Student Loan Debt: Which Repayment Option is Right for You?

Last month, we discussed the various different income-driven repayment options for student loans. Today, we are going to look at which strategies can make sense given several different sets of career plans and student loan burdens.

In general, physicians will derive the largest benefit from enrolling in one of these income driven repayment plans if:

1. They have an average or larger than average student loan burden

2. They are in a longer training program

3. They plan to remain working for a qualified 501c(3) program

4. If their income doesn’t force the max payment (IBR and PAYE) once practicing

As a reminder, each of these income driven repayment plans is based on a percentage of discretionary income, so the more payments that are made while in training at a relatively low income, the greater the potential forgiveness. Also, with IBR and PAYE, there is a payment cap based on what a 10-year standard repayment plan would be, regardless of your in-practice income. With each of these factors being taken into account, it becomes quite apparent that there is the potential for significant loan forgiveness if there are payments (the more, the better!) made in training; while the max payment once practicing is capped at a 10-year standard repayment plan.

Most of the time while one is in training, the required payment is not enough to cover the interest on the loans. Conceptually, one could make payments for seven to eight years in training while their debt burden increases, despite making monthly payments. Upon graduation, their loan balance would be higher than when they started residency, and then they would only have to make payments for a few years based on their income as an attending. Once 120 payments (residency payments count the same as they do at full income) has been reached, the remaining loan balance would be forgiven.

With these items being taken into consideration, it will generally make sense to make payments in one of these programs during training if the physician expects to continue working for a non-for-profit long-term. PAYE has a lower payment calculation and also has a payment cap similar to IBR, so if you qualify for PAYE, this is preferable over IBR.

If you not qualify for PAYE, then it may be worth considering the new REPAYE program. Under this program, there is an interest rate subsidy while in negative amortization; however, there is NO CAP on the maximum payment. Also when switching from IBR to REPAYE, you must enter a 10-year repayment plan for one month and then make the switch. When the switch takes place, the interest will capitalize. Please consider this decision carefully as it could be costly.

If one is not considering working for a 501c(3) upon graduation, it would likely be best to look at either REPAYE for the interest rate subsidy or refinance the loans privately. Over the last several years, many banks are offering to buyout federal loans in exchange for a lower rate than offered federally. These programs do not allow for income driven repayment, but the potential interest rate reduction can be substantial.

As you can see, there are many options available for student loan repayment and it is important to consider your career plans, marital status, debt burden, liquidity needs, and income potential in developing your personal student loan repayment strategy. Please run the numbers before making any decisions or seek the help of a financial advisor to help you do so.

Developing a student loan strategy requires many complex considerations, it is advised that you consider your options with your financial advisor as the discussion above is only a general outline of available options.

More information can be found at: https://studentaid.ed.gov

Michael Paulus, CFP, is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated. 1500 Market Street | 12th Floor--East Tower | Philadelphia, PA 19102.

Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. This is not a recommendation of any strategy or product in particular.