PA vs Family Practice Doctor (financial perspective)

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PA vs family practice doctor financial viewpoint

 

Is it financially worth it to become a family practice doctor or should you be a physician’s assistant (PA)? The family practice doctor has a higher salary but takes much longer to start earning his salary and has higher debt levels and taxes. The PA, on the other hand, earns less but has lower debt levels and taxes and can start investing 5 years earlier. This is a purely financial showdown: PA vs family practice doctor.

Let’s look at this from 2 standpoints. (1) A financially savvy person and (2) a not as financially savvy person.

Lastly, this is not meant to sway anyone into either field. Much more important personal factors are autonomy and length of schooling desired, as well as desired flexibility to switch specialties mid-career. I made this only because I was always curious.


Background Info

Salary

(a.) According to the 2017 Medscape Physician Compensation Report and Residents Salary and Debt Report, family practice doctors earned $209,000 in practice and $54,000 in residency. Medscape is much more accurate than general compensation sites like Payscale.

(b.) Physician assistants earned a median of $105,000 according to the 2016 Statistical Profile of Certified Physician Assistants.

 

Taxes

Both live in Dallas, TX and pay FICA, Federal income, and no state income tax. They would have no state income taxes living in Texas but higher property taxes. Student interest paid is tax deductible up to $2,500 but it only saves up to $1,000 in income per year for the years that interest is being paid and it’s confusing under IBR, so I will leave it out. It makes very little difference in the big picture. Also, taxes have to be payed on the forgiven loan amount under IBR.

Training cost

(a.) The cost of medical school is $34,500 (tuition, fees, health insurance) per year for 4 years for the average in-state public medical school, according to AAMC. This is significantly cheaper than private or out of state public schools at over $50,000 for both. You can subtract $3,000 per year if you are on your parents health insurance until 26. Having visited a number of school’s websites, indirect costs can be estimated at around $22,000 (room, board, books, transportation) per year.

(b.) The average total 27 month cost for PA school is $71,000 in state and $90,000 out of state, according to The Physician Assistant Life. Once again, indirect costs (room, board, books, transportation) can be estimated at $22,000.

Loans Taken

(a.) Medical: Assuming you don’t qualify for financial need as determined by FAFSA, you can take out Direct unsubsidized Stafford loans up to $40,500 annually at 6.0% (2017) with a 1% origination fee. GradPlus unsubsidized loans can be taken out for the remaining yearly balance at 7.0% (2017) with a 4.3% origination fee. Unsubsidized means the interest accrues from day 1 of school.

If you do have “exceptional” financial need, you can take out a Perkins loan which offers a slightly lower interest rate and no origination fee; however, you can only get $8,000/yr from it, so it doesn’t make much of a difference. Lastly, a 4th kind of loan you can have is an HRSA Primary Care loan if you have financial need. These are 5% loans with no limit up to cost of attendance with a 1 yr interest grace period. Using some rough math, this loan is actually pretty good and could save you $50,000 or more but people that may qualify would most likely already have higher undergrad debt levels that would build during medical school and negate the savings. Note: the formula for Stafford’s interest rate is 3.6% + 10 yr treasury rate and Gradplus’ is 4.6% + 10 yr treasury rate (Edvisors.)

*** I am going into a lot of detail because if I just pull an “average debt level” number like most websites do, it would be skewed lower because 1 in 5 people have no medical school debt (parents paying, military etc.)***

(b.) PA: PA students take out loans of the same sort as medical students above except that the lower interest rate Stafford loan is limited at $20,500/yr. So, they take out $20,500 of 6.0%, 1% origination fee DIrect unsubsidized Stafford loans and 7.0%, 4.3% origination fee Gradplus unsubsidized loans for the rest.

Interest compounding

According to studentaid.ed.gov and DebtFreeAdventure, interest is calculated using a simplified daily interest formula of principle x interest / 365.25. Daily interest on a 100k loan at 5% is [100,000 x .05 / 365.25] = $13.69.  Interest is capitalized per year (unlike most loans, which are monthly.). This means the interest is added to the 100k principle after 12 months. The next year, you are charged further interest on [interest not paid + original principle]. Thus, if you didn’t pay your $13.69 per day then at the end of the year $5,000 (365.25 x 13.69) would be added to your 100k principle. Your next year’s daily interest rate would be $14.37 ($105,000 x .05 / 365.25)

Now that we have all of the basic background information necessary, it is time to get back to the PA vs family practice doctor showdown.


PA vs Family Practice Doctor Round (1) The financially conscious Jim

(a.) family practice doctor

Cost of school

At age 23, Jim goes to the cheaper in state public medical school that costs $34,500 (if only he lived in Texas!) His total cost is $53,000/yr ($34,500 – $3,000 + $22,000) if he stays on his parent’s insurance plan. He takes out $53,940 each year in loans ($40,500×1.01 + $12,500×1.043) including his origination fees. His combined interest rate is 6.24%([$40,905/$53,940] x 6% = 4.55%…. + [$13,040/$53,940] x 7% = 1.69%). Since his interest is never paid and compounds every 12 months, his debt level is $251,590 after 4 years of school.

Residency

Jim begins his residency when is 27 making $54,000 and $43,300 post-tax. He lives in an apartment, so he has no property taxes. He doesn’t want his debt to grow but also wants a little more spending money. He pays off his $15,500 interest each year and lives off $27,800 post-tax, which is an $8,000 raise from medical school (also doesn’t include a few thousand in books per year.) After his 3 year residency his debt is still $251,190.

Eliminating debt

Now Jim is 30 earning a post-residency salary of $209,000 and $150,000 post-tax. He is 30 now so he expects to live more comfortably but within reason. He lives off $60,000 post-tax  while paying off his debt. He enters a 3 year plan to pay off $91,200 per year in debt.

Investing for retirement

At age 33 Jim is debt free and ready to start investing for retirement (at 65) as well as living a little more like a doctor! At this point it is hard for me to say how much post-tax income someone should seek to live off for the rest of their working years vs retirement like I did for the $28,000/yr resident, $28,000 mid 20’s PA below, $60,000/yr early thirties doctor. To figure out how much you should invest as a doctor, check here.

To make a comparison easier, let’s assume the doctor and PA want to live off a comfortable $100,000 post-tax in retirement, which would require $140,000 pre-tax and $3.5M in savings assuming the common 4% rule for retirement withdrawals ($3,500,000 x .04 = $140,000). I am not inlcuding Social Security in retirement. Jim starts investing $30,000/yr and lives off of $120,000/yr post-taxes and investing. $30,000 per year for 32 years (retiring at 65) at a very reasonable 7% gives you $3.5M. Pretty cool! Don’t worry, I’ll have many investing posts later.

(b.) PA route

Cost of school

At age 23, Jim goes goes to PA school at a cost of $57,500/yr ($35,500 + $22,000). He takes out $59,300 each year in loans ($20,500×1.01 + $37,000×1.043) including his origination fees. He has a combined interest rate of 6.65% ([$20,705/$59,300] x 6% = 2.09%… + [$38,590/$59,300] x 7% = 4.56%) His debt level is $130,700 after 2 years to make it simple (actually 2.25 years)

Eliminating debt

At age age 25, he starts earning his full time salary of $105,000 and $77,500 post-tax. He is still in his mid-20s and is happy to live like the medical resident until he pays off his debt. He lives off $29,300 and enters a 3 year plan to pay off $48,200 per year in debt

Investing for retirement

At age 28, Jim is debt-free and is ready to start investing for a $100,000/yr post-tax retirement income like his doctor twin. He starts investing $20,500/yr and lives off $56,000/yr post-taxes/investing. He has longer to invest at 37 years until his 65th birthay, so he can afford to invest a lotless per year at 7% to get to $3.5M.

Conclusion

PA vs family practice doctor (financial perspective)

Or my new prettier infographic:

PA vs family practice doctor (money)

 Financial Winner: Family Practice Doctor

The two live almost identically until 35, but it’s a different story after that. PA vs family practice doctor round 1 goes to the doctor. The dividends don’t start to pay off for the doctor until he is 35 but then he will have more than double the post-tax income than the PA for 30 years.

I always thought the PA would be better off for two reasons:

(i.) I thought the  extra 5 years of investing for retirement would make a huge difference. And it does…the doctor has to invest 50% more money at 30k vs the PA’s 20k per year for the rest of their life. It doesn’t matter though because the doctor still has twice the disposable income after doing that.

(ii.)I thought medical school was way more expensive than PA school. Is it though? The sticker price is much more but the debt level is actually better than for the PA proportional to their salaries. The doctor’s debt level after school/residency was 20% higher than his salary but the PA’s was 23% higher. Wow…

I could not have been more wrong. The next will be a different story as Harry will not pay off all of that interest during residency, but for now the family practice doctor is the financial winner.


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PA vs Family Practice Doctor Round (2) The not financially conscious, Harry

(a) family practice doctor

(More expensive) cost of school

Harry goes to an out of state public university that costs $58,700. Like the above example his total cost is $77,700 ($58,700 – $3,000 + $22,000.) After origination fees, he takes out $79,590 each year in loans ($40,500×1.01 + $37,200×1.04). His combined interest rate is 6.48% ([$40,905/$79,590] x 6% = 3.08%… + [$38,688/$79,590] x 7% = 3.40%). After 4 years of school, his debt level is $373,390. Wow!

Residency

During residency at 27, Harry also makes $43,000 post-tax but he doesn’t want to pay off as much debt as Jim and opts for the Income Based Repayment plan to pay less during residency. He has to pay 10% of discretionary income, which is adjusted gross income  – 150% of the poverty line. His AGI $54,000. 150% of the poverty line for a 1 person household is $18,000, so .1 x ($54,000 – $18,00) = $3,600 per year is his debt repayment during residency and he lives off $39,400 post-tax.

Like I mentioned in the beginning, calculating the interest deduction is confusing here because to get your AGI which gets you to your IBR payment, you take out deductions first but you don’t know your deduction yet because that is your IBR payment. Whatever, it’s not much money in the big picture (a couple hundred each year.) After making this very small yearly payment for 3 years, his debt has grown to $438,520 at the end of residency.

Eliminating debt (poorly)

At 30, with that scary debt load on his back, Harry starts making $209,000 pre-tax and $150,000 post-tax. Under IBR, he has to pay .1 x (AGI – 150% poverty line) for 20 years at which point his outstanding debt is forgiven but he still has to pay tax on the forgiven amount. His yearly payment is $19,100 for 17 years and he lives off $131,000. Unfortunately, I couldn’t use an IBR calculator online because they can’t take into account that salary jumps from 54 to 209k, so I had to do this in excel for the remaining 17 years. The resulting loan balance to be forgiven and taxed is $676,350 when he is 47. It grew because he wasn’t paying all of the interest each year.

To get the tax he has to pay, add the loan balance to his yearly income. This bumps the loan balance into a higher tax bracket because loan forgiveness in considered taxable income. He will have to pay taxes based on a gross income of $885,350 that year even though it wasn’t really income! Ouch!  The tax he has to pay just for the loan forgivness is $270,660 ($329,660 including income taxes.) He will pay for the loan taxed amount from his savings, which will be calculated next, so as to keep his income steady for comparison rather than having a huge blip at age 47.

Investing for retirement (too late)

Harry starts to think about retirement at age 40 and believes he should start saving. He didn’t think he needed to start thinking about retiring when he was in the first 10 years of his 35 year career. He starts to invest as much as Jim does at $30,000/yr and live off $101,000. After 7 years of investing with a 7% return, it is time to pay his tax on his forgiven loans. His portfolio has grown to $278,000, but his loan tax is $270,660 leaving him with only $7,340 in retirement savings at age 47.

He continues to invest 30k/yr after this setback until age 65. With no more student payments, he can live off $120,000. His retirement savings are $1,090,000 at age 65. Thus, he lives off 4% of this or $43,600 pre-tax and $35,800 post-tax in retirement. Once again, this does not include Social Security.

(b.) PA route

(More expensive) cost of school

Harry attends an out of state PA school at age 23 at a cost of $67,000/yr ($45,000 + $22,000) per year for 2 years. He takes out $69,000/yr in loans ($20,500 x 1.01 + $46,500 x 1.04) per year for 2 years including his origination fees. His combined interest rate is 6.71% ([$20,705/$69,000] x 6% = 1.8%….+ [$48,360/$69,000] x 7% = 4.91%.) His debt level is $147,790 after 2 years. 

Eliminating debt (poorly)

At 25, Harry is going to do the IBR route like above. He has a pre-tax salary of $105,000 and post-tax $77,500 salary. His IBR payment per year is $8,700 which leaves him with $68,800/yr to live on. When he is 45, he would have an outstanding balance of $181,500 to be forgiven and taxed. After adding the loan forgiveness to his earned income at age 45, the tax he has to pay on his loan forgiveness is $59,370.

Investing for retirement (too late)

Harry starts thinking about retirement at 40 like his doctor twin. He starts to invest $20,500. He invests as much as Jim the PA does at $20,500/yr. After 5 years at 7% his portfolio is worth $126,140. After subtracting his loan forgiveness tax, his portfolio is worth $66,770 at age 45. He continues his $20,500/yr investing after this setback. At age 65 his retirement savings are $1,160,000. He lives off 4%, $46,400/yr pre-tax, and $38,000 post-tax.

Conclusion

 PA vs family practice doctor (financial perspective)

Or my new prettier infographic:

PA vs family practice doctor (money)

Financial Winner: Family Practice Doctor

PA vs family practice doctor round 2 goes to the doctor, but does he really win? They both have to live off less than 40k in retirement, so they really both lose… Anyways, the PA lives on a lot more in his 20s but a lot less every other year.


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Takeaways from the 2 scenarios

  • Yes, it is clearly worth it from a purely financial standpoint to become a family practice doctor. PA vs family practice doctor rounds 1 and 2 from a solid personal finance plan and shaky financial plan, respectively, both prove this.
  • The salaries at different ages are so skewed for Harry. Why would you want to live the high life when you are in your 30s and live off less from then on?
  • Delaying saving for retirement will cost you a ton of retirement income. Harry as a PA or doctor has to live off less in retirement than he did when he was a resident. Rather than just for a few years, in retirement he has to live like this for maybe 25 years.
  • Harry the doctor invests 78% as much of his salary over his live as Jim does ($750,000 vs $960,000) but only has 31% as much money saved up ($1,090,000 vs $3,500,000) because he started 7 years later and had to pay off his IBR loan forgiveness tax. The situation is similar for both PAs
  • For all of Harry’s bad financial decisions, he actually lives as about the same as Jim on the PA or doctor route from 33 until he is 65. At that point though, he will seriously regret going to a more expensive college, delaying retirement saving, and paying off his debt in a bad way as he has to majorly decrease his standards for the rest of his life.
  • Most importantly, financial reasons shouldn’t be your main reasons for going into a field and I doubt anyone reading this will switch from one to the other based on this information. What it should tell you is why you should switch from being like Harry to being like Jim.

 

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