Debt

Paying Off Big Debt Fast: Dentists Share Their Stories

Janyce Hamilton

Janyce Hamilton is a freelance in Naperville, Ill. Her article "Dental Implications of the Human Genome Project" appeared in the January 2001 issue of the Journal of the California Dental Association. For that article, she received the American College of Dentists/American Association of Dental Editors 2002 Prize for Dental Journalism.

Copyright 2003 Journal of the California Dental Association.

Writing out monthly checks for the financial Big Three -- student loan, practice loan, and home mortgage -- is a source of stress for many dentists. Getting out from under these burdens faster than the 10 to 30 years indicated in the repayment schedules seems impossible.

As a result -- in the opinion of one loan officer -- "Less than 5 percent of all dentists in this country are able to retire at age 65 without experiencing a dramatic reduction in their lifestyle."¹

What’s happening here?

Graduating from dental school without big student loan debt seems as likely as winning the lottery. In 2000, the national average debt upon dental school graduation was $87,605;² in 2001, another estimate placed this amount at $105,574.³ In California, the average is more like $123,000 -- an amount for which an income of $177,000 to 266,000 may be needed for comfortable repayment.⁴

Is there a better way?

This article details the debt strategies of five dentists, most of whom have paid off all student loan debt within an average of five years after graduation. Two of the five also paid off 100 percent of their new practice loans in less than five years. Revealed are their specific strategies for balancing debt reduction with careful, strategic expansion via taking on substantial new debt. The following pages lay out their vision of how to smartly pay down big debt fast.

There is, indeed, a better way, and these dentists’ stories reveal how.

Typical Scenario Upon Graduation

Because tuition is expensive (Table 1), new dental school graduates are beyond broke; they’re deeply in debt. Needing money, they contact someone like a Brad Beck, regional sales manager at Sky Financial Solutions in Danville, Calif., with two problems: high debt and minimal to no cash flow.

"I typically see a personal financial statement with little or no cash, no savings, a car and personal items of minimal value, student loans of $65,000 to $200,000, and minimal to high revolving debt (high revolving debt being greater than $35,000). It is not unusual to see some delinquencies that have a negative impact on credit scores that are generated by the various credit bureaus used by lenders," Beck said.

With the emergent cash flow crisis, the new dentist sitting in the lender’s chair has a real-life need for immediately obtaining an associate position or securing financing to start up or purchase a practice (Table 2). A significant number of dental graduates (37 percent in 2000) plan to become associates, at least for "a while" before swallowing hard and taking out another big loan to become partners or owners.⁵ Only 15 percent plan to become partners or full private practice owners right out of school, with the balance pursuing specialties, government, teaching, or undecided careers.

Making No Dent in High Debt

No sooner do new dentists put away their caps and gowns, than that heart-stopping envelope arrives in the mail: "Dear Doctor, the first installment to repay your loan is due in 45 days." Hands trembling, holding the notice, the questions they ask themselves are: Can I meet this monthly payment? How will I handle also paying on a home loan or a practice-acquisition loan?

"I remember getting the notice a year ago," 33-year-old John E. Willardsen, DDS, said from his Redlands, Calif., Spanish Mission home. "My deferment was over, my grace period was up, and they had my current address."

After graduating from Loma Linda University School of Dentistry in 1997 and completing the intense 3 1/2-year oral implantology education program there, Willardsen said he is servicing three loans totaling "something like $170,000." He’s not sure of the amount, the interest rate or terms, he said, because "I have completely blocked it out." He said he is just hoping somebody somewhere "isn’t trying to rip me off, because I would not know it. I have no time to scrutinize my loan paperwork."

Added on top on that is the $250,000 loan to open his office in Indian Wells, Calif., in 2002; a 4,000-square-foot home for $520,000; three kids; and a few nice cars.

Like many indebted dentists, depending on his mood at the moment, he expresses one of two attitudes toward debt: defiance or woe.

"Don’t be a coward, go in there and make things happen!" Willardsen offered up to those entering dentistry, in a debt-defiant moment. Later in the evening, however, a long day’s work had set in. He yawned, and admitted that dentists should also think about starting out a little slower than he did. "I dove in, and got a big house when I could have lived in an apartment for awhile."

Worse-case debt scenario?

Someone who can’t make the payments joins the ranks of those dentists who have defaulted to the tune of $9.5 million in federally guaranteed student loans⁶ and fail at establishing their dream solo practices.⁷

"But it all seems to work out," said Natasha Lee, DDS, who recently opened her own practice out of an abandoned street-level liquor store in downtown San Francisco. "Dental offices have a very low failure rate." Lee could be called gutsy, since she worked for only one year as an associate before further plunging into the red to pursue building her dream dental suite.

Fresh-faced at 29, Lee graduated from the University of the Pacific in 2000 with $200,311 in dental school debt.

"I had to consolidate my loans to a 30-year ‘mortgage.’ I now pay $1,800 per month, which is a bit better to deal with than what was closer to $2,400 per month before consolidation," Lee said.

Great visibility of the storefront location made Lee feel that throwing her cares to the wind and heaping $340,000 on top of her student loans to build out from scratch was worth it.

"People told me I was crazy. But it’s what I had to do. I could not afford to keep working as an associate dentist."

Neither Willardsen nor Lee have yet to pay more than the minimum payment on their loans. Their dream, however, is to be able to chip away at the principal once they get established -- "whenever that will be," quipped Willardsen, with a flash of dark humor.

They are young, and time is on their side.

After 10 to 20 years of practicing, many dentists are bitterly finding themselves still faced with substantial debt burdens. Second-guessing their tactics to get ahead leads to sleepless nights. The question of how to do away with debt faster than the seemingly everlasting payment schedule is a hot one. On a recent weeknight, a group of dental study club members were overheard exchanging debt stories in a pub near a dental school. "I’m haunted by my student loans," said one. "I’m declaring bankruptcy," said another.

Unfortunately, the ghost of student loans is not forgiven in bankruptcy.

Dentists second-guessing their financial plans should take heart, however, because there is a way out.

Five Dentists Who Wiped Out Debt

Here are the stories of five dentists who are taking control of their debts, instead of feeling controlled by them.

Roger N. Gilbert, DDS

Age: 38

School: Loma Linda University, 1991

Student loan debt upon graduation: $80,000

New practice acquisition debt in 1995: $150,000

Debt status 2002: Education and new practice loans: $0

Quote: "Debt Will Get You."

How he did it: Gilbert worked as an associate for the first three years out of dental school, while paying as much as possible on student loans each month. Instead of quitting work when the couple had children, Gilbert’s wife keeps working as a clinical laboratory scientist to produce income to pay down their debt. Her years of employment is also building up the 20 percent employer-matching retirement fund for their golden years. "If we get divorced, she is taking half because she deserves it," he joked.

When half of his student loans were paid off in just six years, Gilbert took out a second mortgage and paid off the $40,000 remaining so that he could deduct the interest on taxes. Around that time, he took out a new practice loan to open shop in Grand Terrace, Calif. However, he opted for a six-year repayment schedule to force himself to make large monthly payments. In the contract, he retained the option to pay it off in as little as four years without penalty.

"As an employee, I made a high income, but it was all taxable. I knew as owner, I could write off things from part of my car to a box of toilet paper," he said.

Along the way, he heeded advice from colleagues and his CPA, who fed him number projections. He refinanced his mortgage three times to take advantage of the dropping interest rates. "Each time we refinanced, we increased our payments while knocking down the length of the loan so we would have to pay it off quicker," he said. In 2000, Gilbert paid off the entire $150,000 practice loan -- an amazing five-year feat.

Strategies/Tips: Borrow less than you’d like to during college, "make do instead of buying new," and if you need to put something on a credit card, don’t get it.

Gilbert recalls his friends in college going out to bars and going on ski vacation during break. "I only took out loans for tuition, so I had no money left over. I was a desk monitor at the dorm 7 p.m. to midnight, and I cleaned up the dental lab to earn money for incidentals and food." In fact, after he married in college, he and his wife felt comfortable on their budgeted spending money of $20 for two weeks. "To this day, we never order appetizers and dessert, because we got so used to ordering the meal and splitting it during dental school."

Instead of buying new equipment all the way around when he acquired an existing practice, he decided to forego the bells and whistles. For example, he had his ripped dental chair upholstery repaired. "‘If it doesn’t make you do better dentistry or make more money, you don’t need it’ is my philosophy," Gilbert said. Likewise, when something is necessary for the practice, it is only paid for out of income generated by the practice. "I don’t put it on a credit card or take out a loan. That way, my debt remains almost nothing." Gilbert’s most recent temptation was to buy a laser. "I thought about it, but didn’t. I thought about it from the patient’s perspective, and sometimes lasers can hurt, so a shot may still be required. So to the patient, it would be no different. That answered my question of whether I would be doing better dentistry."

Steven Miyamoto, DDS

Age: 33

School: University of California at Los Angeles, 1994; oral and maxillofacial residency at the University of Medicine and Dentistry of New Jersey, 1998

Student loan debt upon graduation from dental school: Approximately $10,000

New practice acquisition debt: >$300,000

Debt status at start of 2002: Educational loans: $0; practice loan: >$200,000

Quote: "It is important to find other dentists who are handling their debt responsibly and use them as your mentors."

How he did it: Like everyone else, Miyamoto took out loans when he started dental school, but he didn’t take out an excessive amount to support a lavish student lifestyle. After graduation, when he became an oral surgery resident, he put as close to 100 percent of his modest resident salary as he could toward the loans. In 1998, only 22 percent of dental students received "loans" from family to help finance dental school;⁸ down from 67 percent in 1980. Today those percentages are probably less. Miyamoto was lucky -- his parents saved for years to send him to school and his sister, Dr. Sharon Miyamoto, a periodontist, helped him pay off the remaining part of the loans.

Strategies/advice: Start a Roth retirement account while you are a student. "When I was a student, my sister kept telling me to start an IRA, but I wasn’t thinking that far ahead at the time," Miyamoto said. "However, now I see the wisdom in starting early. A person who contributes to an IRA in their early 20s will always have more in their retirement accounts than those who start in their late 20s, even when the older dentist continues to contribute. Also, most dentists will be unable to contribute to an IRA in their first year of practice because they will be making more than the legal limit to contribute. It will be too late to start thinking about IRAs when they graduate from school.

"You can only refinance your dental school debt once, so do it now while interest rates are low. There is good debt and bad debt to take on. I tried to pay off my student loans quickly and pay off my credit card bills as they come in. In dental school, we had a guest speaker on financial planning who told us to live like students regardless of how much we make. He told us of dentists he knew who were buying expensive homes and cars far above their means, and getting themselves deeper into debt," he said.

CDA sponsored a New Dentist Conference in September just before the Fall Scientific Session with seminars on managing debt and tax planning. Miyamoto said, "One of the most important things that our CDA Committee on the New Dental Professional tries to impress upon young dentists is the need for various financial specialists. Just as we would ask the advice of dental specialists for a different root canal or extraction, we need to seek the advice of specialists in those areas of our lives where we are not experts. Every young dentist should have an accountant who specializes in dentists, a financial planner who specializes in dentists, and a lawyer who can handle dental contracts. They can advise you the best way to structure your loans, do your tax planning, your retirement planning, and handling your office 401k. More importantly, find other dentists who are handling their debt responsibly and use them as your mentors."

Miyamoto and his partner, Dr. Peter Lam, are greatly influenced by Dr. Richard Swenson’s book, Margin. He explained that the book’s message had such a profound impact on them that today they build their workday around these principles. Miyamoto explained, "Dr. Swenson is a family practice physician who found that he was working so hard on his career improving the bottom line, he lost the margin in his life. This margin is the space between the money we make and the money we spend, and the space between our personal life and our limits. We need to bring back this space -- this margin -- in our finances and live simply, and the margin in our time commitments and spend more time in our relationships. No practice where you sacrifice your family can be called ‘successful.’"

Melanie Parker, DDS, MS

Age: 40

School: University of California at San Francisco, 1993; orthodontic residency, 1997

Student loan debt upon graduation from residency: $60,000

Debt toward new practice acquisition: $375,000

Debt status 2002: Education loans: $30,000; new practice loan: Just under $375,000

Quote: "Financially, it is like jumping off a cliff when you buy a practice. It’s nice to know that others have done it and survived."

How she did it: "I paid off half my student loans in the first five years after I was done with school. I could have paid my student loans all off in the first few years after buying my practice, but I chose to instead save up $220,000 and reinvest it in the practice," Parker said. "I paid off the high interest loans first, but I continue to pay on the low-interest educational loans, because I believe I am getting a higher long-term payback by instead investing what I saved into updating, remodeling (including new sterilization system and computer system), and expanding the San Diego practice I bought."

Strategies/tips: Set goals for yourself and work on one at a time. Network with other dentists who are at the same point in their professional careers. Spend within reason. Parker said, "I drive a BMW, but I saved up, bought it preowned, and paid cash to save on the high interest. Instead of getting the three-bedroom home we want in this area on the beach that would cost us $1 million plus, we live simply in a two-bedroom apartment near the beach. Also, my husband and I help manage our apartment building, which reduces our rent to only $750 a month, allowing me to invest in my practice and pay down my debt for the time being."

Han Lee, DDS

Age: 39

School: UCLA School of Dentistry, 1991

Student loan debt upon graduation: $20,000

New practice acquisition debt in 1998: $80,000

Debt status 2002: Education and new practice loans: $0

Quote: "You may earn gazillions, but if you don’t have a thrifty attitude, you won’t get anywhere."

How he did it: Stay focused. "I worked hard as an associate for seven years to learn the business side of dentistry at someone else’s expense," Lee said. "I learned by doing repetitious work to do things right. I realized I should not hurry, and should be careful and conservative in my choices. Our goal was not going to the movies and restaurants, but paying off our debt as soon as possible.

"When I was ready, I used the practice’s brokers and sales rep to help me find a practice that was not overpriced. I bought a practice that was not lucrative, but I opened up six days a week, and turned it around. My wife, who put me through dental school by working as a registered nurse, became pregnant around this time. It wasn’t easy, but we cleared the hurdle of paying off the new practice debt in one year. She now raises the kids and is invaluable working part-time in my office doing the billing. If someone quits or is sick, my wife can fill in," he said.

Strategies/tips: "My wife learned where our pennies were going, and we lived modestly using self-discipline to pay off our debts," Lee said. "We did not procrastinate at paying off debts; we paid off as much as we could each month. We lived in a modest house, and took a family vacation once a year that was not overly priced.

"My advice is: Do not spend money where there is no return. I still drive my 1985 Honda with almost 300,000 miles on it. But I will soon get a better preowned vehicle. If you buy an old office, change the parts and make repairs yourself, even if it looks somewhat dated at first. Only once you have paid off the practice loan do you allow yourself to buy new chairs, paint, and carpet. Don’t get too fancy -- if a patient is sitting in the reception area on a $300 chair, he will wonder how much more he is going to have to pay for your simple filling. Focus on clinical skills -- do it right the first time. Start doing six-handed dentistry. The extra assistant can help you progress faster during crown prep by changing burs for you, and also adjusting lights. Advance on as many dental learning curves as possible, as soon as possible. Respect the patient’s perspective -- realize that he or she may have different value systems, different values, different priorities, and different socioeconomic conditions. I have learned a very important lesson from my mentor dentist many years ago -- ‘The more you focus on achieving financial success, the more financial success escapes from you,’" he said.

Loma Linda Graduate

Age: 30

School: LLU, 1997

Student loan debt upon graduation: $100,000

New practice acquisition debt in 2000: $450,000

Debt status 2002: Education loans: $50,000; practice loan: $360,000

Quote: "Don’t look at it as debt, it’s an investment and you come out ahead every month."

How he did it: "When I graduated from dental school, I wanted to work very hard to retire in 25 years," said a young Southern California dentist who requested anonymity. "My student loans will be paid off in eight months, with my Los Angeles practice debt paid off in 10 years or so. I save $10,000 a month. My associate and I do our own prophylaxes. I bought a nice home, but we don’t take expensive vacations. In California, you need to buy a half-million-dollar practice to earn a good income. So even though I was a little fearful of starting my own practice, it was a good risk worth taking. I may seem like I have a lot of debt, but it doesn’t bother me because I think of my equity and net worth should I liquidate, and it’s almost equal to my debt. As I continue to pay off my debt, my net worth will continue to climb higher."

Advice/tips: To take out as little student loan debt as possible, remind yourself that this is not free money. "You’ll be working very hard and have little to show for it if you are paying several thousands a month in debt. And don’t take out a 25-year new practice loan or defer or refinance your student loans for a longer repayment schedule. Take out a 10-year loan or less. You can work as an associate for a short time, but remember even if you make $150,000, you’ll pay $40,000 of that in taxes, and you can’t pay a lot toward your loans and a house on what remains," he said.

Cheapest Source of Advice

Only one dentist interviewed for this article was satisfied with the amount of financial and business coursework provided in dental school. The remainder say that to learn how to manage debt they have either secured their own accountant, financial planner, and tax attorney or have gotten solid tips from colleagues at dental meetings, or in dental journals (see box Page XX).

Natasha Lee, CDA’s representative to the ADA Committee on the New Dentist, said being involved in organized dentistry surrounds her with colleagues who are an endless source of free ideas. "I’ve learned and absorbed an incredible amount of information about the business and practice of dentistry this way."

Conclusion

While paying off the "bad debt" of high interest, nondeductible credit cards and auto loans may be an obvious goal, the decision to pay off other debts as fast as possible can become more complicated. Carrying "good debt" (student and practice-acquisition loans necessary for cash flow) may feel uneasy at times. Some think worrying about good debt is a sign that you have yet to design a long-range financial strategy. Consulting financial planning professionals can help create a master plan. This allows the smartly indebted dentist to grow more comfortable with necessary debt, seeing it instead as an "investment." Of course, deciding to pay down good debt faster than the repayment schedule is a laudable goal, as long as money continues to be set aside monthly for savings toward retirement, among other things.

Table 1. 2000-2001 Tuition, Fees and Other Costs for Dental School Based on four-year Degree.

LLU $133,052

UCLA 67,252 (resident)

110,940 (nonresident)

UCSF 71,407 (resident)

112,383 (nonresident)

UOP 160,496

USC 163,782

National average 84,819 (resident)

121,434 (nonresident)

Table 2. Impact of Student Loan Debt*

On associate dentists …

* Nine in 10 dentists: "I could not afford to start or purchase a practice"

* Eight in 10 dentists: "I had to accept an associate position"

* Eight in 10 new dentists feel student loan debt will substantially or significantly effect them financially during the next 10 years

* Eight in 10 with debt above $100,000 report they are "worried" about it^**

On owner dentists …

* One in two dentists used a commercial loan as the source of establishing current practice. Average sum paid to establish current practice: $174,192.

* Source: 1998 Survey of New Dentists on Impact of Student Debt. ADA Survey Center, Chicago, 1999.

** Source: Weaver RG, Haden NK, Valachovic RW, Annual ADEA Survey of Dental Seniors -- 2000 Graduating Class. J Dent Educ 65(8):788-802, 2001.

Box

10 Tips for Paying off Debt

1. Develop a long-range personal finance plan. Brad Beck of Sky Financial Solutions, Danville, Calif., claims creating a customized financial game plan "will provide the answers to many of the complex financial questions dentists will face in their early years, as well as over their entire career."

2. Take a pass on the lavish lifestyle in the early years of dental practice. "It is easy to begin earning a large salary and get into a debt-oriented lifestyle -- that is, big cars, expensive houses, country club memberships, expensive clothes, and lavish spending on restaurants and so on," Beck said. "It is difficult to maintain a lavish lifestyle when there is a lot of debt outstanding, and it is easier to become delinquent." He said many lenders look at a dentist’s personal lifestyle and pay habits in assessing risk, looking favorably on those who control their personal expenses by not living lavishly. In calculating cash flow, lenders may assess "debt service ratio," which should be something like at least $1.10 in cash generated for every $1.00 in debt.

3. Investigate consolidating and refinancing student loans at lower interest rate. Simplify paperwork, lower payout.

4. Investigate whether a family member would lend at a lower rate.

5. Prioritize which loans should be paid off first. The hard-and-fast rule that high-interest loans are to be paid off first has occasional exceptions; dentists should double check that they have factored in the value of interest write-offs from practice and mortgage debts to calculations for payoff priorities.

6. If willing to move, consider a service-connected U.S. government repayment program. For example, the Indian Health Service may repay $20,000 a year for each year of service: www.dentist.his.gov. Other organizations that pay back student loans in exchange for service are National Health Service Corps: http://nhsc.bhpr.hrsa.gov, Disadvantaged Health Professions Faculty Loan Repayment Program: http://bhpr.hrsa.gov/DSA/flrp/newdefinition.htm, and several programs through the National Institutes of Health.

7. Work a part-time job and commit to using 100 percent of the income to paying off student loan principal. Every $100 paid early toward the principal of a 10-year loan at 8 percent interest, for example, will save $45.86 in interest payments.⁴

8. Take out a mortgage with no prepayment penalty, and pay a little more each month. One financially naïve dentist, who had taken out a 30-year townhome mortgage for $300,000, had religiously paid his payments each month for 10 years. In recent years he was ready to buy a house. He called his mortgage broker and asked, since he had paid on the loan for one-third of the years, if he had $100,000 to put down on another property. He was shocked to learn he had only paid off $7,000 on the principal. Amortization means a very small percentage of payments go toward the principal during the first part of repaying a loan.

9. Open a practice as soon as possible after graduation. Taking on more debt to open one’s own practice is considered "good debt" just as dental school loans are. Working as an associate -- although smart for two to six years to learn the ropes of running a business -- means high taxation and no deductions, an arrangement less likely to produce sufficient income to pay off debt.

10. Don’t pay off good debt if it is at the expense of retirement savings. Compounding investment interest right out of the gate toward long-term wealth accumulation is a key component of future financial success. A nest egg to "expect the unexpected" must be at least an equal priority to paying off student loans.

References

1. Wysel G, Downsize your debt. Dent Pract Finance 7(7):20-5, 1999.

2. ADA Survey Center, 2000-2001 Survey of predoctoral dental education: academic programs, enrollment, and graduates. ADA, Chicago, 2000.

3. Weaver RG, Haden NK, Valachovic RW, Annual ADEA survey of dental school seniors: 2001 graduating class. J Dent Educ 66(10):1209-22, 2002.

4. Cohen AR, Managing your educational debt. Am Soc Anesth Newsletter 1998;62(4):5-6.

5. Weaver RG, Haden NK, Valachovic RW, Annual ADEA Survey of Dental Seniors -- 2000 Graduating Class. J Dent Educ 65(8):788-802, 2001.

6. HHS Kicks Loan Defaulters Out of Medicare and Medicaid: Names Also Posted on New Internet Web Site. Jan. 20, 1998. Accessed Nov. 13, 2002 at http://www.hhs.gov/news/press/1998pres/980120a.html.

7. Weissman D, New grads: here comes ADA1 PLAN: Loan program targets HEAL debt burden. 26(7):1,26, 1995.

8. Fox K, Spiraling debt snares students: New dentists face big bills while trying to build practice. ADA News 2001;32(15):14.