MEconomics, Part Two: The Long Reach of Med School

Part Two of this series on physician compensation and my personal bottom-line addresses where all the difficulties begin:  with medical school debt.  Let's walk through the process of accumulating educational debt and estimate whether the published averages tell the whole story.

ASSUMPTIONS

First, a few elements of my educational history that need to be mentioned up front:

• I entered medical school with no undergraduate debt.


• I was lucky enough to go to a public medical school--the University of California, San Francisco--which means my education debt is much less than it would have been if I had gone to a private medical school.


• I extended medical school from 4 to 5 years in order to spend an extra year taking electives in advanced pediatrics, obstetrics, rural medicine, and inpatient medicine as a test of my vocation for family practice. Most people will not choose to extend medical school in this way, but I have no regrets at having done so. 

Second, the financial aid package I got in medical school was not the best-case scenario for a medical student. A couple of reasons:

• Until I turned 30, I was required to submit financial information from both my parents in order to be eligible for grants/scholarships. I decided not to pursue this information from one of my parents for a number complex personal reasons. Once I turned 30, I was eligible for grants on the basis of my own financial information alone, so my last two years of school were funded more favorably than the first three years.


• There was one year in which I was not eligible for subsidized Stafford loans, which was the only source of funding I qualified for until I turned 30.  Therefore, the relative ratio of subsidized to unsubsidized funds in my loan portfolio was less favorable than it would be for most medical students. (A discussion of subsidized versus unsubsidized Stafford loans follows.)

Finally, the following numbers are, by necessity, approximations because a) UCSF does not keep archives of their historical tuition rates on their public websites, and b) I can't find my tuition bills for the years in question (1996-2001).  The following estimates are pretty accurate, because I know how much debt I had when I graduated.

COST OF MEDICAL SCHOOL BY YEAR

Total loan amount:  $93,500.00.

As this table shows, I graduated with $93,500.00 in debt, about $34,000 of which was subsidized and $59,500 of which was unsubsidized.  

What is the difference between these two types of loans?

• Subsidized:  Interest rate on the money borrowed is forgiven during the time the borrower is in school and for a 6-month grace period after graduation.
• Unsubsidized:  Interest accrues on this portion of the debt during the time the borrower is in school and during the 6-month grace period after graduation, during which time no payments are due.  

Which leads me to the subject of accrued loan interest....

LOAN COSTS OF MEDICAL SCHOOL DEBT

All of the loans described above carried an 8% annual interest rate, which is a lot higher than interest rates are right now, thanks to a higher federal Prime rate during my medical school days.  

Because the unsubsidized portion of my loans were accruing an annual 8% beginning on the day each loan was taken out, the total accrued interest on my loans was approximately $14,280.00.  I say approximately because I don't have the world's most sophisticated loan amortization calculator at my fingertips, but this is pretty close to the truth.  

Initial loan amount + Accrued interest = $107,780.00

BUT WAIT, THERE'S MORE

So far, I've been talking about the loan amounts I was granted under Federal student loan programs.  The maximum loans permitted under these programs covered my tuition, books, and a preset estimate of living expenses.  At the time I was in school, our financial aid office estimated that cost of living--assuming shared living quarters--would be about $800/month.

Now, I went to school in San Francisco between 1996-2001.  You might recall a little thing called the tech boom that happened in the Silicon Valley/Bay Area during those years, which had the effect of driving up prices of just about everything, including housing, transportation expenses, and a lot of other elements of a student's budget you can imagine.  Financial Aid's estimated student budget didn't change at all, however.

Some of my classmates might have squeaked by on the $9,600.00/annum budget, but most of them did not.  Instead they got cash infusions from their parents, or took out private loans to cover shortfalls.  I succumbed to the latter solution.

Private loans are issued by banks, are unsubsidized, and charge not only a higher interest rate but also a loan origination fee.  They are the only other option to medical students, once the student has exhausted their Federal loan maximum for the year.

What did I borrow?  Over the last two years of med school, $19,000 at 12%.  Why did I need the money? Largely for transportation costs to attend rotations outside the Bay Area (Santa Rosa, Fresno, Salinas). It would have saved money to restrict my rotations to San Francisco, but I knew I was interested in rural family practice and San Francisco isn't....rural.

(Parenthetical note:  our financial aid office really should have taken into account the cost of parking tickets in the typical student budget.  Parking in San Francisco is notoriously tight and traveling to and from different hospitals strained the limits of the most accomplish parking-space detector.  A medical student is not permitted to leave wards every two hours to move her car, so one of the sacrifices of learning clinical medicine is the occasional $25 parking ticket.  These really add up.)

Total private loan cost with accrued interest:  $22,120.00.

WE'RE NOT DONE YET!  CREDIT CARD DEBT

I'm not proud of the credit card debt I racked up during medical school.  Who would be?  But it is a common phenomenon among medical students and is totally avoidable with good budgeting and realistic expectation, neither of which I had back in the closing years of the 1990s.

What did I charge up?  Vacations, dinners out, books to satisfy my ravenous reading habit.  Not a good idea.  I regret it, but I still consider this debt as part of the cost of my medical training.  Some will disagree with this, but I believe this debt belongs to that part of my life when I was borrowing money in order to earn a living, instead of earning one.  Here it is:

Credit card debt, at various interest rates ranging from 12-18%:  $17,900.00.

Fortunately I was able to convert this debt from credit cards to an interest free, guilt-ridden loan from the Bank of Mom, which is punishment enough for having racked it up in the first place.

OK, SO WHERE ARE WE?

On the day I graduated from medical school, I had the following debt to show for my five years:

• Loans: $93,500.00
• Accrued interest $14,280.00
• Private loans/interest $22,120.00
• Credit Card debt $17,900.00
• GRAND TOTAL $147,800.00

Just to put this total in perspective:

• It is far less than it would have been if I had gone to a private medical school.  My friends who did left school with $200,000-$250,000 in debt.
• It is also far more than UCSF's estimated indebtedness for a medical student, which was closer to $50,000 in the literature they disseminated.  I have already described the reasons why my indebtedness was greater (5th year, grant eligibility, parking tickets), but I would argue that the average medical student rarely achieved the estimated indebtedness published in UCSF's literature.
• It is enough to buy a house in some small towns, and enough for a 20% downpayment on a decent condo in most cities. 

OPPORTUNITY COST OF MEDICAL SCHOOL

Money is one cost of medical education, opportunity is another.

Opportunity cost, as I understand it, refers to the cost of not choosing an option, such as attending medical school.  Opportunity cost may also represent an opportunity gain if the choice in question is an expensive one, such as financing medical education.

Of course, there is an element of the imponderable in calculating opportunity cost.  When it comes to medical education, most people assume the opportunity cost is trivial compared to the future earning potential a doctor has upon graduating.  Unfortunately, this assumption fails to examine the opportunity cost of medical education.  Rather than trying to assign a dollar amount to opportunity cost, I prefer to express it as a salary/debt comparison between two scenarios.  In my case, the opportunity cost comparison might look like this:

Scenario One:  Attend medical school, accumulated education/private/credit card debt as noted above. Graduate, attend 3-year residency.  Residency salary:  1st year $35,000, 2nd year $45,000, 3rd year $50,000.  Payments on loan are minimal during residency, and loans finally turned over to forbearance (i.e. no payments made, no penalty but interest accrues throughout residency).  Federal loans are consolidated to 5% interest rates after graduation.

• Total educational indebtedness after med school: $147,800
• Interest accrual during residency @ 5% (3 yr): $20,812
• Average annual salary during med school (5 yr) $0
• Average annual salary during residency (3 yr) $43,333
• Combined average salary over med training (8 yr) $16,250
• Total indebtedness after residency: $168,612

Scenario Two:  Do not attend medical school, obtain entry-level job appropriate for B.A. degree, earn merit raises yearly (average $2000/year).

• Total educational indebtedness after 4 yrs $0
• Interest accrual $0
• Beginning salary out of college $25,000
• Ending salary after 8 years $39,000
• Average annual salary over 8 years $32,000
• Total educational indebtedness after 8 years $0

As you can see, in Scenario Two, my average annual salary would have been twice the average annual salary in Scenario One, and my indebtedness would have been zero.  You can also see that my overall indebtedness increased in Scenario One, because I wasn't able to make significant payments on the medical school loans and finally went into loan forbearance.  In fact, you could actually adjust the average annual salary in Scenario One to account for an increase in total indebtedness to get a more accurate opportunity cost, but I am not going to do so because I think the case is clear enough.

If you are a bottom-line kind of person, you might calculate the difference between the two scenarios as the difference in average annual salary over the 8 year period of my medical training, multiplied by 8:

• $32,000-$16,250 = $15,750
• Eight-year difference = $126,000

Opportunity cost of medical education (5 years med school + 3 years residency) compared to regular employment therefore equals

$126,000 in salary differential + $168,612 in educational indebtedness

= $294,612 

Wow.

Now, you can take issue with any number of assumptions in this calculation.  Maybe I should make a reduction for the 5th year of electives I chose to take.  Or eliminate credit card debt from the calculation, because that was my own fault.  Or, reduce the average annual salary in Scenario Two, because college grads aren't guaranteed a steady job.  Fine.  Make your own adjustments but I think you'll come out with an opportunity cost well into the $200,000 range for medical education.  The amount approaches $400,000 for my friends who went to private medical schools.

OK, I can hear the arguments brewing, so you lost out on $294,612 by becoming a doctor, so what?  You'll make that back in a few years, won't you?  Quit griping.

Granted I shouldn't be griping.  My earning potential really took off after I finished residency, no doubt about that.  But I haven't recouped that $295,612 yet, not by a long shot.  I'll be addressing some of the obstacles to getting that money back in the short term in the following segments of MEconomics.

TAKE-HOME POINTS

1. Medical school is expensive, even if you get a great deal at a public school.
2. Cost of living during medical school may exceed financial aid estimates.
3. Financial aid estimates fail to include private loans needed to cover excess costs in #2.
4. Accrued interest during medical school AND residency is a significant source of medical debt.
5. Opportunity cost of medical education--simplified here as salary/debt differential--is significant and should be addressed openly before deciding to attend medical school.

Next Time:  MEconomics, Part Three: Real-Life Income--What?! 

Comments

[Tony]

Try the military. They need all types of surgeons and would pay for your entire medial school debt and give you some money to live on.

[Angela]

Does anyone know of any scholorships for a 31 year old woman going back to school to be a rural ophthalmologist? Since I work full time now, federal finacial aid is not giving me much to go on. Any information would be extremely helpful!
astebbins77@yahoo.com

[Tom]

Can anyone give the opinion about Loyola Medical school in CNMI. Can they offer 4 year MD programe without MCAT.All medical schools within the United States must be accredited by one of two organizations. The Liaison Committee on Medical Education (LCME), jointly administered by the Association of American Medical Colleges and the American Medical Association, accredits MD schools. Accreditation is required for a school's students to receive federal loans. Additionally, schools must be accredited to receive federal funding for medical education. Does anyone know they are accredited.

[drox]

I think the starting salary post-college depends greatly on your line of work. Social workers, scientists, writers and many others make in the low '20s when they graduate. And many do NOT get $2000 in merit raises every year, esp. if they work at non-profits where salary freezes are common. I know plenty of folks in their 30s who are making 45K at social service jobs they've worked for 10+ years.

[Shirah]

The US gov't assumes that your parents will be paying for your GRADUATE education until your 30? Oh, boy, wouldn't that be nice. I had to pay for my own undergraduate, but because of how much money my parents made (who would NOT be paying my education) I couldn't get nearly as much financial aid.

[Vijay]

My mind is reeling with numbers. Math & accounts were never my strong points. That's why I became a doctor. The only thing that I can say is that I'm thankful that I wasn't born in the US.
PS. Reminder to self. Be eternally grateful to my father who put me through private medical school.

[Theresa]

HalfMD: Good point. I knew med students who bailed on clinical medicine but still felt compelled to finish the MD in order to qualify for consultant/pharma/biotech jobs.

You may not feel any mobility right now, but once you've finished training you do have some flexible options, and medicine is pretty recession-proof (well, relatively) so that is a hidden benefit.

Thanks for stopping by.

[Half M.D.]

There is not only the opportunity cost. Don't forget that once you are accepted to medical school, you're generally stuck there. I am currently a fourth-year medical student. While I know I have made the right career decision, several of my classmates now want out. The problem is that all of them are now in debt of at least $150,000. None of them can lead to medical school because there are few jobs that can pay off such a hefty sum.

So while doctors will eventually make up for the opportunity cost, there is limited mobility. At least with a free BA from a state university, college graduates always have a choice of what to do next.

[MaryM]

I have to agree about the salary for a college grad. My son, the History Major, has a job at a law firm, not as a lawyer, he's making more than that with a year's experience.

Had he done something silly like graduate with a major in a technical area -IT, Engineering, Accounting- he'd be making more, and more than that in 8 years. Plus his employer would be footing the bill for a part-time graduate degree!

That said, IT and Accounting folks never get any respect and oftentimes they end up working killer hours.

[Theresa]

Good point. I was going by what psychology B.A.s were getting in the late 1990s. I think you are using current-day salaries, which is an important adjustment to make for students considering med school right now. Thanks for the comment.

[guy]

i think you are vastly underestimating what a college graduate makes. I don't think I can one in dallas for less than 40k a year, probably more than that, plus many increases.

and that's just for a college degree and at the end of that many years your salary would be substantially more than you estimate.. closer to 80k i would imagine.