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).
