When I'm asked what is the most significant topic of concern on a new dentist’s mind is it is almost unanimously student loans. Congratulations! As a new graduate, you’ve worked extremely hard for years, now you must begin your career and learn how to be the best clinician possible with a financial boat anchor around your neck. To me, it’s clear why dentists and veterinarians are late savers. Once you see your first paycheck, it likely feels like you get to keep a small portion, and the rest goes right back out the door.
Dental school graduates have an average debt burden upon graduation of just over $260,000 according to a 2016 American Dental Education Association study. When reviewing the median average starting salaries per PayScale’s national survey, new dentists are making about $120,000. That is an average debt to income ratio of just over 2.0. When faced with a large number of loans, that monthly payment is often daunting and downright scary.
I don’t claim to be the resident loan expert; I’ll defer that title to Travis Hornsby at the Student Loan Planner. I was fortunate enough to meet him in St. Louis last month, and his knowledge is incredible. I have, however, spent time and financial resources to sharpen my skills and utilize the latest technology to help discuss and plan for student loan debt when developing a financial plan.
There have been countless articles written on what the various payment options are. I’ll link to them throughout. I do not want to rewrite articles already complete on the topic. My goal is to add some additional perspective.
First, when asked if someone should save, invest, or pay back loans that is incredibly difficult to offer that advice in a vacuum. Anyone that does you should take the advice with a grain of salt. Your specific situation will dictate so much. Are you married? What does your spouse do? Where do you live? How do you file taxes? Is there a public student loan forgiveness (PSLF) option that you can do without hating your life? Do you want to be a business owner? What is your income vs. student loan balance? What type of loans do you have (private or federal)? What are your rates? I could go on and on. The amount of details in student loans is why you likely feel frustrated and confused.
Your first step should be to save cash in a savings account equal to three months of living expenses if you are a joint income household or six months if you are single income household. You have to be able to live if something happens. Second, if your employer is offering a retirement plan with a match, please contribute taking advantage of the match. The match is free money, so take it. Also, your contributions to this help to lower your income, so it will be helpful with any loan forgiveness plans. You should be attempting to max out the contribution of $18,500, as you likely are behind the curve on saving. Third, if your employer offers an HSA, please take advantage of contributing to this for tax savings as well as to save for medical expenses. You can read more on HSAs here. After that, let’s focus on paying down your student loan debt.
Refinance – I’ve seen this as a common option over the past several years as interest rates have been low. If you have a debt-to-income level of 1.5 (Equation: Student Loan Debt / Your Personal Income), this likely will be the route you take. Budget and attack the debt aggressively. Do be careful of understanding if you need a co-signer what that means. Some refinancers will still forgive loans if you die, others do not and those pass to a co-signer. As you contemplate refinancing, I’d encourage you to check out Student Loan Planner or White Coat Investor links as they offer cashback for their links.
Pay As You Earn (PAYE) – If you qualify for PAYE, this often is superior to IBR or REPAYE. The challenge is a qualification. You must have a financial hardship, not have a balance on a federal loan before Oct 1st, 2007, and have a federal loan disbursed on or after Oct 1st, 2011. The repayment plan is income based and will not exceed 10% of discretionary income (can be joint or single…key for married couples), and will never exceed the standard ten-year repayment amount. PAYE has a feature that caps your interest compounding on your loans (capitalization) at 10% of the loan amount. In layman’s terms, this helps to reduce the amount of interest that is added back to your principal loan amount if you are not paying enough to cover the interest expenses. Often in the early years of loan repayment, this occurs. PAYE offers loan forgiveness after 20 years of payments. The forgiveness is taxable in the 20th year, so planning for this massive tax bill in the future is critical. Looking for more information Student Loan Hero has an expanded article on PAYE.
Revised Pay As You Earn (REPAYE) – There are no qualifications to enter into the REPAYE repayment program. REPAYE is similar to PAYE, with a couple of significant differences. First, the loan repayment amount is 10% but is always on both spouse’s income. The monthly payments can exceed the standard ten-year repayment if income rises. 50% of the interest that accrues during periods of negative amortization. When you are paying less than the interest expense that is growing the department of education will cover 50% of that interest that is adding to the loan balance. The forgiveness is 25 years, not 20 when used for graduate and professional loans. The forgiveness is taxable as well, so planning for this massive tax bill in the future is critical. Student Loan Hero once again has an expanded article on REPAYE.
Income-Based Repayment (IBR) – There are two IBR plans “old” and “new.” Never chose the “new” plan. The “old” IBR is 15% of discretionary income. Reasons to select “old” IBR are if you don’t qualify for PAYE and your spouse has a high income and a student loan balance as well. Then it may make sense to file as married filing separately. Also, there is a payment cap unlike REPAYE of the standard ten-year amount, if you believe your income will increase (ownership perhaps) this may make sense. IBR plans don’t cover any interest capitalization, interest accrual may have a higher payment amount if you are under the ten-year repayment amount, you must qualify via financial hardship, and it offers forgiveness in year 25. If you can qualify for both PAYE and “old” IBR take advantage of PAYE!! The forgiveness is taxable as well, so planning for this massive tax bill in the future is critical. Student Loan Hero once again has a smaller article on IBR.
When looking at PAYE, REPAYE, and IBR consider:
- Eligibility
- Lowest Payment
- 10% or 15% discretionary income
- Payment cap
- Fastest to forgive
- Treatment of spousal income
- Are you married?
- Does your spouse have a high income?
- Limits on interest accrual and capitalization
- You must consolidate all ineligible loans to federal loans to qualify
- Cannot be FFEL
- Cannot be Perkins
- Cannot be Parent PLUS
Public Service Loan Forgiveness (PSLF) – Is a beautiful thing if a position is available in your desired location and you can make it work from an income perspective. All the above: PAYE, REPAYE, IBR all qualify you to be eligible for PSLF. You can also do standard repayment plans, but that doesn’t make as much sense when you run the math. To qualify for PSLF, you must work for a non-profit or government position. You must make 120 qualifying payments; this is not the same as ten years of work. That is a critical aspect to understand. PSLF is excellent for spouses who both have significant debt and select REPAYE. The reason PSLF is special is after 120 qualifying payments your loans are forgiven, and there is no tax burden. The program does not count if it is in deferment, must be in payment mode. Paperwork is critical. Verify income and family size, employment annually, apply for forgiveness. Keeping good records will be your friend.
Additional items to consider
- If you are not sure if you have private debt, pull your credit report and review it.
- Payments for income-based repayment are adjusted annually, and you must recertify based on family size and income.
- If you have a big intra-year income deduction, you can ask for the payment to be recalculated thus lowering the amount. Think job loss, reduction in hours, disability, time off for the birth of a child, and various others.
- You can switch between repayment plans, but it does trigger capitalization. Debt/income ratio still is a qualifying factor for any switches.
Things to AVOID
- FFEL -> must consolidate these to be eligible for PAYE, REPAYE, IBR, and PSLF. The key is the loans must be direct. FFEL never counts towards 120 payments for PSLF.
- Long-term repayment = not income driven or standard, none of these count towards PSLF either. MUST ENROLL in qualified repayment plan (PAYE, REPAYE, IBR, and Standard).
- Borrowers are never checking on filing status, married filing joint vs. married filing separate.
- Forgetting to recertify income on time can cause capitalization on unpaid interest.
- Employment Certification Form (Annually) for PSLF, have employer sign and send this in. No required but is a big CYA. Remember to keep good records!
- Those in PSLF, avoid lump-sum payments. These don’t count as more payments; you want to trickle in monthly to count towards 120. Never pay a chunk and then sit for ten months, that only counts as one payment.
In closing, I hope this can help as you or someone you know navigate the student loan gauntlet. If you are not looking for a comprehensive and holistic financial plan, but merely want student loan help, I recommend reaching out to Travis and the Student Loan Planner team. My role is to help plan student loans in regards to the larger life and financial plan of clients. The number of student loans and the impact of these decisions are the single most significant planning opportunity for any newly minted veterinarians and dentists with six figures of debt. The “financial salesperson” DOES NOT have a clue on how to help you here. You’ll hear very generic advice, or blatant statements of "I cannot provide advice on those." Bad or a lack of advice can cost you thousands of dollars over your life.. Do not let your student loans prevent you from accomplishing the dream and vision you so passionately loved when you first were accepted into dental school. The debt burden may seem impossible, but you can do this!
More Great Resources:
How Dental Practice Owners Can Take Advantage of Student Loan Repayment Rules, and Corporate Dentistry vs. Private Practice: The Impact on Your Student Loans