We’ve discussed borrowing, consolidation, grace periods, and deferral. We’re working our way up to repayment. This is the thing that you do for a LONG time! This is what scares everyone. Paying the money back. 

Repayment is also incredibly confusing because there are numerous repayment schedules and plans to choose from. 

As always, we’re going to go slow and break this down into easy-to-understand pieces of information.
The first concept is to differentiate time-driven repayment from income-driven repayment. 

The definitions are just as their names say. 

Time-driven repayment is characterized by a set period of time, the repayment schedule. Almost all loans (outside of federal student loans) are on time-driven repayment schedules. Another way to say this is an amortization schedule. 

For example, the repayment schedule on a home mortgage may be 15 -30 years. The repayment schedule on a car loan may be 3-5 years. This means that the principal and interest will be paid in full at the end of the repayment schedule. Every month’s payment has an interest component and a principal component and they total to the monthly scheduled payment. 

On the other hand, income-driven repayment is characterized by the income of the borrower. Meaning that the monthly payment amount is determined by the income of the borrower. It’s kind of a “pay what you can” model.  So, the less a borrower earns the less they pay and the more they make, the higher their payments. 

Back to time-driven repayments. Under the master promissory note on your federal student loans, the default repayment plan is 10 years. But, extended plans can be selected for up to 25 years, if the borrower has more than $30,000 in outstanding direct loans. Since interest is accruing, you’ll pay more for the longer plans. 

There is also a graduated plan, where the monthly payments are set lower for the first years and then slowly “graduate” or increase over the years. This was designed to simulate an income-driven plan, where a borrower’s income should increase slowly over time, but for veterinarians, that’s not automatically true. 

Now, let’s move over to income-driven repayment plans. They are only available on direct federal loans that are still in the federal system! 

This is where things start to sound a lot like alphabet soup. (The government loves acronyms). 

There are multiple plans that fit a variety of loans and incomes. We’re just introducing these now and will fully explain them later

PAYE - stands for Pay As You Earn

REPAYE - stands for Revised Pay As You Earn

IBR - stands for Income-Based Repayment

ICR - stands for Income Contingent Repayment

PSLF - stands for Public Student Loan Forgiveness. This is not a repayment plan by itself but can be combined with another income-driven repayment plan on forgiveness. 

Here’s the hallmark of these plans. The big, giant, can’t-miss feature. This is the concept that makes these plans defy common financial knowledge. 

Any principal or interest that has not been paid, at the end of a specified period, (depending on the plan) is FORGIVEN. Meaning that there are no catch-up payments or balloon payments at the end of the plan. The payments will max out at where the extended repayment would have been set.

Said another way - Income-driven repayment plans allow a borrower’s payments to be less when their income is lower. Then, as their income increases, and as long as they continue to make payments, they will eventually reach the max payment amount. At the end of a specified period, the leftover will be forgiven by the Department of Education. 

Every year, the income of the borrower and their family size and status will have to be updated and certified, then their payments will be set for the next year. So the payments are “income-driven.”

This is huge because this means that the borrower will not pay the entirety of the loan balance. They will pay what they can, and then the rest will be forgiven. 

Now, there is a catch and that comes from the IRS. Under all of the plans except for PSLF, the amount of loan that’s forgiven is taxable under ordinary income tax rates. Meaning that in 15, 20, or 25 years depending on the plan, the balance is forgiven, but the borrower will need to pay a percentage of it back in taxes. 

We’ll discuss and plan for the taxes in a later drip. 

For now, know that time-driven repayment plans require that the borrower pays the entire loan balance back in an amount of time from 10-25 years. 

For income-driven repayment plans, know that not all of the balance will be paid back. 

Let’s look at why income-driven repayment makes a lot of sense for the average veterinarian. 

Let’s say the average veterinarian’s income is $100,000. They’ll pay about $20,000 in income taxes, and that gives them a take-home income of $80,000 or about $6,666 per month. They have a rent or mortgage payment of $1,500; a car payment/lease of $1,000 and they buy $300 in gas. They pay an additional $1,000 in health insurance, car insurance, and home insurance. Their cell phone bill is $150 per month. They spend about $500 per month on food and personal items. Their home internet and other subscriptions are $150 per month. So, that totals $4,600 in expenses, and they haven’t traveled, bought any clothes, entertainment, or funded an emergency fund! 

Now, the average veterinary student graduates with $200,000 in student debt. If they stay on the standard repayment plan, that will be a $2,301 monthly payment. So, the average veterinarian will be living month-to-month on the standard plan. 

If the veterinarian chooses the extended repayment plan, their monthly loan payment will be $1,400 per month. Which will allow them to buy clothes, and travel, but money will still be tight! 

This is where income-driven repayment comes in - under an income-driven payment plan they can lower their monthly payments, and put some money into savings and an emergency fund. 

Keep in mind that these are BEST CASE SCENARIOS, using $100,000 in income and average debt. Many veterinarians make less than $100,000 (50% to be exact if you understand how averages work!) and many veterinarians have more than $200,000 in debt. And many veterinarians have credit card debt, health care payments, and other expenses that can and will pop up. So income-driven repayment programs can be an absolute lifesaver for them. 

To wrap things up, Income-driven repayment is a necessity for most veterinarians that have a debt-to-income ratio of greater than about 1.5:1. 

Understanding the difference between income and time-driven repayment can help you make the right decision on your repayment plan. 

Don’t worry, we have some important drips coming up, that will go over some of the things we barely mentioned here like debt forgiveness and the details of the repayment plans. Let’s go step-by-step and help you make the best possible decisions on your student loans.