Originally published by www.coastalresearch.org.
First in a series
When you think of two young professionals married to each other, you may think that these two people have nothing in the world economically to worry about. Unfortunately, for most professionals coming out of their respective graduate schools, the reality can be quite different.
The reality is student loan debt with interest rates that are running at 8% and higher. Graduate school student loans may total between $100,000 and $300,000 per individual, while at the same time these individuals must deal with a sour economy and diminished job and income expectations.
Consider, as a case study, a professional couple living in a middle class community in Pennsylvania. The wife is a physician in her first year of residency, working for one of the larger hospital systems. Her husband is a lawyer working for a small company. Both are earning an income, which is not always assured in today’s economy.
The physician works approximately 95 hours a week. Her first year salary is $48,000, which in her second year will increase to $49,500. She receives medical, dental and vision care insurance from the hospital, which covers her and her husband.
Her husband works approximately the same amount of hours in a month as she does in one week. He earns approximately $37,000 a year. He does not receive medical, dental, or vision insurance. Because he is an independent contractor rather than an employee of the company for which he performs work, his wages are reported as IRS Form 1099 income for “sole proprietors”. For purposes of federal and state taxation, an independent contractor is responsible for paying both the employer’s and the wage earner’s halves of the Social Security and Medicare taxes.
This raises the husband’s Social Security tax liability from 6.2% to 12.4% and the Medicare tax liability from 1.450% and 2.9%, because he is “self employed.” In effect, he has required “payroll taxes” of 15.3% of income, rather than the 7.65% that “wage earners” pay. Even though there is a ceiling on the amount of income taxed for social security (well above the lawyer’s present income), the Medicare tax is assessed against all earned payroll income.
Although the professional couple earns $85,000 before tax, tax credits and any deductions, when one factors in the costs of servicing their student debt, the couple’s income picture is much less adequate than it might initially seem.
Before breaking down where the $85,000 household income is spent, a discussion of how the student loans were incurred is in order.
Each attended a state university, and either through scholarship or an educational fund, they both managed to graduate without any undergraduate student loans (although many of their graduate school classmates had amassed sizable student debt as undergraduates). But neither was able to pay the costs of medical or law school.
Her student debt load totalled $167,000 for tuition alone, with an additional $36,000 in loans for her living expenses for the four years of medical school. Medical and law school students do not have time to work on anything other than their studies, so any income from odd jobs while in these or most professional graduate degree programs is not an option. His student loans totaled $136,000 for both tuition and living expenses for a year of graduate school and three years of law school.
There are currently a variety of government sponsored student loan repayment schemes. But with regards to our couple, the only relevant program is that she is in a hardship deferment, meaning that she is making no payments on her debt (even though its interest is compounding). His repayment is currently capped at 15% of his AGI (Adjusted Gross Income, the amount of income on which he owes taxes).
The lawyer’s payments just after graduation were costing $1250 a month. With his low current income, the repayment rate was adjusted to $460 a month. But, since this couple recently married, his student loans will now increase to 15% of the couple’s total income increasing his payment amount to $920. (After 30 years of making regular monthly payments, any outstanding debt is forgiven.)
Both professionals have cars. His car payment is $385 a month, while her payment is $350 a month. Both vehicles get over 32 MPG average. Because they live near her residency program, between them they spend less than $100 a month on fuel. Their combined cost for both their automobile and homeowner’s insurance is approximately $190 a month.
Given that the couple knew her residency would be 3-4 years and that the housing market was priced at the lowest levels in 10 years, the couple decided to purchase a townhouse. Their fixed mortgage payment is $1330 a month, less than cost of renting in the same community.
Let’s examine the income and expenditure flows for the couple. First, before AGI, the couple’s gross income is estimated at $85,000, which would place them in the 28% IRS tax bracket. Given that the top of the 25% tax bracket is $82,000 and that the couple will get at least their standard deduction of $11,400, we calculate their tax rate at 25% for federal taxes. However, the federal tax rate does not include their social security taxes.
Taking the $48,000 amount, the physician will be paying $3,672 in SSI, while her husband will be paying $5,661, based off his $37,000 income.
| Hers | His | |
| Base Income | $48,000 | $37,000 |
| SSI Taxes | $3,672 | $5,661 |
| Net | $44,328 | $31,339 |
After withholding and estimated taxes, this leaves the following amounts:
| Hers | His | |
| Post SSI tax | $44,328 | $31,339 |
| 25% federal tax rate | $12,000 | $9,250 |
| Net | $34,328 | $22,089 |
This leaves the following after federal tax amounts for their monthly budgets:
| Hers | His | |
| Monthly income after income tax | $2861 | $1841 |
| Student loan payment | 0* (deferred) | $460 |
| Net | $2861 | $1381 |
Housing expenses (mortgage and Insurance), car insurance, car payments, etc.
| Hers | His | |
| After tax income | $2861 | $1381 |
| Mortgage | $1,330 | 0 |
| Insurance payments | 0 | $200 |
| Car Payments | $350 | $385 |
| Utilities – Cable/internet | 0 | $130 |
| Gas/Electricity/Water | 0 | $145 |
| Telephone/Cellphone** | 0 | $186 |
| Groceries | $500 | $0 |
| Sub-total | $2180 | $1046 |
| Net* | $681 | $335 |
*This does not cover property taxes, Pennsylvania’s township taxes or state income taxes. State and local taxes vary by state and even township in commonwealth states like Pennsylvania. As these taxes can change widely even from year to year , so that it is hard to estimate these tax liabilities accurately.
**The cell phone plan covers data and 700 shared minutes plus roll over.
The couple’s net income, after the living expenses, student loans and federal taxes is $1,014 a month or $12,168 annually from which the local property assessments and any state income tax will be made. In this particular example those annual local and state assessments total $3250, leaving only $8,918 ($743 monthly) for the couple’s discretionary income prior to their marriage.
Because the husband and wife’s income are now aggregated, the husband’s student loans, although still capped at 15% of monthly income, have now doubled, as a result of the joint income. The discretionary income that was used for the likes of dining out, clothing, adult beverages, gym memberships, professional association memberships, movies, and movie rentals, have now been reduced further by the doubling of his student loan payments from 460 to $920, leaving $283 a month. This razor-thin amount of discretionary income, makes savings or expenditures on such items as household furnishings (which would benefit the local community) impossible.
The reason why there is any residual income at all in this example is that the physician, who is in residency, has her loans deferred until she graduates from the residency program. When she finishes her residency and is practicing in her specialty, she would expect a sizable increase in income, but with that increase monthly payments on HER loans must commence and the amount her husband is required to pay on his loans must increase to reflect the increase in their joint income.
For this example, assume his income and their living expenses remain the same, but that her income and their loan obligations increase (i.e., any increase in their aggregate income, regardless of whose income increases, bumps up the amount of each person’s loan subject to the 15% loan payment cap). The starting salary in her field is approximately $175,000 annually depending on location.
| Hers | ||
| Base | $175,000 | |
| SSI* | $6,696 | |
| Medicare | $2538 | |
| 28% tax rate* | $49,000 | |
| Net | $116,767 | |
*SSI taxes capped at $108,000; income tax rate based on 2010 rates, filing jointly.
A hypothetical monthly budget once she has entered practice might be as follows.
| Hers | ||
| monthly after tax income | $9,730 | |
| 15% student loan cap | $2,188 | |
| His student loan | $1,220 | |
| Net | $6,323 | |
Of course these numbers are only estimates and have not been fully calculated for deductions. These are only intended for the purpose of showing the raw data that married professionals have to go through. Each decision made will change the raw numbers. For example, once physicians graduate from their residency programs, they tend to move to a new location, which means a new home or a new apartment. Depending on the circumstances, this will reduce or increase discretionary income.
Although the after tax income might in other circumstances be regarded as a reasonable income, the crush of debt impacts the economic situation of the young professionals who experience it. While physicians still are any demand, for many professionals the anticipated increases in salaries will quite probably not be seen.
There likely has been no comparable time when so many professional couples have started their careers with such a high aggregate debt load for repaying and servicing their student debt. The impact of these debt levels is poorly understood. Some of the consequences may be foreseen, such as a continued avoidance by physicians of geographical areas and specialties thought to offer lower remuneration. Other unforeseen but likely perverse, consequences may well emerge.
Next in the series: Medical School administrators respond
wow. i dont know if this is insanely informative or utterly depressing. perhaps a bit of both. thanks for posting!
I try not to think about this. It makes me sick to my stomach
When the median American salary is around $50,000 dollars before taxes, I think living like an average American for 10 years post high school with the expectation of having between 5-10,000$ in discretionary income monthly isn’t such a bad deal. I hope that student physicians and lawyers take that time to analyze the way most of their patients and clients will be living for their entire lives.
The writer of this piece doesn’t know much about taxes. The wife is getting the raw end of the deal, while the lawyer has a chance to increase his income without doing work. Being an independent contractor, at first glance, does make it necessary to pay more taxes up front.
However, as an IC he gets to make claims for his cell phone, car payment, use of home office for business purposes, computer-related purchases, etc. This “secret” is the real reason so many people want to work as an IC. However, to qualify as one, the hiring business loses a lot of the priveleges implicit in an employee, such as telling them exactly how to do certain types of work, or demanding they work from X time to X time.
In the end, with a good accountant who knows to obey tax laws but understands the full range of legal exceptions and claims, the IC pays less in taxes than the employee wife.
Neil the average American does not have 300k+ student debt. Sure 50k isn’t much but you know you can do a lot with 50k if your entire student debt is 30-50k. They finish 4 years or 5 if they get a masters they will pay off their debt within 10 years. By the time their medical school friends have finished their residency they will have no debt as they will have been working for nearly 10 years working up the corporate ladder.
Basically in the time you spent studying they will have payed off their loans and bought houses and had families.
Yeah PJ is right about that. If one has a good accountant or understanding of taxes, one can easily figure out ways to reduce it. One good example I read in a book is where this one physician who had a private practice. On his taxes he put that he was a “sole proprietor,” but his accountant told him to put his practice down as an “S corporation.” It is because sole proprietors get the attention of the IRS and are usually taxed the most. By putting yourself as a small corporation helps one fly under the radar when being taxed.
This is why it annoys me when some residents or even physicians act like that is the way things are when they are being taxed a ridiculous amount. There are always ways to increase income. Wonder why the rich become richer, it is because they have good accountants and understanding of the tax laws. So it is always good to ask the question, “Is there a way for me to gross more?”
Ser.,
Regarding the debt., you are right they do have say 300,000$ in debt but even minus the minimum 15% of their income paying it down they will still have in the range of 5-10,000 dollars of discretionary income above and beyond cost of living if just one of the adults in the relationship is a doctor and the other doesn’t work. And when we are talking about average americans 50,000 is most likely a two parent working poor family with no corporate ladder to move up. I understand that the debt is scary and way higher than it should be but I think it is always important to look at our lives in perspective.
This is a fascist system, its the cleansing of the middle class, moving us into poverty! No other country in the world has such expensive education, most countries have free education and their graduates come to US and get all the good jobs!!
So let’s see, while she has not even graduated yet, they are able to make all their payments including mortgage, health insurance and two cars, and still have an extra $10K a year. They are drowning in debt, yeah, right..
When she graduates the situation will change because she will have to start to pay back the student loans and will have to live with the same budget as somebody who is making ONLY over $11,000 a MONTH and has no student debt.
The article fails to make the point, big time.
Is this supposed to be scary? Who’s drowning?
The marriage tax strikes again…
If California (LA county), we pay close to 10% on sales taxes on top of all of things listed above.
Our generation’s job market/college situation is nothing like what it was back in the day.
On a side note, it’s only been 6 years since I started college at one of the UCs (public), and tuition since then has gone up ~40%
If the only job that you can get coming out of law school is one that pays 37K per year then dont go.
She racked up 167,000 in debt on tuition at a state school?? That is the same price tag as a private school. She must have been out of state. They bought a townhouse and are likely stuck with it. Even with their less than ideal financial decisions, they will be okay when she starts making a full salary and the husband’s salary starts shooting up. Sucks to be a lawyer in this market.
I went to an instate medical school, and my indebtedness is 185K… thats with tuition of about 25K a year (just increased to over 30k this year, glad i just graduated), and cost of living another 15-20k a year, plus 20k of interest that accumulated while in school. Yeah, the average indebtedness for state schools is over 100K (i think it was like 130K) and private was like 170K, but that takes into account people with scholarships or affluent families who could pay the price tag. That being said, their situation is not that bad, and neither is mine (and I just bought a condo at 220K with a monthly payment of less than the appartment I was renting during medical school), and will be forebaring my loans or possibily going into income based repayment.
Overall this is a very interesting article. I would like to point out that SDN doesn’t quite understand the way income tax is calculated. 25% is the marginal tax bracket.
hey…maybe instead of buying brand new cars, you get a beater you can drive until you’re out of debt. Maybe instead of buying a townhouse, you rent the cheapest thing you can find until your income goes up! then you don’t have to pay property taxes…There I just saved your couple about $1500 a month.
Basically, don’t buy stuff you can’t afford.
Nice point, Glu. Its really not that bad; your debt depends on your living expenses and what your “needs” are. I calculated it and I will have to devote about 33,000 GROSS for 20 years to pay off my med school debt. That’s really not that bad in the long run. For example, EM is an average competitive specialty and you can make 250,000 gross. Thus, instead of making 250,000 gross you will be pulling in 217,000. Not THAT big of a deal. Also, the 33,000 year gross that I devote to service the loan debt is worth much less in real terms as the years go by, only the absolute figure is the same.
At least they can get married! Imagine if they were gay and each got taxed as a “single” individual. They have a lot less to worry about than we do.
I’m sorry, but looking at this…all I can feel is bitter and angry that they can get married and have that tax break and I can’t.
i’m scurred…
Glad to only owe 100K. Hope to pay it off before the liberals all require me to take care of their useless behinds.
No, you shouldn’t be scurred. Aight.
Word. Well, I happen to have a strong interest in pursuing the lucrative subspecialty of neurological surgery, after I’ve gained entrance into and graduated from a top-tier medical school, no doubt. Knowing full well what kind of debt going to medical school might/will shackle me to, only serves to spur my competitiveness. Granted, as a minority (and a darn brilliant one at that), I might be able to gain admission with a full scholarship to a top medical school, after I’ve completed my Ivy League undergraduate years. Of course, I will prove my capability with top-notch GPA and MCAT scores, first (so as to remove any and all preconceived doubts about my intellectual capacity-I don’t think that affirmative action should play a significant part, if at all, in med school admissions) I want to know I made it into an Ivy League med school through sheer intellectual mastery and academic rigor, not through a politically correct “bump-up”. Watch out for this promising young pre-med. I start college soon.
My wife and I are second year dentists.
We both graduated dental school in 2009 with around $250,000 in student loans, totaling $500,000.
We both make $150 a year. MONTHLY budget:
salary 12,500 X 2 = 25,000
after FEDERAL and STATE tax = 16,000
student loan payment (3,OOO each) = 6,000
health insurance = 600
car payment= 650
mortgage= 1800
ac/electric= 200
cellphone=200
Direct Tv= 150
water= 150
internet= 50
groceries/food= 1,000
that leaves about 4,900 extra each month, but guess what!?
Credit card debt of 40,000 ( debt from school related licensing, testing, relocation, moving expenses)
so the 4,900 goes to credit cards each month.
leaving us 0…..living day to day……….
Dr. J:
You could eliminate your direct tv (why would you spend 150! dollars/month for tv?), your cellphone plan can be much cheaper. There are many good 30-35 dollar/month contracts yielding ~300 monthly minutes and free nights and weekends. How do you spend 1,000/month for food for 2 people? I spend ~ 100 and I eat a LOT. (~4,000 calories/day)
Credit card debt was a bad choice.
hmm
Speaking of food, I think if you don’t cook and eat everyday, then it will really cost a lot….(maybe 10-20 dollars a day for one person??)
goodmusic00
Yes, food can be very expensive if you eat out or buy normal priced items. (I.E, not buying on sale)
I don’t cook much and eat a lot of fruits, vegetables, pasta, and cereal because I spend a lot of time exercising and need to focus on school. Thus, even though I spend 100 bucks/month on food I eat very well. Fruits, vegetables, fish, nuts, very healthy.
Dr J:
Instead of spending so much money on unnecessary cable tv and your other incredibly high living expenses, (500 dollars/month for food each person?!!!) why don’t you pay off your credit card debt as soon as possible? Its probably accruing at 15% or so; you’re not going to consistently find market yields that high so if you paid off your credit card debt that would be the best financial choice…
I am in the same boat. I’m in the rat race with no hope of getting ahead. I live in a small house with an old toyota truck and don’t see me getting ahead unless I start a business in another industry than medicine (one that does not have stark laws and that is tax-advantaged)
oh, and how do you cook for yourself if you are working 95 hours/week?!
Let me shine some light into this topic…… here is our story, I am a dentist and my hubby is a pharmacist. We have combine 340k in student loan. We both love what we do, and good at it. However like everything else in life, you have to be prepared to sacrifice to do the things you want to do, not just a year or two, but for a long long time. Ever since we were in school we have lived way below our means, we moved from California to a small town in Texas, living standard here is way way lower than California. As a result, we are able to pay large payments every month toward our student loan. In matter of two years, we will be able to pay off nearly half of our combine student loan, if we stay here for four years we can pay all of our the student loan off if we wanted to. Besides paying off student loan, we are putting away around 3000 a month in our 401k, we are saving 3500 a month in our savings. Our living expense here is around 2000 month, no car payment yet, still driving old car from college days. We don’t eat out, I cook every meal for myself and hubby. I cook all day on Sundays, preparing lunch boxes for myself and my hubby. We eat healthy, almost all organic stuff. It’s a lot of work to live this way, but we save a lot of money, and we eat well, which is very very important to me. We have been extremely blessed, but also we have been extremely disciplined. We don’t have fancy cars, fancy house or fancy cloth, or fancy anything. We do travel to see our family every few month. We budget every month, and follow our budget religiously, if we are planning a trip, we save first before going on the trip. If we planning to give big gifts, we save ahead of time, before we give it. If you look at our furniture we would think we are very poor people, we still using furniture from college days. I wanna a pet, instead of getting one from fancy breeder, we rescued one from the street. We live cheaply, but we are happy and healthy.
If you want to become a doctor, and you don’t want to be in debt forever, it is possible, but be very very smart about life style choices ( both while in school and after school) and location where you live, learn how to cook, and learn to enjoy simple things in life which won’t cost a lot of money. Take care your body, your health is your most valuable assets, pray to God, he provides for you.
Dr. Tooth,
Thank you for your response. I will be attending a private out-of-state dental school and am worried about my student loans (it will be similar to you and your husband’s combined student loans). It’s the only one I got accepted into and I will not give up my dream simply because it’s too expensive. I’m glad to know that there is a way to pay off my student loans, and quickly (4-5 years), if you can give up the “finer things in life”. You have given me hope and I thank you for your post!
DMD class of 2015,
Check out the military’s HPSP scholarship program, ESPECIALLY if you are married with kids, (pays all tuition and expenses, 2K/month living stipend, guaranteed job, with slightly below or above average salary considering all benefits). The military way of paying for a private dental school has never been as good of a financial deal as it is currently, plus their AEGDs give you suberp clinical skills. I did it even though I got into a cheaper in-state school. Air Force life is great but really competitive (especially now and will be for the next 10 years) to specialize unless you stay in and pack on years of service so if you do want to specialize and not stay in, go A or N. ARMY and NAVY life can suck sometimes, but then you get to make a “real” sacrifice for your country (most are really glad they did later in life and a lot regret not having done so who haven’t) as well as getting a really good deal. Nope, I am not a recruiter, just a older DS who is on his second career and already been thru the high debt/high income cycle of American profesional life.