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Published 5/1/2013
Dave Denniston, CFA

Financial Strategies for Young Physicians

How to deal with medical debt

You’ve finally completed your medical education (medical school, residency, and fellowship) and are ready to embark on an orthopaedic career. But how are you going to deal with the debt that you’ve accrued?

According to the American Medical School Association, 86 percent of medical school graduates have educational debts totaling between $119,000 and $150,000. As a young orthopaedist, your debt may be even higher.

Trying to balance the financial stresses of repaying medical school debt with buying a first home, purchasing a new car, enjoying life, and saving for retirement may seem overwhelming, but a specific plan of action based on basic principles can help.

Debt reduction
In my opinion, the most important priority for young physicians is to lower and eliminate consumer and educational debts while establishing a “rainy day” fund.

Now that you have your first job as a physician, make sure to set aside money during the first few months. This fund will be your cushion, enabling you to deal with the “stuff happens” factors in your life. I suggest that physicians save a minimum of $6,000 within the first few months. As an orthopaedic specialist, if you make more than $200,000 annually, double that. Continue to save that amount annually to keep building your cash cushion.

At the same time, you need to focus on reducing your debt. First, make sure that you consolidate and lock in the interest rates for your student and consumer debt. Current interest rates are not likely to get any lower and may, in fact, increase within the next 2 to 3 years. Signing up for automatic payments may knock off a quarter percent or more on your debt.

If you haven’t quite completed your residency or fellowship yet, consider either deferring your loan (where interest will compound) or requesting your lender for forbearance through an income-sensitive repayment plan. For example, residents in Minnesota have an average salary of about $49,000. Forbearance could alleviate some financial pressure by enabling you to keep more of your current income until your ability to pay back your loans increases.

You might also consider debt-forgiveness programs that are available through federal or state sources. The American Association of Medical Colleges has a database of federal and state loan repayment/forgiveness scholarship programs. In addition, the National Health Service Corps has a program for primary care physicians.

Also, find out what it would take to pay back your student loan in 10 years or 15 years instead of 30 years. Because 30 years of interest on a 5 percent, $150,000 student loan amounts to nearly $140,000 worth of interest, taking that long to pay back the loan means you’ll nearly double the total amount that you’ll have to pay. If you pay back the loan in 15 years, your total interest is about $64,000. That $76,000 savings in interest payments could buy you the cabin, recreational vehicle, or several European vacations you want for your retirement.

At a minimum, consider putting an extra $500, $1,000 or more per month toward paying down your debts.

Lastly, because student loans are not likely to be tax deductible, you should pay them down before you pay down a mortgage. However, other consumer debt such as credit cards and car loans typically have higher interest rates than student loans. Pay off consumer debt (or even better, don’t incur consumer debt) before paying down student loans.

In setting priorities for debt repayment, balance interest rates with your cash flow. If the interest rate difference between debts is significant—4 percent or more—pay off the debt with the higher interest rate first. Also, if your debt is down to $5,000 or less, consider focusing on paying off that debt to increase your monthly cash flow.

Lifestyle and retirement
What is a reasonable lifestyle? I consider a reasonable lifestyle to mean that you aren’t just squeaking by. You are able to eat out frequently and enjoy going out with friends and family. You are able to vacation, golf, fish, or enjoy a small wine collection.

On the other hand, a reasonable lifestyles means you are committed to keeping your expenses within limits. To help keep an eye on your living expenses, sign up and use free budgeting and wealth management tools, such as those available through websites such as Mint.com, Emoneyadvisor.com, and creditkarma.com

Current lifestyle spending, however, has to be balanced with saving for retirement.

Remember that contributing to your 401k lowers your income taxes. It doesn’t matter how much you contribute; every bit will help. If your employer provides a matching contribution, make every attempt to contribute the maximum match. A dollar-for-dollar employer match, for example, is like an automatic 100 percent return on your investment. Similarly, a 50-cent or 25-cent match per dollar is like a 50 percent or 25 percent return on your contribution.

As highly compensated specialists, orthopaedic surgeons should come as close to maxing out the maximum contribution to lower both federal and state income taxes. If you are younger than age 50, your maximum 401k contribution in 2013 is $17,500. If you are older than age 50, you are allowed a “catch-up” contribution of $5,500 over the standard maximum, for a total of $23,000 in 2013.

Achieving your goals
As you plan your current lifestyle, take a few steps back and ask yourself the following questions:

  • What are my goals, dreams, and desires?
  • When do I want to reach those goals?
  • How much money is it going to take to get there?

As a young physician, you should think about starting small, building a better lifestyle as you pay off your debts. For example, consider purchasing a fairly modest townhome or condo rather than a “McMansion.” With today’s depressed real estate prices, you can purchase a nice residence for $150,000 to $200,000 in the Twin Cities—and many other metropolitan areas also have quite affordable housing options.

Make sure that you can put at least 20 percent down. If you put down only 5 percent or 10 percent, you may have to purchase private mortgage insurance, which raises your monthly payments by a couple hundred dollars.

Similarly, apply this same philosophy when you’re considering a new car. I strongly suggest paying in cash. If you already have a high-interest car loan, pay it off as soon as possible.

Cars are depreciating assets, so why put a significant chunk of your hard-earned funds in something that you know will lose money? The second you drive a new car off the lot, you’ve typically lost $5,000 to $10,000 of value.

Instead, consider buying a used car with 20,000 to 50,000 miles on the odometer. Hold onto it as long as possible. If you hold a car for 5 years or more, buying is a better deal than leasing. Even though the initial cost of the lease is less than the initial purchase of the car, constantly renewing a lease for a more recent model adds up to more than the purchase price of a car that you have and maintain.

As for other goals—paying for your children’s college educations, buying a second home, or donating lots of money to worthwhile charities—let them wait until you take care of debt reduction, savings, retirement, and current lifestyle choices. Once you are debt free, you’ll have a tremendous amount of cash flow to be able to fund these other projects.

Final thoughts
Everyone’s situation is different and unique. Take some time to ponder and reflect upon your situation. Many physicians are so busy that they don’t give these critical areas a second thought. Make sure that you are working with a professional financial advisor who can guide you through the turbulent waters of savings and debt.

You’ve made a fantastic commitment to helping others, the community, and your colleagues by becoming an orthopaedic surgeon. Make the same commitment to your finances as you have to your career and you will find yourself well down the road toward financial independence.

Dave Denniston, CFA, is a professional wealth manager and financial advisor located in Bloomington, Minn., and the author of 5 Steps to Get out of Debt for Physicians and 45 Secrets to Financing a College Education. He can be reached at ddenniston@machtig.net

Editor’s note: Articles are provided for general information and should not be construed as providing legal or financial advice; readers looking for specific information should consult a qualified professional.


  1. http://www.amsa.org/AMSA/Homepage/About/Committees/StudentLife/StudentDebt.aspx
  2. http://www.mayo.edu/msgme/residencies-fellowships/compensation-and-benefits
  3. http://www.ehow.com/about_6329985_cost-leasing-vs_-buying-car.html
  4. American Association of Medical Colleges database—federal and state loan repayment/forgiveness scholarship programs: https://services.aamc.org/fed_loan_pub/
  5. National Health Service Corps Student to Service program: http://nhsc.hrsa.gov/loanrepayment/studentstoserviceprogram/