Don’t Fear The Debt!

Lately a new breed of veterinary financial guru has popped up. These folks are screaming from the rooftops that the only way to happiness is to pay off all student debt and do it as quickly as possible. Cancel your gym membership, disconnect your Internet and for heaven sakes don’t travel! Then, and only then, you will achieve nirvana. Their websites are full of testimonials from veterinarians who graduated with insurmountable amounts of debt – and paid it off in record time. Sometimes important details are omitted – like that they married a physician. Other times there are true tails of sacrifice and coupon cutting for a decade or more.  

Is debt-free the ultimate goal?

But should paying off student debt as quickly as possible be the end all goal in life? Well, if the idea of owing money and being in debt is so stressful that you have trouble sleeping at night then by all means, pay off that debt. Do it regardless of the personal cost. For most of us however, the answer is more complicated. Sometimes debt isn’t bad if it leverages our ability to live a reasonable life. As long as we manage debt carefully it can be useful. Lets consider two students Ally and Sara. 

Fearfull Ally

Ally attended a private veterinary college. Although she tried to live frugally, she graduated with $270,000 in debt. Ally accepted a job in Phoenix AZ earning $90,000. Her take home pay after taxes and deductions is  $5,170 a month. Ally is fearful of debt. She is not well versed in personal finance but reads webpages about how others paid off their student loans in just 10 years. She selects a standard repayment plan and is paying $3,000 a month leaving her $2,170. After rent, car and food payments ($1200, $400 and $250/ month) she is left with $320 a month. This is for everything else – entertainment, personal care, prescriptions, cloths, vacation, etc. Its going to be a long 10 years – assuming something expensive doesn’t happen, like her car breaks down or she gets sick! More importantly, Ally will have little chance to save for retirement, buy a home or establish an emergency fund. 

Savvy Sara

Sara also attended a private veterinary college. Like Ally, Sara also graduated with $270,000 in debt and accepted a job in Phoenix AZ earning $90,000. Sara, being knowledgeable about personal finance decides to select REPAYE, one of the income based payment programs. Her monthly payment is only $587 and in 25 years she will get loan forgiveness and walk away from the remaining debt. Sure, Sara will have to pay the so-called “tax bomb” but she is prepared. She knows that in 25 years she will owe the taxman ~$106,000. This is not a big deal. Sara invests just $273 a month in a savings account earning 2% so she will have the $106,000. Her total monthly loan related expenses are $860 a month.

Sara is not just fearless – she is smart. She wants to be comfortable in retirement. Her employer offers a SIMPLE IRA. Since her employer will match up to 3% of her salary, she deposits just $225 a month. Her employer matches it for a $550 a month investment. Sara’s IRA grows at 6.25% until retirement when she has ~$1million. Meanwhile, over the next ten years she and her significant other go on a few vacations, save for a home, establish an emergency fund and plan a life together. This is all possible because she takes home $2,140 more a month than Ally. 

Using debt to leverage life

Moral of the story? Be Sara not Ally. Ally paid off her student debt and sacrificed a lot. She woke up at 36 with no debt but little else. Sara managed her debt and leveraged a life. Notice that she didn’t just take the monthly savings and spend it that would be a huge mistake– she saved wisely. Her retirement is well planned. She has money saved for a house. Her emergency fund is well stocked. She even managed a few vacations. All this is possible because Sara was financially savy and used debt to leverage her life. Sure, Sara paid a little more on her loans $370,040 vs $366,249 but that $3,791 over 25 years paid for a lot of living.

To calculate your loans under different circumstances, please visit the VIN Foundation loan simulator.

The PocketDVM – The #1 personal finance blog for veterinarians