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Why Capitalization?


The future dentist's professional journey begins the moment they are accepted to dental school. However, the excitement of finding out they have been accepted often wanes quickly in the face of staggering debt. While costs to attend dental school may appear to start out fairly small – one quarter or semester at a time – there are additional expenses such as books, housing, and costs of living that must also be paid for.

These expenses can lead to increased borrowing and debt, and by the final graduation and residency completion, the total balance of all loans combined can be anywhere from $200,000 to $400,000 – which must be paid back with interest.

A six month “honeymoon period” is often available, but once it is over the payments begin coming due – for most graduates, this means multiple payments per month to as many as 20 different lenders. For the first year it may not seem too bad; a real career has been launched and real paychecks are coming in. However, as payments drain bank accounts each month, more time is spent watching the balances and wondering if loan consolidation is the answer.

You think you are going to be able to reduce your overall interest rates, only to find that the rate isn’t much different. The bank claims they can’t see a track record of you making regular payments for a long enough time period. So you struggle on, and around a year and a half or so after graduation you finally start getting offers to consolidate your debt into one monthly payment.

Of course, this doesn’t mean your troubles are over. Your monthly payments still seem enough to choke you, and now you’re locked in for 15-20 years. Surely there is some flexibility as your income increases, can’t you just sock an extra lump sum into the principal?

You ask your lender if paying in an extra $10,000 or so can drop your monthly payment to a more reasonable sum. Sadly, that’s not how it works; the best the bank can do, they’ll tell you, is cut off some of the payments at the end. As it turns out, complete loan consolidation wasn’t the best idea after all.

There’s a better way to manage your debt and pay it off faster – while maintaining flexibility and cash flow in case of a life emergency. A capitalization plan partially consolidates your debt into 4-6 loans, with varying balances and terms. Any extra available funds can be funneled into paying off the first loan early.

When the smallest loan is paid off, you have that monthly payment as additional funds which can be viewed as an “unstructured loan payment”. This means if you are short on cash one month, you can use these funds for whatever you need. If not, you simply roll them into extra payments on the next loan on your list.

This “snowball effect” often means your loans are paid off more swiftly than with total loan consolidation. A capitalization plan lets you remain in control of choosing when and how you pay off your loans, allows you to save money and puts you in a better position financially to purchase a practice at an earlier date. Once you purchase a practice, having those student loans already paid off means you have capital to put towards your new business – you can effectively become your own bank.

Need new equipment? More staff? A marketing budget? Giving your own practice a loan means new principal and interest payments go back to your own account, instead of a third-party lender. This allows you to keep your loan obligations unstructured, leaving you financially flexible in case of a life emergency, and can provide incredible tax benefits.

Capitalization planning and CAP plans can start working for you immediately after graduating and continue to benefit you for as long as you own your own practice. The icing on the cake is that this kind of plan can even produce tax free income for retirement after you use your own capital to update your practice or buy a second one!

Contact me if you’d like to know more about setting up capitalization planning. It could be the best plan for your future you’ll ever make!

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