What are the hallmarks of income-driven repayment plans? Why are they different than all other traditional or conventional loans? 

We’ve already discussed that they can lower your monthly payments because they are… income-driven, not time-driven. But is there a catch? Will it catch up with you later? 

The BIG, BIG, BIG deal about income-driven repayment plans is the DEBT FORGIVENESS. After you make your payments for the specified amount of time, (20-25 years) any balance left over on your loans will be FORGIVEN by the Department of Education. 

This is huge and will likely significantly lower the amount that most veterinarians will pay back on their student loans. Forgiveness is the thing to look forward to and the major reason to use these plans. 

For many veterinarians, the amount of debt forgiven will be $200,000, $300,000, or even $400,000! This is big money! 

Ok - let’s break forgiveness down… 

First, we have to ask why? 

Why do these programs exist? Student Debt Forgiveness is designed to help Americans fund their education and provide relief from excessive tuition costs. This is the way that the Federal Government chose to fund higher education, particularly graduate and professional schools. During the Great Recession, when many states were in a budget deficit, they had to cut funding to universities. The universities had to respond by increasing tuition. The Federal government could have stepped in and funded universities in real time, but it didn’t. They chose to issue large amounts of debt to students (that’s you) and promise to forgive the debt in 20-25 years. It’s a classic example of kicking the can down the road for government funding. 

But here is the issue. Graduates have to take proactive steps to qualify and apply for forgiveness and be enrolled in the program for 20-25 years. 

Some will and some won’t. So the government will make some money back. 

That’s where we and you come in! We want you to be prepared, plan, and take advantage of the programs that the government set up! These programs are set up exactly for most veterinarians!

The second most common question is - what happens if the program goes away? Will the government pull the rug out from under people enrolled and planning for forgiveness? 

A couple of answers here, 

1) These programs are baked into the master promissory notes for all federal borrowers. The master promissory note is a contract between you, the borrower, and the lender, the government. If the government were to discontinue the forgiveness programs, it would be breaking the contract with millions of borrowers and that would lead to massive lawsuits. No one expects the government to willingly wade into these lawsuits. 

2) These same borrowers that are counting on forgiveness programs are also millions of voters. In all things political, every vote counts. If a political party voted to remove forgiveness they would alienate millions of borrowers that are counting on these programs, probably to lose their votes for the rest of their lives. So, the political will is not to discontinue these programs, but to make them stronger. 

In summary, to discontinue these programs, the government will likely remove them from the master promissory note and sunset them for future borrowers, not current borrowers. 

Here’s the most common question. What about the taxes? 

Yes, here’s the semi-catch…the debt that is forgiven counts as taxable income. How does that work? When a borrower no longer has to pay a debt, the IRS sees that as income. It’s basically like a negation of a debt, which is a positive. It’s called Debt Forgiveness Income. So, in the year that a veterinarian has their debt forgiven, they have to include the amount forgiven as taxable income to the IRS. 

Now, for many veterinarians, that will be a huge amount of debt, which will lead to a large amount of taxes. 

Some critics say that this is a reason to not enroll in debt forgiveness. But let’s crunch the numbers. 

Here’s a hypothetical story to illustrate. Let’s say one of your friends offers to give you $300 if you give $100 to another friend. (this is a good friend). No strings attached, that’s the deal, they give you $300, but you have to give up $100. Is that a good deal? Yes, of course, you will be ahead by $200 and your other friend will be ahead by $100. 

Now let’s apply this concept of debt forgiveness and our friends at the Department of Education and the IRS. The DOE is saying, we’ll give a veterinarian $300,000 if they give our friend over at the IRS $100,000. Keep in mind that the average tax rate on that income is going to be around 30-35%. 

Should the veterinarian take that deal? Yes, of course, they will be ahead by $200,000. Yes, the IRS is going to make some money, but the veterinarian is going to be considerably ahead. Yes, we need to plan for and budget for taxation, but it’s not something to be afraid of!

Here’s the next big mistake that veterinarians make when on the pathway to debt forgiveness. Making extra payments. It feels good to make that extra principal payment. It’s conventional knowledge to apply extra payments to the principal to lower the amount of interest accruing. But if the veterinarian is on the debt forgiveness track - it actually hurts them. Let me use a better illustration…it’s like putting a bunch of cash in a pile and lighting it on fire! 

When planning for forgiveness, we want to maximize the amount forgiven, by making the least possible amounts of payments. The lowest amounts of payments will result in the most amount forgiven and as we already discussed, the taxes are actually a net gain. 

So, don’t make extra payments while in repayment planning for forgiveness. Only make what payments you are required to make! 

Now, all of this forgiveness takes planning! This is not a set-it-and-forget-it thing. Remember that the government and servicers want to make this hard for you because that’s how they make more money. 

When planning for forgiveness, you’ll want to minimize your payments to maximize the amount forgiven. You’ll want to start planning for the debt forgiveness taxation early and be ready for the taxation event. And you’ll want to prepare yourself mentally. Many veterinarians have to watch their debt balance increase because, under income-driven repayment, they aren’t even making the interest payment. If you’re planning for forgiveness, you have to be ok with this loan balance sitting there. You have to know that you have a plan and that plan will ultimately save you money. You have to resist the urge and conventional knowledge to make extra payments. 

It all goes back to understanding how income-driven repayment plans work, how forgiveness and taxation work, and how your plan comes together! 

We are talking about huge sums of money and critical planning, so it’s worth your time and effort! 

Keep trudging along, you are making huge progress!