Future Value and Compounding for the Medical Student

When $100 is deposited in an account that earns interest and it turns into $105 the following year at 5% interest, it will not just become $110 in two years but $110.25 due to compound interest. Similarly, this concept is very useful in retirement savings. Many people do not realize that if they save for retirement just a little each year, the compound interest will give them bigger gains, the longer they keep the money in the account. Albert Einstein recognized the importance of compound interest and declared it to be very powerful for long term savings because it does not just have linear growth but exponential (McGraw Hill, n.d.).

One interesting thought that crossed my mind is the compound interest accumulated on student loans. For someone who has taken out loans for undergraduate then graduate level and medical doctorate, this can amount to many years. If the student puts the loan in deferment when they do not have a job, then it continues to accumulate debt, and this can be a dangerous scenario of compounding and future value. Let’s take a look at a case scenario. A student has $452,678 of principle debt and has accumulated $61,491 in interest debt totaling $514,169 already. If they continue to defer the loans if they cannot find a job and assume no additional debt at 8.05% interest (current rate) for 5 years will be: FV = PV * (1+r)^n

FV = 514169 * [(1+0.0805)^5]

1.0805^5=1.4727

1.4727*514169=757216.6863

The time value of the money will be $757,216.68 in 5 years that the student will owe if he/she does not make payments and does not find a job.

            Student loan debt is creating inequalities in the wealth gap further exacerbating the situation. Those that take student loans are usually ones from economically disadvantaged backgrounds or females. People go to college and take out debt for the pursuit of higher paying wages and escape low-wage occupations through education. However, the problem becomes when people default on their loans due to poor job opportunities and they accumulate more interest and debt. This can continue to spiral and compound worsening the financial disparities (Mir & Toor, 2024). 

            If someone utilizes compounding in a positive way through Roth savings then it is more beneficial. Students should maximize their ability to invest in Roth accounts while they fall in the lowest tax brackets before becoming a doctor. This will allow them to invest like their non-medical friends that have already entered to workforce and have 4 years of working experience with savings while the medical student is in school.

References

McGraw Hill. (n.d.). Finance: Applications and Theory (6th ed.). Cornett.

Mir, A., & Toor, S. (2024). The Business of Stealing Futures: Race, Gender, and the Student Debt Regime. Journal of Business Ethics, 1-20.