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Debt Management

Debt is now a ubiquitous feature of medical education. Many medical students and physicians have amassed college indebtedness, which, when added to the sizable loans acquired from friends, family, banks, states, and the federal government during medical school and residency, accumulate into seemingly incredible sums that frequently influence career decisions. The percentage of students in debt at graduation has increased to 85% for private medical school graduates and 86% for public medical school graduates, according to data from the Association of American Medical Colleges 2007 Medical School Tuition and Young Physician Indebtedness. The June 1, 2007 issue of Medical Economics reported that approximately 20% of physicians aged 34 or younger have debt of $400,000 or more, and among those aged 35-39, almost 30% have at least $400,000 of debt.

Debt can be divided into personal and business categories. Loans for business purposes should not be viewed negatively, because they are frequently required to establish or enlarge a practice and are generally necessary to equip and open an office. This loan debt is needed to capitalize your practice or business venture and is tax-deductible. However, these startup loans are not the principle focus of this review. Here, we are looking at the personal debt created during the years before you enter the workforce. This debt can be attributed primarily to medical school loans, home purchases, and credit card debt. As a general proposition, debt service obligations should not exceed 30–40% of your family's gross annual income. Although start-up costs for your practice may be high in the beginning, they should decline over time. If your debt reaches 60–65% of your income, Medical Economics warns, "(Y)ou're on thin ice."

In order to eliminate your debt, it is important to list your loans and their interest rates, deductibility, and terms. In general, it's a good idea to pay off your loans with the highest interest rate and the shortest term and those personal loans from friends and family first, unless there are extenuating circumstances. Personal loans are usually not of a structured nature and can destroy important relationships unless quickly repaid. Secured bank loans, most commonly acquired to finance a home, property, car, boat, or other asset, have clearly defined terms, including amount borrowed; duration of the loan; interest rate, whether fixed or variable; and predictable tax consequences. For example, the interest on primary or secondary homes is tax-deductible, whereas that for financing a car or boat generally is not. Therefore, home mortgage and home equity loans will be the last debts eliminated in your debt management plan. Car loans are an inevitable occurrence, but loans for luxury items, such as boats, should be carefully weighed as you gauge your debt tolerance. Debt tolerance is a concept that describes your ability to repay your loans and debts and includes your psychological comfort level.

Unsecured loans come in many varieties and degrees of risk for misuse and abuse. In today's world, bank and merchant credit cards are the most common. Unfortunately, lenders seem to encourage the use of credit cards by providing unrealistically high loan limits. Although the interest rates for these convenient cards are often enticingly low at the beginning of their use, they may subsequently exceed 18% annually. Without question, debt balances on credit cards should be kept to a minimum. It's a good idea to transfer balances from high interest accounts to lower rate cards. Several Web sites provide comparative information about credit cards to help you find the best current deal.

Federal Educational Loans are now easily obtained and widely used. These may be subsidized, not requiring initiation of repayment until training is complete, or unsubsidized, whereby interest accrues during training and will be capitalized. Loan consolidation can help you lower your college and medical school debt. Information about consolidating Stafford Federal Loans can be found at www.staffordloan.com.

Finally, if your debt begins to overwhelm you, you might seek assistance from credit counseling/debt negotiation companies. But these companies must be carefully evaluated, as not all are legitimate. The Federal Trade Commission (FTC), the nation's consumer protection agency, offers valuable assistance at their Web site. The FTC and some state Attorneys General have sued several companies that called themselves credit counseling organizations because they deceived consumers about the cost, nature, and benefits of the services they offered and even lied about their nonprofit status.

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