By Todd Balsley
GL Advisor
Many health professional students will graduate this year, excited to begin their career. However, a majority of these students have accumulated a significant amount of student loan debt while pursuing their degree, and after graduation, will be responsible for paying it back. With the national average of student loan debt for medical school graduates surpassing $170,000 last year*, it is critical that all students begin evaluating their repayment options prior to graduation.
Below, we have outlined four important steps that all 2011 graduates should consider as they approach repayment in order to save thousands on student loan debt. Taking time to develop a plan to manage your student debt now will help ensure you are on track to improve your financial position after graduation.
Determine Your Optimal Repayment Strategy
Student loan borrowers often have a diverse portfolio of loans with a variety of interest rates. Thus, the optimal repayment strategy will vary by borrower based on their loan portfolio, future employment plans and expected salary both near-term and long-term. All borrowers should evaluate and understand their options to ensure the appropriate repayment strategy is utilized in order to achieve the greatest savings.
Fortunately, the government created programs that provide health professionals with the opportunity to improve their liquidity and lower the cost of their student loan debt. Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF) are two such programs which can offer eligible student loan borrowers the opportunity to save thousands. To recognize the greatest savings, initiating the process for utilizing these programs should begin prior to graduation. Benefits of these programs include:
- IBR: Limits monthly loan payments to 15% of borrowers’ discretionary income, and for up to three years after repayment begins, the government will pay any interest on their subsidized loans not covered by their reduced monthly payment. Additionally, after 25 years of qualifying payments, any outstanding balance is forgiven. In 2014, program enhancements will go into effect for new borrowers, which will limit monthly payments to 10% of discretionary income and forgive outstanding loan balances at the end of 20 years.
- PSLF: Provides tax-free loan forgiveness to federal loan borrowers who make 120 qualifying payments while working for an eligible employer, such as a non-profit hospital or university. Unlike other forgiveness programs, there are no limitations regarding geography, type of medicine practiced, or types of patients treated.
Borrowers who will most likely not be eligible for IBR or PSLF should consider alternative repayment strategies to lower the cost of their debt. One strategy is targeted repayment, a plan which focuses on retiring higher rate debt more quickly in order to lower the interest cost of a borrower’s debt portfolio. Targeted repayment is accomplished by directing a majority of a borrower’s monthly loan payment toward the higher rate debt. Federal loan repayment options such as forbearance, extended payment plans, and deferment may be applied toward lower interest rate loans in order to free up additional funds which can then be used to target the higher rate debt. Although this strategy is rarely practiced, borrowers are strongly encouraged to consider it as a repayment option, as the interest savings can be substantial.
Consolidate Loans
Every eligible 2011 graduate should consider consolidation as it will position loans for maximum benefits, if performed correctly. Consolidation can take months to complete, so it is important to begin this process immediately as delaying the process can affect savings.
- A new statute, available until June 30, 2011, creates the opportunity for eligible in-school borrowers to take advantage of consolidation prior to graduation. Considerations for taking advantage of this opportunity include the loss of grace period and certain borrower benefits.
- A majority of health professional students will need to perform multiple consolidations to ensure repayment flexibility. Consolidation should be grouped by interest rate.
- Variable rate federal loans should be consolidated separately to lock in at a historically low rate, available until June 30, 2011.
All decisions regarding consolidation must be approached strategically as the potential costs and benefits are unique to each borrower. Student borrowers should perform research on their own or consult with an experienced advisor to understand the potential costs and determine if consolidation would be beneficial.
File Taxes This Year
Many 2011 graduates are not required to file their 2010 taxes because their income earned is less than the income filing threshold. However, all borrowers should file a 2010 tax return regardless of income level, as how and when a recent graduate files their taxes can have a direct impact on the potential savings obtained through federal repayment programs.
For example, since IBR monthly payments are based on a borrower’s adjusted gross income (AGI), it is critical to accurately calculate AGI in order to reduce monthly payments and receive government subsidies. Additionally, married borrowers must also consider the tradeoffs of “married filing jointly” versus “married filing separately”. This decision is dependent upon several factors including each partner’s income and federal educational debt levels. In addition, certain graduates below an income threshold are currently able to recognize tax savings for up to $2,500 a year of student loan interest paid for at least the first 5 years of repayment.
Discussing all options with a tax professional who understands how a borrower’s tax filing status can impact student loan benefits will help ensure the greatest savings are recognized on a borrower’s return. The Internal Revenue Service requires that all tax forms be submitted by April 18th, so students should begin the tax preparation process immediately.
Evaluate Need for Supplemental Funding
Many students approach graduation with the anticipation that they may need additional funding for career-related expenses after graduation. For example, medical school graduates entering residency tend to take out residency loans to cover expenses related to exam preparation, residency interviews, relocation and other eligible expenses incurred to start their new career. For those students who may require supplemental funding after graduation, taking steps now to find a loan that suits their needs can be extremely beneficial for securing a low rate loan and getting a head start on the application process.
Choosing the right loan can be a confusing process, so students should evaluate interest rates, APR’s and other financial information from multiple lenders before taking out supplemental loans. It is important that borrowers take time to consider and compare various options in order to select the loan which best meets their supplemental funding needs.
Managing Your Financial Future Starts Now
Taking the appropriate steps to prepare your loans for repayment during your last semester in school can provide significant savings opportunities both now and as you progress throughout your career. However, most health professional students have neither the time nor the resources to manage their debt effectively. Student loans and related federal programs can be confusing and even intimidating and taking full advantage of their benefits requires an in-depth understanding of each program’s details. For instance, many student borrowers do not fully understand the financial implications that certain tax filing decisions have on their student loan benefits. Additionally, few realize that the timing of entering repayment programs is critical to achieving maximum savings. To ensure you make the best financial decisions as you begin your career, we strongly recommend that you research your options and consult with a financial professional who has expertise in managing student loans and financial planning.
Todd Balsley graduated from Harvard Business School in 2005 and is an Executive Vice President at GL Advisor. GL Advisor is a unique service designed to help heath care graduates and other young professionals manage their student debt burden and other financial matters in order to improve their overall financial position. View free webinars for medical students and residents and veterinary students and residents.
* Based on data collected by AAMC, AMA and GL internal student database.
GL Advisor is a division of Graduate Leverage, LLC (GL). GL Advisor does not offer all services to residents of Nevada, New Hampshire, Idaho, and North Dakota at this time.
This article would be a lot better with an explanation of which common govt health loans have IBR or PSLF and what criteria generally have a person qualify.
How does filing taxes help? When you sign up for IBR, if you have a 0 AGI or didn’t file they just want your paystubs to get your income.
I get the feeling the author is just trying to make this all sound very complicated so we’ll run out and hire GL Advisor.
As the author I wanted to comment on the above posts:
For John: Most Federal Student Loans are eligible for IBR and qualification requires that you demonstrate a partial financial hardship which means the 15% of your discretionary income (divided by 12) needs to be lower than a year10 year standard payment. Also, in terms of eligibility for PSLF your federal loan payments must be qualified Direct Loan payments. Therefore consolidation is required for a borrower who has loans with another lender. Evaluating the reduced payment amount, subsidy amount, and underlying interest rate of your loans will help determine if it is economically advisable.
To address Jane’s comment: First a tax return may be used as supporting income documentation for IBR and further servicers pull AGI information directly from the IRS for purposes of validating income for IBR. The most common mistake we see is actually what was proposed in the posting. As stated, when a borrower applies for IBR he or she has to provide either paystubs or AGI documentation. Most borrowers do not know their current year’s AGI as it has not yet been calculated, or as you indicated, might not have one at the time of filing. Given this, servicers recommend they submit paystubs instead—and this was the posted suggestion. The problem is paystubs do not contain AGI figures and as a result the servicer can only annualize the borrower’s gross income. For your average new medical resident, this results in an increase of more than $3,000 in loan interest costs. This is just one of the costly mistakes we see medical residents make in the process of debt management. Also, to address “the running out and hiring GL” comment, we designed our program to provide potential clients a free assessment consisting of an action plan on potential savings using their data. Thus, prior to any need for commitment clients are able to determine how much they stand to benefit. I hope this helps.
Todd, I’m still confused. Why does it help to file a tax return with 0 AGI, if they’re just going to ask for paystubs in that case? They won’t accept my 0 AGI if I’m working now, but the article says I should file “regardless of income level” – what does that accomplish?
PSLF is very new, and to my understanding, the first year’s class that would be eligible is not up for a few more years. This means nothing has been paid out by this program yet. When the government realizes how much this will cost them, there is good chance this program will be stopped. Don’t forget they are shortly doing away with any new subsidized Stafford loans because they can’t even afford to pay the interest. In short, it would be great if this works out, but I wouldn’t put the majority of my eggs in this basket.