As a dentist, you’ve likely emerged from dental school with some amount of student loan burden. According to the ADA, the average dental school graduate owes over $290,000 in student loans.
Faced with this debt, many dentists debate taking one of two actions, often based solely on the actions their peers or mentors took. You choose to either pay off your student loans as quickly as possible or pay the minimum to accumulate cash and begin growing your investment portfolio.
Paying off Student Loan Debt vs. Investing
Either way, at some point in time, you look in the mirror and ask yourself a critical financial question:
“Should I pay off my student loans early, or start investing?”
This decision can significantly impact your long-term financial health. While there’s no one-size-fits-all answer, understanding the pros, cons, and financial implications of both strategies can help you make a well-informed decision.
Before choosing a path, there are a few variables that should be taken into consideration:
Interest Rates on Student Loans
Federal and private student loan rates vary, but many dental graduates face rates between 6–8%. This makes early repayment more attractive than it might be for borrowers with lower interest debt.
Expected Investment Returns
Historically, a diversified retirement portfolio has returned an average of 6–8% annually after inflation; many portfolios in the past 10-15 years have returns well into the double figures! But unlike loan payments, investment returns aren’t guaranteed.
Your Risk Tolerance and Financial Goals
Are you more risk-averse or growth-oriented? Do you want to own your own practice soon, or are you aiming for early retirement? Your personal and professional goals play a large role in the best course of action.
Once you have a solid understanding of these variables, and you have identified YOUR preferences, now we must consider the implications of the actions we take:
Option 1: Paying Off Student Loans Early
The main benefit of paying off student loans early is the guaranteed return factor. Every extra dollar toward your loan saves you money in interest – essentially a risk-free return equal to your loan’s interest rate. Coming in a close second is improved cash flow; becoming debt-free earlier can free up monthly income for other goals or investments. The sum of these is ultimately peace of mind. For many, the psychological relief of being debt-free is invaluable.
But we understand there is no free lunch. The money used to pay off loans early could potentially earn more if invested; why hurry to pay off a loan at 6% when your investments could earn 8-10%? This means your funds have less time to use Einstein’s Eight Wonder of the World – compound interest –resulting in the need to allocate more money in a shorter time period to achieve similar goals. Lastly, an aggressive repayment practice reduces your available cash for emergencies, practice ownership, or family needs. Even if investments decrease in value, you can still access them if needed. We have yet to find a student loan issuer who will let you reverse payments to free up cash once they are processed!
Option 2: Investing
On the other hand, some opt to invest early and often, whether it be stocks, real estate, or businesses. The main benefit to this was mentioned above – compound interest. You’ve probably heard the expression “time IN the market, not timing the market,” stressing the importance of starting as soon as possible. The earlier you start investing, the more powerful compound interest becomes—especially over 20–30 years. And when you save in a retirement account, you now have added tax advantages. Contributions to retirement accounts (like IRAs, 401(k)s, or defined benefit plans) may reduce your taxable income and grow tax-deferred. And even better than tax-preferred money is free money! If your employer offers a retirement match and you’re not contributing enough to receive it, you’re leaving free money on the table.
So what is the case against investing early? Not many young dentists have experienced this, but the stock market does carry risk and can decline in value (ask your parents about the late 1990s or 2008). Investments are volatile and do not guarantee returns.
This means if your loans carry higher interest than your investments earn, you’re losing money in the long run. Beyond the strict finances of it all, holding debt – especially when it is the first time seeing such a large number with your name linked to it – creates ongoing stress. That is exactly why we want to help you identify what is important to YOU.
This decision needs to be based on your thoughts, your situation, and your preferences, not just doing what everyone else is.
A Blended Approach: The Smart Middle Ground
For most dentists, the best solution isn’t either/or—it’s both.
Here’s a practical, step-by-step approach that many of your peers have found valuable:
- Make Minimum Payments on Loans to stay in good standing.
- Contribute to Retirement Accounts, at least enough to get any employer match.
- Pay Extra Toward Loans with any surplus cash flow, especially high-interest debt.
- Reassess Annually as your income grows and your goals evolve.
As your earnings increase (which they often do in the dental field), you’ll have more flexibility to ramp up both loan payments and investment contributions. If you expect your patients to make it a priority to come see you at least twice a year, you should give the same importance, time, and intention to your student loan repayment and retirement plans.
