Students: How to safely wade the waters of 6-figure debt
This is the first in a series of articles on money management. The second article, “How interns and residents can stay afloat while anchored to debt,” focuses on financial issues important to residents.
Michael Mank, OMS I, wasn’t thinking about money when he decided to go to medical school. The 24-year-old Buffalo, N.Y., native had previously pursued physical therapy as an undergrad and was seeking a profession in which he could serve others.
But Mank quickly educated himself on debt, budgeting and basic personal finance when he started figuring out how he was going to pay for school.
“While I knew that medical school was expensive, I didn’t realize it was this expensive,” says Mank, who expects to take out more than $120,000 in loans to pay for the first two years of his education at the Midwestern University/Chicago College of Osteopathic Medicine (MWU/CCOM) in Downers Grove, Ill.
Mank, who would like to go into primary care, has taken steps to cut down his student debt, such as living at home and working for two years after undergrad to save up for medical school. He buys gas and food in bulk at Costco. He’s applied for scholarships, though they’re hard to land as a first-year student.
“The purpose in going to medical school is to get the degree. It’s not to have a penthouse apartment.” Kantrowitz of Fastweb.com
Mank’s situation isn’t uncommon. Nearly half of DO and MD grads carry a six-figure debt burden on graduation day, says Mark Kantrowitz, the publisher of the college planning sites Fastweb.com and FinAid.org.
Another incoming student, Adam Thompson, OMS I, shares Mank’s sentiments.
“When I decided to start applying, I knew it was going to be a pretty large financial burden,” says Thompson, of the University of Medicine and Dentistry of New Jersey-School of Osteopathic Medicine (UMDNJ-SOM) in Stratford. “It’s pretty daunting as someone who’s in college and has college loans already to pay for. But I knew that people did it, so I could do it too.”
First-year tuition at osteopathic medical schools averages $39,033 for in-state students for the 2012-13 school year, according to a survey by the American Association of Colleges of Osteopathic Medicine. Tuition increased on average by about 4.5% two years in a row at the colleges. Last year, DO graduates with debt reported owing an average of $207,317 for their medical education, according to another AACOM survey. Of the graduates surveyed, 93% reported having medical education debt.
Cost of education
But Kantrowitz and other finance pros stress that learning to make smart borrowing—and budgeting—decisions can help students cut their debt load as they pick up money management skills that will aid them for the rest of their lives.
Twice the price?
Rule No. 1? Don’t borrow the maximum allowed, and don’t spend your refund check—your loan money in excess of tuition and school fees—on a vacation, says Kimberly Brown, PhD, the director of finance at Midwestern University and chair of AACOM’s Council of Student Financial Aid Administrators.
“What we do is we kind of illustrate to them, if you had $5,000 extra this quarter and you use that to go to Europe, here’s how much you really paid for that Europe trip by the time you pay it off over a 10-to-30-year repayment at the interest rate,” she says.
In this vein, figuring out how much debt you’ll have and working out how much you’ll be paying in interest is another important first step to financial health in medical school, says Sharon Howard, the director of financial aid for the West Virginia School of Osteopathic Medicine (WVSOM) in Lewisburg.
“The major thing that they need to think about is how much it’s going to cost them by the time they get it repaid,” she says. “Just because they borrow a dollar today doesn’t mean that’s what that money is actually costing them.”
Kantrowitz agrees and gave this example: A $100,000 loan at 6.8% interest paid back over 30 years will ultimately cost the borrower of about $235,000. “The total interest exceeds the amount you borrowed,” he says. Whittle the repayment term down to 10 years, and the borrower will only pay about $138,000—or more than three times less interest.
“There is a tendency to spend money because you can and to borrow to the limit. But the purpose in going to medical school is to get the degree,” Kantrowitz says. “It’s not to have a penthouse apartment.”
For many former students following a 30-year repayment plan, Kantrowitz says, every dollar they spend while living on loans ultimately costs them $2. “You’re effectively paying twice as much for it. So before you spend student loan money on anything, whether it’s an apartment, a gadget, a car, double the price and ask yourself, ‘Would I still buy it at twice the price?’ Because realistically, that’s what it’s going to cost you.”
Another day older and deeper in debt?
Howard says students often overborrow because they anticipate landing a job with an institution that will pitch in to repay their loans.
“Medical students need to do well in school to have more access to grants and scholarships.“ Patel of Bankrate.com
“That is one reason it is somewhat difficult to keep student borrowing to a minimum,” she says. “because all they see is down the road, where a hospital is going to offer them a big package of salary and loan repayment. So they aren’t too worried about how much they borrow now.”
Ali H. Abdallah, OMS III, of the Touro College of Osteopathic Medicine in New York City, anticipates having close to $300,000 in student loan debt upon graduation. He would like to go into primary care, and says that with the primary care physician shortage in the U.S., he hopes that support and loan repayment programs for primary care doctors will become increasingly common in the future.
“I’m on the optimistic side,” he says. “I believe there’s going to be more support for medical students because it’s going to reach a breaking point where physicians can’t sustain themselves. It’s already occurring. I’m hoping that the support is going to be there.”
On the flip side, financial planner Julie Murphy Casserly, author of The Emotion Behind Money, cautions medical students against counting on loan forgiveness or a high-paying job, even if their chances of landing them are high.
“So many people in our society today believe that if they get that job with the big salary, that will fix all their cash-flow problems,” she says. “And that can’t be further from the truth because once you get the bigger salary, you actually wind up increasing lifestyle, and you typically just have more problems if you don’t put a plan in place.”
Once students wrap their heads around how much money they’re going to need to borrow, they can make smart decisions about the types of loans they get, Kantrowitz says.
“They need to borrow federal first because the federal loans are cheaper,” he says. “They are going to save you the most money, and they have the most flexible repayment terms, especially if you’re going to end up at a place like NIH where you might be able to get upfront loan forgiveness.”
But Casserly suggests students look into alternatives to conventional loans. “Maybe you have somebody who would like to privately fund your student loans, where you can get a lower interest rate than what you can get through the normal federal programs,” she says. “That’s a creative solution because that could cut your payments down significantly.”
While it’s not an option for all students, Casserly points out that a student could borrow from a relative at an interest rate of 3 or 4% rather than the typical 6.8% rate that federal direct unsubsidized loans carry, which would benefit both the borrower and the lender because interest rates on savings vehicles are unusually low today.
Can schools help?
Students can use resources such as FinAid.org and Bankrate.com to map out their loans, start thinking about debt repayment plans, and learn the basics of how interest on a loan is compounded. Also, many osteopathic medical schools offer their own resources to help students.
“The financial aid staff does have an open-door policy, so we definitely advise students to come speak to us one-on-one before they accept any type of loans out there,” says Joseph Sanchez, the director of financial aid at University of North Texas Health Sciences Center (UNTHSC) in Fort Worth, which encompasses the Texas College of Osteopathic Medicine.
Thomas Moorman, the vice president for student affairs at UNTHSC, says university staff arrange yearly money management presentations for osteopathic medical students, during which students can ask about anything related to personal finance.
First-year student Mank says he’s been impressed by MWU/CCOM’s approach to helping students manage loans and budgeting. In fact, he says his attitude toward debt changed when he heard MWU/CCOM’s director of financial aid services give a presentation on loans and money management. One of the director’s standout quotes from the speech, Mank says, was “Live like a student now, not later.”
“Once you get the bigger salary, you actually wind up increasing lifestyle, and you typically just have more problems if you don’t put a plan in place.” Casserly, financial planner
“That has really stuck with me and kind of dictates how I spend my money each week as I’m here at school,” Mank says. In fact, he adjusted his loan amount the very next day.
Students at schools without advanced resources to aid them in budgeting, borrowing and financing their education may have to seek out those resources on their own. The Council of Osteopathic Student Government Presidents (COSGP) has compiled information on scholarships, financial aid and more. Students should know that many scholarships don’t receive enough applicants, says Jace Eichorn, OMS III, of Edward Via College of Osteopathic Medicine-Virginia Campus and COSGP’s national treasurer.
Budget, budget, then budget some more
Once medical students and premeds work out how much they will need in loans, how loans work, and which scholarships to apply for, they can look into lifestyle decisions that will allow them to accrue less debt in the first place.
The first step? Track your spending, says Jessica Patel, personal finance analyst for Bankrate.com.
“It all comes back to budget,” she says. “If you can figure out beforehand where your money is going and how much you’re planning on needing each month—if you know that you’re going to need X amount for housing, and X amount for food, and X amount for your car loan or whatever else you may have, then you’ll know in advance how much more you’re going to need and where that money for loans is going to come into play.”
Crunching the numbers before entering a program will help keep students from getting in over their heads while they’re in school, Patel says.
Sharing living expenses with roommates is another major way to cut costs, says Web publisher Kantrowitz, and medical students won’t be spending much time in their homes anyway. Living close to school can slash transit costs as well. Speaking of transit, medical school might be a good time to ditch your car if you can, says Kantrowitz, as it’s a way to eliminate multiple costs such as insurance, a car payment and gas.
UMDNJ-SOM’s Thompson employs some of these tactics. He lives with his girlfriend and walks to school instead of driving. He also keeps track of his cash flow.
“I use Mint.com as something to keep me aware of my spending and my budget,” he says. “It’s a pretty useful tool. It’ll break down all of my spending across accounts and tell me how much I’m spending on certain things like groceries or gas or anything like that.”
A more prosperous tomorrow
Budgeting and cost cutting in their training years will help students later on when they start earning a higher salary and have to plan for retirement, buying a home and saving for an emergency fund—all while juggling six-figure student loan debt.
And though carrying such a big debt can be a tough fate, medical students can rest assured that they’re investing in their future—and that they’re going into a comparatively high-paying field.
“No one likes debt,“ says David Morganstern, a certified financial planner, member of the MD Preferred Financial Adviser Network and CEO of Confluence Wealth Management. “Everyone wants to have financial freedom and to not be burdened, but a doctor’s earnings are going to be significantly above average in time. Once students get out, their lifestyle is going to start to change dramatically for the better.”
Remember why you’re in medical school—and that focusing on your studies and being a great student can also help you financially, Bankrate.com’s Patel says.
“Medical students need to do well in school to have more access to grants and scholarships,“ she says.
Mank says that, while the idea of taking on so much debt is daunting, he talked to several physicians beforehand who said going to medical school on loans was a good idea.
“I was always assured that I would be able to manage my loans whether I went into pediatrics or family practice or neurosurgery,” he says.
However, reducing debt will only leave medical students better prepared to enjoy the high salary when it eventually comes their way, Kantrowitz says.
“Once all your debts are gone, then you can start spending the money like there’s no tomorrow.” he says, wryly. “There’s a lot of freedom that comes with not owing anybody anything, and you save more money if you’re very aggressive in paying down these debts.”