In investing, a value trap is a stock that is seemingly trading at an attractive price relative to its valuation. An inadvertent investor will buy the stock thinking it’s a good deal, but the investment will either not increase in price or actually drop. This is because the investor was unaware of the true (lower) value of the investment, which did not become apparent until the person had committed.
For many students, the high cost of medical education is something we are peripherally aware but do not fully understand until we have to deal with it. What I am saying is, medical students and pre-meds may be aware that medical school will cost hundreds of thousands of dollars but do not realize that this price is in vacuum and actually the minimum of what they have to pay.
The elephant in the room is interest. Interest by itself may seem harmless but its true terror rears its head when we stop to analyze how it really works. Due to the compounding nature of interest, it can take a few years for you to owe double of what you borrowed. To put it in perspective, below are the doubling times for a few interest rates:
Interest Rate Time to double your debt
1% 69 years
5% 13 years
7% 10 years
10% 7 years
20% 3.5 years
This problem is compounded by some loans beginning to collect interest as soon as you get your MD. In some cases, it may be difficult to put a dent on your debt during residency, more so if you matched to an area with a high cost of living. But even before becoming a doctor (and getting that nice salary), there are conditions that can affect your personal finances for the rest of your life. Important conditions are how much you end up paying for medical education and how you decide to deal with your debt. As a simplified overview, below is a summary of my MD financial comfort tiers:
Tier A: You have your medical tuition and living expenses paid for. Congrats! You either have a really nice scholarship or went into something like an MD-PhD program. For the former, the world is your oyster and you can be in the money for life if you play your cards right. For the latter you will have to stay 3-4 years longer in training and may end up an academic career which may not pay as much as the top tier specialties, but it’s still pretty comfy.
Tier B: You (or your family) pays for you medical education out of pocket. Yes you may be down a couple hundred thousands dollars, but paying no interest and the earning potential as a physician makes the investment a bargain.
Tier C: You take out loans for your medical education but have a concrete plan to pay it back ASAP. You know that you will have to cool it on the luxuries during medical school/residency and the early years as a physician, but in the end you will be better off for it. If you learn how to save and invest your sweet physician salary, you will still be in a great position!
Tier D: You take out loans and plan to repay them, but you don’t really have a plan and figure you’ll deal with that when the time comes. Maybe you think the “high” physician salary will solve all your problems. Maybe you think that as a resident or as an attending you’ll have time to learn about debt-repayment and what interest does to you. Maybe you think you can make the minimum payments until your sort your life out. You are playing a dangerous game, friend.
Tier F: You put your head in the sand and let the interest rack up. Refer to interest table please.
With all this said, the reason I am talking about this is not to be patronizing or judgmental. Rather my wish is for junior med applicants and students to get a dose of reality. If medicine is your calling, the price tag should not dissuade you from pursuing your dream. But the mindset of “I will worry about it when the time comes” or “It will sort itself out” will only set you up for emotional and mental anguish down the line. Heck, even the plan of going into a high-paying specialty to write off your debt is a huge gamble and will put extra pressure on doing extremely well (trust me, this will happen on its own so don’t stack the deck against you). Life only gets harder, and you don’t want to be years into your medical training and have yet another reason to second-guess your life choices.
Basically what I’m saying is that one of the best investments you can make in your pursuit of medical education is to take a real, hard look at your financial reality. But it’s not all doom and gloom, and it just happens that the magic of interest and money doubling can actually be used to your advantage. In future blogs I hope to talk about the basics (and ease) of investing and how you can make your money grow, especially with that nice physician salary.
Undocumented Physician Scientist in Training 