Why Paying off Student Loans Should Not Be Your Goal!

May has now come and gone, which means that many of you will soon be or have recently graduated from dental school and although you may not all have the same specialties, one thing you will all have in common, is the whopping amount of student debt you have accrued. In 2014, the average dental student graduated with $241,097 in debt, nearly double the amount of debt that students accrued for school back in 2001.

Most of you will graduate, become an associate in an already established practice, and start paying off that student debt right away; but what if we told you, that instead of taking that route, we advise that you consider purchasing your own practice; that we advise you to establish your own practice and then slowly start tackling your student debt, a little bit at a time.

Now we know what you are thinking. You are sitting there reading our words, silently thinking to yourself, “Are you crazy?” What sense does it make graduate from dental school, owing hundreds of thousands of dollars in student debt, and then taking out ANOTHER loan to buy my own practice?

Well, student debt is not a contributing factor in whether or not a lender will loan you the money to buy your own practice. A bank would rather see an applicant who has $250,000 in student loan debt and $50,000 dollars in savings, than a borrower who has $200,000 in debt and $0 in savings. This is because they expect you to have student loan debt but they need you to have some personal financial savings to reduce the “risk” they are taking on by lending you money.

Before we go any further, let’s clear one thing up: This doesn’t apply to all kinds of debt. Credit card debt is much different than student loan debt. Credit card debt is revolving and having a larger amount of credit card debt than the average borrower can and will be seen as a hindrance.

So, if owning your own practice is a professional goal, it will be more beneficial to funnel your earnings into a savings account, than to funnel your earnings into paying back your student debt right out of the gate or working for the first five years as an associate to “pay off your debt”.

This will make even more sense when we let you in on this little secret:

The cash flows that you will receive as an owner will be much higher than that of an associate.

Again, we know what you are thinking: “Well, duh!”…. But let’s dig a little deeper and for the purpose of this example, let’s look at a General Dentist practice that will have $1M in collections annually:

Earnings as an Associate…… The Associate of a practice that brings in $1M in collections annually will typically have a pay range of 25-30%. After subtracting 28% of the collections related to hygiene, that associate will be earning 25-30% of $720,000, or $180,000-216,000 in gross associate compensation.

Earnings as an Owner……. When we look at the possible earnings as the owner of the practice, the collections derived from the hygiene production will be added back, because that portion of the collections is considered a benefit of being an owner. This means that instead of the owner earning 40% of the $720,000, he or she will actually earn 40% of the full $1M (after taking into account an assumed overhead of 60%), and that means that as an owner you have the potential to earn $400,000 per year. Essentially, you are earning between $184,000 to $220,000 more as an owner than as an associate and are doing the SAME WORK.

Associate

Owner

25%-30% of $720,000

Compensation:  $180,000-$216,000

40% of $1,000,000

Profit:  $400,000

That is an additional owner’s benefit of $184,000 to $220,000!!!

 

Now that you see how beneficial ownership can be…..let’s go back to student loans. As you can see, if you wish, it will be so much easier to pay back the $241,000 in loans as an owner, making $400,000 annually, than as an associate making $200,000 annually. The ability to pay loans off quicker, in turn, means that you will be saving additional money that would have been allocated to accrued interest.

Aside from the increase in pay, other benefits of being an owner over an associate are that as an owner:

    • You are able to build equity in your business.
    • You are able to control your own destiny.
    • You are able to manage taxes more effectively.
    • You have the ability to maximize a pension plan to prepare for retirement.

The key to moving forward with your own practice, regardless of the amount you still owe from school, is finding the right practice for you. Finding the right practice for the right price should be your biggest concern upon graduating from school, not immediately paying back the student debt.  Don’t quite believe us yet?  Talk with lenders! We can connect you to some of the top lenders in the dental acquisition industry who are experts in dental practice financing and understand how a dental practice works, what the opportunities and risks are.  They can further guide you so that when you are ready to purchase, you are that much more ready!

Buyer’s Consulting is just one of the many services we offer here at NDP, and when you are ready to move forward with purchasing your own practice, we would love to help you find the right practice and help you down the path to ownership!

Already have an opportunity for ownership or interested in learning more about dental practice financing?

Contact Us today to learn more about how to set up your complimentary buyers discussion!