It is my pleasure to introduce a special guest writer - our colleague Andrew Paulson. Andrew has a master's degree in Accounting and is a Certified Student Loan Professional (CSLP) and enjoys business and finance. His passion for helping people find solutions to complex financial problems inspired him to create StudentLoanAdvice.com where he is the Co-Founder and Lead Student Loan Consultant. He advises dentists across the country on how to best manage their student loan debt. For those investing in their health care career through federal or private loans, Andrew’s got the breakdown for you. Given his special background in navigating student loan debt, Wilson and I wanted his take on his philosophy on planning and tackling student debt. We wanted to share his advice in hopes that you, whether you are a pre-dental student or a current dental student, may gain a new perspective that will certainly benefit your financial future in the coming years.
(Jenny interlude) Speaking from my own experience, I was so excited to gain acceptance to dental school that I rarely thought about the financial commitment. For me, I decided to pursue financial freedom through the Health Professions Scholarship Program through the US Navy (you can read more about it in a previous post linked here).
Without further ado, here is an introduction of the importance of considering financial student loan management:
1. “Why should I think about student loans before or during dental school?”
Dentists are one of the most indebted professions out there. According to a study from ADEA, the average student loan debt for a dentist graduating in 2020 was $304,824 + more if you consider loans taken for degrees prior to dental school. Unfortunately, the increase in salaries has not been commensurate with tuition increases, putting some dentists in an even more precarious position to pay off their student loan debt.
Student loans can impact a dentist’s ability to:
Save for retirement
Purchase a home
Get married or have children
Attend medical appointments
Payoff credit cards
And much more.
2. “Can you break down the four most common loan repayment plans?”
A. Standard 10 Year Repayment: fixed monthly repayment plan to pay down your student loans. The monthly payment is calculated by your loan servicer based on your student loan balance and interest rate.
Ie. a dentist owes $300k at an interest rate of 7% in loans. The monthly payment would be $3,483. *Over 10 years the dentist would pay $417,990 with $117,990 in interest. Monthly payment of that magnitude would be very hard to afford on a resident or associate's salary.
B. Extended 25 Year Repayment
Similar to the 10-year repayment plan, the extended 25-year repayment plan is a fixed monthly payment but over 25 years. This extended plan has a lower monthly payment but a longer repayment period.
For the same dentist who owes $300k at an interest rate of 7% in loans, on this 25-year plan the monthly payment would be $2,120. This monthly payment is $1,363 less per month than the 10-year plan, providing the dentist with additional cash flow. But at what cost? The dentist will carry the debt for an additional 15 years and will pay way more in interest. In total, the dentist would pay $636,101, $336,101 in interest. That’s more interest paid than the original amount the dentist borrowed for college!
C. Income-Driven Repayment
Because Income-Driven Repayment (IDR) plan payments are primarily based on your income, IDR can be a great repayment plan for dentists if they can’t afford the monthly payments in the standard 10-year repayment plan or if they are pursuing loan forgiveness such as PSLF or taxable loan forgiveness. However, most dentists will not be eligible for PSLF because they won’t work at a non-profit or 501(c)3.
There are three different IDR payment plans that are generally considered: IBR, REPAYE, and PAYE. IBR is based on 15% of your monthly income and REPAYE and PAYE on 10% of your monthly income and they should be evaluated closely if your situation requires an IDR plan.
Now if the dentist who owes $300K also makes $120K as an associate dentist, let’s calculate her monthly payments. First, we calculate discretionary income. Assuming the dentist is single, we take $120K of income and subtract $19,320 which is the deduction based on a household size of one.
$120,000 - $19,320 = $100,680
$100,680 is the discretionary income for the year. Next divide it by 12 to calculate the monthly discretionary income.
$100,680 / 12 = $8,390
With a monthly discretionary income of $8,390 their monthly payments would be $839 using REPAYE/PAYE or $1,259 if they use IBR.
REPAYE/PAYE $8,390 * 10% = $839
IBR $8,390 * 15% = $1,259
If the dentist pursued PSLF in PAYE, after 10 years of payments they would have paid $100,680 and had $410,231 forgiven tax free.
If the dentist pursued taxable loan forgiveness in PAYE, after 20 years of payments they would have paid $201,360 and had $508,619 forgiven. However, the $508,619 would be added to their tax return as income and be taxed. Assuming a 35% tax rate, they would pay a tax bill that year of $178,017. In aggregate, the teacher would pay $379,377 on their student loans.
PAYE taxable loan forgiveness $201,360 + $178,017 = $379,377
Curious if you’re a good fit for loan forgiveness? Learn more here
D. Private Refinance
Private refinance is the process of taking existing federal or private student loans and having a private lender pay off your existing student loan(s) and issue the borrower a new loan with a new set of terms. Unless you are planning to do a forgiveness program, we usually recommend that dentists eligible for private refinance seriously consider a private loan in order to get a lower interest rate. But keep in mind there are a number of federal protections that a borrower loses by private refinancing.
In our example, the dentist owes 300k in loans at an interest rate of 7%, but if that dentist privately refinances their loans to the same 10-year term it drops their interest rate to 3%.
Monthly payments are now $2,897 per month and over 10 years the total amount paid would be $347,619 which saves over $70,372 compared to the standard 10-year repayment plan. And don’t forget the added bonus of monthly payments that are $586 less than the standard 10-year plan. That is a HUGE saving just by privately refinancing.
You can see from these four scenarios that there is a BIG DIFFERENCE in the long-term ramifications of your choices on how you handle your student loans. Check this out!
3. “How can I seek personalized help?”
StudentLoanAdvice.com, was created to help dentists and other high earners stop making mal-informed decisions with their student loans. The student loan industry is growing more complex each day with a multitude of repayment plans and loan forgiveness options—each with varying advantages and disadvantages that touch on your income, tax filing status, and even how you’re contributing to retirement. It’s no surprise that many of our clients, prior to our consultations, were making FOUR AND FIVE-FIGURE MISTAKES through mismanagement of their student loans!
For a few hundred dollars we’ll meet with you one-on-one, review your situation, and provide you with a customized student loan plan to help you optimize your student loan management to guarantee that you are reaching financial freedom from your loans as quickly as possible in the smartest way possible.
There is a lot more detail on student loans not covered in this post which you may need to be aware of in your specific situation. Not interested in doing a deep dive and want an expert to help determine which repayment status will save you the most money? Book a consultation with StudentLoanAdvice.com today!
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