Medical School Loans Viewed Like a Business Loan
I have observed that many recent medical school graduates seem to be embarrassed about their student loans. As I talk with these individuals you can see in their body language that they feel taking on approximately $200,000 in debt to get a medical degree might have been an imprudent financial decision.
In contrast, I invite you to think of your student loans as a business investment. I don’t know who came up with this, but I have heard comments from others referring to this concept. This made sense to me so I thought I would share a few statistics.
Starting Salaries and Typical Debt
‘For the sake of simplicity, I will use averages. There are many factors that can be used in this analysis. I am not going to take into account undergraduate debt or your salaries during residency. I simply want to illustrate the how student loan debt stacks up against buying a business.
The median starting salary for physicians based on a 2014 study is $279,000. The average student loan debt for 2014 was $183,000. If you will allow me to grossly oversimplify, many of you just spent $183,000 to purchase a $279,000 business profit stream.
What About Franchise Business Loans?
Let’s assume you are ready to start a business have access to $200,000 to invest in a franchise business. How would this investment compare to your medical education investment?
Here are a couple of real-world examples:
According to FranchiseDirect.com, $188,975 is the mid-cost to purchase a Subway franchise. A professionally managed Subway restaurant grosses around $400,000 a year. A reasonable expectation of profits would be to take around 20% or $80,000 as an owner while working 40 hours a week.
According to franchisegator.com, the cost to open a Fastsigns Franchise is between $151,140 and $293,535 the average of which is $222,337. Owners discretionary profit from this business is $156,983.
Keep in mind that these websites are in the business of selling franchises and have an incentive to make franchise purchases look attractive. In both cases, you may have noticed, the annual income from the investment is substantially below the cost of opening the franchise.
One way to measure the efficacy of these investments is to compare how quickly you can pay off your debt using some portion of the income provided. If you were to commit 25% of your income to debt reduction, you would pay off the Subway purchase in approximately 9 1/2 years and the FastSigns purchase in about 7 years. If you commit 25% of your starting physician salary to pay off your student loans, you would have them paid off in about 3 1/3 years. This analysis does not take into account interest rates for any of the loans. There is a good chance that the interest on your student loans would be below the interest required to borrow the money for a new franchise.
As a side note, it would be much easier for a new physician to take 25% or more of their salary and set it aside for debt reduction than it would be for the lower income franchise owners.
You Made A Great Investment in Yourself
If you follow relatively close to the averages, you are way ahead of some of the best selling franchises. You have purchased one of the most exclusive business in the world. Your business is portable, you can take it to any part of the country and exert substantial control over your daily work life. Less than 1% of the public is eligible to buy into your business. You made a good business decision, and have absolutely nothing to be ashamed of.
By the way, the business you invested in is yourself. You need to treat yourself as a real business and protect that asset. Check out our article on buying Disability Insurance while in residency.