Wealth advisor unpacks domino effect of debt for healthcare professionals, and how rate hikes have reshaped conversations
While physicians and dentists tend to land high on the income scale, that doesn’t make them immune to the pressures of rising interest rates. In fact, according to one advisor, they may be among the client segments most at risk of getting hurt from debt.
“Most of my clients are physicians and dentists,” says Gurtej Varn, wealth advisor and founder of White Coat Financial (pictured above). “They amongst the Canadian population are some of the most vulnerable, especially young physicians and dentists, to interest rate increases.”
The snowball effect of student debt
When it comes to debt, healthcare professionals like Varn’s clients will typically get hit in several ways. During their schooling, they’ll typically accumulate breathtaking amounts of student debt; many of his clients carry balances of around $300,000 in a professional line of credit by the time they finish. With interest rates on those debt vehicles hovering around 6.95% today, they’re facing around $1,800 a month just in interest payments.
“While they're in residency, they don't make a lot of money. They’re not paying down the principal, so that balance is just adding up every month,” Varn says. “They don’t actually make the payments they need to on a lot of these loans until they start practicing, which means their debt is compounding for several years.”
When aspiring physicians and dentists graduate, they’re hit again. Because so much of their cash goes toward debt servicing, their budget for living expenses, rent or mortgage costs gets constricted. Especially for clients in British Columbia or Ontario, the financial pain can get so acute that they have to delay incorporating their practice or pull more money out of their corporations, exposing them to higher taxes.
With a longer timeline to becoming debt-free, he says many healthcare professionals also have less opportunity to benefit from long-term compounding returns in their RRSPs, TFSAs, or FHSAs. Higher interest rates are also negatively impacting the ability of those more advanced in their careers to carry practice loans on top of mortgages, car loans, and any remaining student loans.
“When interest rates were a lot lower, it seemed a little more feasible to take on all this debt,” Varn said. “But given interest rates have gone up so much, they're really being squeezed right now.”
Debt conversations accelerating
While debt has always been a priority at Varn’s practice, he says those conversations have increased and intensified. More debt-pinched clients are looking to pay off their loans and lines of credit as soon as possible, and Varn’s team is urging clients to wipe those slates clean.
“When interest rates were around 2% on these professional student lines of credit, we were suggesting clients could allocate some of their income towards their RSPs or TFSAs, or building up their retirement assets, and we’ll continue making the scheduled payments to their debt,” he says. “Oftentimes, conversations on incorporating would happen a lot earlier too.
“But these days, the conversation has transitioned almost entirely to ‘let’s get that student loan, especially the professional student line of credit, paid down a little bit more,’” Varn says.
As the pressure of higher interest rates weighs on the financial outlook for healthcare professionals, Varn believes proactiveness should be the watchword for advisors working with physicians and dentists. He says he’s taking the initiative on reviewing clients’ assets and liabilities, budgets, and options for mortgage payments, among other aspects, in order to head off the risk of panicked calls or poor decisions.
“I find that in our industry, it’s really all about constant communication, and making sure we’re guiding clients’ decisions because that’s what they’re paying us for. Sometimes that involves being proactive rather than waiting for them to call on us,” he says.
“Most of us know how to do the math of investments, debt and tax planning … but on a more emotional and client-care standpoint, we should reach out to them before they have to reach out to us – because money is on their mind whether they call us or not.”