3 debt elimination strategies every chiropractor needs to know.
Back in high school, I ran the 400 meters. It was a grueling race. Huffing and puffing, coming down the last stretch, my body was burning and groaning. It felt like I was dragging a piano behind me.
Perhaps you feel like this too. But now it is debt you are dragging along. You are working so hard and it feels like you are barely going anywhere.
If you have a lot of student debt or debt on your practice, consider three key strategies that are available to you today that you may not have heard of before.
Equity-interest reduction
Practically every chiropractic student is paying somewhere between 6 and 7 percent interest on his or her loans. On $100,000 worth of debt, that’s about $6,500 a year in interest (or over $500 a month just in interest.)
Think about virtually any debt, like a mortgage or car loan. If you have a high interest rate today, and interest rates drop tomorrow, you could get it refinanced somewhere. Your 6 percent loan could become a 5 percent loan.
Yet, for student loans, the situation is different. You can’t get them refinanced even though the Federal Reserve has driven interest rates ridiculously low. In this void, private equity has started to step in to make refinancing possible today for many doctors.
Several companies like SoFi, DRB, and others are now offering to refinance your student debt at rates that could cut your interest in half. These companies are currently charging nothing to refinance your student debt and may even give you a $250 credit for the first month.
They are financed by private equity that is looking to take relatively low- risk returns to hedge against interest rate risk in bonds.
A caveat: You have to be working to take advantage of these refinancing programs. You cannot refinance your debt through them if you are still a student. But once you can show a contract or proof of higher income, you become eligible for participation.
Public loan forgiveness
If you work for a nonprofit or a government agency, consider the 10-Year Public Service Loan Forgiveness (PSLF) program, which offers many advantages. Sponsored by the federal government, it can cover virtually any field of practice—including chiropractic.
Here’s how it works: While you are employed full-time for a public-service organization, you must make 120 on-time, full monthly payments. Qualifying employment is any job with a federal, state, or local government agency, or a nonprofit that has 501(c)(3) status, as well as certain nonprofits that are not 501(c)(3)s.
It can cover all of your federally backed loans, including Stafford, Perkins, and other programs. The benefits are currently not taxable, but this could change in the future. The federal government forgives your balance at the end of the 10-year program.
Currently, all debts that are forgiven are exempt from state and federal income taxes. And $100,000 is the taxable equivalent of $142,860 (assuming a 30 percent tax bracket). This is a huge potential benefit.
As part of this process, you will have to choose a pay-back program based on your earnings. You want to enroll as soon as possible once your education is complete because you pay on the earnings reported on your tax return. If school ends in June, this means you’ll bank nine or 10 months of low payments until you’ve filed your taxes.
A caveat: If you own a for-profit practice or are part of a franchise, you won’t be able to qualify for these programs. On the other hand, there are increasing rumblings that “alternative medicine” is becoming more mainstream, so many chiropractors are now being employed at hospitals and other nonprofit entities. This is a great program for them.
Tax-deductible ‘friendly’ debt
You can put most forms of debt into one of two categories: “ugly” or “friendly.” Ugly debt is not tax deductible. Friendly debt is tax deductible.
An example of friendly debt is the tax-deductible debt on your primary residence. Likewise, you can consider credit cards, car loans, life insurance loans, and student loans to be ugly debt.
The reason student loans are especially problematic is because they stop becoming tax deductible once your income reaches a certain level. Currently, that is $65,000 if you are single or $130,000 if you are married.
Most chiropractors are making more than these amounts, considering that many are married and in a two-earner household.
How much equity do you have in your home?
Could you convert ugly student and automobile loans and credit card debt into friendly tax-deductible debt?
Alternatively, in your practice, business lines of credit typically have a higher interest rate than mortgage debt, but are also tax deductible and more friendly than credit card debt or student loans.
Lighten up
As a chiropractor, you’ve made a commitment to serving others and your community. You are helping patients every day by relieving them from tremendous physical pain.
Maybe it’s time to work on your own pain—reduce the weight of that piano that you’ve been dragging, cross the finish line with a strong burst of speed, and get out of debt.
Dave Denniston, a chartered financial analyst (CFA), is a professional wealth manager and financial adviser in Bloomington, MN. He can be contacted at 800-548-1820, dave@daviddenniston.com, or through DoctorFreedomBook.com where you can get a copy of The Freedom Formula for hysicians.
