Why Having A Student Loan Repayment Strategy Is Critical For Physical Therapists

By Joseph Reinke, CFA, CEO and Founder of FitBUX

When speaking with student physical therapists and clinicians about their student loans, we at FitBUX stress the importance of developing a strategy.  If there is only one thing you remember from this article about strategy, it is this: IF YOU MANAGE YOUR RISK, YOUR RETURN WILL BE THERE.  This means if you develop a strategy which will mitigate the risk to your overall financial situation, things are likely to work out in the end.

This is essential for all individuals regardless of age but extremely important for students and recent graduates: after graduation, you are not just starting your professional career, you are also beginning to work on your financial future.  You want to get started in the right direction.

To illustrate the importance of developing a strategy and managing your risk, we will look at an actual example for a client who recently graduated and wanted to open his own private practice.

A Real-life Example

Let’s refer to our client as “Chris”.  

Chris’s Current Situation

  • He recently graduated and has $140,000 in student loans.  
  • He has decided that he would go on a Federal Income-driven Repayment plan (IDR) regardless of whether he will end up opening his own business or work for another company.
  • Other than one business class and reading a couple of blogs, he has no finance or business experience.
  • He completed two of his clinicals at a private practice.
  • He has $2,000 in savings.

Chris’ Current “Strategy”

  • He wants to start a business that combines training and physical therapy.
  • To keep expenses low he was planning on working out of two gyms and using their equipment.
  • Since he realized his practice would not be profitable for a while, he was planning on working two part-time jobs.  However, the money from these part-time jobs would barely cover his modest living expenses.
  • His strategy for his student loans was to go on IDR. While Chris had done some light research on IDRs, he had no plan in place to handle the sometimes (very) large tax liability associated with that type of plan. This is because under an IDR plan, any amount that is forgiven at the end of the term is taxed as regular income. In other words, while the loans are forgiven, the tax bill is not. In short, his strategy was to pay as little as possible on the student-loan and deal with consequences later. That’s not exactly a sound strategy…
  • When asked how he planned on managing the potential risk of failure in his professional endeavors, he had no plan.  This meant that if his business failed in three to five years, he would have no money, would have a difficult time marketing himself, and would be saddled with a tax liability building up from his student loans.

One Strategy That Chris Could Implement

The following is one strategy we explored with Chris:

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  • The strategy entailed Chris altering his mindset from starting his business today to building the foundation of his business over a three to five year period. This would significantly increase his chance of success as a business owner down the road.
  • He would go to work at a private clinic working forty hours a week.  This would allow him to have a good paycheck and learn the business.
  • In his free time he would further develop his human capital (Human Capital is defined as the skills, knowledge, or other intangible assets of individuals that can be used to create economic value). In his specific case, this would consist of learning as much as possible about business, marketing, and finance.  In addition, he could work towards getting professional designations.  This would allow him to market himself and his company once he launched it.  He would also have the opportunity to learn from a mentor and network within the PT community to find a potential partner that could complement his skill set.
  • While building this foundation, he could launch an internet site and begin developing an online audience.  Therefore, he would have people to market to when he launched the company as well as the opportunity to show the world his expertise.  
  • Most importantly, he was setting himself up financially and managing his overall risk should the business venture not succeed:
    • His monthly payment on an IDR plan would be about $400 in the first year instead of $1,589 if he elected to repay his student loans immediately, allowing him to keep $1,190 in his pocket each month.
    • Over a five year span, he would be able to save up approximately $70k in cash.
    • In addition, between his contributions and his employer’s match, he would save approximately $75k in his 401k.
    • Most importantly, he would now be able to set aside $35k of the $70k he had in cash to meet the tax liability of being on a IDR Plan.  He would still have $45k left over and could concentrate 100% of his energy on his new company instead of working part-time jobs just to make ends meet.
    • When starting his company, he would have a significant amount of experience and an audience that he may be able to monetize in multiple ways.

As you can see, by first building up his Human Capital, Chris would be able to manage the risk associated with his present and future situation:  if his business did not perform as expected, he would still have his tax liability taken care of, $75k in his retirement account, and valuable experience/education/designations that could not be taken from him.

In summary, by developing this strategy and focusing on managing risk, Chris will be able to increase his probability of success.  Managing this risk will keep him in a reasonable financial shape even if his business failed.  

Again, strategizing and managing risk is key.  If you would like to develop a strategy with your student loans, contact FitBUX.  We are here to help Physical Therapists get started on the right path financially.