Medical Professional Case Study

One of the first questions I get asked with every client in the medical field is around managing debt. Most people have a plan on how they want to pay down their debt, but in many cases there is a more efficient way to achieve that objective.

For young physicians, especially if someone is in residency or fellowship, it is often a great idea to go ahead and get on an income-driven repayment plan in order to start the process of qualifying towards Public Service Loan Forgiveness (PSLF). With the CARES Act that was passed in 2020, there are some key changes that I have addressed here that are really good opportunities (like possibly not having to make a payment and that still counting towards PSLF).

Fortunately, there are many different ways to pay down student loans, however the best way for you may be a little different than your friends.

These are the key issues that I find when I first start meeting with clients and discuss student loan strategies:

1. They may be on the wrong repayment plan - there are 8 different federal repayment options, and they all are a little different. Four qualify for loan forgiveness and four do not. Many people hear that they should be on an "income-based" repayment plan, however that may be the third highest repayment plan - and if your goal is loan forgiveness that may cost you significantly more.
2. Falling out of balance when repaying loans vs building savings. Everyone knows they should save money, but everyone also knows to pay off debt ASAP. So what's the right balance? Often I see people viewing it as either/or, when the reality it should be both. And the math checks out.
3. They may be able to save more money by refinancing over what you could have forgiven (or vice-versa). If we run the numbers and you could have $80,000 forgiven (after-tax) or save $80,000 in interest, which would you rather do? There are risks to both - forgiveness might not be around forever or your loans could be forgiven next year. Refinancing may have a higher payment, but you know what the future looks like (from a payment standpoint).

As you can see, these are just a few areas that bring up many additional questions. There's no strategy that works 100% of the time. It's different for everyone. We all have our own goals, objectives, and ways of doing things, which makes working with a good advisor (shameless plug) that much more important!

In this example, let's use a hypothetical couple that I meet during their residency or fellowship training. The only thing I ask of my clients if we are to work together, is that they work hard to tackle all of the action items we lay out, ask questions along the way, and truly want to understand how all these financial things work and fit together. Quite frankly, most physicians are smart enough to do y of these things on their own. They are also smart enough to recognize that having a coach is a really valuable asset, and they like having a second set of eyes on things. Someone to also take the emotion out of their financial decision-making.

Michael Jordan was a great basketball player, no one can dispute that. But would he have won 6 Championships without Phil Jackson?

Let's assume in this hypothetical example that these folks have been do-it-yourself-ers up to this point. However, they don't find a ton of joy in worrying about all these things, and they realize their time is better used with their family and doing other things. In many cases, young physicians want to start working with an advisor because things are starting to get real from a financial stand point - about to finish up residency, confused about the future of student loan forgiveness programs, want to buy a house, need to consider getting disability insurance to lock that in before training is over, and to this point they have heard a bunch of conflicting thoughts on finances. It comes down to people just wanting more clarity and confidence with their finances. They key is - that you have an open-mind, a willingness to learn, and want to think outside the box.

As we start to discuss finances, I begin to understand how people think about money - the emotional side of things, which is the main reason behind decision making. Once we organize the data and understand where they were at today, that gives us a clear path on where we need to go from there. From those early conversations, I knew the student loans just felt like a huge burden to them, like the anchor on their ship. So that's where we started.

Now this couple is going into private practice, and that really helps guide the conversation to which direction we need to go. If they were going to have loans forgiven, then we would potentially need to save money for a huge tax bill down the road (about $125k after 20 years once we did the math). If we assume that is their plan, after paying that tax bill, that means they would have about $100k-$150k of loans forgiven. Given the type of loans they have, and the interest rates associated with those loans, that gave me a clear indication of what we need to compare to see if refinancing their loans would actually be a good decision. 

In conjunction with that, we also knew we had to be saving for a house purchase once they moved on from residency. Let's say they had a goal of putting $50,000 down after renting for the first year, and buying about a $500,000 home (so 10% down). That means that at a minimum, we need to be saving close to $5,000 per month for a year in order to hit that goal (plus be able to pay some closing costs potentially, furnish the house, do some minor updates, and still try to have some money left over as a cushion). 

One of the things we set up in order to automate their savings, and automate their spending, was a cash flow system (not a budget). Most people have their direct deposit go to their checking, they pay their bills and fund their lifestyle, pick a number and move that to savings, and might do some money to an investment account or retirement account because they've been told they're supposed to. That works for a few years, but as life gets more complicated, you won't realize how inefficient it is until it's too late. When I taught this system to them, it took a little trial and error, a few tweaks along the way, and having to change what they had been accustomed to from the past, but in almost every case it works incredibly well. Some clients have called it "life changing".

We covered every single aspect around their finances. The fun stuff like investing, retirement, rates of return, buying into their practices, tax diversification strategies (really important for medical professionals), estate planning, employee benefits, etc. We also discussed the "not as fun stuff" like asset protection strategies. Protecting their investment in themselves, protecting their futures, and protecting everything they have worked hard to build. It can be a cruel world out there sometimes, filled with creditors and predators, and what experience has taught me, is that those things happen when you least expect it. You can chase rates of return all you want, but if you haven't protected your assets, all you have done is invested for someone else.

1. My clients often end up saving more money over time with the cash flow system. The best part is that people don't even realize how much they saved until they look at their saving account.
2. After discussions on buying a home, many of my clients end up doing the physician loan program through their bank which allows them to put as little as 0% down. This gives clients a ton of freedom and flexibility because they can get into a house sooner, and keep plenty of cash on hand. It also allows people to buy their furniture with cash, home updates and renovations with cash, and still have money left over for their emergency fund.
3. I often have clients who are able to lower their student loan payments by thinking a little outside of the box, and if they save that extra money and invest it conservatively, they could add over tens and potentially hundreds of thousands of dollars to their balance sheet. All while having more certainty around the future of their student loans.
4. Early on many couples have some philosophical differences around money, but after 12 months of coaching we can easily get on the same page and work as a team to hit their goals. That gives clients so much confidence not only in themselves, but also in each other, and their futures.

^{All scenarios and names mentioned herein are purely fictional and have been created solely for training purposes. Any resemblance to existing situations, persons or fictional characters is coincidental. The information presented should not be used as the basis for any specific investment advice.}