Graduating medical students: if you haven’t already begun, it’s around time to consolidate your federal student loans. The benefits are discussed in this chapter from my (free) book. While you’re at it, you should also probably read the whole thing.
Trainees: It’s never too early, but if you haven’t looked into getting disability insurance yet, you should especially get some quotes in June before leaving your institution after finishing residency/fellowship.
If you know where you’ll be next month, a good agent will be able to compare your available institutional discounts from each location and make sure you get the best deal. My own policy was cheaper with discounts from my training institution.
The folks at LeverageRx and Pattern can get you quotes for the right kind of policy (own-occupation, non-cancellable, guaranteed-renewable) from the reputable companies quickly. You should always get a few sources of quotes to comparison shop too; insurance is expensive, and you’ll be holding this policy for a long time.
You may ultimately decide not to pull the trigger, but it helps to know your options in order to make the right decision for you (and your family).
((Those are affiliate links. Using them helps support my writing without cost. The information is always free; all agents get paid by the insurance companies and not the individual.))
From Verdad’s “Private Equity Fundamentals” (a good albeit somewhat technical read):
The sample of companies we looked at is nearly unprofitable on an EBITDA basis, mostly cash flow negative, and extraordinarily leveraged (mostly with floating-rate debt that is now costing nearly 12%). These companies trade at a dramatic premium to public markets on a GAAP basis, only reaching comparability after massive amounts of pro-forma adjustments. And these are the companies that most likely reflect the better outcomes in private equity. The market and SPAC boom of 2021 presented a window for private equity and venture capital firms to take companies public, and private investors took public what they thought they could. Presumably, what remains in the portfolios was what could not be taken public.
Resolving these challenges will be difficult. Growth seems more challenging in a wobbly economy, and the tailwind of rising multiples has disappeared. Private equity sponsors will likely need to have difficult conversations with their lenders and focus on operational execution to manage costs as they navigate a less friendly macro environment. From a quantitative perspective, the fundamentals of sponsor-backed companies look frightening.
GAAP stands for “Generally Accepted Accounting Principles.” EBITDA stands for “earnings before interest, taxes, depreciation and amortization.” These companies often report adjusted “pro-forma” measures to make themselves look better:
It’s a nice summary of the house of cards.
The online course version of WCICON23, “Continuing Financial Education 2023: The Latest in Physician Wellness and Financial Literacy” is now available. It includes 55 hours of content and qualifies for 22 hours of CME. It also includes a talk from yours truly on the surprisingly interesting topic of thinking about thinking.
Enrollment is $100 off through midnight on April 17th and would be—in my opinion—a great way to use your CME funds.
(Signing up from this post also supports my writing, thank you.)
Registering through the link here is also one of those effortless ways you can support this site while doing what you were going to do anyway.
I’m very much looking forward to speaking again this coming year at the Physician Wellness & Financial Literacy Conference (aka WCICON23), which will take place March 1-4 at the very nice JW Marriott Desert Ridge in Phoenix. If you have a CME fund to burn, I can’t think of anything else I’d rather spend it on.
Code CON23BW will net you $200 off an in-person registration through January 25.
The official application for the Biden student loan forgiveness is now live. Impossible to say if any legal action will block it in the end, but for now the safest thing to do if you qualify is to apply as soon as possible. It’ll take about 2 minutes.
Apply here.
From Bloomberg, some crazy machinations involving the restructuring of Envision, the massive medical staffing company, in order to pay off debts.
This is because Envision had $7 billion debt from its 2018 leveraged buyout by KKR, and KKR needed to find ways to exploit the paper details in order to restructure the company without getting taken to court and blocked.
“Loose documents have become the norm rather than the exception,” says Damian Schaible, co-head of restructuring at Davis Polk & Wardwell. “If we go into a real recession, we are going to see more and more borrowers and sponsors seeking to exploit document loopholes to create leverage against and among their creditors.”
Here’s the quick summary, which invokes the playbook of spinning off the valuable assets in order to essentially dump the crappy ones:
Envision, which also explored a consensual debt exchange that would have raised less funding, ultimately opted for what is considered one of the most controversial and coercive out-of-court restructurings to date. The [initial] deal…would prove to be just the beginning of a series of maneuvers that eventually allowed the company to restructure the vast majority of its debt but forced creditors to turn against one another.
The strategy rested on two pillars. The first was a drop-down transaction, in which a company’s most valuable assets are moved away from existing creditors and used as collateral for new debt. The second was a series of debt repurchases and exchanges that gave certain creditors priority over others and pushed anyone who declined to participate to the end of the line for repayment.
We always talk about stocks being risky and bonds being relatively safe, but corporate debt is its own beast in this world where overleveraged companies can successfully exploit loopholes to screw over current creditors in order to obtain new financing.
Envision first designated [their profitable ambulatory surgery business] Amsurg as a so-called unrestricted subsidiary, effectively moving it out of reach of existing creditors without violating provisions in the credit agreement that prohibited moving or transferring the asset. The Amsurg assets would then be used as collateral to borrow $1.3 billion from Angelo Gordon and Centerbridge, who’d effectively be stepping ahead of everyone else in the repayment waterfall. Envision could then use the cash raised from the hedge funds to boost liquidity and to repurchase some of its existing debt at steep discounts.
Ultimately, only $153 million of the original loan was left outstanding, as owners of 96% of the debt had exchanged their holdings and waived their rights to litigate the transaction in the future.
Likely a harbinger of things to come. The “bad guys” largely win. And for creditors, better to get pennies on the dollar than nothing.
The years of low-interest easy money did a lot of emboldening and overleveraging, and everyone was eager to deploy capital on dubious deals:
There was a bitter irony in the way most of the company’s creditors ended up competing for crumbs. Four years earlier, when Credit Suisse Group AG sold the debt that financed KKR’s purchase of Envision, demand was so high that a salesperson teased investors with a picture of cake crumbs on a plate. The message then: Hurry up and grab it before it’s all gone.
Some interesting passages and food for thought from Just Keep Buying: Proven Ways to Save Money and Build Your Wealth by Nick Maggiulli (a personal finance book with much more data behind its analysis than average for the genre).
On saving:
And one of the most common financial stressors is whether someone is saving enough. As Northwestern Mutual noted in their 2018 Planning & Progress Study, 48% of U.S. adults experienced “high” or “moderate” levels of anxiety around their level of savings. The data is clear that people are worried about how much they save. Unfortunately, the stress around not saving enough seems to be more harmful than the act itself. As researchers at the Brookings Institute confirmed after analyzing Gallup data, “The negative effects of stress outweigh the positive effects of income or health in general.” This implies that saving more is only beneficial if you can do it in a stress-free way. Otherwise, you will likely do yourself more harm than good.
That’s a counterintuitive claim: stressing about not saving enough does more harm than not saving enough.
On spending:
Researchers at the University of Cambridge found that individuals who made purchases that better fit their psychological profile reported higher levels of life satisfaction than those who didn’t. Additionally, this effect was stronger than the effect of an individual’s total income on their reported happiness.
For example, it has been well documented that people get more happiness buying experiences over material goods. However, what if this is only true for a subset of the population (e.g., extroverts)? If so, then we may be generating spending advice based on the 60%–75% of people who are extroverts to the dismay of introverts around the world.
I suspect Maggiulli is right to point this out. Just like scientists get annoyed when news media take a small experiment or a mild trend in the data and throw up a big bold headline, the idea that all humans benefit from the same things in the same sorts of ways doesn’t pass intuitive muster. For many people, I suspect there are probably plenty of high-impact ways to spend on some things and dumb ways to buy experiences.
On valuing an educational/career investment:
The proper way to find the current value of these future earnings is to discount this payment stream by 4% per year. However, there is a simpler way to approximate this—divide the increase in lifetime earnings by two. This will be roughly equivalent to a 40-year payment stream discount by 4% per year. I prefer this shortcut because you can now do the math in your head. Therefore, a $800,000 increase in lifetime earnings over 40 years is worth about $400,000 today.
Value of Degree Today = (Increased Lifetime Earnings/2) – Lost Earnings While things like taxes and other variables can affect this calculation, it’s still a simple way to check whether a degree is worth the cost.
Food for calculus when considering not just expensive degrees but also lengthy medical training or an additional fellowship.
On the health impact of debt:
For example, research published in the Journal of Economic Psychology found that British households with higher levels of outstanding credit card debt were “significantly less likely to report complete psychological well-being.” However, no such association was found when examining households with mortgage debt. Researchers at Ohio State echoed these findings when they reported that payday loans, credit cards, and loans from family and friends caused the most stress, while mortgage debt caused the least. On the physical health front, a study in Social Science & Medicine found that high financial debt relative to assets among American households was associated with “higher perceived stress and depression, worse self-reported general health, and higher diastolic blood pressure.” This was true even after controlling for socioeconomic status, common health indicators, and other demographic factors.
What makes buying a home even easier is if you can afford it. This means being able to provide 20% as a down payment and keeping your debt-to-income ratio below 43%. I chose 43% because that is the maximum debt-to-income ratio you can have for your mortgage to be considered qualified (i.e., lower risk). As a reminder, the debt-to-income ratio is defined as: Debt-to-Income Ratio = Monthly Debt / Monthly Income
Part of what makes mortgage debt less impactful to mental health is presumably the fact that mortgages feel universal and almost no one you are likely to know (at least early in your professional career) has the money to buy a house with cash.
Nonetheless, I suspect I will have a measurable well-being boost when mine is gone.
On why to invest:
In essence, by investing your money you are rebuilding yourself as a financial asset equivalent that can provide you with income once you are no longer employed. So, after you stop working your 9 to 5, your money can keep working for you. Of all the reasons why someone should invest, this might be the most compelling and also the most ignored. This concept helps explain why some professional athletes can make millions of dollars a year and still end up bankrupt. They didn’t convert their human capital to financial capital quickly enough to sustain their lifestyle once they left professional sports. When you make the bulk of your lifetime earnings in four to six years, saving and investing is even more important than it is for the typical worker.
Fund the life you need before you risk it for the life you want.
The conversion of human capital to financial capital is an excellent way of looking at/arguing for investing.
On being realistic about wealth:
For example, research in The Review of Economics and Statistics illustrates that most households in the upper half of the income spectrum don’t realize how good they have it…households above the 50th percentile in income tend to underestimate how well they are doing relative to others…even households at the 90th percentile and above in actual income believe that they are in the 60th–80th percentile range.
For example, you would need a net worth of $11.1 million to be in the top 1% of U.S. households in 2019. However, after controlling for age and educational attainment, the top 1% varies from as little as $341,000 to as much as $30.5 million. For example, to be in the top 1% of households under 35 that are also high school dropouts you would only need $341,000. However, to be in the top 1% of college educated households aged 65–74 years, you would need $30.5 million.
It’s incredibly easy to find some Joneses to keep up with.
On green grass:
But why does happiness start to decline in the late 20s? Because, as people age, their lives usually fail to meet their high expectations. As Rauch states in The Happiness Curve: “Young people consistently overestimate their future life satisfaction. They make a whopping forecasting error, as nonrandom as it could be—as if you lived in Seattle and expected sunshine every day…Young adults in their twenties overestimate their future life satisfaction by about 10 percent on average. Over time, however, excessive optimism diminishes…People are not becoming depressed. They are becoming, well, realistic.”
Part of the curse of medical training is to coincide with this natural stage of disillusionment.
Big long-hinted-at news in the world of student loans this week. Please peruse the Biden Student Loan Fact Sheet. The Official FAQ is short and very readable.
Here are some highlights:
Student Loan Pause
- Payment pause extended “one final time” through Dec 31, 2022. This is again a massive benefit to current borrowers and especially those going for PSLF. For example, each month of $0 payments that qualify is often a four-figure subsidy to an attending physician.
Debt Cancellation
- Up to $20,000 in debt cancellation to Pell Grant recipients and up to $10,000 in debt cancellation to non-Pell Grant recipients. Pell Grants are for undergraduate loans only, so most young physicians will be in the second camp.
- To be eligible for cancellation, your annual income must be below $125,000 (for individuals) or $250,000 (for married couples or heads of households). It is unclear how exactly they will define and what they will be using to verify income at this time (probably AGI from last tax return?), or for example, if people utilizing the married filing separately loophole to reduce IDR payments may finagle some free money (e.g. the resident married to an attending loophole; I suspect not).
- Current students are eligible for this relief. If you are a dependent for tax purposes, then it’s your parents income that will be used.
- The process should be automatic for many folks, but some may need to apply. If you’d like to be notified about news, sign up for the DOE’s “Federal Student Loan Borrower Updates” here.
This is obviously a one-sided easy-to-deploy benefit to borrowers that does nothing to address the underlying program of skyrocketing tuition. There has been an incredible amount of hand-wringing and teeth-gnashing about this on the internet. The irony of most of that discussion, particularly those against forgiveness, is that the government subsidizes and gives money to a variety of citizens for a variety of things (owning a home, having children, investing in long-held assets). There is no neutrality to any status quo either. People pick and choose where to aim their indignation on a daily basis but often do so in an isolated out-of-context fashion. Mostly, people respond to every event in the predictable ways of their camp.
So, this is the functional equivalent of a big tax cut for mostly young, mostly college-educated (or often college-attempted) Americans. Now, politically that camp pretty firmly supports democrats, so trying to appeal to that already strong base may not be a very savvy move in the current political climate, and it may not be very well-timed given the current inflation issues, but it’s not as though we haven’t injected money into the economy through similar (or even probably less effective) means before. It just so happens that this is targeted to have a clear disproportionate impact on a smaller subset of Americans than, say, the tax cuts of the Bush and Trump eras (which had a substantial disproportionate benefit for wealthy Americans but was perhaps less obvious to a casual observer).
Everything is political, and this is no exception.
PSLF
- The application for the temporary PSLF expansion expires on October 31, 2022. See the White House page here.
- Again, this was designed to temporarily remove some of the fine-detail barriers to achieving PSLF by allowing past payments using the wrong payment plan (e.g. extended, graduated) or ineligible loan type (e.g. Perkins, FFEL) to count.
- You don’t need to have fully earned forgiveness to benefit from this program, this is to codify credit for past payments.
- This is mostly a boon for older borrowers (i.e. mostly people who started school before 2009).
The New Payment Plan
- A light-on-details proposed (not final) plan to further reduce payments on undergraduate loans to 5% and fully cover unpaid monthly interest for everyone.
- For borrowers with original loan balances of $12,000 or less, IDR-based forgiveness after 10 years. Currently, for undergraduate borrowers in PAYE, that’s 10% and 20 years.
- Raise the discretionary income floor so that more people will have $0 payments.
If you’ll notice, the generous forgiveness terms in this setting are on very small loan amounts. The goal here is in large part to make local education, and specifically community college, affordable for all Americans such that low-income families will have small or no monthly payments and then forgiveness after 10 years. This will, again, not really do much to deal with students borrowing for more expensive schools (except potentially make long-term loan forgiveness more attractive thanks to low monthly payments and a smaller tax-bomb thanks to a better interest subsidy).
As in, this would have a relatively small impact for most doctors except for preventing negative amortization during residency (effectively lowering your interest rate and making private refinance during training less competitive). One clever possible benefit would be to waive the in-school deferment and enter repayment for undergraduate loans while in medical school to enjoy $0 payments and 0% interest via IDR, effectively granting you subsidized loans in a world where many loans have been unsubsidized.
From the (the free or inexpensive) The Almanack of Naval Ravikant: A Guide to Wealth and Happiness:
If you look at even doctors who get rich (like really rich), it’s because they open a business. They open a private practice. The private practice builds a brand, and the brand attracts people. Or they build some kind of a medical device, a procedure, or a process with an intellectual property. Essentially, you’re working for somebody else, and that person is taking on the risk and has the accountability, the intellectual property, and the brand. They’re not going to pay you enough. They’re going to pay you the bare minimum they have to, to get you to do their job. That can be a high bare minimum, but it’s still not going to be true wealth where you’re retired but still earning.
The problem with employment: “They’re going to pay you the bare minimum they have to, to get you to do their job.”
It’s always in the interest of the suits to pay you as little as they can get away with. It’s always in the interest of the hospital, the university, or the company to either pay you less, push you to produce more, or both. It certainly seems to be a very hard temptation to resist at the moment.
Speaking of retirement:
What is your definition of retirement? Retirement is when you stop sacrificing today for an imaginary tomorrow. When today is complete, in and of itself, you’re retired.
…one way is to have so much money saved that your passive income (without you lifting a finger) covers your burn rate. A second is you just drive your burn rate down to zero—you become a monk. A third is you’re doing something you love. You enjoy it so much, it’s not about the money. So there are multiple ways to retirement.
but…
Lusting for money is bad for us because it is a bottomless pit. It will always occupy your mind. If you love money, and you make it, there’s never enough. There is never enough because the desire is turned on and doesn’t turn off at some number. It’s a fallacy to think it turns off at some number.
When it comes to helping people turn their jobs from just the income-generation game or the I-need-a-passive-income-side-hustle game, we need to move more industries (and here I’m thinking about healthcare) into more of a cooperative venture and less of a competition.
My co-founder Nivi said, “In a long-term game, it seems that everybody is making each other rich. And in a short-term game, it seems like everybody is making themselves rich.”
I think that is a brilliant formulation. In a long-term game, it’s positive sum. We’re all baking the pie together. We’re trying to make it as big as possible. And in a short-term game, we’re cutting up the pie.
The scarcity mindset sours the calling.