Dealing withDental School Debt

There is no good debt. What the debt was accumulated for may be good, but debt itself is not. What’s more, some debts are worse than others, such as debt for which the interest is nondeductible and must be paid with after-tax dollars.

According to William J. Sifer, CPA, interest on student loans provides little or no income tax benefit. Therefore, student loans are no longer a bargain as far as interest rates and repayment terms. 

“That’s the problem with a lot of school debt,” explains Robert J. Creamer. “The law is very limiting on how much a dentist can deduct. They can only deduct $2,500 if their income is low enough to get the deduction, but the deduction is limited once their income reaches $60,000 to $75,000 dollars for those filing as single taxpayers, and $120,000 to $150,000 for those filing jointly as married; our average general dentist [ie, clients of Creamer & Associates, PC] earns $300,000.”

Many dentists think that because they have a low interest rate on the student debt that they should not pay it, but rather should work on a practice loan that they have, Creamer observes. Even if the practice loan is at 8%, what they might not realize is that the practice debt is not as bad of a debt because that interest is fully tax deduct­ible, he says.

For example, if a doctor is in the 40% tax bracket, then they get to deduct and receive a tax benefit of 40% of the interest they pay on the practice loan, Creamer explains. Therefore, the effective rate of interest is reduced.

“It’s a matter of the doctor understanding the difference between tax deductible interest and nondeductible interest and putting the right priority toward getting that debt paid off,” Creamer says.

Additionally, Joseph Jordan, Esq, notes that the longer dentists defer the dental school loan debt, the more detrimental it could be, particularly because the debt will be accruing interest. He says that if dentists work in a qualifying clinic, they can participate in a debt-reduction program in which the state provides a certain amount of funds directly toward the student loan debt, in addition to their clinic associateship salary.

In today’s market, home-equity loans are available at very reasonable interest rates, notes Sifer. If dentists have property with available equity, they could consider paying off up to $100,000 of their student loans using a home-equity loan. The interest will be deductable, as the law stands now, making the cost even lower, he says.

“The objective is to get out of debt as quickly and as cheaply as possible,” Sifer says. “Be advised, however, that a home-equity loan places a mortgage on your home until it is paid off. A student loan is generally unsecured.”

Granted, dental school debt is good debt in the sense that it is an investment that will pay back in the millions of dollars, asserts Roger Levin, DDS. However, he emphasizes that dentists need to build earlier and faster than ever before because when they have debt, they want to get a return on that investment as quickly as possible.