Student Loans: Modern Indentured Servitude

When it comes to my finances, everything else besides paying off my student loans seems trivial. I mean, I am attending physician. We have no shortage of money to survive on.

Nonetheless, 6 years out from my medical school graduation, almost half of my after tax income goes to servicing my student loans. Indeed, I might have quite medicine altogether after my daughter died if not for my student loans

Given that our finances provide more than enough for a comfortable life, all other financial decisions take a back seat to my student debt. Pretty much anything I forego financially is because of student loans.

My student loans are financial and emotional albatross that weigh on me constantly, even when I am not consciously thinking about them. Currently, I am an indentured servant to the medical profession. The debt changes the relationship physicians have with their chosen calling.

Debt is a trap, especially student debt, which is enormous, far larger than credit card debt. It’s a trap for the rest of your life because the laws are designed so that you can’t get out of it. If a business, say, gets in too much debt, it can declare bankruptcy, but individuals can almost never be relieved of student debt through bankruptcy.
-Noam Chomsky

The Long Road to Freedom

I prioritize paying off my debt above all other significant expenses. This has led to some significant improvement in my student loan balance. This has tracked about like this:

Graduate from medical school: ~$285,000 principal + interest.

6 months later, interest capitalized: $330,000 principal.

Finished residency: $330,000 principal+$65,000 interest=$395,000.

Currently, almost 3 years out from residency graduation: $188,000 principal+$30,000 interest= $218,000.

So, progress is being made. On the other hand, it comes at a cost. I have avoided contributing to the economy in significant ways because of my debt.

Some are basic consumer activities which I am more than happy to forestall. These include buying newer cars, new furniture, etc. These thing bring me little to no happiness, so foregoing them is not a sacrifice. The economy might miss those purchases some, but relatively little.

These, on the other hand, are significant:

  1. Saving for retirement: Back when I was employed (W-2), I took advantage of my employer’s match and maxed out my 403b. However, now with SEP-IRA which has no match, I still contribute, but at a much lower rate than maxing out (partially because the max is so high relative to my income (>50,000). The 6.5% guaranteed return on my debt is hard to dismiss.
  2. Home ownership: we tried this, got lightly burned. We will probably rent for a total of 3-4 more years before we try and buy another house. Another significant investment in the economy delayed.
  3. Pursuing activities other than working and finances. I have to focus a great deal of time and energy on paying down debt. So much so, it sometimes feels like I am in debt residency. I read about finances, scheme on ways to increase my debt payments, etc. Sometimes, it leads to neglecting other parts of my life.

Who Cares?

A reasonable response to my hand wringing over my debt is, indeed, “Who Cares?” I am in no way living in destitution. I will, in the next 2-3 years be able to pay off my debt entirely without any real deprivation (we live on about $90k/year for a family of 3 – very comfortable).

Additionally, one could point out I went to medical school knowing what it would cost and was not forced to accept loans in exchange for education. This is also true.

Moreover, what will likely end up being a total $500,000 investment will have moved me from a childhood of living on about $50-70,000/year in today’s dollars with a family of 5 to 4-5x times that income/year. I was never going to be an investment banker, tech entrepreneur, or engineer, so it is unlikely I would have made that jump in income any other way.

If you feel these things, that is totally legitimate. I do not need anyone’s pity for my financial situation, but you might want to stop reading now.

On the other hand, if this affects a privileged actor in the economy such as I, imagine how it holds the lives of less privileged students hostage.

Paying to Play in the Modern Economy

This plays out in the broader economy. We have placed increasingly expensive layers of education in between poverty and opportunity.

This is key.

The increasing cost of education and student loans, in particular, have made opportunity only available to the wealthy and those willing to live a good portion of their lives in indentured servitude.

I want to emphasize this point: for a huge number of students the price for the access to opportunity can only be paid with student loans. They do not represent an investment with a guaranteed return, but the only the opportunity to collect.

On top of this, unlike almost any other business debt, educational debt is non-cancellable. For example, I know someone who started medical school. Her mother got cancer when she was in medical school. She was able to finish, but with great difficulty and still has not been able to start residency. But her debt keeps accumulating interest….

In any other business situation, if you took out a loan to invest in a business and something terrible happened, you could declare bankruptcy and at least get back to zero. Educational debt just sits there, continuing to accrue interest despite your inability to collect on the investment….for the rest of your life.

Medical Schools Hold Abnormal Bargaining Power

Medical schools have disproportionate power when negotiating with potential clients (students). They are the gate keepers to a prestigious and historically wealthy profession.

What bargaining power do individual students have?

The average age of beginning medical students is 23 years old. Many of them have spent close to a decade striving towards medical school admission. Every physician they know has taken on loans to become a physician, so who is going to say no?

Are the risks of being unable to repay your loans explained to first year medical students before they sign on the dotted line?

I think not, because medical schools don’t care.

As long as medical students graduate, they don’t care about their debt. They just want all four years of loan payments.

It is inaccurate to say medical students really understand what they are getting into when they accept loans. For instance, I think few understand the cost of the interest compounding while they are in residency.

Moreover, no first year medical student knows how long they will be in residency. So, it is literally impossible to know what the cost will end up being when beginning medical school.

However, no student agreeing to take on loans can understand how the yoke of student loan payments will make them feel. The way it might weigh on their lives for 10-20 years. That can only be experienced and doesn’t have a cost measured in dollars.

Still, most physicians with discipline, and some luck, can pay off the loans relatively quickly.

Student Debt will have Long Term Effects

Beyond the specifics of my or any physician’s experience is the reality of student debt becoming a giant drag on the overall economy.

As a society, we are trading a large prolonged stimulus to the higher education sector in exchange for a significant drags on future productivity and consumption.

Moreover, we have provided the education sector with a way to be almost completely cost insensitive. In the days when state and federal dollars made of the bulk of their budgets, public universities had to be cost sensitive. Now, they just increase income from students, almost overwhelmingly from student debt.

We expect the most financially vulnerable of our population (young students) to enter into lifetime binding contracts with these institutions.

Meanwhile, where are they getting most of their financial advice?

From these institutions themselves, whose main goal is to keep up their class sizes. They certainly don’t have the long term financial health of their students as their primary concern.

We have yoked an entire generation with the personal responsibility for our penchant for deficit spending.

Back to My Indentured Servitude

A colleague of mine who paid off his student loans with hard work and sacrifice told me, “I am so glad I did, it has completely changed my feeling about practicing medicine.”

He gave voice to what a lot of young physicians know: their ability to get creative, tack risks in business, and try and improve the healthcare system is hamstrung by the need to get out of massive debt.

The Hospital-Pharmaceutical Complex has been very adept at exploiting this as a way to keep a churning stream of physicians willing trade their profession for escape from financial bondage.

As for myself, we are yet to see if it turns out to be worthwhile investment. I could have been earning income and saving for retirement since my mid-late 20s instead of accruing debt. It largely depends on how long I work as a physician.

Luckily, I have found a practice arrangement that I can imagine working in for quite a while. The freedom to take a couple of months off from a particular working environment has greatly extended my working life.

2 years ago I was thinking about trying to FIRE like so many physicians and possibly switch to a non-clinical job in the process. Now, as long as I get my debt paid off soon, I can imagine a reasonably lengthy time career as a physician.

However, not all physicians are so lucky, and most non-physicians don’t have anywhere near the options physicians.

Why I Haven’t Refinanced my Student Loans, Yet.

vagaries of living with student loans

Student loans suck, I hate mine, with a passion – my wife thinks I am obsessed. Though I hate how expensive debt is, mostly I hate how it steals a certain amount of liberty from your life. Refinancing helps you save money in the long run, but it can also trap you in a job or situation that is really bad for you and your family – I should know.

Fleet Street Debtors Prison

If I had refinanced prior to my daughter dying and my partners being shitheads and had a 4000-5000/month student loan payment, I would have felt MUCH more pressure to try and stick it out.  Moving would have seemed much more risky.  At least financially, that gig was damn good.  I may have ended up losing my whole career or even my marriage for the sake of saving some interest payments over the course of several years.

I want to reiterate that I hate my student loans. In fact, after leaving that job, we sold a house, moved, and started renting.  We took what we got out of the down payment from the sale and paid down loans, 12-15% of my loan burden in one fell sweep.  That is how much I hate student loans.

why i still haven’t refinanced

That all being said, I wanted to touch on a couple of aspects of the whole student loan refinancing debate that I think are under-appreciated in some of the other discussions and with which I have personal experience:

  1. Income Driven Repayment has more options than I usually see discussed
  2. Not all physicians are anesthesiologists, radiologists, and private practice emergency medicine docs making $300-500k a year.
  3. Capitalization sucks – going off of an Income Driven Repayment plan causes all that accumulated interest to capitalize.
  4. Life is really freaking unpredictable and the federal student loan servicers are much more flexible than a traditional lending organization.
medical school and residency

Almost all of us ended up on income driven repayment (IDR) during residency.  My biggest financial mistake to date was going to one of the most expensive out-of-state medical schools.  I didn’t have to, my home state has one of the cheapest, and I got in.  I just thought it would be a better career move, and plenty of people agreed with me at the time.

As a first year attending, reading the White Coat Investor was like being visited by the Dickensian Ghost of Financial Decisions Past.

Anyway, I had and have A LOT of student loans.  When I graduated medical school, I signed up for Pay As You Earn (PAYE) rather than Income Based Repayment (IBR), which allows for a lower monthly payment.  There is another REPAYE, which is even lower (point 1).  Over the course of three years of residency, I accumulated about $65,000 in interest. True, only about 33,000 of that could capitalize under PAYE terms, that is till a lot new interest earning debt.

first year attending

If had gone off of PAYE at the time I started my first job, I would have had a $4000/month payment and $33,000 of newly capitalized debt (point 3).  Instead, I stayed on PAYE, my payment was about $1500 and that interest DID NOT capitalized.

My student loan burden (capital + interest) is about $150,000 less than when I graduated.  I am earning in the $200-250k range as a family doc (point 2) and not $500k/year.  Because of that, I still qualify for PAYE, and I still have about $35,000 in interest that has not capitalized.

Obviously, I payed much more than minimum.  I am not saying that paying the minimum is a good idea.  What I am saying, is that even though I was still paying $5-10k/month in student loan payments, I had the flexibility to pay less if something unexpected happened.  That flexibility is worth something.

Now, someone who likes math more than I do could probably make a educated guess on where the benefit/cost break even point is on refinancing versus interest capitalizing.  I still have never done that. I probably should.

But, Mousie, thou art no thy lane [you aren’t alone]
In proving foresight may be vain:
The best laid schemes o’ mice an’ men
Gang aft a-gley, [often go awry]
An’ lea’e us nought but grief an’ pain,
For promised joy.

Robert Burns, To a Mouse, on Turning Her Up in Her Nest With the Plough, November, 1785

LIFE IS UNPREDICTABLE (point 4)

The flexibility of IDR was priceless when I had to walk away from my job for the health of myself and my family.  Being able to only pay $1200/month for a couple of months on my loans was a huge relief.

As it was, arranging and paying for multistate move, paying rent and a mortgage for 3 months simultaneously, getting licensed in a new state, and arranging my current traveling doctor gig was stressful enough.

If I had been juggling a $5000/month payment, I might have folded.   Inertia and fear might have kept me miserable in my old job.  It could have cost me my life.  Physician suicide is not a rare thing these days.  How do you put a dollar sign on that?