Repayment And Forgiveness Options For Your Student Loans
Repayment and Forgiveness Options for your Student Loans
Is the enthusiasm for your work is being drained by the stress of your student loan obligations?
By Phil Getz, Program Manager, Navicore Solutions
This post originally appeared in the Maryland Veterinarian Medical Association Newslettter, Summer 2015.
You followed your passion, graduated from veterinary school and are working in the field you love, literally, “in the field”, for some of you. But something is amiss. The enthusiasm for your work is being drained by the stress of your student loan obligations. The veterinary profession is one that is driven by passion; a passion ignited at a very young age by a love for animals; a passion strong enough to carry you through the rigors of veterinary school despite the costs – and the costs are high. According to the American Veterinary Medical Association, the average amount of student loan debt for a 2013 veterinary graduate was over $160,000. Considering the average starting salary for a veterinary school was approximately $68,000 for the same period, it is understandable that many veterinarians are struggling to keep up with their student loan payments.
A common recommendation is to limit your student loan debt to your expected first year salary upon graduation. At this amount, your monthly student loan repayment on the Standard 10 Year Repayment Plan would fall within 10% to 15% of your salary, which should be manageable. Once your payment exceeds 15% of your salary, it starts to impact your ability to accomplish other goals in your life, such as; building an emergency fund and saving for a home or your own practice. The more your debt payment exceeds 15%, the more it can affect your financial security. Not only will it impact your ability to reach your financial goals, but it can easily lead to an accumulation of credit card or personal loan debt.
If you are reading this article, you are probably well aware of the statistics and feeling the weight of them personally. The good news is – there are federal student loan repayment options available that may help you lower your monthly payment to an affordable amount. In addition, there are a handful of ways in which your student loan debt might be reduced or eliminated. Some of these options can provide immediate or near term relief while the benefits from others may not be realized for 10 -25 years.
A note on deferment and forbearance
Deferment and forbearance are the federal options available for postponing your student loan payments. You may be able to defer paying your loans for up to three years, but you should be aware of the consequences of choosing this option. Unless you are able to defer your student loan payments without accruing interest costs, your debt will continue to grow while your payments are suspended, making it even more difficult to pay your loans when the period of deferment or forbearance ends. Even if your loans are not accumulating interest, you will be more likely to make lifestyle decisions that don't factor in your eventual student loan payments. Once the period of deferment or forbearance runs out, you will be forced to try and fit this “new” payment into a budget that may now include a car or mortgage payment and may be less affordable than it was before. Don't ignore your debt or put off making payments thinking it will get easier to manage in the future.
Tip #1 – Make paying off your student loan debt a priority. Establish a repayment plan, and then build your lifestyle around what's left after making your student loan payments. This will help you keep control of your finances by forcing you to make choices that are affordable in the long run.
Tip #2 – Use deferment and forbearance for emergency situations only. They can be valuable tools for navigating a temporary financial hardship but repayment should resume as soon as possible.
Student Loan Default
A federal student loan is considered in default once it has been delinquent for more than 270 days. There are several negative consequences to having student loans in default, the worst of which may be the garnishment of your wages or legal action initiated by the Department of Education. You will also be prevented from obtaining any new loans if you want to return to school and will be ineligible for any of the income derived payment plans until your loans are brought current. If you have loans in default, you have several options for returning them to good standing:
- Pay them in full – If this were possible they probably wouldn't be in default in the first place.
- Rehabilitation – You make 9 full payments over a 10 month period at an amount that is agreed to by the Department of Education. You can speak with a Department of Education representative at 1-800-621-3115 to work out a repayment amount that is affordable for you.
- Direct Loan Consolidation – With this option, you consolidate your defaulted loans with other federal loans and agree to repay your loan under the Income-Based Repayment Plan, Pay as You Earn Repayment Plan or Income-Contingent Repayment Plan.
If your loans are in good standing, you may be able to take advantage of one of the following forgiveness plans:
Veterinary Medicine Loan Repayment Program
This federal program forgives up to $25,000 of student loan debt for each year of service, up to three years, in a designated veterinarian shortage situation. Each April, a new set of shortage situations are posted on the NIFA web site, found here http://nifa.usda.gov/vmlrp-map, with veterinarian applications for these positions due in June.
Currently there are no designated shortage areas in Maryland, but there are areas in the neighboring states, which might provide an opportunity for any veterinarians who live near state borders. Also, new nominations are made each year, so there could be opportunities within Maryland in 2016.
Public Service Loan Forgiveness
One of the most generous loan forgiveness programs is the Public Service Loan Forgiveness Program. Designed to encourage individuals to work in areas of public service, this program offers loan forgiveness for those working for government organizations and qualifying nonprofits. After a borrower makes 120 payments, while working full-time at a qualifying organization, any remaining balance on their William D. Ford Federal Direct Loans will be forgiven. Thirty hours per week is considered full-time, so it's possible that a veterinarian could fulfill the time requirement teaching at a state college or working at a nonprofit 501(c)(3) organization, and put in some time at a private practice.
Perkins loans and FFEL loans do not qualify for the PSLF program; however, they could become eligible if consolidated on a Direct Consolidation Loan. Only payments made after the consolidation is complete count towards the 120 qualifying payments, so it's important not to include any Direct Loans that you've been making payments on that are already counting towards the 120 qualifying payments.
If you qualify for Public Service Loan Forgiveness, you will want to select one of the Income Driven Repayment Plans listed below rather than the Standard Repayment Plan, otherwise there will be nothing left to forgive at the end of 10 years.
Your options for repayment will be determined by the type of loan you have, the outstanding balances and the date when the loans were originated. Following is a brief description of each of the repayment plans:
Standard Repayment Plan – On this plan, your payment is calculated to ensure your student loan is paid off within 10 years. If you can afford the payment and you do not qualify for Public Service Loan Forgiveness, this may be a good option, as you will generally pay the least amount of interest over the life of the loan.
Graduated Repayment Plan – With this repayment plan, your monthly payment starts lower than the Standard Repayment Plan, and then increases every two years. The payments are calculated to pay the loan off in 10 years, but because the initial payments are lower, you will pay more interest on the Graduated Plan than you will on the Standard Plan.
Caution: The following plans are attractive because they allow you to lower your monthly payment, however, the extended repayment periods, which can be up to 25 years, will result in much more interest being paid over the life of the loan.
Extended Repayment Plan – This plan is for Direct Loans with balances greater than $30,000, that were taken out after October 7, 1998. You may have a fixed or a graduated monthly payment with the loan extended for up to 25 years.
Income Driven Repayment Plans – The monthly payment for these plans is calculated as a percentage of your discretionary income. Your eligibility for each repayment plan depends on the type of loan you have and the dates you took out your loans. You should choose one of the income driven repayment plans if you qualify for Public Service Loan Forgiveness, since any balance remaining after 120 payments will be forgiven. If you do not qualify for PSLF, then be aware that your lower payments may significantly extend the life of your loan, causing you to pay much more in interest than the standard plan. Following are brief descriptions of the Income Driven Repayment Plans:
- Income Based Repayment (IBR) – There are two IBR plans; one is for loans taken out prior to July 1, 2014 and calculates your payment based on 15% of your discretionary income and the other is for new borrowers who took all of their loans out after July 1, 2014 and calculates your payment based on 10% of your discretionary income. The first IBR plan has a repayment period of 25 years and the second, for new borrowers, has a repayment period of 20 years.
- Pay As You Earn (PAYE) – Monthly payment is calculated as 10% of your discretionary income with a repayment period of 20 years.
- Income Contingent Repayment (ICR) – Repayment amount is based on 20% of your discretionary income or what you would pay on a 12-year fixed payment plan, whichever is less. The repayment period for this plan is 25 years.
Repayment Periods – Under the three Income Driven Repayment plans, any remaining loan balance at the end of the repayment period is forgiven. Please note that forgiven debt may be subject to income tax except if you qualify for Public Service Loan Forgiveness.
Income Verification – Since your payment on the Income Driven Repayment plans is based on your income, you will have to provide a copy of your tax return each year to obtain your new monthly payment amount. Your monthly payment will increase or decrease based on your discretionary income, but it will never go higher than the payment required on the Standard Repayment Plan.
You can retrieve all of your federal loan information at www.nslds.ed.gov and obtain detailed descriptions of the repayment plans at www.studentaid.ed.gov.
If you would like assistance reviewing your student loan repayment options, please contact the Student Loan Counseling Department of Navicore Solutions at 866-592-4557.
Phil Getz is the Counseling Relationship Manager at Navicore Solutions, a nonprofit financial counseling organization focused on improving the financial well-being of individuals and families through education and personalized counseling. Phil's experience working for both for-profit and nonprofit financial organizations over the last 25 years has provided him with a unique perspective on personal finance. Contact Phil to discuss how Navicore's services can be used to benefit your business, your employees and the customers you serve.