A question we get asked frequently is “Will my student loans prevent me from buying or opening my own medical, dental or veterinary practice?”
Doctors typically carry a lot of student debt. According to the Education Data Initiative, on average, physicians graduate with about $241,600 in debt, dentists with $292,169, and veterinarians with $183,302, which can take a considerable amount of time to pay off.
Because of this high debt load, many doctors don’t consider practice ownership so they can avoid taking on more debt. In reality, student loans don’t prevent you from becoming a practice owner, and practice ownership could help you pay down your debt faster.
The short answer is no, student loans will not prevent you from owning a practice, but they do play a role in obtaining a loan to purchase or start a practice. Student loans can affect your debt-to-income ratio and credit score, which are both factors that are used to determine lending eligibility.
Here’s how these are affected by student loans and play a role in practice loan approvals:
Debt-to-income ratio: Debt-to-income ratio is a financial metric used by lenders that compares a borrower’s amount they pay in debt to their income. The lower a borrower’s DTI ratio, the more attractive they will look to a lender. A high monthly student loan payment could make your DTI high, making you a less favorable candidate for a practice loan.
Credit score: Credit score is another factor that impacts a lender’s assessment of your creditworthiness. Credit scores are classified as excellent: 850 to 800, very good: 799 to 740, good: 739 to 670, fair: 669 to 580, and poor: 579 to 300. Prospective borrowers may face rejection on loan applications, higher rates, or less favorable terms if they have a low credit score.
Debt-to-income ratio is calculated by dividing monthly bills and debt payments by monthly income. Having high monthly student loan payments can increase debt-to-income ratios significantly.
To lower your DTI, you will need to lower your monthly student loan payment. If you have federal student loans, you may want to consider enrolling in an income-driven repayment plan that could lower your monthly payment.
Refinancing* is another option that may reduce monthly payments for federal or private student loans, but this option is not for everyone. Many new graduates consider refinancing their federal student loans, but end up increasing their monthly payment and debt-to-income ratio. We recommend not refinancing if you want to buy into a practice.
*If you are considering Public Service Loan Forgiveness or income-driven repayment, do not refinance your federal student loans.
See Also: As a Doctor, Should I Refinance My Student Loans?
Student loans are beneficial to your credit score when you make your payments on-time but can lower your score if you miss a payment.
To improve or maintain your credit score, make your payments on time. If your credit score is lower than ideal due to missed payments, it typically takes at least six months of on-time payments to improve your score. We recommend setting up auto payments to ensure you never miss a payment.
Maintaining a strong score keeps your financial options open, allowing you to open a practice if you decide to.
See Also: How Doctors Can Improve Their Credit Score & Other Common Credit Score Questions
When opening your own dental, veterinary or medical practice, you may be concerned that you will need to borrow more money in addition to your existing student loan debt, but taking on this debt is not necessarily a bad thing.
This sentiment was summed up well by Meredith Jones, DVM, CSLP®, associate financial planner at Vincere Wealth and veterinarian, in “One Thing Financial Planners Wish Doctors Knew About Student Loan Debt.”
“Student debt doesn’t have to affect your career decisions,” Jones said. “No matter how much debt you have, there is a plan out there that is going to work for you.”
Both student loan debt and a practice loan are investments in your future. Having a clear business plan and a student loan repayment plan are essential to managing your debt load well.
Though some worry taking on more debt for practice ownership could negatively impact student loan repayment, it could actually help you pay off your debt quicker. Becoming a medical, dental or veterinary practice owner means you will likely receive additional cash flow. Giving you the leeway to pay off student loans, save for retirement, or achieve other financial goals.
Though practice ownership can be intimidating, there are lenders who work specifically with physicians, dentists and/or veterinarians and understand the complex financial challenges that doctors face. Panacea Financial works exclusively with doctors to help them achieve their financial goals – including practice ownership!
Have a plan for your student loan debt? Get expert guidance from a Certified Student Loan Professional with a Student Loan Consultation for Doctors. Explore repayment, forgiveness and refinancing with expert advice for just $200 — half the cost of other student debt consultation services. Learn more here.
Get connected with the Panacea Practice Solutions team and explore the possibility of practice ownership today here.
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