It’s no secret that student loan debt for graduating dentists has been spiraling out of control. According to the American Student Dental Association, in 2016, the average dental student graduated with $261,097 of loans. While this number may be staggering, many students graduating from specialty residency programs have student loan debt of $600,000 or more! As accountants, we are asked regularly what doctors can do to help lower their debt payments, increase their cash flow or how to make these suffocating loan payments.
Over the past few years, we have spoken with many new graduates who consider either private practice or working for corporate dentistry. Most students do not consider buying their own practice due to the tremendous debt they’re already carrying. Corporate dentistry offers the doctor a set salary to budget for those staggering debt payments. Graduates might start off with corporate dentistry to help cover their loans, costs of living, etc., but many will switch to owning their own practice in later years once they determine how they want to practice. While the stability of corporate dentistry may be attractive, many find it is more beneficial to own their own practice than to work for corporate dentistry.
Graduating doctors should know about the increased earning power and other benefits of owning a private practice. For example, assume a graduating general dentist is capable of producing $750,000 annually. If that doctor accepts employment in corporate dentistry, he or she will typically earn $187,500 or 25 percent of production. If that doctor were to purchase a practice that earns $750,000 in collections, the purchase price would be around $487,500, based on a value of 65 percent of collections. If the doctor finances the $487,500 over 10 years at a 5-percent interest rate, payments would be $5,170 per month, or $62,040 per year. Assuming the practice will net the industry average 40 percent of collections or $300,000 before the doctor’s salary, benefits and perks, the purchasing doctor would have $237,960 left over after paying the practice purchase debt payments. That is gross collections of $750,000 multiplied by 40 percent = $300,000 less debt service of $62,040 = $237,960. This is more than 25 percent higher than the corporate dental counterpart. Moreover, at the end of 10 years, the practice debt would be paid off and the purchasing doctor’s net would then be $300,000, or 60 percent higher than a corporate colleague. The doctor could then use this excess income to repay student loan debt faster or begin saving for the future with a pre-tax retirement plan contribution to a 401k plan or Simple IRA. Furthermore, an asset (practice value) is now available to sell in the future to help provide financial security in retirement.
As a doctor, you should also know that your income will be too high to deduct the student loan interest. The deduction is lost on your personal tax return once you reach an income level of $80,000 for single filers and $160,000 for married filers. As you can see, no matter what option you choose for your career, corporate or private practice, you will lose this deduction almost as soon as you graduate from dental school.
A student loan repayment assistance program is a more recent development in student loan debt repayment that will impact new graduates. Large corporations have started assisting their new employees with this benefit to help alleviate the loan burden. Corporate dentistry has started using this benefit to attract more graduates. Private practice dentists can add this benefit as well. Unfortunately, these benefits are normally taxable if they are received from anyone other than a state or local government. Under proposed Federal tax regulations (Student Loan Repayment Assistance Act), this program could help provide up to $6,000 per year to an employee, with a lifetime limit of $50,000. Again, these are proposed, so many changes could occur in the future before we have final regulations.
As a graduate of dental school, you need to be informed of your options. You need to hear the pros and cons of both private and corporate dentistry in order to make the best decision for yourself. Our article only touches the surface, so do your research and ask questions.