I remember the days leading up to graduating dental school. I had an incurable case of senioritis, and I was ready to go. I had reached all my requirements with a few months to spare. It was just a matter of time. It wasn’t school itself that was on my mind. All I could think about at that point was the student debt that I knew I had to face once I got out.
I recall that every student at USC’s dental program was required to take an exit course that went over student loan repayment options. They called it a course to make it sound official, but it was literally a one hour power-point presentation in a small classroom with mostly empty seats. I remember sitting towards the front of the classroom, with a notepad and pen, and furiously scribbling notes throughout the entire thing. Meanwhile, classmates grumbled about what a waste of time this was. Some tardily strolled in, halfway through the presentation, just so they can sign the sign out sheets. Those that did come on time sat, and politely listened, but without a pen in hand, sitting back casually until the presenter announced the end. At that time, I thought that I was the only one who did not understand this stuff. It seemed like either everyone either had rich parents, or had a plan. I remember kicking myself for not studying this before, since my classmates appeared bored at best, presumably because they already knew the ins and outs of their loan repayment plans. There was only one other classmate, a boy, who was taking notes with me. I remember him vividly, though we never talked before, because he asked tons of questions that I was too afraid to ask. I also remember him because after the class, the speaker offered to do additional mini-lectures if we had questions. He was the only other person I saw pursue this topic as avidly as I in the upcoming weeks before graduation. I would come in for a one-on-one meeting with the financial advisor, and after I walked out, he would walk in. Or vice versa. We had meetings with the malpractice representative twice, and for disability insurance once more, after the required one. We were the only two students in the classroom during these meetings. He and I sat next to each other at the front of the room, taking notes and writing down numbers and calculations. I must have seen him on 7 different days outside of the required exit course. I never spoke to him, not once. I don’t even remember his name, although we were in the same class. I wish I did so I can hit him up and ask how his path to repayment is going. Meanwhile, I thought everyone else had it all figured out. But I was wrong.
I was so obsessed (afraid? aware?) of the student debt’s debilitating ability to control my life that I even had Mike sit in on some of the meetings. This was around the time we had talked about getting married, and I realized that now my decisions will start to affect someone that I cared about. I wanted him to a) know what he was getting into because once you’re married, you share EVERYTHING and b) not be extremely affected by the loan I was bringing in. I felt a lot of guilt, and it was the first time in my life that I realized that my misguided financial choices will impact a loved one’s lifestyle for a long period of time. I knew I had to get out. I went through projections and extrapolations and Excel sheets with counselors. Then I scheduled an appointment with Mike in order to go over the same spreadsheets and Excel sheets again (because they won’t allow you to take a copy of the real numbers home…). We are numbers people, and I had to have him see the numbers. I remember coming home to late night discussions about our “game plan”. I remember feeling trapped, and slightly depressed, that I could not find a short term solution for this. I got out of dental school and picked up just about every possible side hustle I could muster while waiting for my license in the mail. Before I even started work, I reached out to a CFP because I felt that I needed help. I didn’t know the ins and outs of finances as well as I would hope, and I wanted to make sure that we were doing everything correctly. The one thing I did know was that the only thing on our side was time. The sooner I addressed my financial problems, the less of a burden they will be in the future. I wanted to cut off all compounding problems (read as interests), nip them in the bud persay, before the weeds could grow thorns.
Throughout this entire process, all anyone would say (when I was bold enough to ask them about their repayment plan) was that they were going with the student loan repayment route. In parrot-like manner, almost. Surely, when the exit course was being taught at USC, it was implied that the student loan repayment plan is the way to go. It was the YOLOs of all YOLOs. You only pay a small percentage of your paycheck, for 20-25 years, and then your loan is forgiven after that. Have fun now, enjoy life while you are young, and worry about the debt later. I always felt in my heart that that could not have been the best option. But everyone I talked to at the beginning of our journey said that my loan was too large to realistically pay down the debt in a standard way, unless I was some baller G who landed a five star practice that I owned for myself. I mean, I understand why. A standard repayment required a $6000 check being sent to My Great Lakes, every month for 10 years. That is 120 consecutive payments of $6000. It’s a huge pill to swallow. Mike didn’t believe we could do it given the numbers. Even my financial planner, who first looked at our finances in September, said that it can’t be done according to our current financial situation. (Eventually, we did get to a point where it could be done, but I will save that for a future post). So at the beginning of our journey, everyone we consulted with said we had to choose between the following three student loan repayment options: IBR, PAYE, or REPAYE.
I chose one and then entered the real world, where I learned, that most people who graduated from college did not even have an exit course and have absolutely no idea what they are doing with their student loans. I have talked to numerous professionals, and there has been many instances where they asked a question regarding a fundamental aspect of their loan program because they just didn’t have the answer. I have dentists who have been out 3, 5, 10 years, asking me questions about loans. I am no expert at this stuff, just to clarify, but I did study it for a fair amount of time. I have been thinking about writing this post for a while, but it wasn’t until Mike’s co-worker was talking to Mike one day and said, “You know what Sam should write about on her blog? All the Student Loan Forgiveness options and their clauses. Because no one seems to understand this shit.” His girlfriend is a pharmacist working for the past two years under a Public Service Loan Forgiveness Program, and she says her colleagues have made some major mistakes that have screwed their financial plan significantly. More on that at a later post as well. The take away message here is that, maybe no one actually knew what they were doing as the graduating days neared us. I sure didn’t. I was so unsure about my options that I felt the need to hire a financial planner just to get things straight. Maybe no one still knows. And when it was outwardly voiced that there is a need for this post, then that’s what motivated me to sit down and write it. Additionally, I will walk you through our decision tree, to give you some insight as to why one of these was the option we chose. Please understand that our decision tree does not necessarily predict your own decision tree. It is only meant to show the thought process through which we reached a final decision.
When we went through the student loan exit course, there were numerous slides on that PowerPoint that, in my opinion, were haphazardly organized. As a visual person, here is the best way I could organize this information. There are three options currently, IBR, PAYE, and REPAYE. The following are the differences between the three programs.
IBR VS PAYE VS REPAYE
||-All federal Family Education Loan Program, Stafford and Grad Plus Loans
-All FFELP and direct loan consolidation loans that do not contain parent PLUS Loans
|-All Stafford loans or Grad Plus Loans disbursed on or after October 1, 2011.
-Consolidation loans made on or after October 1, 2011, unless they contain a direct loan or FFEL loan made before October 1, 2007, or a Parent PLUS loan.
-Direct loan borrowers without loans prior to October 1, 2007 who also had a disbursement made on or after October 1, 2011.
|-Any Stafford/Grad Plus Loan
-Any direct consolidation loan that does not contain Parent PLUS loan.
||-Payments under a 10 year term must be higher than what they would be under IBR.
||-Payments under a 10-year term must be higher than what they would be under REPAYE.
||-No payment amount limit.
||15% of discretionary income. The maximum is what you’d pay under a 10 year loan.
||10% of discretionary income.
||10% of discretionary income.
||-If filing joint tax returns, both spouses’ incomes and eligible debt is considered.
-If filing separate tax returns, only the applicant’s income and eligible debt is considered.
|– If filing joint tax returns, both spouses’ incomes and eligible debt is considered.
-If filing separate tax returns, only the applicant’s income and eligible debt is considered.
|– Both spouses’ income and federal student loan debt, if applicable, is considered regardless of filing status.
-Exception for victims of domestic violence or if borrower is separated from spouse.
||When calculated, payment is equal to or greater than what it would be under the 10 year term and/or when the borrower leaves IBR.
||When calculated, payment is equal to or greater than what it would be under the 10 year term and/or when the borrower leaves PAYE.
||As there is no maximum payment, interest will only be capitalized once they leave REPAYE.
||Any remaining balance after 25 years of eligible payments is forgiven and taxed as income. Only payments made on or after July 1, 2009 are eligible.
||Any remaining balance after 20 years of eligible payments is forgiven and taxed as income. Only payments made on or after July 1, 2009 are eligible.
||Borrowers with undergrad loans only will receive forgiveness after 20 years of eligible payments. Those with graduate loans will receive forgiveness after 25 years of eligible payments. Forgiven amount will be taxed as income.
The following are requirements that apply to all three loan forgiveness options:
- Discretionary income is adjusted gross income minus 150% of state poverty level for the borrower’s family size.
- Loans cannot be in default.
- Minimum monthly payments can be as low as $0 per month. For example, if you are currently not working due to disability or maternity leave, you pay a percentage of your income, which is $0.
- If payment does not satisfy monthly accrued interest, the Department of Education pays the remained for most subsidized Stafford loans for up to 3 years. For REPAYE only, the agency also will pay 50% of unpaid interest on unsubsidized loans.
- Like IBR/REPAYE, payments under REPAYE count toward public service loan forgiveness. If your loan is under FFEL program, you need to consolidate in order to get REPAYE.
- No Parent PLUS Loans: First thing is first. You’ve got to figure out which student loans you’ve taken out. Once you have that figured out, you can decide which loan repayment programs you qualify for. It is important to note that none of these loan forgiveness programs allow Parent PLUS loans. If you are going to consolidate your loans, you have to make sure that none of the loans that were consolidated are part of a Parent PLUS loan, otherwise, you immediately disqualify yourself from the loan forgiveness programs.
- October 1, 2011 is the cut off for PAYE. If you have taken out loans prior to this date, you will not qualify for PAYE.
- Payments under a 10-year term must be higher than what they would be under IBR. But does it makes sense to do IBR? This is important if your loan amount is quite small. For example, if you have a loan of $150,000 (let’s say because you worked your butt off to minimize the student loan total) and you make $135,000/year as a dentist, a 10 year repayment plan will have you paying $1718.52/month at a 6.7% interest rate for 10 years. Compare that to IBR where you pay $1687.50/month at the same interest rate for 25 years. Technically, in this example, you will still qualify for IBR, because your 10-year term payments are still higher than IBR payments. But is it worth it? To me, it would make sense to just stick with standard repayment and get rid of the debt in 10 years, rather than prolonging it for 25 years, especially since you pay about the same monthly payment. The shortened debt time will decrease the total money you end up paying, because it decreases the amount you pay in interest. Plus, you will no longer have the debt hanging over your head. Compare that to a dentist who makes the same amount of money per year, but who has a loan debt of $550,000. Now the month difference is $6500/month vs $1687.50/month. IBR works well if you have a huge loan and cannot make the atrocious monthly payment fit with your ideal lifestyle. For smaller loan amounts, it may be best to just stick with standard repayment.
- Smaller monthly payments: A good thing or a bad thing? When looking at these programs with a short term mindset, it is easy to think that smaller monthly payments are better than larger monthly payments. However, may I point out that small monthly payments for a large loan may not be enough to pay down the interest at all. For example, with a loan of $550,000, the interest that accrues each month at 6.7% interest rate is about $3,200/month. However, as from the previous example, 15% of a $135,000 yearly gross income is $1687. So every month, you are only paying half of the accruing interest, which means that interest will continually add to your loan total. Over twenty five years, you are increasing your total amount under the IBR program. Because of this, your total loan amount at the end of 25 years will be over $1 million dollars. But that’s alright, because it will all be wiped in the end anyways, right? (PS: In order to equal the accruing interest rate, without even touching the principal balance ever, you would need to be making more than $300,000 / year. Yikes.)
- Consider your spouse’s income. It is important to note that under REPAYE, your spouse’s income counts as part of the discretionary income. Depending on your spouse’s income, this can increase your monthly loan payments, which will actually increase the amount you pay long term.
- Forgiven amounts are taxed. This is a crucial part of the clause for the loan forgiveness programs. Those who miss this will be shocked at the end of the 25 years. I actually have met colleagues who have been graduated 3 and 5 years who are not aware of this rule. When I told them that the forgiven amounts will be taxed, their jaws dropped. Why? Because none of them knew. This single rule is what made me question whether loan forgiveness was worth it. As mentioned before, under IBR, with a loan as large as $550k, after twenty five years of payment from a dentist with $135,000 income, you would end up with over one million dollars in debt. I think my number was closer to $1,200,000. This was calculated with the assumption that I would be increasing my salary to more than $135,000 as I increased my experience. Either way, at year 25, the loans will be forgiven, and the total amount forgiven will be considered income that you made that year, and will be taxed similarly. So at the end of 25 years, I was expected to pay north of $350,000, in one lump sum, on top of taxes of the income I made on that year. Unless you have a plan to be swimming in some serious dough in twenty five years, I would say it would be advisable to save up for that $350,000 over 25 years. So that’s an additional $1,166 every month you have to save. But what bothered me most was the total amount of money you would pay after loan forgiveness. It turns out, with the taxed income, you would pay more money than the standard repayment. Standard repayment will lead to a total of $720,000 going towards loans, whereas IBR will lead to a grand total of $856,250. Plus, you would have a loan hanging over your head for 25 years, instead of only 10 years (less than half the amount of time). The time may not seem such a big deal, but that is a very large psychological strain to put on yourself for a very long amount of time. Let’s say you were ahead of your class and graduated dental school at 25. This loan would be with you until you’re 50 years old. That’s a really long time.
- There is no clause stating that you are guaranteed to be grandfathered in the loan forgiveness program. While I would love to believe that we will all be one hundred percent grandfathered into these programs, we must not be in denial, and agree to the fact that there is no such clause that guarantees this to be the case. This program may be subject to future changes with changes in government. 25 years is a very long time, and the government changes can occur in a short time span within those 25 years. For example, what if a law passes that changes the loan forgiveness program from being 25 years to 30 years? What if you were so far in, that all you’ve done the last twenty years was increase your loan to a point of no return? You would then have to go through with the additional five years, thus increasing your loan total even more, which then increases the final amount you’ve paid for your education. Or what if the programs are abolished completely? Perhaps you would get some help, perhaps you would be grandfathered in, but perhaps they do nothing to help you, leaving you with over a million dollars’ worth of debt in your forties that you must now pay off. People may say, that’s crazy, they can’t do that to us! Unfortunately, until I see a statement saying otherwise, I will continue to believe that anything can happen. That may just be me, being overly cautious. Or realistic, whichever.
APPLICATION: OUR DECISION TREE
So which program did we choose? As I stated before, initially, we were told that this was the way to go, so we decided to choose one category to fall under. Unfortunately, we immediately had to eliminate PAYE because I had student loans that were disbursed before October of 2011, which were my undergraduate loans. So we were down to either IBR or REPAYE. Both will take 25 years before the student loans were forgiven. It may seem as if REPAYE would be the best option, because it only requires 10% of discretionary income to be paid, whereas IBR requires 15% of discretionary income to be paid. However, we chose IBR over REPAYE because of the married borrowers section of the chart. IBR allows Mike and me to file separately, which means Mike’s income is not calculated in that 15%. Whereas REPAYE will calculate Mike’s income into the 10% owed every year, regardless of our filing status. This fact alone makes a huge difference in how much we end up paying. Without giving away the actual numbers, the example below will demonstrate this point. Under IBR, a combined income of $200,000 will yield a $2,500 check per month being written towards student loans, whereas a single income of $100,000 will yield a $1,250 check per month towards student loans. One may argue that it is better to pay down a higher portion of the loans so that at the end of the 25 years, the amount left over that you will be taxed on is less. However, if you choose to do the loan forgiveness program, it will actually benefit you most if you pay the least amount possible. Your total payment will be less in the long run. Notice how filing together will require $2,500 per month to be paid towards your loans, which is still not enough to cover the accruing interest. So even with the increased amount you are paying, the loan total will still be increasing. The numbers ended up showing that it would be better to pay taxes on a slightly larger number, than it is to pay twice as much every month without ever even touching principle. Off course, this is of the assumption that your spouse and you make the same income for work. In order to check what works best for your situation, I would recommend running your own numbers, using your loan amounts and your incomes.
I would like to reiterate that I am no expert. I can’t tell you which plan is better for you, and it is highly likely that I don’t know all the ins and outs of all three plans. But this is what I’ve learned so far, and our method of thinking. If there are ever any doubts, just run projections and calculations and excel sheets, and go with the numbers. The numbers won’t lie. I hope this has been helpful to some, and I hope more people realize the importance of thinking about this early on in their careers after reading this post. If you ever need someone to walk you through it, may I recommend a CFP? I wish you the best of luck in your endeavors, and more future insightful posts on finance to come!