“My plan is to pay off my student loans within 5 years.” 

“I want to pay them off as soon as possible”  

“I heard that I should apply all my extra income to my student loan payment, so I can be done with them” 

“I’m going to get a signing bonus, so I can apply it to my loans” 

These are common questions and statements that we hear about repaying student loans. 

What are the right answers about repayment? How do you make these huge decisions? 

Many times students and recent graduates will make these life-changing decisions without consulting an expert, without running the numbers, or without even a second thought. 

Sometimes a bad decision is made by listening to a podcast, a radio show, or on the advice of someone that doesn’t understand the complex veterinary student loan repayment system. Remember: student debt is not like other more traditional types of debt! 

Our point today is to run the calculations, do the math, and make an educated assessment of the best way to repay your student loans. 

The conventional knowledge received from podcasts and even well-meaning family members is often wrong and will cost veterinarians MORE in student loan payments over the long run. 

It’s hard to unwind years of anecdotes, myths, and beliefs about debt and student loans. 

The most simple way to start to understand repayment is that Federal student loans are different than conventional debt. Conventional debt, such as mortgages and car loans require full repayment, under all circumstances. Conventional loans affect your credit score and ability to get other loans. 

Federal Student loans have debt forgiveness and variable repayment plans under the right circumstances. 

The financial planning that applies to conventional loans does automatically cross over to Federal student loans. 

So, leave your conventional knowledge about debt aside as we start exploring student loan repayment. We’re going to be discussing Income Driven Repayment plans, where the hallmark, the goal, is debt forgiveness. The goal is to pay as little as possible on the loans until they are forgiven by the federal government. Many times, for most veterinarians, this is the least costly way to repay federal student debt. Whether you expect to reach student loan forgiveness or not, the income-driven repayment plans can be used to your benefit to prioritize your overall financial wellness. 

Using really rough math, for veterinarians with a debt to income ratio of greater than 1:1, (remember a few drips ago this is a debt greater than the amount of salary), the best repayment plan is one that includes debt forgiveness. 

So, what are the mechanics, the logistics of these plans? 

Step 1 - The veterinarian certifies their income with either their tax statement or their paycheck stub and requests an Income Driven Repayment from their loan servicer. The loans must be in the Federal loan system. Private and private consolidated loans are not applicable. 

Step 2 - The loan servicer calculates the veterinarian’s “disposable income” from their Adjusted Gross Income (AGI). The AGI is a tax calculation that uses deductions and the disposable income is the amount of money the veterinarian should have left after basic essential needs. Calculating the expenses are standardized from the poverty level and it doesn’t matter what the veterinarian’s actual expenses are. 

Step 3 - There are several choices of plans such as Pay as you Earn (PAYE), revised PAYE and ICR, that have slight differences as to which loans are applicable, the amount of the payments and the length of the payments. The veterinarian chooses a plan and makes the scheduled monthly payments. The payments should be a fraction of the normal repayment plans. This is a step where the math becomes important. Spend some time on this step and review the materials at the VIN Foundation 

https://vinfoundation.org/top-5-mistakes-made-by-veterinarians-using-income-driven-repayment/

Unfortunately, your student loan servicer won’t make this decision for you. In fact, most of their service representatives are quite unknowledgeable about the details of the plans. The best course of action is to understand the plans, run the numbers, and tell them which plan is best for you. How do you calculate which is the best plan? Upload your information into the student debt repayment simulator. 

https://www.vin.com/studentdebtcenter/default.aspx?pid=14352&id=7578014

Step 4 - Each year the veterinarian must re-certify their income, using their tax data or paycheck stub. As the veterinarian’s income increases with time, their payments will increase slightly. But, here’s the huge deal - Even if the veterinarian’s income rises considerably, they cannot be forced to pay over the original extended repayment plan amount. Meaning that there will be always something to forgive if the veterinarian started on an income driven repayment plan. This is a BIG BIG deal for those recent graduates that go on to internship, residency, or other advanced education. This means those first years of low salaries will result in forgiveness, even if the veterinarian’s eventual salary is very high. 

Step 4a - The veterinarian must also begin to start planning for debt forgiveness taxation (see Step 6) by saving enough money to have savings to cover the coming taxation event. 

Step 5 - Each plan has a specified time span, ranging from 20-25 years. Once the repayment term is complete, any balance left on the loan is forgiven! That means there are no more monthly payments, the debt is gone! It’s one of the only times in our lives that debt will be forgiven. 

Step 6 - Here’s the bad news, the forgiven debt triggers the IRS to tax “debt forgiveness income.” Although the veterinarian doesn’t actually handle the cash, the fact that they no longer have to pay the debt, due to the forgiveness, it’s deemed to be like income and thus taxable under income tax laws. So, the veterinarian has to pay the applicable income tax, usually in the range of 20-30%. The good news is that the veterinarian has 20-25 years to plan for this taxation and use the power of compounding interest to prepare for the taxation event. Again the way to calculate for the amount of taxation and begin planning is the VIN Foundation’s Student loan repayment simulator. 

The steps are easy, but they are also complicated. There are important decisions to make and planning to be done. But hopefully, you can now see that the goal is to minimize monthly payments in order to maximize the amount forgiven. 

Here are some common questions and myths 

• Is there a chance that the programs will go away? 

This is a super common question and concern and there are several reasons why the experts don't expect them to go away. 

 1) These income driven repayment programs are specified in most borrowers’ master promissory notes. Meaning that they are part of a contract between the Department of Education (DOE) and the student. It’s really hard to unwind a contract and that would be basically what would happen if Congress or the DOE  took the programs away. 

2) Since the COVID pandemic and the CARES act, basically, every step that the President, Congress, and the DOE have taken has been to increase student loan relief. There is political will to reduce the strain on student loan borrowers and help, not hurt them. Also, there are millions of Americans who have student debt and it’s a major issue for those Americans. Removing these programs while people are depending on them would have a large negative political impact and probably cost millions of votes. Politicians think about votes and it would basically be political suicide to vote these programs away. 

3) These programs have started and many Americans, not just veterinarians are currently in repayment and depending on the program.  If they do go away, it will probably be for future borrowers, those students that haven’t entered college yet or signed the Master Promissory Note. The current borrowers would likely continue with the programs, while they are “phased out”.

None of this is perfect and it’s hard to fully predict what the DOE, the President and Congress is going to do or not do. But the overwhelming consensus among experts is that these programs are safe and they are likely only to be improved upon.  

• What about taxation? Won’t that cost more money? 

This is a knee-jerk reaction that many assume without doing the calculations. Taxes aren’t fun, but they are never 100% of the income. The current income tax structure in the US is about 15-39%. So if you receive $100 of “free money” you have to pay (on average) $30 in taxes. So you are $70 ahead. That’s still $70 of free money. 

Let’s scale this up. Let’s say a borrower has $300,000 in debt forgiven by the DOE, but they would then owe the IRS $100,000. They are still $200,000 ahead! Yes, they have to pay $100,000 in taxes, but they saved $200,000! That’s a good deal all day long. The big deal is that the taxation has to be planned for, and savings should be prepared in anticipation of the taxation event. 

The big point is to make sure that you do the calculations, understand the actual finances and let the numbers guide your decision. Many veterinarians let myths, misconceptions and bad advice make their decisions and that can cost hundreds of thousands of dollars more. 

It’s now up to you to do your research, do the calculations and make the educated decision about your student debt repayment.