Five Steps to Financial Security for Fellows

The first few years after medical school can seem financially suffocating for young physicians. Who can think about saving for long-term goals, such as buying your first home or planning for retirement, when you’re struggling with day-to-day bills and the equivalent of a mortgage in student loan debt? The good news is that fellows are earning more. The 2010 Postgraduate Fellowship Compensation Survey, produced by the American College of Healthcare Executives in Chicago, found that nearly 75% of fellows surveyed earned between $45,000 and $60,000 per year. Just 4% of those polled said they earned less than $40,000 a year, while 15% said they were paid $60,000 or more. (See “What Do Fellows Earn?” below.)

Indeed, fellowship compensation has increased over the last 5 years; median base compensation rose 14% to $49,800 in 2010, from $43,604 in a similar survey conducted in 2006. “[T]here also has been a noticeable improvement in fringe benefits that are fully paid versus those [that are] partially paid. The improvements are most noticeable for medical, dental, and disability insurance,” according to the study’s authors. “For example, 43% of fellows in 2010 received fully paid disability insurance when in 2006 only 29% received this benefit.”

Still, even students at the high end of the fellowship pay scale must find the means to service enormous debt. The average educational debt for the Class of 2010 was $157,944, according to the Association of American Medical Colleges in Washington, D.C. (That’s just an average—students in certain medical specialties graduate with debt of $200,000 or more.)

“In the coming years, a lot of people will still be paying off their student loans when it’s time for their kids to go to college,” said Mark Kantrowitz, the publisher of financial aid information Web site finaid.org, in an interview with The New York Times.

On top of 6-figure education loans, many graduates have substantial high-interest credit card debt. On average, older graduate students (aged 30 to 59 years) had outstanding credit card balances of $12,593, according to a 2007 Nellie Mae survey, the most recent data available. That’s almost twice as much as their younger counterparts aged 22 to 29 years, who carried average credit card debt of $6479.

So what’s a struggling fellow to do? Don’t panic. By taking a methodical approach to managing your spending and your debt, you can get on the road to financial security. Just follow these 5 steps.

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In the coming years, a lot of people will still be paying off their student loans when it’s time for their kids to go to college. ”

Choose the Right Repayment Plan

If you’re one of the lucky few young physicians with enough income to cover your monthly expenses and your debt payments, with money to spare for saving, choose a student loan repayment program with the shortest term. The standard federal loan repayment program extends payments out for 10 years. (Extended and graduate repayment programs allow graduates to expand payments up to 30 years.) If you have higher-interest private loans, pay the minimum owed on your federal loans and concentrate on making larger payments to pay down the higher-interest debt first.

But if you’re neck-deep in debt, including high-interest credit card debt, and you expect your current meager salary to increase steadily over the next decade, consider enrolling in an income-based repayment (IBR) program. Graduates pay 15% of their income over 25 years, and after that the remaining balance (if any) is forgiven. (You can cut that down to 10 years if you work in public service, including jobs in government and nonprofit 501(c)(3) organizations, under the Public Service Loan Forgiveness plan.)

In 2010, the federal rules were changed to make the IBR rules more equitable for married couples. Previously, the formula that lenders used to calculate IBR payments did not combine a couple’s total student loan debt, leading to monthly payments that were up to twice the amount 2 single borrowers would have to pay, particularly if both spouses had advanced degrees. For married couples who file jointly, lenders now use a formula that factors in the couple’s total outstanding federal student loan debt and adjusted gross income to come up with the minimum monthly payment. Find out if you’re eligible for the IBR program by using this calculator: ibrinfo. org.

Can’t Afford Your Lifestyle? Change It

Many graduates in their late 20s have enjoyed living on their own for many years. When the time comes to finally start repaying those big monthly education bills, however, some may find themselves unable to make ends meet and be forced to make hard decisions about their living arrangements.

Moving back home with one or both of your parents can seem like a drastic—and humiliating—step for a young physician to take, but eliminating monthly housing costs can allow you to concentrate all your disposable income on repaying your high-interest debts. But don’t just show up on your parents’ front porch, laundry in hand. Instead, create a “rapid debt-reduction plan” that plots out how long it will take you to whittle down your debt to a manageable level, and sets a goal for when you plan to get back out on your own. (Vertex2.com, a site devoted to Microsoft Excel spreadsheets, has an excellent debt-reduction worksheet—based on the “snowball method” of paying the highest debts first— that can help you track your progress at bit.ly/15FuL.)

If moving home with your parents is not an option (or at least, not a palatable one), consider taking on a roommate to share your monthly household expenses, and perhaps even your commuting costs.

Once you’ve got the right loan repayment plan in place and you feel comfortable that you can afford your monthly household expenses, it’s time to focus on emergency savings. Yes, emergency savings is even more important than saving for retirement at this point. The fact is, small and even big financial crises—such as a major car repair or being unable to work because of accident or injury—do happen to people your age, and you need to plan for it.

Save for a Rainy Day, Even When It’s Pouring

Conventional wisdom calls for saving between 3 to 6 months of monthly expenses in an emergency account, but even this amount can seem daunting when there are so many other pressing bills to pay. So start small—and stick with it. Open a high-interest online savings account and start socking away, say, $25 to $50 a paycheck, by having the funds automatically deposited each pay period. Then once a year, or sooner if your cash flow improves, increase that amount steadily until your savings would cover at least 3 months of expenses. Using an online account and cutting up your debit card to avoid easy access to the funds will help you avoid the urge to splurge.

Not Saving for Retirement Yet? Start

With your short-term financial cushion in place, it’s time to think about long-term savings. Younger workers are notorious for putting off saving for retirement early in their careers. In fact, a full one-third of workers aged 25 years and under do not contribute to employer-sponsored retirement plans, and only 4% of young workers are maxing out their workplace retirement plans, according to a recent survey by the tax-information publisher CCH Inc.

This is especially true for younger physicians and couples struggling to repay enormous student loan debt. Most do not realize, however, that even meager retirement savings in the first few years after medical school can contribute substantially to their retirement nest egg down the road. By the time retirement rolls around, they will have missed out on a lifetime of compounding.

The retirement age for those born after 1960 is 67, so a 27-year-old fellow has 40 years to build a nest egg before he or she is eligible for full Social Security benefits. For example, socking away $5000 a year over 40 years, with a relatively conservative 6% return, will generate savings of $871,667. But if you postpone retirement savings in just that first year alone, your account would end up with $51,429 less.

Again, if you’re struggling financially and even saving $5000 a year pre-tax seems too steep, try at the very least to contribute enough to get your employer’s 401(k) matching contribution. It doubles your return on savings before you even begin investing.

Thinking About Raiding Your Nest Egg? Stop

If you have already begun contributing to a retirement savings account—on your own with an individual retirement account (IRA) or a Roth IRA, or through your workplace’s defined contribution plan, such as a 401(k)—the temptation to tap into the savings to make ends meet may be strong. Nearly 1 in 5 Americans admitted raiding their retirement accounts during the past 12 months to cover household expenses, according to a recent report by consumer finance site Bankrate.com. Even worse, 60% of young workers cash out their 401(k) when changing jobs.

If you are considering tapping your retirement savings, don’t! After getting hit with taxes and penalties, you’ll end up with roughly 70 cents on the dollar. And as with the example above, spending even a few thousand dollars in savings early in your career can have dire consequences when you’re ready to retire. In fact, some may find themselves unable to retire because their savings fall short of their goals. Instead, search for other ways to cut back on spending and leave your tax-deferred retirement account alone.

By following these steps, and sticking with them—no matter how tough the going gets—you will shore up your finances, pay down your debt more quickly, and potentially save yourself thousands in interest costs.

Terri Cullen is managing editor of Physician’s Money Digest, a personal finance, financial news, and practice management resource exclusively for physicians. She has covered personal finance and financial planning topics for more than 15 years as an author and former writer and columnist for The Wall Street Journal.

This edition of Oncology Fellows is supported by Genentech, a member of the Roche Group.