One of the most common questions we hear from students pursuing dental training is: “What do I do with all this debt?” Specifically, they are interested in finding out whether they should pay off their loans, how much, and how soon upon graduation. The next question is inevitably, “when should I start investing?” The answer, like so often in life, is “…it depends.”
Most people who transition from training to practice experience a sudden surge in income. With that, frequently comes the desire to make up for years of living a student lifestyle, coupled with an objective to ‘get rid of mountains of debt’ that has accrued over the years. It’s not uncommon to have close to half a million dollars in debt once you put together dental school and residency expenses. Understandably, it can appear overwhelming. But it need not be.
Accelerated payoff – does it make sense?
Even if you see your income quadruple overnight upon taking that first real paying job, you should do some serious thinking before you rush into an accelerated payment plan. The first thing you want to do is to look at the balances on your loan statements, and figure out if it’s feasible to pay off the loans within a ten-year period. If the answer is yes, you should figure out if doing so will leave over some money to establish important financial milestones, such as developing emergency reserves, and starting a retirement savings program. If your balances are so high that a ten-year repayment window leaves you broke, you will want to consider a 25-year extended payoff, or even income-base repayment.
A key factor will not only be the loan balances, but also the interest rates on your loans. In today’s economy, if you have a 6% interest rate or lower on your loans, you might be better off not accelerating your payments, and instead taking any surplus and investing it in the market for the long term. It’s important to stress “the long term,” as only a committed investment will allow you to capture the upsides of compounding and market cycles. Historically, the market has produced 8.7 percent return over an extended period of time. (Source: Vanguard).
Refinance versus consolidation
Many people get confused regarding the difference between refinancing and consolidation. Consolidation doesn’t necessarily save you any money (well, it may save you some service fees,) it just means you make one payment rather than having to pay multiple lenders every month. Refinancing is actually replacing those loans with a lower cost loan.
The great news is that private firms now specialize in refinancing loans for high-income professionals. They know the risk of those loans defaulting is low compared to an average student loan that has a high default risk. So they are willing to give lower interest rates to doctors, dentists, attorneys, and other professionals. Our advice, if loan terms are acceptable, is to take the lower rate, establish a cash reserve, and utilize the remainder to accelerate the debt or begin an investment program.
Which brings us to investing – when should you begin?
This one is easy. Start as soon as possible, today, if you can! The question about whether you should pay off your loans, versus contribute to your retirement plan is actually a 30- or 40-year proposition. You don’t want to pay off your loans for two decades, be debt free, and then have zero in savings or retirement plans. That’s the biggest mistake you could possibly make. You’d be missing out on the power of compounding interest, and missing out on powerful market cycles that could hugely impact your financial future in a positive way.
Debt is not as bad as you think.
The bottom line is, that debt is what allows you to generate the income you always dreamed of, doing the job for which you have prepared for years. A good rule of thumb is to dedicate approximately 20 percent of your income to some sort of ‘net worth building program’ – a combination of paying off debt, setting up emergency reserves, and starting a savings plan.
Whatever you do, don’t go it alone. Always work with a qualified financial professional who can show you the way. Good luck!
 Historical return, 1926 – 2015, of a moderate 60/40 stock to bond portfolio is 8.7%.
When determining which index to use and for what period, we selected the index that we deemed to be a fair representation of the characteristics of the referenced market, given the information currently available. For U.S. stock market returns, we use the Standard & Poor's 90 from 1926 through March 3, 1957, the Standard & Poor's 500 Index from March 4, 1957 through 1974, the Wilshire 5000 Index from 1975 through April 22, 2005, the MSCI US Broad Market Index from April 23, 2005 through June 2, 2013, and the CRSP US Total Market Index thereafter.
For U.S. bond market returns, we use the Standard & Poor's High Grade Corporate Index from 1926 through 1968, the Citigroup High Grade Index from 1969 through 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975, the Barclays U.S. Aggregate Bond Index from 1976 through 2009, and the Spliced Barclays U.S. Aggregate Float Adjusted Bond Index thereafter.
For U.S. short-term reserve returns, we used the Ibbotson 1-Month Treasury Bill Index from 1926 through 1977 and the Citigroup 3-Month Treasury Bill Index thereafter.
Source: Vanguard Portfolio Allocation Models.
About Treloar & Heisel
Treloar & Heisel is a premier financial services provider to dental and medical professionals across the country. We assist thousands of clients from residency to practice and through retirement with a comprehensive suite of financial services, custom-tailored advice, and a strong national network focused on delivering the highest level of service.