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Physician Loans: Understanding and Overcoming an Epidemic : Plastic and Reconstructive Surgery


The cost of medical education and monetary momentum necessary to begin solo practice have increased significantly.1 As a result, physicians have more routinely found themselves in greater and greater debt early in their careers.1–4 Unfortunately, financial education is severely lacking in both medical school and residency educational curricula. Thus, many plastic surgeons face significant financial strain, despite their high income. This is also a likely contributing factor to the decreasing percentage of plastic surgeons, and all physicians, seeking solo practice, with a concomitant rise seeking employed positions5 (Fig. 1).

Fig. 1.:

Physician loans are widespread and generally come in two varieties: student education loans and practice loans. Successfully managing these loans is imperative for a physician’s financial and overall well-being.

The complex machinations driving this increasing medical debt are difficult to define. Outside of physician advocacy groups including PlastyPAC,6 they also remain largely outside of the control of individual surgeons. Thankfully, the knowledge and strategy to effectively manage and overcome these debts are completely within the control and grasp of all plastic surgeons. Furthermore, financial well-being is being established as a critical piece of overall physician well-being that is too commonly overlooked.7 Thus, efforts to improve the overall financial well-being of our field to mitigate burnout, moral injury, and declining patient care are imperative.7

We therefore seek to define the current state of physician loan burden, focusing on the two main contributors of education and practice loans. Furthermore, we aim to provide straightforward and evidence-based guidance for plastic surgeons to effectively manage their physician loan burden.

METHODS

The Association of American Medical Colleges administers a national graduation questionnaire survey annually to all graduating medical students, with 16,630 students responding in 2020.8 The associated report contained cumulative data from previous annual reports; this was used to provide information on debt across school type and various demographics, such as sex, race, ethnicity, and socioeconomic background.

Public and private resources for physician loans were investigated to provide a broad understanding and representation of the current state of options available to physicians in general. In addition, experts in the field, including financial advisors and physician finance experts, were interviewed. This particularly permitted disclosure of specific details related to practice loans with certain banks and companies. These data were accrued and tabulated for presentation within this article. Measures of central tendency were used as necessary.

RESULTS

Types of Debt

By graduation, the education debt, which is the sum of medical school debt and premedical debt, for a medical graduate with such debt is roughly $200,000. Of all graduates, 73 percent reported having education debt, which is overall decreased from 2012 (86 percent of reported education debt).8 Medical school debt makes up the majority of education debt, with the 4-year cost of attendance for the class of 2020 at over $275,000 for over half of all medical schools. In addition, for 19 schools, this 4-year cost of attendance was greater than $350,000.8 Premedical debt was stable over the studied period and, in comparison, was far lower than medical school debt. Premedical debt consisted of only 9 percent of the total amount of education debt, and only roughly one-third of medical school graduates reported having premedical debt. In other annual surveys, it was found that of all premedical education costs, 40 percent was paid for by scholarships/work-study, 41 percent by family/personal resources, and 18 percent from loans.8

Noneducation debt occurred fairly infrequently, with only 18 percent of graduates with any type of nonmortgage, noneducation debt. This included four general categories: credit card debt, car debt, residency relocation loan, and other debt. The median amount for noneducation debt was only $10,000. Only 4 percent of graduates had a mortgage, with the median mortgage debt being $150,000.

Naturally, graduates with increasing types of debt on average had a higher medical school debt. For example, graduates who only had medical school debt averaged $171,000 in debt, while those with both medical school and premedical debt averaged $212,000 in debt.

Trends in Cost/Debt

When adjusting for inflation using the Consumer Price Index, the median education debt level from 2015 to 2019 was stable at roughly $200,000 per year. However, over the past decade, the median cost of attendance has grown at a faster rate than median debt levels at a rate double that of inflation. In comparing public and private schools, the cost of attendance for public schools has increased at a higher rate. Whereas the education debt level has been roughly stable over the past several years, the percentage of graduates with debt has been decreasing. Since 2013, the percentage of graduates with debt decreased from 86 percent to 73 percent. This is thought to be attributable to either an increase in the number of graduates with scholarships, a change in federal loan availability, or higher levels of self-reported family income.

Debt Differences by Type of School

In general, medical schools were broken down into public versus private, which was roughly a 60:40 ratio. Private medical school graduates were slightly less likely to have education debt in comparison to their public medical school colleagues (71 percent versus 74 percent in 2019). However, when they did have education debt, private medical school graduates tended to have a larger median education debt ($215,000 versus $200,00 in 2019). Interestingly, over the past decade, the compound annual growth rate of median education debt was 2.3 percent, with the growth rate higher for public school debt (2.9 percent versus 1.9 percent).8

Debt Differences by Demographics

Several demographic factors were analyzed to determine their relationship with debt level. Between men and women, although the median education debt was the same ($200,000), there was a slightly higher percentage of men with education debt than women (74 percent versus 72 percent); however, the cause for these differences was unclear.

Family income levels were also examined with relation to median education debt and percentage of students with education debt. Students with family income in the top 5 percent (income above $206,000) had a significantly lower likelihood of having education debt (only 55 percent of these students) in comparison to the remaining students (range, 79 to 91 percent with debt). In addition, when these students had education debt, they tended to have a lower median education debt ($189,375) in comparison to the remaining students. They also tended to more often (44 percent) have their education debt financed with personal/parental/familial funds, and were less likely (14 percent) to have scholarship compared to the remaining students.8

DISCUSSION

Often overlooked, the impact of debt is taking an increasingly significant toll on both financial and overall physician well-being. Those medical professionals with higher debt show greater emotional exhaustion, depersonalization, and burnout potential.9 Debt, often initially viewed as an afterthought, can quickly become an overwhelming presence in the lives of many young physicians whose primary focus should be on providing the best care to their patients.

Rising tuition for education and expense costs associated with practice start-up combined with less favorable loan repayment terms can throw new and even experienced physicians into a downward financial spiral. Alarmingly, a study by Kibbe et al. found that 32 percent of academic surgeons would not recommend their career choice to their children or medical students because of the financial burden accumulated during training.10

Debt, the majority of time, is a necessity for medical students and residents, who ultimately develop a somewhat laissez-faire attitude toward amassing loans, a condition at times playfully described as debtabetic neuropathy. Most physicians who enter medical school are financially illiterate and relatively naive when it comes to evaluating accruing liabilities or debt-to-income ratios. Making the choice between additional loans, and foregoing medical education, becomes simple. Once graduated, new doctors soon realize the weight of large financial responsibility on their shoulders, and it becomes a game of catch-up.

Finding the right strategies to become financially independent can seem daunting. Obviously, starting early cannot be stressed enough, but finding time to learn about budgeting or loan repayment pathways during medical school and residency can seem unrealistic. However, no one is immune to financial mistakes, but poor pecuniary decision-making early on can create challenges later in one’s life. Education and practice loans place a large burden on physicians, and plastic surgeons are no exception. In a study by Gray et al., surgeons with debt were found to have a greater average debt burden than the average debt outlined in the annual graduation questionnaire.11 Luckily, the strategies to manage these loans successfully and achieving general financial well-being are similar. Furthermore, surgeons have long been recognized to make extraordinary personal sacrifices to excel in their profession, and by far the majority will apply this characteristic toward management of their debt load.12 Financial knowledge is an important aspect of being an effective surgeon, regardless of the career path chosen, and can ultimately be an empowering aspect of a young physician’s psyche.13

The first step toward managing debt and working toward overall financial independence is education. There is no limit to the resources available that cater to financial education specifically for physicians, by physicians. These include books, such as The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing, and various blogs. There is also no shortage of hard loan-related data available.

How plastic surgeons use this information and take an active role in their financial well-being is difficult to answer. Should it be up to the individual physician to learn about financial health? Or should medical schools expand their curricula to involve further training on these topics? Perhaps even in-service examinations, which are correlated with board passing rates, may be an appropriate place to include some basics on financial knowledge and planning.14 A sponsored dinner during residency is hardly adequate to prepare physicians for some of the future financial obligations they will inevitably face. In addition, unlike many other professions which begin retirement savings and planning from the beginning, many residents postpone pursuing such avenues, perhaps because they do not yet feel that they have truly begun their practice. However, in doing so, they are missing out on opportunities most clearly available to them during their training period. For example, the amount one can contribute to a Roth individual retirement account is based on the modified adjusted gross income, and often physicians are unable to contribute once they begin their own practice.15 Indeed, when considering balancing education debt with retirement savings, disability insurance, and the costs of starting a practice, most residents believe that more financial planning and debt management education is needed during residency.16

One approach that is being taken by a select group of medical schools is to offer “free tuition.” Most require a demonstration of need, or competition for, an allocated number of spots. It does highlight the recognition by many for-profit institutions that the financial obligations with regard to medical education factor significantly into the lives and decisions of those choosing to pursue medicine as a career. In addition, New York University, for example, after offering free tuition, demonstrated in their 2019 applicant cycle a 47 percent increase in applicants.17 There was also a concomitant increase in underrepresented minority applicants—indeed, the graduation questionnaire survey also demonstrated that students in these demographics reported a higher median education debt amount ($230,000) and a higher likelihood (91 percent) of having education debt, making free tuition obviously more appealing.8,17

Ultimately, the amount of money borrowed in the end may not necessarily be as important as the way in which this debt is managed. For that to happen, a foundation of basic fiscal understanding should be a fundamental element of medical education and possibly included as a topic in licensing examinations. This emphasizes that paying off debt is the most important thing that one can do to boost financial well-being and advance toward financial freedom. Each $1 you use to pay off debt is $1 that your net worth increases.

A full financial curriculum is outside the scope of this article. However, the senior authors (J.D.F. and M.Y.N.) describe here their personal strategy for debt management and paydown. Next, we address debt paydown and student loans. There are many methods; however, the one that will be described is commonly referred to as the snowball method. The steps involved in the snowball method are outlined in Table 1.


Table 1. -
The Snowball Method of Debt Paydown









Step Description
1 Create a list or table of all of your debts (including mortgage)
2 Decide how to prioritize them (e.g., highest to lowest interest, lowest to highest amount)
3 Rearrange list so that they are in the determined order
4 Make lowest required payments on all debts
5 Take the remainder of the monthly amount budgeted for loans and any extra discretionary savings from that month and pay it to the first loan on your list
6 Keep doing this until that loan is paid off
7 Once first loan is eliminated, repeat for the second loan and so on

Put simply, organize all of your debts into a priority list based on interest rate, amount, or any other variable. Pay the minimum for all loans. Pay all extra funds to the first loan on the list until it is gone. After that, move on to the next loan. Each time you eliminate a loan, you will be adding that required monthly payment to the rest of the allotted monthly amount for debt paydown, increasing the size of the snowball and the speed at which you pay off your debt

Regarding loan forgiveness through the Public Service Loan Forgiveness program (which is applicable only to federal education loans), this is an option if you work or plan to work at a qualifying governmental or section 501(c)(3) institution. Making minimum payments for 10 years working for such an institution (including years in residency if continuous minimum payments are made) will result in the remainder of loans being forgiven by the government. Roughly one-third (34 percent in 2019) of all indebted graduates reported interest in Public Service Loan Forgiveness.8 In general terms, if you have a longer training period and/or have a low income-to-debt ratio (<1), the Public Service Loan Forgiveness likely will be a good option for you. If neither of those are true, paying off your debt by means of an approach like the snowball method is likely your best option.

Although beyond the scope of this discussion, refinancing of loans is also an option for both federal and private loans in an effort to secure a lower interest rate. This may be done as many times as the borrower likes to continually secure lower and lower rates. Regardless, the most financially prudent method after refinancing is still to pay off the debt as quickly as possible to minimize interest payments and increase cash flow.

Although debt is clearly commonplace on finishing medical education, even once training is completed, additional loans may be necessary to start a practice. Whether starting a practice or acquiring an existing practice, loans may be used for purchasing inventory and equipment, obtaining commercial real estate, or simply funding working capital or refinancing existing debt. The major factors to consider when deciding the type of loan needed include how quickly the funds are needed, the flexibility of the payment plan, the length of the loan, and what collateral may be provided. There are several factors to consider before applying for a practice-related loan. The first step is to check one’s credit report and scores, as this will determine which loan options are available. Then, for new practices, one should develop a business plan that details the startup costs and profit projections. For established practices (whether already owned or acquiring an existing practice), reports on profit/losses, cash flow, and growth objectives should be outlined.

The U.S. Small Business Administration provides a 7(a) loan program, which is touted as the “SBA’s primary program for providing financial assistance to small businesses.”18 The types of 7(a) loans are beyond the scope of this discussion; however, the basics are that the loans are financed through intermediary lenders and guaranteed by the U.S. Small Business Administration, and thus these loans are subject to the lending guidelines of both the lender and the U.S. Small Business Administration. The loans typically are characterized by low interest rates with long repayment terms—because of these positives, they are highly desired and competitive to obtain. Naturally, the competitive loans will require a reliable borrowing background and steady income. For more information on U.S. Small Business Administration 7(a) loans, the official U.S. Small Business Administration website details the types, typical loan and interest amounts, processing times, and more (https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans).18

Bank loans are a relatively inexpensive option, with providers such as Bank of America, Wells Fargo, and U.S. Bank among the most commonly used.19 Banks will also offer specialized products for physicians, and also can factor in student loan debt, which is common to physicians who have just completed training. In contrast, nonbank term loans are provided by private, online-based companies that function similar to the lending arm of a bank. These offer options such as lines of credit, equipment financing, and term loans. These loans typically have interest rates higher than the aforementioned options, but they tend to be a little more flexible as their sole purpose is for streamlined business loans. Short-term loans, more specifically, are relatively quick and easy to be approved for; however, they come with higher interest rates, shorter repayment terms, and do not typically come with plans tailored toward medical professionals.

Lastly, business lines of credit and equipment financing are separate, more specific options when financing a practice. A business line of credit is analogous to a business credit card, with the lender approving a line of credit at a determined amount. The physician will only pay interest on the funds borrowed, and thus this provides a quick option with flexible repayment. Equipment financing, in contrast, consists of loans that are tailored toward the purchase of specific items (e.g., laser). A benefit is that the equipment itself functions as collateral, thus lowering the risk to lenders and decreasing the need for a down payment.

The idea that debt has a profound impact on medical education, practice management, medicine, and society as a whole needs to be recognized. There is obviously no one-size-fits-all solution for the current problem facing students or emerging attending physicians in this country, and undoubtedly a combination of efforts from banks, universities, policy makers, students, and others will be needed to address the issue of educational debt.

For now, the choice to become a physician, for most, will come with a cost, and that cost will continue to rise. Costs of medical training and practice establishment, especially in certain specialty tracts, are escalating. This, coupled with worsening repayment structure, is not an equation for financial success and overall well-being. Traditional “education” as we know it is evolving, and new platforms for higher learning are ever increasing. The digital classroom has become widely accepted, and growing pressure to lessen the financial obligation of education will continue to mount. Until then, the impact of debt is a problem reaching well beyond the medical community. Student loan debt is now the second highest consumer debt category, behind only mortgage debt, and higher than both credit cards and auto loans.20 This trend continuing would lead to an epidemic for current and future generations of physicians.

CONCLUSIONS

Financial education is a necessity for plastic surgeons at all levels. Financial well-being is a critical component of overall well-being, with debt constituting an integral component of financial health. The two major forms of debt facing plastic surgeons are educational and practice debt. Unfortunately, the amount and frequency of these debts remain outsized. However, through financial education and the enactment of sound financial strategies, these debts can be effectively managed, improving physician well-being and bringing the focus more squarely back on patient care.

REFERENCES

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15. IRS.gov. Amount of Roth IRA contributions that you can make for 2021. Available at: https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021. Accessed April 27, 2021.

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17. Berman J. One year after offering free tuition, applications to NYU medical school surge. Available at: https://www.marketwatch.com/story/one-year-after-offering-free-tuition-applications-to-nyu-medical-school-surge-2019-01-15. Accessed April 27, 2021.

18. SBA.gov. Types of 7(a) loans. Available at: https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans. Accessed April 20, 2021

19. Adams D. Telephone interview conducted by Arvind Manisundaram. November 16, 2020.

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