Reality of Dentistry After Graduation

i've said it before and i'll say it again...

oh how fortunate i will be if i can go to my state school and only be forced to borrow ~$75,000. $75,000 worth of debt seems so reasonable to manage, whether I find a job right out of school with a take home of $50,000 or $80,000.

Rezdawg said:

Aphistis, do your scenario with 300K loan and 5.75% interest rate.

Click to expand...

As long as you can find an investment with more earning power than 5.75%, you will be MAKING MONEY in the long run.

Check out this thread to see how the med students have made lots of money doing this: http://forums.studentdoctor.net/showthread.php?t=106400

Rezdawg said:

Aphistis, do your scenario with 300K loan and 5.75% interest rate.

Click to expand...

Gladly. You should be more careful about the things you ask for.


STUDENT LOAN REPAYMENT: REDUX


Scenario 1: $300,000 in student loan debt paid in 10 years

$300,000 in student debt principal, for 10 years, locked in at current 5.75% APR = $3561.05 per month

Total interest paid on this loan = $127,326.00

After repaying loan debt, loan payment money is placed in a Standard & Poor index fund, which has yielded an average 30-year annual return of 10.77%.

$3561.05 monthly, for 20 years, at 10.77% annual yield, with all dividends reinvested = $3,065,940.13

So, in this scenario you've earned $2,211,288.13 in interest on $854,652.00 in capital, for a total of $3,065,940.13


$3 million is a pretty nice pile! But, just for the hell of it, let's take a look at what would happen doing it the way I suggested. I bet that, like Rezdawg predicts, the advantages of a longer repayment period disappear with the increased loan burden, right?

Right...?


Scenario 2: $300,000 in student loan debt paid in 30 years

$300,000 in student debt principal, for 30 years, locked in at current 5.75% APR = $1750.72 per month

Total interest paid on this loan = $330,259.20

Difference in interest between Scenario 1 & Scenario 2 = $202,933.20

Difference in monthly loan payment between Scenario 1 & Scenario 2 = $1810.33

Put that difference into the same Standard & Poor index fund as above, and you get...

$1810.33 monthly, for 30 years, at 10.77% annual yield, with all dividends reinvested, less $202,933.20 in additional loan interest = $4,778,283.20

So, in this scenario you've earned $4,329,544.40 in interest on $651,671.99 in capital, for a total of $4,778,283.20

Final difference between Scenario 1 & Scenario 2 = $1,712,343.07



So, by taking the long-term repayment this time, you've spent $202,980.01 less on investmental capital (which STILL, by itself, completely offsets the additional interest paid on the 30-year loan) and earned $1,712,343.07, or 55.9%, more on your investment. In case you missed it the first time, that's 55.9%. That's right, not only do the advantages of extended repayment fail to disappear under these circumstances, per Rezdawg's prediction, but they TRIPLE in value.

Personally, Rezdawg, if you want to unload your loans as soon as possible, that's no business of mine. Lots of people would rather have the peace of mind of knowing they're out from beneath their debt burden, and if you're one of those, go for it and don't let anyone stop you. But if you're going to sit around here giving people terrible investment advice, and then refusing to back down when confronted about it, you'd bloody well better not be surprised when someone else argues in rebuttal, with detailed supporting explanation, that on this particular topic, you're so full of crap it's a wonder you haven't yet aspirated any. G'night.

well, let me first say that aphistis is right -- it's really simple math. if you can invest money at a higher yield than at the rate you borrowed... you want to extend those loan repayments out as far as possible.

HOWEVER, it is also important to remember that you may not always be able to find that investment that yields 6%, or 8%, or 9%, or whatever you need it to be to "make a profit". A downturn in the stock market, or a depression in the housing market and you could be in trouble. But, in the long run, you will likely come out better if you don't make silly investments, whether it be in real estate, public companies, or something else.

if it was that easy to do, then people would just borrow money, invest it at a higher rate, and play with the profits. now while some people can do this if they are lucky, most cannot. like all things... if it sounds too good to be true, it probably is.

but at the very least, aphistis does remind us of the GOLDEN RULE of investing/borrowing. If you can invest your money at a higher rate than you can borrow it at, then borrow as much for as long as possible. this keen financial awareness can be very important. micromanagement of your funds is critical!

for instance, as an undergraduate financing school, i have about $12,000 in a savings account and $15,000 in various savings bonds (purchased primarily in the late 1980s). my mom was cashing my bonds in to pay for my rent. when i got wind of this i was stunned. i quickly explained to her that my bonds were drawing ~5% interest while my savings account is currently only drawing about ~1.5% interest. therefore, there's absolutely no reason to use my bonds when i can use my savings account.

make sense?

organichemistry said:

i've said it before and i'll say it again...

oh how fortunate i will be if i can go to my state school and only be forced to borrow ~$75,000. $75,000 worth of debt seems so reasonable to manage, whether I find a job right out of school with a take home of $50,000 or $80,000.

Click to expand...

Looking at your amazing GPA's I think you will have no trouble at getting into your state school! Congrats!

Aphistis, you got it wrong buddy...check your numbers again.

300,000 loan over a 10 year span at 5.75% hands you a $3293.08/mo. payment....NOT "$3561.05 per month" like you quoted. Therefore, stop lying to the audience.

Secondly, its convenient that you are now switching to an 11% rate of returns compared to your more realistic rate of 6%.

Like I said, you are assuming that everything will be gravy over the 30 years and that the stock market will exactly mirror what has taken place over the last 30 years. If I could read into the future and comfortably assume the next 30 years will be golden, then I agree with you. Unfortunately, nobody can guarentee that. You never know what can happen and that is the exact problem of your situation. That is what I stated the first time we went around. You seem to still be living in a fantasy world. I will set you up with my dad. He is a psychiatrist and Im sure I can pull some strings and get you 20 bucks off. With that 20 bucks, you can turn it into $67.38 in 30 years.

Good night.

organichemistry said:

HOWEVER, it is also important to remember that you may not always be able to find that investment that yields 6%, or 8%, or 9%, or whatever you need it to be to "make a profit". A downturn in the stock market, or a depression in the housing market and you could be in trouble.

Click to expand...

Exactly, why f*ck around when you can deal your own cards? Why make investment decisions that could benefit you 30 years from today...a benefit that will barely make a difference at that point in time when youve already lived your life and have a handy check coming in because of your retirement plan.

The point of Aphistis' posts (very good, one of the few good posts on this board actually) is that getting debt free asap is not always the most financially prudent move. Which is an important, and repeat-worthy point.

Debts that have long-term low interest rates are not dire, and due to inflation, same amount of money is worth less in the future.

mvs04 said:

The point of Aphistis' posts is that getting debt free asap is not always the most financially prudent move. Which is an important, and repeat-worthy point.

Click to expand...

True, but by his method, you are forced to not only wait 30 years, but to hope that everything falls correctly....and for what? An amount that will be chump change compared to my retirement account.

Sorry, I have a life to live from when Im 30-60.

Rezdawg said:

True, but by his method, you are forced to not only wait 30 years, but to hope that everything falls correctly....and for what? An amount that will be chump change compared to my retirement account.

Sorry, I have a life to live from when Im 30-60.

Click to expand...

he's not talkign about exiting life for 30 years, just that extending debt repayment into 30 years can be a very financially prudent move. His number-crunching was an example how instead of how money invested that yields a high return is superior to money spent in paying off low-interest debt. I mean it's just a common sense truth in money management...

if you have a discretionary 1000 dollars this time frame, you can

a) put it into debt repayment, saving yourself x% in interest payment

or

b) invest it, and yield yourself y% return, you would obviously choose b if y > x.

It's not like this is some financial planning for the future, it's just a demonstration of how your comment of "By the way, business tip...extending your repayment over 30 years is a bad move." definitely is wide off the mark.

mvs04 said:

he's not talkign about exiting life for 30 years, just that extending debt repayment into 30 years can be a very financially prudent move. What is this "30 year wait" that you bring up? Wait for what?? How does making a minutiae monthly debt payment prevent you from livign your life?

Click to expand...

You are already taking money away from your current income to pay for your retirement. Why take more money away from your current income to barely supplement the money that will be in your retirement? And, it ONLY supplements it under the condition that the next 30 years will be like the previous 30.

I'd rather let my retirement fund take care of my future and live years 40-60 with more money to play with. Money that can go towards business ventures that can yield you better profits.

I understand the concept...its simple...but, IMO, its not worth it. You can do better, its not all about who has the extra penny when you are 70, there is more to life than that. Enjoy your money while you have the ability to enjoy it.

Rezdawg said:

You are already taking money away from your current income to pay for your retirement. Why take more money away from your current income to barely supplement the money that will be in your retirement? And, it ONLY supplements it under the condition that the next 30 years will be like the previous 30.

I'd rather let my retirement fund take care of my future and live years 40-60 with more money to play with. Money that can go towards business ventures that can yield you better profits.

I understand the concept...its simple...but, IMO, its not worth it. You can do better, its not all about who has the extra penny when you are 70, there is more to life than that.

Click to expand...

Re read my earlier post. You're missing aphistis' point and you should re-read the posts. He did not talk about retirement or anything of that sort, he's simply saying you can end off monetarily better off if you extend your repayment schedule.

mvs04 said:

Re read my earlier post. You're missing aphistis' point and you should re-read the posts. He did not talk about retirement or anything of that sort, he's simply saying you can end off monetarily better off if you extend your repayment schedule.

Click to expand...

I read what he said...and you CAN do so IF the past predicts the future. Or, you can take your money and control it the way you want to by either putting it in business ventures or by buying your wife a prada handbag or Hermes belt. At the very least, you have control over your money and not depending on the past to make your money for you 30 years down the line.

I understand the concept and the philosophy...its simple. Its just not something that I think is wise to do because Im not Ms. Cleo.

Rezdawg said:

I read what he said...and you CAN do so IF the past predicts the future. Or, you can take your money and control it the way you want to by either putting it in business ventures or by buying your wife a prada handbag or Hermes belt. At the very least, you have control over your money and not depending on the past to make your money for you 30 years down the line.

I understand the concept and the philosophy...its simple. Its just not something that I think is wise to do because Im not Ms. Cleo.

Click to expand...

well, now you've completely departed from what you spoke of earlier (pay off debt asap). You make a valid point that the return % cannot be divined.... however, consistent positive returns on your money has been de facto the way of the financial world ever since the financial world has existed! It is the very nature of the beast. Short of civilization collapsing, there is always positive returns to be had, whether one specifically can attain it, and to what degree, is up to the individual.

mvs04 said:

well, now you've completely departed from what you spoke of earlier (pay off debt asap).

Click to expand...

How so? Im still saying to pay off the debt. When you do that, you will have much more freedom to get involved in life's other opportunities. Thats been my point all along.

Rezdawg said:

How so? Im still saying to pay off the debt. When you do that, you will have much more freedom to get involved in life's other opportunities. Thats been my point all along.

Click to expand...

yes but your advocacy of pay off debt asap is simply not valid. Talk to any financial planner worth a darn, they don't speak of debt-free, they speak of debt-management.

which then again brings up the points of:

1) being in low-interest debt and having a long repayment term does not impinge upon life's freedoms

2) using the money that would be spent in repaying low interest debt often is better spent invested.

You're free to spend/repay/invest money however you see fit, but the problem lies within the promotion and dispromotion of money-management strategies. One can act unwisely, but when one presses others to do the same, bad stuff.

mvs04 said:

1) being in low-interest debt and having a long repayment term does not impinge upon life's freedoms

Click to expand...

Agreed. Thats exactly why I have no problems taking out 300K. I know I can still live the life I want to live while paying back the loan.

mvs04 said:

2) using the money that would be spent in repaying low interest debt often is better spent invested.

Click to expand...

Again, Im not saying that if you invest it over a 30 year span, that it will not be worth it. It could or it could not. Im saying that instead of putting an extra few thousand away each month (when you already have retirement money getting put away), you can make better use of your money. Why sit and hope for a time 30 years later when you can actively make use of the money during the most useful and productive time period of your life?

Rezdawg said:

Again, Im not saying that if you invest it over a 30 year span, that it will not be worth it. It could or it could not. Im saying that instead of putting an extra few thousand away each month (when you already have retirement money getting put away), you can make better use of your money. Why sit and hope for a time 30 years later when you can actively make use of the money during the most useful and productive time period of your life?

Click to expand...

This is where you missed the point. It's not EXTRA money that you'd just invest away, this is money that you would other wise HAVE to use to repay your debt (or add to your monthly payment). You have this extra amount because you would extend your loan repayment to 30 years instead of say, 15 or 10, hence allowing you a lower monthly payment. This difference is the money under discussion. Oh and since when did investing money necessarily mean you can't touch it for 30 years? Anyways, this topic is done, PM me if you want to continue this.

mvs04 said:

TOh and since when did investing money necessarily mean you can't touch it for 30 years?

Click to expand...

I got your PM...

If you touch it before 30 years, then the whole plan goes to waste. This plan only works at the end of a certain time period.

mvs04 said:

This is where you missed the point. It's not EXTRA money that you'd just invest away

Click to expand...

No, it is. Instead of continuing that payment, you can spend it on something that could turn out better.

Rezdawg said:

Aphistis, you got it wrong buddy...check your numbers again.

300,000 loan over a 10 year span at 5.75% hands you a $3293.08/mo. payment....NOT "$3561.05 per month" like you quoted. Therefore, stop lying to the audience.

Click to expand...

Yup, that's right. I'm not sure what I did, but I definitely miscalculated that particular figure--though I'd contend it's less an attempt at "lying to the audience" than a simple, honest mistake of the sort that happen when supporting an argument.

Of course, given that you appear to be so manifestly unfamiliar with with the concept of supporting your arguments, I suppose I'll have to cut you some slack.

Secondly, its convenient that you are now switching to an 11% rate of returns compared to your more realistic rate of 6%.

Click to expand...

Yeah, it is convenient. It's also reality. The first time I ran this for you, I fudged the numbers way down so I could make my point without making you look embarrassingly ignorant. You wouldn't listen, so this time I slapped you with the real investment market. Sorry 'bout your luck.

Like I said, you are assuming that everything will be gravy over the 30 years and that the stock market will exactly mirror what has taken place over the last 30 years. If I could read into the future and comfortably assume the next 30 years will be golden, then I agree with you.

Click to expand...

No, I'm showing you what has happened for every single 30-year period since the Korean War. There's a big difference, but at this point I'm seriously questioning whether you can appreciate it.

Unfortunately, nobody can guarentee that. You never know what can happen and that is the exact problem of your situation. That is what I stated the first time we went around.

Click to expand...

No, what you stated the first time around is that extending your loan repayment is a bad move. Since then, the only support you've come up with is that if a debilitating accident happens, your investment strategy may not come to fruition.

You seem to still be living in a fantasy world. I will set you up with my dad. He is a psychiatrist and Im sure I can pull some strings and get you 20 bucks off. With that 20 bucks, you can turn it into $67.38 in 30 years.

Good night.

Click to expand...

I want to reemphasize what I said before, because the more I hear out of you the more firmly I'm convinced that you desperately need to hire someone to protect your personal finances from you.

Otherwise, I think I'm finished here. My original goal was to debunk this notion that paying off your student loans immediately is the financially smart thing to do after graduating, and I think I've thoroughly accomplished that. Beyond that, it's out of my hands. Remember what's said about leading horses to water?

This thread is very interesting. I just thought I would add a couple of points.

Although aphistis is right on the money (pun intended) with his analysis, he did neglect to take into account that you will be taxed on your investment gain. So if you did make an 11% annual return on your invested money, keep in mind that Uncle Sam would be keeping at least 10% of the profits. This percentage all depends on what tax bracket you are in, whether the gains are long or short-term capital gains, etc. That would reduce that gain to which aphistis refers, but not enough to render his analysis incorrect.

Another point is that the stock market is not the only place to put your free money if you choose the 30 year repayment method. Those funds could also be used to purchase or start-up a practice. Although I am still years away from owning a practice, I have to believe that you could do better than an 11% annual return on your invested capital if its in your practice.

Overall, this is an interesting thread. I think the main point that bears repeating is that there are many investment vehicles (stock market, investing in a practice, etc.) that could be more profitable than paying down your loans immediately. But if paying down your loans immediately allows you to sleep better at night, then by all means do it.

Aphistis is correct that repaying over a 30-year period can be a much better decision than repaying over 10 years. You really can't dispute that fact. I worked as stock broker for a couple of years, and, the assumption that he'll earn 10.77% is dead-on accurate. There have been roughly thirty 30-year investment periods since the end of the depression, and the market, over those periods, has returned nearly 11%. His S&P fund will track the overall average performance of the market, and is a CONSERVATIVE play in the market. He could do a lot better in both up and down years if he played a little more active role in his portfolio, which I'm sure he would, but to illustrate his scenario, he chose a perfect example.

As for taxes, there are plenty of non-taxable retirement options to tuck that money away into. So that money won't be taxed (until much, much later), and Asphistis' numbers are spot on. Using Asphistis' numbers, that $1810/month is well within the yearly limits of many tax sheltered retirement plans (see your accountant for details).

If you choose the 10 year route, you'll have to find that extra money to put into your retirement program. With a monthly payment around $3300/mo, you'll be hard pressed to match an additional $1800/mo into your retirement plan like you can under the 30 year option--now you're spending $5100/mo on debt and retirement leaving you even less discretionary income. That's going to make it more likely that you'll actually see some "curveballs" that will ruin your "plan" than when you are only speding $3300/mo on the same to items.

Honestly, the only reason I can see for paying off your debt in 10 years is to afford yourself the peace of mind that you don't have to worry about school debt anymore. But, I'm betting that most of us will jump right back into that debt to buy a second home, upgrade the practice, etc. I think most Dentists end up being in GOOD debt the rest of their lives.

ncalcate said:

This thread is very interesting. I just thought I would add a couple of points.

Although aphistis is right on the money (pun intended) with his analysis, he did neglect to take into account that you will be taxed on your investment gain. So if you did make an 11% annual return on your invested money, keep in mind that Uncle Sam would be keeping at least 10% of the profits. This percentage all depends on what tax bracket you are in, whether the gains are long or short-term capital gains, etc. That would reduce that gain to which aphistis refers, but not enough to render his analysis incorrect.

Another point is that the stock market is not the only place to put your free money if you choose the 30 year repayment method. Those funds could also be used to purchase or start-up a practice. Although I am still years away from owning a practice, I have to believe that you could do better than an 11% annual return on your invested capital if its in your practice.

Overall, this is an interesting thread. I think the main point that bears repeating is that there are many investment vehicles (stock market, investing in a practice, etc.) that could be more profitable than paying down your loans immediately. But if paying down your loans immediately allows you to sleep better at night, then by all means do it.

Click to expand...

You're absolutely right, the picture is much more complicated than what I described with taxes, inflation, & other considerations, but that'd expand the scope of the discussion way beyond what I was willing to take time for. Plus, like you said, the take-home message remains the same anyway. Thanks for chipping in!