Employer assisted student loan repayment benefits for veterinarians
We have run thousands of student-loan repayment simulations for veterinarians in an effort to help them navigate their student loans and repayment options. The results have shown for situations where student debt exceeds income, the most flexible and financially beneficial repayment strategies are counterintuitive.
Contrary to conventional wisdom, loans with shorter terms and lower interest rates don’t necessarily result in the best deals, particularly for recently graduated veterinarians in the confusing world of federal student loan repayment. This is because the U.S. Department of Education offers several plans known as income-driven repayment (IDR) options that are meant to ease the load. IDR plans are quite beneficial for newer veterinarians, especially those who have student loan balances that exceed their income. When using IDR, paying more than the minimum monthly payment, even if the additional payments are coming directly from your employer, often does not make financial sense for neither the borrower nor the employer.
Owing to various benefits in IDR plans, including balance forgiveness, a borrower using IDR over a long period, even at a higher interest rate, ultimately could pay less in total than through a private refinance loan with a lower interest rate. When a borrower is likely headed for student loan forgiveness using IDR, it also doesn’t make sense financially to pay more than is required by their discretionary income a measure used to determine their minimum monthly payment.
Calling all associate veterinarians
Before considering an employee student debt-relief benefit, making additional monthly payments towards your student loans, or pulling the trigger on a lower interest rate private refinance of your federal student debt, make sure you go through these steps:
- Determine your IDR plan eligibility using the VIN Foundation My Student Loans tool
- Compare your minimum payment due using an IDR to what you’re paying now
- Run loan simulations at the VIN Foundation Student Loan Repayment Simulator
- Minimize your loan repayment costs, Maximize your monthly cash flow
- Negotiate the best compensation benefits for your situation
Review all your repayment options carefully. As well-intentioned as it may be, there is a very good chance you’ll be paying more, losing flexibility, or discounting the value of the benefit you’re offered with many of the employer student loan assistance programs currently offered for veterinarians. Approach your employer about having the benefit redirected to pre tax benefits in your compensation package or paid out in a way where you have control of how those funds are used.
Calling all veterinary employers
Before offering an employee student loan assistance program, make sure you go through these steps:
- Get knowledgeable about federal student loans and IDR at the VIN Foundation Student Debt Center
- Will a direct student loan contribution reduce your associates total repayment costs?
- Consider the tax implications and logistics of a direct student loan contribution
- Are there other compensation benefits that will result in a larger value to you and your associate than a student loan contribution?
- Cater a plan that matches both your and your associates’ financial goals
For example, instead of a contribution of $150 per month — $1,800 per year — directed at a federal student debt balance in excess of the borrower’s minimum monthly payment due, those funds probably could go further if it were given directly to the employee, contributed to pre-tax benefits such as retirement savings or health insurance, or directed to a forgiveness planning fund and IDR education.
Here is how a $150-per-month employer contribution could unexpectedly affect the financial situation of veterinarian borrowers whose student debt is more than their annual incomes:
- Employer payments applied directly to student loan accounts increase the borrower’s taxable income.
- Higher taxable income increases the minimum payment due under IDR plans. The more paid per month, the more the borrower pays in total.
- Payments made above the minimum payment due under IDR, unless they can be applied to principal or count as part of the minimum monthly payment due, result in more money paid in total than required under IDR.
- Additional payments made on student loans that go only toward unpaid interest will reduce the amount forgiven. However, for a borrower using an IDR plan known as REPAYE, the additional monthly contribution may negate some or all of a monthly unpaid interest subsidy available under the plan, thereby reducing the value of the contribution.
- Under IDR, loans are forgiven after 20 to 25 years of payments. The amount forgiven is taxable. If the goal of an employer contribution is to reduce the employee’s tax liability, then the benefit from a $150 monthly contribution is $45 ( assuming a tax rate of 30 percent on loan forgiveness). Over 20 years, $36,000 of employer-paid student loan payments translates to a reduction of $10,800 in total repayment costs for a borrower who reaches forgiveness — not a very good return on those funds.
We have to think beyond the employer student loan contribution plans largely catered toward undergraduate hires for other industries. For associates whose student debt exceeds their income, these contributions plans benefit the third-party providers much more than the veterinary employers or associates using them.
If you want to get really creative, consider a deferred compensation plan where your associate might earn an increasing amount in a fund they control that can be used to cover any anticipated tax liability incurred by student loan forgiveness. Alternatively, those funds could be used to finance a buy-in or purchase of your practice for succession planning.
If a deferred compensation plan is too complex, I have seen employers offer retention bonuses or even student loan bonuses after meeting a specified period of time with the company. The most reasonable of these bonuses allow the associate to control the use of those funds rather than trying to make payments directly towards thier student loans. With the right tools and education, they can figure out the best way to apply those funds. The employer receives the benefit of attracting and retaining the associate and the associate gets to optimize the use of their bonus for their circumstances. Win-Win!
Dr. Tony Bartels graduated in 2012 from the Colorado State University combined MBA/DVM program and is an employee of the Veterinary Information Network (VIN) and a VIN Foundation Board member. He and his wife have more than $400,000 in veterinary-school debt that they manage using federal income-driven repayment plans. By necessity (and now obsession), his professional activities include researching and speaking on veterinary-student debt, providing guidance to colleagues on loan-repayment strategies and contributing to VIN Foundation initiatives.