybe there was something to this whole idea.
But alas there is not.
Fast forward to now
So I have obviously drawn a line in the sand and do not agree with my friend that doctors should die with their student debt.
But this idea keeps coming up. In fact, I would wager that the majority of people think that the best strategy for managing debt in general, and their student debt in particular, is to make minimum required payments and string it out as long as possible.
I believe the reason is because it kind of seems like it would work. You make small payments every month that often do not make a huge dent for you. This seems better than paying high lump sums that sting initially.
But this is exactly what the debt companies want you to think!
Why debtors want to doctors to die with their debt
Let’s start by examining how debtors like student loan servicers and credit card companies make money.
They lend you money. And they charge interest every day based on the principal amount left on the loan until the day that it is all paid off.
The more you let the loan sit around without paying it off, the more interest they collect. And even if you pay it off, the less you pay, the greater the principal remains and the more interest they collect on it.
By dying with you debt, you don’t win. They win!
That is exactly what they want you to do. That’s how they stay in business. Credit card companies would be broke if everyone just spent responsibly and paid off the total amount on their card each month.
Your student loan servicer’s worst nightmare is for you to pay off your total loan ASAP.
And the numbers back us up…
Let’s look at a case study
There are two doctors. They each took out $200,000 in loans that they need to repay (no PSLF). They both got initial 6.8% rates that they refinanced to 5%. And they both need to start paying now as they just finished their training. As is standard, their minimum required payment is 0.5% of the loan amount, or $1,000 monthly.
But that is where the similarities end…
Dr. DWD (Die With Debt)
Dr. DWD thinks he has it figured out. He’s not going to let these loan sharks win. He vows to just pay the minimum amount every month and no more.
He works as an orthopedic surgeon and makes good money. A monthly payment of $1,000 is a drop in the bucket.
However, what he doesn’t realize is that the loan company is licking their lips. Because at this rate, it will take Dr. DWD over 35 years to pay off his loans! And he will end up paying $231,000 in interest only!
That’s right. He will ultimately pay more in interest than the original principal of the loan! So, in total, his loans will cost him $431,000. This is death by a thousand cuts!
Making this even worse is the fact that his monthly cash flow for 35+ years was reduced by $1,000. That’s $1,000 less a month to invest and take advantage of compound interest in his favor.
But now let’s take a look at…
Dr. LWD (Live Without Debt)
Dr. LWD doesn’t like the idea of having debt hanging over her shoulders. Plus, she also reads this blog and understands why paying off debt aggressively is a key step in the path to financial freedom.
The formula to build wealth is to stop compound interest from working against you (via debt) and get it working for you (via investing). So she decides to pay off her debt as quickly as she can.
She is a pediatrician, so she is just able to save an extra $1,000 a month to contribute to her loan payments. That way, she pays off double the minimum required amount.
And what is the result of that?
Well, it now takes her only 10.83 years to pay off all of her loan. And, even more impressive, her total interest paid is just $60,000. That’s almost $200,000 less than if she just paid the minimum amount like Dr. DWD did!
Plus, compared to Dr. DWD, she has over 20 years where she can invest not just the extra $1,000 monthly but the full $2,000 that was being contributed to her loans. Assuming that compound by 5% annually, in 20 years, that grows to over $700,000! (You can use the calculator here to see these numbers for yourself.)
I rest my case
Like some of the best examples, this one is over simplified. But remember, I am a simplifier and I think people learn best when extraneous and distracting variables are eliminated.
What this illustrates is that paying off your debt sooner is better. You minimize interest paid and maximize the ability to use compound interest in your favor. It’s not even close. Not even a question.
So, doctors, do not die with your debt. Do not string out your debt. Just pay it off.
And don’t @ me about interest arbitrage
Because yes, mathematically interest arbitrage makes sense. If your loans are at 5% interest and you can make 7% gains by investing, it makes sense to invest.
For more on this concept, check out this post: What’s Better? Should You Pay Off Debt or Invest?
However, returns from paying off debt are guaranteed. And no investment return is guaranteed. Ever. Except like a Certificate of Deposit which will not be that high.
And yes, if Dr. DWD invested the $1,000 each month that he wasn’t using to make additional loan payments, his total return would be similar to what Dr. LWD ultimately made.
But there’s a big caveat. That would be a rational choice. And humans, especially when it comes to investing, are not rational. We are much less likely to invest money that we don’t have earmarked for that purpose. We are more likely to spend it. Behavioral financial habits favor paying off debt.
So, what’s the bottom line?
- Doctors, don’t die with your debt. That’s how the debt companies win.
- If you are not paying down debt aggressively, make sure you are investing instead. Even if it is hard to do behaviorally.
Plus a few other random tips and tricks:
- If you have private loans or federal loans that will not be forgiven (that is key!), consider refinancing your loans to a lower rate and also to receive cash back like I did (twice) with Credible.
- This is one of my favorite strategies. If you want to pay extra towards your loans, why not create additional cash flow to do so instead of dipping into your clinical income? These Physician Side Gigs to Make You Passive Money are all vetted by me and, in most cases, used by mw to do just this!
- And finally, create a written financial plan where you write down exactly how you will reach financial freedom. There are many paths that will work. So figure yours out and stick to it! My written financial plan is shown here!
What do you think? Should doctors die with their debt? Why or why not? Do you have a better strategy? Let me know in the comments below!