Dental school takes big bite

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This article was published 17/09/2011 (5182 days ago), so information in it may no longer be current.

Calvin is starting his fourth year of sciences and already has tens of thousands of dollars in student debt.

The 22-year-old University of Manitoba student has more than $40,000 in student loans, but that represents only a fraction of the total he expects to owe once he’s completed his education.

Calvin says he is applying to dentistry school for next year, which has highest tuition fees and costs at the university.

“It’s more than $40,000 in tuition, books, supplies and living expenses for each year of dentistry,” he says.

By the time he’s done, he says he expects to have more than $200,000 in debt.

Government student loans aren’t enough to even cover the $19,000 cost of tuition, so Calvin says he plans to get a loan from a financial institution.

“I’d have to get a line of credit, but I’m not really sure, though,” he says. “That’s part of what I’d like to find out.”

Although he knows the costs going in, Calvin says he worries the debt load will impair his ability to afford future expenses such as buying a car, a home and even his own practice one day if everything goes as he plans.

“It’s not so much that I’m worried about this year, because my current loan will have me covered, but how am I going to take care of myself in future years?”

RBC financial planner Ryan Lussier says Calvin has already demonstrated he has good financial management skills.

“It doesn’t look like he lives a crazy lifestyle and has done a good job on his spending,” Lussier says. “He’s on a budget, and a lot of students don’t even have a budget at all.”

These are good indications Calvin will have the ability to handle a future debt load that is much higher. Lussier consulted a commercial loan specialist at RBC, account manager Michael Witoski, who works almost exclusively with dentists and dentistry students, and says Calvin should consider consulting a commercial banking specialist like Witoski if he gets accepted into dentistry.

“The dentist’s practice is more of a business than any other medical profession,” Lussier says. “It’s not like you just throw up a sign and all of a sudden you get a bunch of patients.”

After getting accepted into dentistry school, the first step is to apply for a line of credit.

Most financial institutions have lending programs specifically designed for students enrolled in professional programs such as dentistry. Many offer credit lines of about $200,000 or more.

“The line is often offered at the prime lending rate,” Lussier says, adding students only need to make interest payments during their course of study. “After graduation, you don’t have to start making payments on the principal for 12 months.”

The credit line offers flexibility. Calvin can use as much or as little as required, and he can start paying down the debt while still in school if he has part-time employment while studying full time.

Once Calvin graduates and finds work, likely as an associate in an existing dental practice, he can expect to earn between $120,000 and $200,000 a year.

“If he can find a practice owner who is selling a portion of the business, that’s great, but most usually start out as an associate at practice.”

Earning $150,000 a year, for instance, Calvin would be left with about $90,000 after taxes and other deductions.

On a debt of $250,000, Calvin could likely afford the $2,400 monthly payments, based on the current floating rate of three per cent, if he wanted to be free of his student debt in 10 years.

Lussier says Calvin should look into the benefits of incorporating once he’s working as a dentist. Some dentists who incorporate might choose to move their line of credit debt into the corporation, he said.

This strategy, called cash damming, offers many benefits, including making interest on the debt tax-deductible.

Furthermore, his earnings under the umbrella of the corporate structure can be used more efficiently to pay down his debts.

Any earnings up to $400,000 by an incorporated small business in Manitoba are not subject to provincial corporate taxes, and the federal tax is only 11 per cent. On earnings of $150,000, the corporate tax would be about $16,500, leaving him with more money for debt reduction. The remaining cash could be paid out as a salary to Calvin at a lower personal tax rate.

“If he earned $150,000 without a corporation, his average income tax would be about 35 per cent and his marginal rate would be 46.4 per cent.”

That added capacity to pay down debt will come in handy as Calvin forges ahead with his career, which will likely require a lot of future capital investment. Lussier says most new dentists are unable to make the leap to owning a practice after graduation because the cost of equipment and other infrastructure for a practice often exceeds $1 million.

“It’s tough to come up with that right off the bat,” he says.

“If they’re lucky enough to find an owner willing to sell off his business, then that may be an option, and that’s where commercial bankers will work with him to evaluate the business and see if it makes sense.”

Fortunately for Calvin, his timing couldn’t be much better. Like many professions in Canada, graduating dentists are looking at very favourable business and labour- market conditions for the next decade or more, Lussier says.

“There are a lot of baby boomers in that line of work right now, so the possibility of buying into a practice becomes a lot more prevalent as they look to exit their practices.”

 

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Calvin’s finances

INCOME

Student loan: $12,880 (annual); $1,073 (monthly)

Part-time job: $4,080 (annual); $340 (monthly)

Parents: $1,200 (annual); $100 (monthly)

 

Monthly expenses: $1,474

 

DEBTS

Student loan: $40,160

 

Future tuition and materials costs for dentistry at U of M

Tuition: $19,000 per year (four-year program)

Books and materials: $16,500