300/400K Debt = Indicative of Healthcare Bubble?

[carml]

What do you guys think?

One indicator of bubbles is folks' irrational exuberance, as Shiller likes to put it.

I think that medstudents' willingness to go into so much debt is a form of such irrational exuberance. When a bubble grows, people are willing to make huge buys on margin. Medical debts are essentially margin buys - you're buying a future stream of income on a margin (a little simplistic, but let's work with this).

Over the past decade or so, these debts have been getting out of control. Worse still, this in the face of clear future pay cuts - students willing to take out even bigger loans when the future income stream will not be as great as that of today's generation of physicians.

I call irrational exuberance on the part of the student willing to go into so much debt simply for a future stream of income (which is likely to decline in real terms).

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[igap]

I do think that a bubble is forming, but it is not here yet. The student debt in America is over 1 trillion dollars and growing at a fast clip. I suspect that instead of a crisis that hits America overnight by a daisy chain of massive defaults, we'll see gradual declines in productivity, innovation, and private industry. We will see the warehousing of an entire generation of physicians and other workers in government salaried jobs, or salaried jobs that are paid mostly by private companies collecting entitlement payouts (e.g. - hospitals collecting bundled ACO federal payments and paying physician salaries).

In 10 years, there will be virtually no residency graduates going in to private practice. They will all be looking for a hospital/corporate/government salaried job. This is how American medicine will become socialized ultimately. It won't be the U.S. government telling you what to do, it will be the huge student debt that students have willingly taken on believing against all logic that they will be able to pay off their loans and live the good life.

So yes, I do believe that medical students and residents today suffer from very real "irrational exuberance" about their debt levels and their future earning potentials. The bubble has not formed yet though. I think that student debt has to be at the 3 trillion + level before we will see massive waves of defaults. The debt levels have to be so high that physicians cannot repay the loans, and will therefore start defaulting. Contrary to the belief that the government will get its money back through garnishment of wages which will happen, the government will not get its money back if physicians default on 500k + of student debt. The physician will likely die before the debt is paid off. It won't matter if the debt is transferable to his/her children because they will not be able to pay it off either. The government cannot squeeze water from a stone.

 

[igap]

What do you guys think?

One indicator of bubbles is folks' irrational exuberance, as Shiller likes to put it.

I think that medstudents' willingness to go into so much debt is a form of such irrational exuberance. When a bubble grows, people are willing to make huge buys on margin. Medical debts are essentially margin buys - you're buying a future stream of income on a margin (a little simplistic, but let's work with this).

Over the past decade or so, these debts have been getting out of control. Worse still, this in the face of clear future pay cuts - students willing to take out even bigger loans when the future income stream will not be as great as that of today's generation of physicians.

I call irrational exuberance on the part of the student willing to go into so much debt simply for a future stream of income (which is likely to decline in real terms).

The term "irrational exuberance" is generally attributed to Alan Greenspan.

 

[MT Headed]

So this is what I'm hearing:

"If I default on a $50,000 student loan, it's my problem. If I default on a $500,000 student loan, it's the government's problem."

 

[igap]

So this is what I'm hearing:

"If I default on a $50,000 student loan, it's my problem. If I default on a $500,000 student loan, it's the government's problem."

Your analysis is wrong in the sense that regardless of the size of the default, the borrower always loses. A more appropriate analysis would have been: "If I default on a $50,000 student loan, it's my problem. If I default on a $500,000 student loan, it's my problem and the government's problem."

 

[HondoCrouch]

Um no, its indicative of a student loan bubble. Student loans across the board are becoming absurd, it's nothing specific to healthcare. The market is distorted by the government enabling schools to endlessly raise tuition. Youve got people regularly graduating with worthless undergrad degrees and 100k+ in debt and taking jobs paying 30-40k, now that is irrational exurberance.

The med school debt situation could better be described as naive.

 

[diwali]

So this is what I'm hearing:

"If I default on a $50,000 student loan, it's my problem. If I default on a $500,000 student loan, it's the government's problem."

the USG will not forgive indebtedness to school loans, and it guarantees its lenders (the odd banks in north dakota, etc. who originate the loans) that should the lender default on the loans, the USG will pursue the borrower -- with a vengeance.

thus, garnishing wages will be a part of such a mess, and nothing, even bankruptcy, will exonerate the borrower.

if you plan on staying a US citizen in the future, the USG will make sure you pay back your loans --and if you default, etc., the fines and penalties are hefty.

 

[Big McHuge]

Um no, its indicative of a student loan bubble. Student loans across the board are becoming absurd, it's nothing specific to healthcare. The market is distorted by the government enabling schools to endlessly raise tuition. Youve got people regularly graduating with worthless undergrad degrees and 100k+ in debt and taking jobs paying 30-40k, now that is irrational exurberance.

The med school debt situation could better be described as naive.

Bingo. Ron Paul recently got hammered for saying he would phase out government backed student loans during his presidency. Tom Woods and Peter Schiff have done an excellent job detailing how government involvement in college education gives universities every incentive to continually raise tuition. I'm sure you can find these videos on youtube. In a true free market economy, the natural progression of a product or service is for the price to go down. Whether it be cell phones, laptops, HD TV's, etc. Could you imagine if the government were subsidizing cell phones? Like education, the market would be distorted, prices would inflate and we'd all be complaining only the super wealthy can afford cell phones. Same thing in education, why is it that 20, 30, 40 yrs ago you could afford college or professional school just by working a summer job. And yet the federal government keeps on encouraging every student in this country to go to college. Anyways I can go on and on but to tackle this 300/400k student debt. I wouldn't do it for that money, I'm sorry. Too scary and too unpredictable in today's climate where physician reimbursements will more than likely decline.

 

[phenylacetone]

Even current PCP salaries can support >$450k indebtedness at graduation. A first year attending with $450k in debt and a starting salary of $150k gross will outearn (after loans) a peer unencumbered by debt earning $92k gross and still make repayment in <10 years (assuming a repayment coefficient of 25% gross income).

 

[dynx]

Even current PCP salaries can support >$450k indebtedness at graduation. A first year attending with $450k in debt and a starting salary of $150k gross will outearn (after loans) a peer unencumbered by debt earning $92k gross and still make repayment in <10 years (assuming a repayment coefficient of 25% gross income).

wow.
Allright first of all, to pay off a 450k loan in 10 years at 6% interest (conservative) you'd have to pay close to 5k a month. 60k a year. After JUST federal taxes on your salary as head of household (28%) you're left with 108k which puts you at 48k a year to live. If you're in cali like me add on another 9% state tax and you're looking at 34500 a year to live. I pay 2k to live in a 2 bedroom house thats okay but not great by any stretch of the imagination. that leaves me what? 10k a year? Under 1k a month for food, clothes, kids, car, emergencies and god forbid I'd ever like to retire (at that rate you would be able to contribute nothing to a retirement acount). Contrast that to a person saving and compounding interest for the entire 10 years on a 92k income. the 92k guy would have 60k a year to live after taxes. If he spends what you spend (34500 a year) he can save 25K a year. 250k over the course of the 10 you're paying your loans. If we assume start age at 30 years (he starts working at 30 and you become an attending at 30...he spent his 20s partying and taking vacations while you were holed up in the library and then working 80 hours a week) he retires at 65 with 2million if he made 4% interest...you retire at 2.5 million. And you lost a decade of the prime of your life. thats called math. Try it. You do people a disservice with your inept assumptions.

edit: oh and by the way...30 years from now 2.5 million is not going to get you far.

 

[carml]

Even current PCP salaries can support >$450k indebtedness at graduation. A first year attending with $450k in debt and a starting salary of $150k gross will outearn (after loans) a peer unencumbered by debt earning $92k gross and still make repayment in <10 years (assuming a repayment coefficient of 25% gross income).

Just playing around with a loan calculator at 6% interest and subtracting out some taxes and conservative living expenses makes it seem to me that the above isn't very likely.

 

[phenylacetone]

wow.
Allright first of all, to pay off a 450k loan in 10 years at 6% interest (conservative) you'd have to pay close to 5k a month. 60k a year. After JUST federal taxes on your salary as head of household (28%) you're left with 108k which puts you at 48k a year to live. If you're in cali like me add on another 9% state tax and you're looking at 34500 a year to live. I pay 2k to live in a 2 bedroom house thats okay but not great by any stretch of the imagination. that leaves me what? 10k a year? Under 1k a month for food, clothes, kids, car, emergencies and god forbid I'd ever like to retire (at that rate you would be able to contribute nothing to a retirement acount). Contrast that to a person saving and compounding interest for the entire 10 years on a 92k income. the 92k guy would have 60k a year to live after taxes. If he spends what you spend (34500 a year) he can save 25K a year. 250k over the course of the 10 you're paying your loans. If we assume start age at 30 years (he starts working at 30 and you become an attending at 30...he spent his 20s partying and taking vacations while you were holed up in the library and then working 80 hours a week) he retires at 65 with 2million if he made 4% interest...you retire at 2.5 million. And you lost a decade of the prime of your life. thats called math. Try it. You do people a disservice with your inept assumptions.

edit: oh and by the way...30 years from now 2.5 million is not going to get you far.

It's rude for you to be so dismissive without doing a diligent analysis (not to mention making an obvious straw man by ignoring both my intent and stated axioms). If you want to pick apart the argument, please first note that I chose obvious hyperbole ($450k loans vs. $150k salary) etc. and used NH as my tax calculation (28% federal, 0% state).

 

[igap]

Even current PCP salaries can support >$450k indebtedness at graduation. A first year attending with $450k in debt and a starting salary of $150k gross will outearn (after loans) a peer unencumbered by debt earning $92k gross and still make repayment in <10 years (assuming a repayment coefficient of 25% gross income).

If this is an attempt to rationalize the educational debt crisis, I'm not buying it.

Reminds me of the this scene from a classic film.

 

[HondoCrouch]

It's rude for you to be so dismissive without doing a diligent analysis (not to mention making an obvious straw man by ignoring both my intent and stated axioms). If you want to pick apart the argument, please first note that I chose obvious hyperbole ($450k loans vs. $150k salary) etc. and used NH as my tax calculation (28% federal, 0% state).

Your assertion was complete hogwash, it was rude of you to even post such nonsense.

 

[cincincyreds]

I don't think we are in the bubble just yet. I think once the debt goes to about $1 million for undergrad and medical school, we will have a situation where the debt is unsustainable, especially if interest rates are 7%. Because one would be insolvent if they made 150k and had to pay the loan back in 10 years.

Interetingly enough, the price of tuition at my med school has doubled in the past 10 years and tuition price at my undergrad has also doubled. So if I started today, I would have been at about 550k of debt at 7% after college and med school. Just a crazy number.

 

[HondoCrouch]

I don't think we are in the bubble just yet. I think once the debt goes to about $1 million for undergrad and medical school, we will have a situation where the debt is unsustainable, especially if interest rates are 7%. Because one would be insolvent if they made 150k and had to pay the loan back in 10 years.

Interetingly enough, the price of tuition at my med school has doubled in the past 10 years and tuition price at my undergrad has also doubled. So if I started today, I would have been at about 550k of debt at 7% after college and med school. Just a crazy number.

The problem is you wont see it until it's too late. At current interest rates and tuitions, 500-600k med school debt will not be out of the norm for the current first year med student by the time they finish med school (4) + residency (3-5) + fellowship (1-2) 10 or so years from now. We are already in the unsustainable zone, it's just not felt for several years because of deferment.

 

[cincincyreds]

I think a lot will depend on the interest rates. When I graduated, the rates were under 2%, now they are 6.8%. Thanks to the magical power of compound interest, one can't say the debt is 3.5x worse{6.8/2}, it is probably about 4-5x worse. This is similar thinking to why you will end up with about 4x the money investing if you can get 10% over 5%. It is the power of compound interest. So if one wants to say we are in a bubble, you need to look at the total debt and the interest rate. I would take one million dollars of debt at 0% interest over 500,000 debt at 10% interest if I had 30 years to pay it back. It just depends on those 2 variables.

So yes, we possibly could be in the bubble, and it may be too late to turn back. I think depending on the speciality, one could pay it back. I mean, my first year out, I worked between 100-110 hours per week working every weekend, every holiday, and made over 600k. I was only able to take this for about 2.5 years before I was burned out. I just wanted everything paid off including the condo, car, and med school loan along with $1 million in investments.

 

[freaker]

Even current PCP salaries can support >$450k indebtedness at graduation. A first year attending with $450k in debt and a starting salary of $150k gross will outearn (after loans) a peer unencumbered by debt earning $92k gross and still make repayment in <10 years (assuming a repayment coefficient of 25% gross income).

Really? I can't believe you'd even paint this as realistic

After the government steals >35% of that money in taxes (and there are numerous taxes beyond the income tax), that's not going to be the case.

Payments on a 10-year loan of 450K at 6.8% interest (I'm being generous, as debt at this range starts demanding 8.0% loans, as Staffords have run out) run $5,178.

Let's take a married doc whose wife takes care of his two kids in South Carolina. He's looking at close to 35K in federal and 10k in states taxes (7% in South Carolina). That doesn't include sales tax. Now he's down to 105k, or $8,750 per month. $8,750 - 5,178 per month in student loan payments comes out to $3,572 per month--less than my gross pay as a resident.

So let's say our hypothetical 92k per year guy "only" has 16,500 of his dollars stolen by the federal government in taxes. Then another 6,500 vaporizes in state income tax. He's down to 68,824, or $5,735 per month.

He's looking $2K per month wealthier than our fine doctor with 450k in debt. And he takes that $24,000 per year in income and invests it over those 10-years in low cost index funds and bonds, earning roughly 6.8% per year. He's looking at having $350,000 towards retirement. That's a pretty big opportunity cost, don't you think?

And neither of the above two examples were being extremely thrifty in their tax deductions, so those numbers could be shifted in the doc's favor. That said, our doc is not just missing out on income; he's missing out on the opportunity to invest and to have his money capitalize. He's not saving for retirment. And that's the toxicity of debt; it costs money up front, it costs money down the road (capitalization), and you lose out on investment return, which our braindead President and Congress Critters haven't figured out.

And why even go through the delayed gratification of being a physician at that point? Just major in business. Or even work towards owning your own HVAC company. You'll make more. And never be in the kind of debt a physician is. You'll enjoy the greater part of your 20s and 30s with an income as opposed to slaving away as a student.

I refuse to donate to my alma mater, seeing as how tuition has doubled since I was a student in 2001. What they're doing to students is downright criminal, and they're fully enabled by the federal government and its loan programs.

 

[cincincyreds]

Yup, make it when I can. I figured if I was doing 80 as a resident, what is an extra 20 hours or 30 hours. I believe financial independence is important. After 2 years that schedule gets old, so now I do about 50 hours/wk. I also make half as much, but that is fine.

 

[kazuma]

Yup, make it when I can. I figured if I was doing 80 as a resident, what is an extra 20 hours or 30 hours. I believe financial independence is important. After 2 years that schedule gets old, so now I do about 50 hours/wk. I also make half as much, but that is fine.

With the way things are going, I figure I may have 3 decent years in Anesthesiology when I finish in 2015 or 2016 if I do a fellowship. I'd hate to sacrifice family life working that many hours, but with 310K (including interest) I don't see any other way to pay it off.