Medical School is Well Worth the Cost

Bottom Line Up Front: 

The financial benefits of a medical school education are far greater than the costs. 
$5.3 million: lifetime benefit of a medical degree. 
$255,000:  Medical school cost estimated from someone with $300,000 of total debt.
$20.78: extra lifetime income generated by every dollar invested in medical school education.
2078%: lifetime return on investment. 
9 to 1: medical school payoff if true cost were as high as a $510k. 

All estimates of the cost of education are greatly exaggerated because they ignore costs of living that everyone must pay whether a student or not. 
$54,880: private college sticker price per year.
$26,820: what the average family actually pays.
$13,700: the true cost of a year of private college above living expenses.

Taxes reduce but by no means eliminate the advantage of pursuing medical education. 

3.33x: how much more than a college graduate the average medical school graduate earns
6.6x:  how much more in federal taxes the medical school graduate will pay.
$3,592,516: 40-year marginal benefit after taxes of a medical education. 
$140.88: medical education return per dollar over 40 years 

The New York Times ran a depressing article profiling some of the 8% of medical school graduates who do not match with a residency training program. This forced gap year results from the failure of residency training programs to expand to accept an increasing number of medical school graduates.
Someone reading the article might walk away with the impression that this is a tragedy. Someone profiled in the article had amassed $300,000 of debt but didn't match. The tone of the article seemed to imply that she had made a colossal mistake.
As painful as her situation must be, as much as she must be disappointed, it is highly likely that she is more inconvenienced than ruined.  She can regroup, do something with this gap year that she didn't plan on, perhaps change the programs or even the specialty to which she applies (some are far more competitive than others).  Someone with an M.D. can do a wide range of jobs that pay decently while waiting.
$300,000 of debt sounds extraordinary. Even by today's standards, it is high - the average medical student graduates with almost $200,000 of debt, versus just below $30,000 for the average 4-year college graduate.  The additional debt medical school adds averages $170,000.
Behavioral finance makes clear that we are exquisitely sensitive to how numbers are presented. We are relatively oblivious to small daily expenditures - $9 a day at Starbucks, for example, but shocked when the number is annualized: $3,285.  If we paid for coffee the way we pay for college and medical school, in one massive 8-year total, that $9 a day would translate to $26,280!  And that's just coffee!
Although we should work to reduce the total cost of education, especially in service professions such as medicine from which all of society benefits, my fear is that someone considering medicine might be frightened away by this high initial lump sum cost.
And that would be a mistake since it presents 8 years of costs disconnected from a lifetime of massive benefits, financial and nonmonetary.
Medical school is an investment and like any investment can be evaluated by analyzing expenses versus income.  A physician working full-time will earn $300k easily in 1.5 years, so this is the first way to view $300k: an investment that pays for itself every 8 months. Few investments offer that sort of return.
Another way is to divide lifetime earnings by startup investment. A resident graduating at 30 has earned a good chunk of the initial cost already if paid $60,000 per year [1] x 4 years = $240k.  The median physician income was $206,500 in 2019 [2]  Half made more, half made less, but the range is much tighter than in other professions.
Let's round off to $200,000 per year.  A medical school graduate who completes training and works until age 70 will work 40 years, earning $8 million.  Add in the $240,000 earned during training and you get a total of $8.240 million.
Divide 8.240 million by 300k and you get 27.5, meaning a medical student who accumulated $300k of debt can expect to generate over 27 times this amount in her lifetime.
Put another way: the cost of medical education is only 3.6% of the eventual payoff.
These calculations ignore many variables.  Most notably, debt is not the full cost of education, only the portion that had to be financed. But even doubling cost estimates to twice net debt gives a business startup cost of about 7%. Not bad at all.
The next simplification is that 100% of income is attributed to medical training. Obviously, the 99% of Americans who aren't physicians earn something; a fair analysis would subtract this something from what a physician earns to generate marginal income, the additional amount someone who paid for college and medical school earns over someone who paid for neither.
The average (median) high school graduate earns $30k.
The median college graduate earns just below $60k.
So a $200k per year income for a physician should subtract $30k as the median expected income if they didn't spend $300k for college and medical school to get $170k per year as the additional annual income payoff from a college and medical school education. 
We could try to isolate the cost and payoff of medical school alone by comparing physician earnings with college graduate earnings. Since the average college graduate starts out with $30k of debt and the average medical school graduate has almost $200k, let's apply this relative proportion to someone with $300k of total debt to determine what proportion is from medical school. If  $200k total debt for a medical school graduate minus $30k debt for a college graduate implies that medical school adds another $170k debt on average.  This means that the proportion of total debt represented by medical school is $170k / $200k or 85%.  85% of $300k is $255k, giving us a refined cost-benefit analysis:

Lifetime expected physician earnings: $8.240 million.

Lifetime expected earnings of a college graduate who starts work at age 21 and works until age 70:  49 years x $60k per year = $2.94 million. [3]

Marginal income attributable to medical degree: 

  $8.240 million physician earnings

- $2.94 million

= $5.3 million.

The lifetime benefit of a medical degree is therefore $5.3 million, the additional amount you would earn with an MD versus with only a college degree.

Medical school cost: $255k

Would you buy a business for $255k expected to make you $5.3 million over your lifetime?  That depends, of course, on what other options are available, but medical school seems a great one.

Every dollar invested in medical school returns $20.78 of extra lifetime income, an 2078% return on investment. By contrast, every dollar invested in the stock market over the same period will grow to $16 [4] - and the stock market is a great investment!

As a percentage of total return on investment, $255k represents only 4.8%. Even doubling the debt to get a $510k true cost estimate gives you an investment that pays off 9 to 1. Few things in life do that.

Often ignored when computing mind-blowing educational costs is the fact that much of the cost of education involves expenses everyone must pay whether in school or not.  Using College Board data, a year at a private college with an average sticker price of $54,880 for which the average family ends up paying $26,820 includes an average of $13,120 of room and board, also known as food and shelter.  College might be the only time when your total cost of rent, utilities, and food averages only $1,000 a month.  Back those expenses out and the true cost of education - even at a private college - is only $13,700.[5]

To illustrate, imagine that you graduate from college and can choose between taking a job paying $50,000 a year or spending a year at graduate or medical school.  It is probable that the worker must pay twice as much for rent, utilities, and food: $2,000 x 12 = $24,000.  The employee also faces a tax bill of $10,492 ($4,295 federal, $3,825 FICA, $2,372 state)[6]; the student pays no taxes.  At the end of the year, the worker's total starting costs before entertainment, vacation, or other luxuries, is $34,492.
This is actually greater than the TOTAL $26,820 the average college student pays for living expenses AND college tuition.  At the end of a year, the worker has $15,508 net after the basic cost of living and taxes.
The student has a year of education under her belt and only paid $13,700 net ($26,820 average minus $13,120 room and board) for that real asset (economists consider education a real asset no different than a home or car). 
Even including a year of lost income, after taxes and the higher living expenses living off-campus, the true cost of a year of education is $29,208.

The bottom line is that there is no cost-free option. To live costs money. None of us has a "burn rate" of zero.  We should only consider the amount education costs BEYOND this baseline cost of living.

 

Taxes and Death
Taxes lower the relative benefit of a medical degree but by no means eliminate it.  Because our tax code is progressive, meaning each marginal dollar is taxed at a higher rate, a worker making less money will keep a higher proportion of gross earnings.  A physician earning 3.33 times the average college graduate will pay 6.6 times as much in federal taxes and 4 times as much in state (Georgia) taxes. [8]  However, since no tax rate is 100%, you are always better off after taxes earning more than less.

Let's apply taxes to the $5 million that a physician will gross on average over a 40-year work life.
A $200,000 income in 2021 generates $63,936.60 in total taxes ($40,811 in federal taxes, $11,753.60 in FICA, and $11,372 in Georgia state taxes), for an after-tax income of $136,063.40.  
Someone earning $60,000 pays $13,749.50 in total taxes ($6,187.50 federal, $2,972 state (Georgia), and $4,590 FICA) for a net income of $46,250.50.
The physician pays 32% of income in total taxes, including FICA; the worker earning $60,000 pays 23%.  The result of this 39% greater proportional tax bite for physicians is a reduction of the higher income advantage: when taxes are taken into account, the annual benefit of a medical education drops over a third from $140,000 gross to $89,812 net.

But this still works out to a 40-year marginal benefit of $3,592,516 for that medical education that cost $255,000, a return of $140.88 for every $1 invested.  [7]

 

Medicine Offers So Much More than Financial Compensation

Of course, we should not choose a career based on money alone. A career in medicine offers enormous additional benefits that are difficult to monetize.

Your work is far more likely to be perceived as meaningful and societally useful both by you and others. This can sustain you through difficult days.

A medical degree opens all sorts of doors to interesting work unavailable to others.

You work closely with human beings and form powerful relationships. You see people get better. Many will thank you.  That feels good.

You never have to explain what you do for a living or why you want to do it. Although this is a weak reason, it's still a positive.  
You learn about and deal with the most fascinating machine out there, one all of us have a selfish interest in: the human body.  Everyone has a body and everyone wants to be healthy.

You help make the world a little better place. Even if you don't always succeed, you are on the side of those who are suffering. You know that you are not causing more suffering than you are alleviating.

You get the awesome privilege of being invited to the most sacred of spaces: births, deaths, and everything in between.

Your work might be difficult but rarely boring.

You realize early on that nothing cures or even ameliorates the common cold.

You can follow healthcare news and help your friends and family know that almost all fantastic medical claims and fads are nonsense.

You will find out how surprisingly heavy a human arm is.

You will get very comfortable with the elderly, the morbidly obese, and those suffering terrible addictions, trying to smoke through a trach tube.

Secretions, gurgling liquid noises, pus, blood, and smells won't bother you much. You will learn how to stick a needle in just about every body cavity and part.  You will become adept at drawing blood, starting an IV, and getting an arterial blood gas.

You will resuscitate someone who has stopped breathing or whose heart has stopped.

You will learn how to have some of life's most difficult conversations.

You will never get used to dying children. But you will also see how resilient and healthy most kids are.

You will always wear your seat belt and never smoke.

You will be surrounded by colleagues who are bright and motivated to help others.  You might even marry one (I did)!

You will meet people from all walks of life, strangers you never would have met, who will open up to you because they trust you, sharing with you the most intimate details of their lives. This will give you an insight into the human condition and how people live that few jobs will. It is no coincidence that so many great writers were physicians (Arthur Conan Doyle, Chekhov, Somerset Maugham, Walker Percy, even Michael Creighton).

You will learn and apply basic rules of logic, inference, and probability in real-time to make calls with limited information. By doing so repeatedly, you will be both humbler and more aware of the limitations of human knowledge. You will learn to avoid snap judgments and sidestep cognitive pitfalls.

You will approach and lay hands on conditions that fill others with dread and be with people whose personal choices might be killing them yet learn to suspend judgment and help them change their trajectory.

You will approach the end of your career knowing that you did some good. Not everyone can say that (honestly) about their work. This isn't a criticism of others but a recognition that most jobs are soul-crushing and most people lead lives of quiet desperation, as Thoreau so eloquently put it.

In the end, you pay so little and are paid so much for such priceless experiences.

 

 

[1] https://www.glassdoor.com/Salaries/medical-resident-salary-SRCH_KO0,16.htm $62,297 is the national residency average pay.
[2] https://money.usnews.com/careers/best-jobs/physician/salary

[3] 49x = 50x - x, so 49 x 60k = 50 x 60k - 60k = 3 million- 60k = 2.940 million

[4] using 7.2% per year after inflation total return from the stock market, close to the long-term average per Jeremy Siegal using 250 years of data presented in his book, Stocks for the Long Run.  7.2% is a convenient number since it doubles an investment every decade.  A 40-year investment therefore grows at by 2⁴ or 16x.

[5] https://www.collegedata.com/resources/pay-your-way/whats-the-price-tag-for-a-college-education  According to the College Board, the average private college has a sticker price of $54,880 on average; in-state public colleges cost less than half that: $26,820.  Although few pay this sticker price, tuition and fees average $37,650 for a private college to $10,560 for an in-state public college.  The rest - between 40-65% - are essentially the costs of living, especially food and shelter.  Average room and board ranges from $11,620 to $13,120 for public versus private colleges, which means that a hungry 18-year-old can be sheltered and fed for only $1,000 a month, a deal she is unlikely to find beyond a college campus.  This discounting of food and housing offsets somewhat the ever-rising cost of tuition, but the net effect is to overstate the cost of a year of college.

[6] https://www.taxformcalculator.com/state-tax/georgia.html   Assumptions: single, no deductions or dependents, Georgia state resident.
[7] https://www.taxformcalculator.com/state-tax/georgia.html  This assumes that the physical files as a single payer without any deductions at all, a highly unlikely scenario.  It also treats FICA withholding as a cost which is only true in the short term. Social security deductions from your paycheck are used to calculate your benefits upon retirement - the more you contribute, the more you will receive.  Social security "taxes" really should be viewed as compulsory retirement contributions to a plan that offers a modest positive return as well as disability insurance and a lifetime pension that increases each year with inflation.  One's actual return can vary greatly depending on how long you work, how early you start withdrawing, and how long you live beyond that, but even for high income taxpayers who have other private savings, social security income in retirement is not insignificant.  For simplicity, I treated it as a cost, which it is on a short-term (before ages 65-70.5), cash flow basis. 
[8] One advantage of a higher income is that social security withholding cuts off after $142,800 (in 2021), meaning that $57,200 is not subject to FICA.  The net result is that the TOTAL tax bite of the higher earner is brought down to 4.65 times that of the lower earner; however, social security probably should not be considered a tax (see previous end note).