A Doctor Burdened by Medical-School Loans – Wall Street Journal

Michael Hackman wants to build a nest egg, but a large chuck of his discretionary income goes toward paying back the student loans he took out to put himself through medical school.

Dr. Hackman, age 33, earns about $ 200,000 a year as an internist and lives outside of Sacramento. Loan payments consume about a third of his after-tax income, he says, making it challenging to save for the future.

“I really like being a doctor, but from a financial standpoint it may not have been the best decision,” he says, adding that he and his wife are expecting a baby soon and hope to buy a home over the next few years. (His wife earns about $ 55,000 a year as a nurse with the U.S. Air Force.)

Dr. Hackman had about $ 160,000 in debt when he graduated from the University of Southern California’s Keck School of Medicine in 2009. The loans ballooned to $ 240,000 after three years of residency (he switched from pediatrics to internal medicine) and a year as a researcher in an oncology lab.

During those years, he was earning about $ 50,000 annually while living in New York. He didn’t borrow any additional money, but his loans were in forbearance, meaning no payment was due but interest accrued and was added to the principal balance. Most of his loans carry about a 7% interest rate, he says.

Dr. Hackman pays at least $ 2,000 a month toward his graduate student loans now and hopes to repay the remaining $ 220,000 he owes within the next decade. He also pays about $ 2,000 in rent, $ 1,500 in health insurance and $ 800 in car payments monthly. He has no other debt. His wife, however, has about $ 80,000 in student loans, which are in forbearance because she is serving in the Air Force.

Dr. Hackman says his goal is to put about $ 1,000 each month into savings, which also acts as an emergency fund. The amount he saves varies, however, because putting aside $ 1,000 a month requires him to abstain from spending on personal items, he says. The account balance is less than $ 50,000, he says.

He also put the maximum amount allowed ($ 18,000) into his 401(k) last year and will do so again this year. Dr. Hackman says he has a standard allocation of equity and bond funds.

Advice from a Pro: “Human capital is his greatest asset,” says financial planner Mark Cortazzo of Macro Consulting Group in Parsippany N.J. Dr. Hackman “is in a stable profession where his income is likely to increase over time,” he says, “but if his ability to produce income stops, he is in real trouble and the rest of the financial planning is for naught.”

As such, he says Dr. Hackman’s first move should be to buy adequate disability and life insurance, especially if he is about to have a child. He says Dr. Hackman should consider purchasing between $ 120,000 to $ 150,000 in disability insurance, about two-thirds of his salary, because the couple would go through their savings quickly if he was unable to work.

Next, the adviser says Dr. Hackman should try to refinance the couple’s debt by getting a personal loan at a lower rate, possibly through a local bank or a private finance company specializing in refinancing student debt.

“A 7% nondeductible loan is very expensive financing. A private firm may be able to get that borrowing down to 5%,” Mr. Cortazzo says. If he “can shave two percentage points off his and his wife’s student debt, that’s $ 6,000 of after-tax money annually.”

Mr. Cortazzo advises Mr. Hackman to wait and see how his expenses change after the baby is born before buying a home and think twice about adding an extra liability to his balance sheet. However, when he is ready, he might want to consider buying a home for little or no money down since a mortgage, unlike the student loan, is likely to be tax deductible and could also have a lower interest rate. The difference between the two loans, says Mr. Cortazzo, could save thousands of dollars annually.

Keeping his savings in cash is a smart move, says Mr. Cortazzo, adding that as a general rule, funds set aside for a short-term goal, less than two years away, should be readily available, such as in a money-market account.

The financial planner says Mr. Hackman’s 401(k) should be almost entirely invested in equities, such as value-oriented stocks, small-cap stocks and international/emerging-market stocks. He says the doctor should be looking for diversified low-cost actively managed equity funds or index funds and not looking to buy individual stocks.

“The key for Dr. Hackman is controlling what details he can and thinking wisely about risk,” Mr. Cortazzo says. “That means avoiding risk in the money-market account, transferring risk through insurance and managing risk in his 401(k) account.”

Ms. Ward is a writer in New Jersey. She can be reached at reports@wsj.com.