A few years ago, I was talking to one of the young gastroenterologists at our hospital who told me about how he had listened to a financial pundit who emphasized the importance of being debt-free and therefore dedicated his finances to paying off his student loans early. He had two young children at home and his wife did not work. He was proud of his recent debt-free accomplishment – I didn’t have the heart to tell him that he had just made a big financial mistake.
Student loan debt is an enormous problem for physicians. Currently, 70% of graduating medical students have student loan debt, averaging $228,000 per physician. After medical school, physicians must complete 3 – 7 years of residency and fellowship, depending on the specific specialty. Resident income is relatively low, with first year residents averaging about $67,000 per year. Most physicians do not complete their training and enter the attending physician workforce until they are in their early 30’s. The temptation to pay off student loans early once earning an attending physician income can be very strong. But I will argue that physicians should not make extra payments on those loans in an effort to be debt-free.Instead, physicians should be debt-smart.
Why not pay off student loans early?
Let’s take my gastroenterologist colleague as an example and go through the reasons why paying off his student loans early was a mistake.
- He is an employee of a not-for-profit hospital. I asked him about PSLF, the public service loan forgiveness program, and he said he had heard about it but didn’t know if he was eligible. PSLF was signed into law by President Bush in 2007. To be eligible, people with Federal Direct student loans have to work full-time for 10 years for a government or non-profit organization, make 120 on-time monthly payments on the loans, be on an income-driven payment plan, and submit a PSLF certification form every year. At the end of the 10-year period, the Federal government will forgive the remaining balance of the loan. Because he wasn’t aware that he qualified for PSLF, the gastroenterologist had not submitted annual PSLF certification forms to the government. The result was that his 6 years of residency and fellowship at a non-profit hospital could not be counted toward PSLF. Had he submitted those certification forms during residency and fellowship training, the government would have forgiven the remaining balance on his loans after 4 years of being an attending gastroenterologist at our university medical center (qualifying as both a state government university and a non-profit hospital). No one should never pay off student loans early if they qualify for PSLF since it reduces the amount of the loan that the Federal government will ultimately forgive.
- His wife does not work outside of the home. Federal Direct student loans are repaid on an income-based repayment plan, meaning that the higher your annual income, the higher your monthly payments. If you are married filing jointly for Federal income taxes, then the income-driven repayment plan is based on you and your spouse’s combined incomes. If your spouse does not have an income, then your monthly student loan payments will be lower, leaving more loan principal that can be forgiven under PSLF. Since my gastroenterologist colleague’s wife did not have an income, he could have had a sizable amount of his student loans forgiven under PSLF.
- He has two children. College education is expensive and tends to increase in cost at a rate higher than inflation. Vanguard estimates that in 18 years, a 4-year education at a state-supported public university like the Ohio State University will cost $290,000 and a private university like the University of Notre Dame will cost $860,000. The only way most parents can come up with that kind of money is to start saving early and make regular contributions to their child’s college education fund. This allows the magic of compound interest to work for them and amplify the amount of money in that education fund. In order to have $290,000 to pay for four years of a college education at a public university in 18 years, a parent would need to make an initial investment contribution of $16,000 for a child born today and then contribute $465 every month for the next 18 years with an average annual return of 8%. That works out to a total of $60,640 in contributions but compound interest will turn that into $290,000 in 18 years. The longer you delay contributing to a child’s college education fund, the less benefit you get from compound interest and consequently, the more money you have to contribute to cover the cost of college. Because the gastroenterologist prioritized paying off his student loans early, he had not yet started to contribute to his kids’ college education funds.
- He might have been able to deduct the interest on the student loan… maybe. You can deduct up to $2,500 of annual student loan interest on your Federal income tax returns if you meet income thresholds. For a married couple filing jointly, the modified gross annual income limit is $170,000 for the full deduction and $200,000 for a partial deduction. Most gastroenterologists earn more than $200,000 a year but many primary care physicians earn considerably less than $200,000 and can qualify for the student loan interest deduction.
- He is not adequately funding his retirement. A recent post on the website The White Coat Investor noted that 25% of physicians retire with less than $1 million in net worth. A million dollars may sound like a lot but net worth includes all of your investments plus everything you own, like your house and your cars. Even if you retire today with $1 million in investments, using a 4% per year withdrawal strategy, that only yields an annual retirement income of $40,000 per year from your investments. Add in an average Social Security benefit of $24,000 per year and you end up with a total annual retirement income of $64,000. Far too many physicians have to either accept a less expensive lifestyle in retirement or work beyond their desired retirement age because they have not saved enough during their working years. Once again, compound interest works its magic best the sooner you start to invest in your retirement account. Assuming an average annual return of 8%, investing $10,000 per year will result in $1.8 million in 35 years. Investing $20,000 per year will result in $3.7 million in 35 years. Investing $30,000 per year will result in $5.6 million in 35 years. By putting money into paying off his student loans early, the gastroenterologist did not have enough money to maximize his contributions to his 403(b) retirement plan.
- But wait, isn’t it better to pay off the loans early so you can avoid paying all of that loan interest? Not necessarily. If y0u have an extra $10,000 at the end of the year, you are almost always better off in the long run putting that money into a 401(k) or 402(b) rather than making extra payments on a student loan. Even assuming a loan interest rate of 8% and an annual investment return also of 8%, you are better off putting the money in a 401(k) or 403(b). The reason is that those 401(k) or 403(b) contributions reduce your taxable income and thus reduce your marginal income tax rate, thus reducing the amount you have to pay the Federal government in income tax. In addition, the 401(k) or 403(b) contributions reduce your modified adjusted gross income, thus reducing your monthly student loan payments on an income-based repayment plan. Factoring in the loan interest, the investment return, today’s income tax effects, and the income tax eventually paid in retirement when taking 401(k) or 403(b) withdrawals, I calculate that the total financial benefit to putting $10,000 into a 401(k) or 403(b) instead of making early payments on a student loan to be $23,000 after 20 years in favor of the 401(k)/403(b) contributions. If you participate in PSLF, then that amount could be even greater by resulting in a larger loan balance to be forgiven at the end of 10 years.
What does being “debt-smart” mean?
In an ideal world, we’d all be debt-free. But education (especially medical education) costs a lot of money and that education can be a tremendous investment that can pay huge dividends in earning power. Education loans can be healthy debt if the education gets you a job with a high annual income. Education debt can also be unhealthy debt if it does not result in a job after college that more than pays for the cost of eduction loans. Doctors have a high enough income that student loan debt is almost always healthy debt. Be sure to make your full monthly repayments every month but do not pay them off too early, particularly if early repayment causes you to neglect other aspects of financial health such as:
- Have an emergency fund with enough money to cover 3 – 6 months of living expenses.
- Contribute to your 401(k), 403(b), 457, or SEP plan.
- Contribute to your children’s college education plan.
On the other hand, avoid unhealthy debt, particularly early in your career. Ways to avoid unhealthy debt include:
- Always pay your credit cards off every month to avoid high interest charges.
- Don’t buy a more expensive car than you can really afford and then face high car loan interest rates.
- Don’t buy a bigger house than you can afford.
- Make an annual budget at the beginning of each year and then stick to it.
- Be adequately insured including home, automobile, term life, health, and disability insurance (and probably an umbrella insurance policy for good measure).
Physicians spend years training for one of the hardest jobs in the world. But that training doesn’t include learning about financial health. All too often, we rely on someone’s talk show, podcast, or website to tell us how to manage our finances, including student loans. Understanding how those loans uniquely fit into one’s personal financial health is a responsibility for each of us.
January 6, 2026
