Don’t Let Student Loans Keep You From a Dental Transition into Practice Ownership

There is a lot of talk about how the landscape of the dental industry is changing, with DSOs, private equity investors, and rising student loan debt all contributing to the shift. While it’s true that these factors are more significant than they were a generation ago, it’s also true that the landscape hasn’t changed substantially. If you are in the final stages of your dental school education, or a young associate, student loan debt doesn’t mean that you can’t make a dental transition into practice ownership. In this post, we’ll discuss student loans and why they aren’t as much of an impediment as you might think.

Debt Compared to Potential Earnings

The first thing to consider is how much student loan debt you have, and how it will be offset by your earnings as a practicing doctor. If you are within the average range of dental students, you will have graduated with about $261,150 of student loan debt. If you borrowed at the Grad PLUS rate of 6.31%, you should have a monthly payment of about $2,940 and, over the life of the loan, will pay about $91,665 in interest. This means your education has a final cost of about $352,815 dollars. No question, that is a significant sum.

However, you have a lot of earning potential. In 2017, the median income for a dentist was $158,120. Now that doesn’t mean you’ll start at $158,000, but you’ll likely start somewhere in the range of about $118,000. Even as a first year associate, you will out-earn the average employee with only a bachelor’s degree by about $63,000. You can consider that $63k as the return on your $352k investment—and that’s just in the first year.

Using 5% salary increases, by year eight, you’d be earning about $167,000 while the bachelor-degree employee is only at $77,000. Your cumulative return over eight years would be $609,000—well over what you spent on your education and still fairly early in your career.

These numbers aren’t reflected in everyone’s experience, but, as averages, they show why its not unreasonable for a young associate to make the dental transition to practice ownership once they have the requisite experience and hand speed to keep up with the rate of production a practice needs from an owner doctor.

Types of Debt

You also need to consider the difference between consumer debt, student loan debt, and practice loan debt. Consumer loan debt (such as for a car, a house, or credit cards) doesn’t earn the borrower any money. Cars and other consumer goods either rapidly depreciate or otherwise lose value through use. A house may gain value over time but unless you are a real estate investor, it’s something you actively use, not something from which you would profit. Conversely, as shown above, student loan debt is an investment, the return on which is realized through your earnings over the course of your career.

A loan for the purchase of a dental practice is an investment in a business. The lender, while concerned about your debt load and earning ability, is primarily interested in the earning potential of the business, as it is the business that will pay back the loan. The question for the lender is whether or not the dental practice has a record of collections that will cover both its overhead, including the repayment of the practice loan, and still provide sufficient cash flow to pay you a salary sufficient to cover your personal debts including your student loans.  For more on dental transition loans, read our post, “Loans for Beginning a Dental Practice.”

As we show in the next section, owning your dental practice is actually a better way to pay your loans back faster than working as an associate.

Ownership Equity versus Employment Salary

The short version is that you are likely to earn significantly more if you own your practice than if you don’t. Let’s consider a couple of examples, one modest and one less so.

First, thinking modestly, let’s say you buy a practice with $600,000 of collections and 75% overhead at $450,000, with the entire cost financed by a bank. We’ll assume you have a few years of experience and have are up to earning $130,000 a year as an associate. With your new practice, you have a net profit of $240,000 a year. Now, you have a practice loan to pay back, which the seller probably didn’t have, so your net earnings will go down from there. A 10-year loan for $450,000 will have a monthly payment of about $4,700. This reduces your annual net profits to $183,000. However, that’s $53,000 more than you earned as an associate.

But let’s mix things up a bit. Sometimes an associate is paid a flat salary, but in other cases the salary is a percentage of their production. If, after a few years of experience, you are producing $800,000 each year, and your salary is 25% of your production, you’re earning $200,000. No doubt about it, that’s a great salary, especially if you are early in your career.

But what if you take your skills and make the dental transition into practice ownership? If you buy a practice that matches your $800,000 a year in production, even if the practice has 65% overhead, with service of your practice loan, you are still clearing over $250,000 in net profit. Plus, once you’ve paid back your practice loan (typically with a 10-year term), you get to keep all of the profits, which, with the given production rate and overhead costs, is $320,000 each year (consider this amount in the context of student loan as an investment, discussed above). If you remain as an associate earning a percentage, your salary only increase incrementally as fees are raised.

Dental Transitions: Texas and New Mexico

Here at ddsmatch Southwest, we are dental transition specialists with extensive experience matching individuals buying a dental practice with the right seller. Dental practice sales are predicted to increase in the coming years as doctors from the baby boomer generation decide to transition their practice and enjoy retirement.  Market conditions are excellent for those seeking to buy a dental practice or take advantage of partnership or associate opportunities. We have several available dental practices for sale throughout Texas and New Mexico, and always take your lifestyle and location goals, clinical skills, personality, and professional needs into consideration as we match the right buyer or associate with our sellers. For more information, visit our website or request a consultation today.