Student Loan Repayment Overview

I am honestly shocked and dismayed at how complicated it has become to pay back student loans.  Back when I was in school, there were fewer options, which actually made the process easier because you didn’t have to research so many choices.  Now, due to the ballooning costs of postsecondary education throughout the country, there are a plethora of options to accommodate the fact that so many borrowers may not have the ability to fully pay back their loans.  Wouldn’t it be so much easier if education wasn’t so pricey to begin with??

But here we are, in a world where this madness is reality. 

In order to make sense of the different repayment options, I had to make a quick cheat sheet for myself to just keep it all straight in my head.  For those of you that need a refresher, or if you’re like me and half of these options weren’t even available when you graduated, read on.  You’ll get a sense of what our recently graduated veterinary colleagues have to deal with.

STANDARD REPAYMENT PLAN 

The simplest of all of the plans.  Same monthly payments paid out over 10 years (up to 30 years for Direct Consolidation loans).  

Who would use this plan? If you have a relatively small loan compared to your income, this will be the quickest and least expensive option.  Yes, your monthly payments will be the highest under this plan, but when including your interest payments, it will be the “cheapest” when compared to the following two plans.

GRADUATED REPAYMENT PLAN

Smaller monthly payments in the beginning, then they increase every two years.  Paid off in 10 years (up to 30 years for Direct Consolidation loans).

Who would use this plan?  Similar to the standard plan, except you are expecting a low income that will increase over time to accommodate the increase in payments.

EXTENDED REPAYMENT PLAN

Payments can be fixed or graduated, loans will be paid off within 25 years.  

Who would use this plan? If you can’t afford the monthly payments on the standard or graduated plans, you will have lower monthly payments under this plan.  You will also pay more overall interest.

ELIGIBLE LOANS

• Direct subsidized and unsubsidized loans
• Subsidized and unsubsidized Federal Stafford Loans
• All PLUS loans
• All Consolidations loans

Note: Private loans are not eligible for these plans. This adds another wrinkle to the loan repayment saga.

INCOME DRIVEN REPAYMENT PLANS: Because most veterinary school graduates have large student loan burdens (the average among 2016 graduates excluding those with no debt was $167,535), this option can be very attractive.  Monthly payments are income based.

1. Income Contingent Repayment Plan (ICR): 

• Monthly payment is the lesser of the following: 20% of discretionary income OR standard repayment plan calculated over 12 years  
• Loan forgiveness after 25 years.
• Income tax due on amount forgiven

2. Income Based Repayment Plan (IBR): 

• 10% of discretionary income (if new borrower on or after July 1, 2014) or 15% of discretionary income (borrowed before July 1, 2014)
• Amount will never be more than the amount calculated under the 10 year standard repayment plan
• Loan forgiveness after 20 years of repayment (new borrower on or after July 1, 2014) or 25 years (borrowed before July 1, 2014)
• Income tax due on amount forgiven

3. Pay as You Earn (PAYE): 

• 10% of discretionary income.  
• Must be a new borrower on or after 10/1/2007 and have first disbursement on or after 10/1/2011
• Monthly payment is capped- must be smaller than the calculated 10 year standard repayment amount
• Loan forgiveness after 20 years
• Income tax due on amount forgiven

4. Revised Pay as You Earn (REPAYE): 

• 10% of discretionary income
• You qualify regardless of when you took out the loan  
• Loan forgiveness after 25 years of loan repayment.
• No cap on monthly payment
• Interest subsidy available if monthly payment doesn’t cover interest
• Income tax due on amount forgiven

*Discretionary income is calculated as your gross income minus 150% of the poverty guideline.  

Here is the chart that explains which loans are eligible for the income driven repayment plans.

You can click here and plug in your numbers to get a rough idea of what your monthly payments would be under each plan.  

Remember to take into account the tax on the forgiven amount.  Under current law, this will be considered income and taxed as such.  For example, if you had $200,000 in student loans and your starting salary is $75,000, according to this calculator, the amount forgiven will be $261,869.  You will have to report your income as your actual income PLUS this forgiven amount of over $260,000, and you will be taxed accordingly. Now you can see why some high income earners grumble about taxes when you get pushed into the highest tax bracket.

Of course, we are talking about an event 20+ years into the future.  Tax laws and laws regarding student loans are subject to change, and we simply cannot predict the future.  But it would be wise to start saving now in order to pay off a potentially very large tax bill, aka the “tax bomb.”

PSLF (Public Service Loan Forgiveness):          

If you are in an income driven repayment plan, you have the option to sign up for PSLF.  This is an incredibly attractive option, because unlike the other forgiveness plans, you will NOT be taxed on the amount forgiven. Here are a few details:

• Make 120 qualifying monthly payments while working full time for a qualifying employer 
• Loan will be forgiven after 120 payments (10 years)  
• Loan balance is NOT taxed  

This is a relatively new program that started in 2007, and we are just now getting some stories of recipients who have actually had their loans forgiven. So far, it does not appear that it has been an easy, seamless process.  Also, it appears that most veterinarians will not be eligible because they won’t be working for a qualifying employer (government organizations and tax exempt not-for-profit organizations).  If you want PSLF forgiveness as a veterinarian, your best bet would be to work in academia or a government job.  You can click here for more information about the program.

There are other lesser known repayment options that are available.  The AVMA has a list of other repayment options that you can access here. 

FINAL THOUGHTS

As if graduating from veterinary school isn’t hard enough, now our new graduates are expected to wade through all of this and be expected to know how to most effectively manage their student loans.  I have not even scratched the surface as there are so many factors to consider when paying back your student loans (loan amount, interest rates, household income, other financial obligations, taxes, financial goals, etc).  Add on top of this the relative lack of overall financial literacy, and we have a potential nightmare.

This situation eerily reminds me of the housing crisis that precipitated the Great Recession.  It is somewhat frightening to think of how little it took to apply and receive these loans.  Granted, this particular story about an orthodontist that owes over $1 million in student loans is rare, but it just goes to show that the system is broken if we  have allowed someone to reach this level of student loan indebtedness.  Paying these loans back is infinitely harder, to the point where we have repayment options that essentially assume that you will never be able to pay them back.  

Did you feel well prepared when it was time to repay your loans?  Did you find the financial aid office or your veterinary school helpful when navigating this topic?  Do you feel the current repayment options are adequate for your needs?  Comment below!