Student Debt

Making Easy Work of Loan Repayment Options

With no fewer than eight repayment options available for federal student loans, it’s no wonder loan repayment plans are so confusing. While it all might seem overwhelming at first, sorting it out really starts one simple question: what’s your student debt to income ratio. It’s a simple question based on an even simpler calculation. If you owe 250,000 in student loans and make $100,000 then you student debt to income ratio is 2.5. If you owe 120,000 in student loans and make $100,000 then you debt to income ratio is 1.2. It’s a simple calculation and yet it’s very empowering.  

The student debt to income ratio

If your student debt to income ratio is less than 2.0, selecting a standard repayment plans makes the most sense. For most veterinarians, the only standard plan that’s logical is the 10-year plan. I wouldn’t consider the 25-year because other extended plans offer lower payments and loan forgiveness. The graduated plan is enticing as initially offers lower payments; however, monthly payments increase substantially as time goes on. Really, it’s a simple choice. 

If your student debt to income ratio is greater than 2.0, selecting an income based plan is the most sensible course of action.  Granted, there are 5 income based repayment plans, but only three (IBR, PAYE, REPAYE) are really worth considering and most veterinarians will find that PAYE, or REPAYE will best suite their needs. Be forewarned, if you marry or plan on marring someone who has income and no significant student debt, REPAYE can blow up spectacularly. 

Lets look at some examples of the student debt to income ratio at work.

High Ratio Sara

Sara attended a private veterinary college. Although she lived frugally, she graduated with $270,000 in debt. Sara has accepted a job in Phoenix AZ earning $90,000. Her debt to income ratio is 3.0. Sara takes home  $5,170 a month after taxes and deductions. If she wanted to pay off her loans in 10 years her monthly payment would ~ $3,000 leaving her $2,170 on which to live. In phoenix this would likely pay for rent, ramen and not much else. 

For her, one of the income based payment programs (IBR, PAYE or REPAYE) would probably make better sense. Her monthly payment would be only $587. Sure, Sara will have to pay the so-called “tax bomb” in 20 or 25 years but lets look closer. Assume that Sara selected REPAYE so in 25 years she will owe taxes on $354,093 of loan forgiveness or ~$106,000. This is not a big deal. If Sara invests just $273 a month in a savings account earning 2% she will have the $106,000. So her total monthly loan related expenses are $860 a month which is much more affordable than $3,000.

Low loan Ally 

Ally attended a state school, and had financial assistance. Like most veterinary students she lived a modest lifestyle in college and veterinary school. She graduated with $150,000 in debt and has accepted a job in Phoenix AZ for $90,000. Her student debt to income ratio is 1.6. Ally takes home  $5,170 a month after taxes and pretax deductions. If Ally pays off her loan in 10 years her monthly payment would be $1,600 leaving her $3,570 on which to live. Not all the money in the world, but livable. In 10 years she is done!

On the Fence

The only source of indecision comes in for individuals whose student debt to income ratio falls right around 2.0. These folks are presented with an interesting dilemma. They can select the standard repayment plan, live frugally for 10 years and then cast off the student debt yoke.  They can chose an income based repayment plan, live more comfortably and be saddled with debt for additional 10-15 years.  There is no easy answer and really it will come down to personal preference. The best way for these folks to decide is to spend some time with the VIN student loan repayment simulator and see which scenario they feel more comfortable. This is true also for High Ratio Sara and the others with high student debt to income ratios.

The PocketDVM – The #1 personal finance blog for veterinarians

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