by Grace Kim, DVM
There is no doubt that student debt is a top concern among veterinarians. Not only is the amount of debt climbing at a dizzying pace, but the multiple available repayment options are difficult to understand and navigate. This creates a perfect storm of confusion and stress.
It’s important to understand that student debt does not always follow the rules of traditional debt. “Normal” debt, such as a mortgage or a car loan, is straightforward. You borrow x amount of money, and you make predictable monthly payments for a certain term until that amount is paid off completely. You can choose to pay this off ahead of schedule by increasing the amount you pay toward the loan principal. This is also the expectation when you are on a standard 10-year, extended, or graduated student loan repayment plan: the goal is to pay off your loans in full.
However, when it comes to federal loans, income-driven repayment (IDR) plans represent an alternative way to pay off debt. IDR plans include the following:
- Income-contingent repayment (ICR)
- Income-based repayment (IBR)
- Pay as you earn (PAYE)
- Revised pay as you earn (REPAYE)
IDR plans determine your monthly payments based on your income, not your loan amount. For example, if you are single and make $80,000 per year, your monthly payment would be approximately $500 per month, no matter whether you owe $50,000 or $500,000. This is vastly different from a traditional type of loan that calculates your payment based on the loan amount.
If you still have a balance at the end of the repayment term (20–25 years), then this amount will be forgiven, which is why IDR plans are also referred to as forgiveness plans. However, you are expected to pay income tax on the amount forgiven. If the forgiven amount is $100,000 and you are in a 30% income tax bracket, you will be expected to pay $30,000 in income taxes the year the loans are forgiven. This amount should be included in the total cost of the loan, and in many cases, the total cost of your loan will still be significantly lower on an IDR plan versus a standard 10-year plan. A general rule is to use an IDR plan if you have a debt-to-income ratio of two to one or greater.
There are a host of variables that can affect your monthly payments, some of which are assumptions about your future. These include:
- The type of IDR plan
- The types of loans you carry
- The date those loans were disbursed
- Your spouse’s income, if you’re married
- Your family size
- Your tax filing status
- Your state of residence
Because of these variables and the relative novelty of these forgiveness programs, it’s not surprising that many borrowers remain wary and decide to pay off their loans aggressively. If you go this route, then it’s critical that you are also addressing these other components of your financial health:
- Having an adequate emergency fund
- Being properly insured (life, disability, liability)
- Saving for retirement
- Having enough cash flow for daily living
- Using your money for self-care and life fulfillment
Ignoring the importance of nurturing all parts of your financial wellbeing means that you are risking financial hardships in the future.
Choosing the best repayment plan is not easy. This is why it’s important to make an informed, strategic decision that best balances your short-term and long-term goals. Run your numbers and decide which repayment plan makes the most sense for not only your present self but your future self as well. The VIN Foundation’s Student Debt Center is a wonderful resource to get started. Approaching this topic with the right tools and information will ensure that you’re making the best financial decision over the long term.
Grace Kim, DVM, is the founder of Richer Life DVM, a website that helps fellow veterinarians improve their financial health and wellness.
Photo credits: ©iStock.com/Burlingham, ©iStock.com//Damir Khabirov
Ready for more? Subscribe now!
Photo credits: ©iStock.com/Jorruang, ©iStock.com/bdspn, ©iStock.com/chriss_ns, ©iStock.com/PIKSEL