Veterinary student debt

Here are some questions about Income-Driven Repayment (IDR) that we tackled live during the 2019 New Veterinary Graduate Student Loan Repayment Webinar.

“Do we have to select a repayment plan every year or will we stay in the first one by default?”

If you do not select any repayment plan you will be placed in the standard 10-year repayment plan by default after your grace period expires. Your monthly payment will be calculated based on your starting repayment principal, interest rate, and the amount needed to pay each loan to zero in 120 months (10 years).

You can choose from a number of repayment options for your federal student loans. That includes income-driven repayment options (IBR, PAYE, REPAYE) or extended/graduated, in addition to the standard 10-year. If you consolidate your loans, you even have the option of extending your payment out to 30 years in many cases.

If you opt-in to another plan, you will stay in the one you choose year after year. However, if you choose an income-driven repayment plan, you will be required to provide documentation of your income and family size at least each year to continue having your payment based on your income.

If you fail to provide the required documentation or your loan servicer fails to process it on-time, then you will still remain in the income-driven repayment plan you originally selected, although your payment will align more closely with a standard 10-year monthly payment amount.

“Is it possible to get kicked off of the PAYE repayment plan in the future?”

No. Once you enter an income-driven plan, you are continually in that plan. However, in order to continue having your payment based on your income, you have to provide (and your loan servicer has to process) your income and family size documentation on-time at least annually.

If you fail to provide the required documentation to have your payment based on your income or your loans servicer fails to process/accept it on-time, or you no longer satisfy the partial financial hardship requirement (PAYE and IBR), then your payment will be the amount you would have paid under a standard 10-year repayment plan on your eligible loans at the time you started using PAYE.

You are still technically using PAYE under that scenario, but you are paying a standard 10-year repayment plan amount. If you should pay your balance to zero prior to reaching the maximum repayment period, then you will not trigger forgiveness. But if you make the standard 10-year monthly payment and still have a balance remaining after reaching the maximum number of PAYE payments, that balance will be forgiven and treated as taxable income.

“If you start off in PAYE and then your income or your combined income with spouse generates a payment that is higher than the standard 10-year plan, what happens to all the payments you have made in PAYE and the unpaid interest?”

Great question — you have perfectly defined no longer demonstrating a partial financial hardship (as described in the previous question). First, when that happens, congratulations! That means your taxable income(s) are high enough that 10% of your discretionary income meets or exceeds a standard 10-year monthly payment. That’s how student loan repayment should work.

Second, you are still enrolled in PAYE under this scenario and the payments you have made and continue to make will count towards forgiveness.

Any unpaid interest balance you have would be added to your principal balance. However, under PAYE, only an unpaid interest amount equal to 10% of your eligible repayment balance can be capitalized. Said differently, there is a cap on the amount of unpaid interest that can be added to your principal using PAYE.

For example, if your starting repayment balance was $200,000 when you entered PAYE and you have $25,000 of unpaid interest when you no longer demonstrate a partial financial hardship, a maximum of $20,000 of your unpaid interest will be capitalized. In this example, your principal would increase to $220,000, you would still have $5,000 of unpaid interest, and no further unpaid interest will be added to your principal for the duration of payment under PAYE.

“Is it cheaper to use PAYE and file taxes separately, since REPAYE requires your spouse income in your calculated monthly payment amount?”

It depends. Generally speaking, PAYE is preferred because it is the most flexible repayment option. Under PAYE, you can separate your income from your spouse (if you file your taxes separately), your maximum repayment period is 20 years (the shortest for those with graduate school loans), and there is a cap on the monthly payment as well as the amount of interest that can be added to your principal. All of those benefits usually make PAYE the better (often “cheaper”) choice.

However, REPAYE can be extremely useful for those folks at the low end as well as those at the higher end of the student debt-to-income spectrum.

“Do any of the IDR plans have the ability to factor your spouse’s income into payment the calculation regardless of tax filing status?”

Yes. Revised Pay As You Earn (REPAYE) requires you to provide your spouse’s income to calculate your monthly student loan payment even if you file your taxes separately from your spouse. All of the other income-driven plans allow you to separate your income from your spouse for the student loan payment if you file your taxes separately from your spouse.

There are exceptions to the REPAYE spouse income requirement if you are separated from your spouse or otherwise unable to access their income documentation.  Here is a table from the VIN Foundation WikiDebt resource to help you compare various features among income-driven repayment plans.

The VIN Foundation Loan Repayment Simulator takes into account the various features of each program as well as your spouse income, any federal student debt, and your tax filing status. Run various simulations to see how your spouse’s income and your tax filing status might affect your loan repayment costs.

“PAYE vs REPAYE — which one is better? I owe $215K in student debt. With PAYE you only pay for 20 years but REPAYE is for 25 years.”

It depends on how you define better. Generally speaking, the longer you are in repayment, the more you are going to pay. That said, because PAYE and REPAYE are so different, there can be cases where REPAYE is “better” than PAYE depending on your circumstances.

Usually, PAYE is going to be “better” than REPAYE because PAYE gives you more flexibility. As you pointed out, PAYE is shorter, so you’re likely to pay less. But PAYE also allows you to separate your income from your spouse when your payment is calculated if you file your taxes separately. PAYE also limits the amount of unpaid interest that can be added to yoru principal balance, thus it can minimize the risk of your principal balance growing during repayment.

With a $215k student loan balance, if you earn an average income in veterinary medicine, then PAYE is going to be better than REPAYE.  You’ll pay less in total, you’ll be in repayment for a shorter period of time, and you’ll have the option to separate your income from your spouse when/if you get married.  You’ll see this numerically if you enter your student loan, income and family specifics into the VIN Foundation Student Loan Repayment Simulator.

The cases where we see REPAYE coming out “better” than PAYE are at higher student debt balances (>$350k) and lower student debt totals, specifically when you expect your income to exceed your student debt balance within a few years of graduation.  You’ll be able to see this play out numerically in the loan repayment simulator as well.

Have more questions? Post a comment below or email studentdebt@VINFoundation.org.

Here are some questions about consolidation using a Federal Direct Consolidation Loan that we tackled live during the 2019 New Veterinary Graduate Student Loan Repayment Webinar.

“How do we know if our student loans are able to be consolidated?”

To receive a Direct Consolidation Loan, you must include at least one Direct or Federal Family Education Loans (FFEL) program loan in the consolidation*.

Your Direct and/or FFEL program loans need only be in their grace period, deferment, or repayment in order to include them in a Federal Direct Consolidation Loan.

Your Direct Unsubsidized veterinary school loans should enter their grace period shortly after your last semester ends or after graduation. I wish I knew the rhyme or reason for each school’s timing on the loan status switch, but it’s highly variable. Some schools switch over quickly and some even a few days before graduation.  Others can take a few weeks or even a month to reflect your graduation status.

The NSLDS is usually updated at least monthly, so you might see your status update with the change of the month following your graduation. You might even call your school financial aid office after graduation to see when they might report your graduation status to the Department of Education.  Sometimes that request can nudge your school into updating your status or reporting your status change earlier.

*Special Note: If you were to only have Perkins, Health Professions Student Loans, or Loans for Disadvantaged Students, you would be able to utilize a Direct Consolidation Loan.  I regularly meet a handful of veterinary students who fall into this category — the good news is that your loan balances in those cases are relatively low and have not been costing you interest during school so you’re in great shape to pay those back without having to consolidate.

“Can you consolidate after the grace period?”

Yes.  But, the timing of your Federal Direct Consolidation is important.

Your Direct Loans and/or Federal Family Education Loans (FFEL) need only be in their grace period, deferment, or repayment in order to include them in a Federal Direct Consolidation Loan.  

There are a couple of issues with waiting until your veterinary school loan grace period expires to start the Direct Consolidation Loan:

1. You continue to accrue interest on all of your unsubsidized loans during the grace period.  Thus, when you do enter repayment or consolidate later, the increased unpaid interest balance will be added to your principal resulting in a higher starting repayment balance.  You are charged interest on your principal — the higher your principal, the more you’ll pay during repayment.

2. The Direct Consolidation Loan takes 30-60 days to process.  Once processed your first payment will be due 30 days after that. If you wait until after your grace period, there is nearly 9 months of time that you are not in repayment, thus not making qualifying payments towards forgiveness.  Better to get the clock ticking, especially if you anticipate having a balance forgiven under an income-driven repayment plan.

“Can you consolidate and waive your grace period if you’re planning to do Public Service Loan Forgiveness (PSLF)?”

You can and you should, especially if you’re starting a PSLF qualifying employment soon after graduation.

In order to make qualifying PSLF payments, you have to be 1) in repayment using an income-driven repayment plan, 2) paying federal Direct Loans on-time, and 3) employed full-time (average of 30 hours per week) with a qualifying employer. 

The sooner you can get most or all of your federal student loans consolidated into a Direct Consolidation Loan, the sooner you can officially start making payments using an income-driven repayment plan, which are 2 of the 3 primary requirements for working towards PSLF.  And if you can get the $0/mo payment due for the first 12 months of repayment, you’ll have more of your loans forgiven when you reach PSLF.

Per the PSLF Employment Certification Form, “A qualifying employer includes the government, a not-for-profit organization that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code, or a private not-for-profit organization that provides certain public services. Serving in an AmeriCorps or Peace Corps position is also qualifying employment.”

I would recommend bringing a PSLF Employment Certification Form to your employer after you’ve started working with them and made a few monthly payments towards your student loans.  Repeat that process each year so you have 9 or 10 of those certification forms to submit with your actual application for PSLF.

After you’ve made 120 of those qualifying PSLF payments, you should have an easier time (in theory) having your remaining student loan balance forgiven tax-free if you have all of your employment certification forms documenting your progress along the way.

“My Perkins Loans, Health Professions Student Loan, and Loans for Disadvantaged Students aren’t listed as eligible under income-driven repayment. Can I consolidate them in order to pay them using PAYE, REPAYE or IBR?”

Yes, you can consolidate those non-Direct loan types as long as you are including one Direct or FFEL program loan in the consolidation. That is one of the primary reasons to utilize a federal Direct Consolidation Loan — to include non-Direct federal student loan types that do not qualify for income-driven repayment (IDR) on their own, but will once you consolidate them.

The most beneficial income-driven repayment plans (PAYE, REPAYE, IBR) and Public Service Loan Forgiveness (PSLF) can only be used with Federal Direct Loans. The only way to make federal non-Direct Loan types qualify for IDR and PSLF is through a Direct Consolidation Loan and the best time to consolidate your loans is as soon as you can after you graduate veterinary school.

“Can you do Federal Direct Consolidation once you have started payments on an income-driven repayment plan?”

You can.  However, if you are already in repayment, you should be extremely careful using a Direct Consolidation Loan.  This is why the timing of your Federal Direct Consolidation Loan is so important.

When you consolidate, you receive a new loan(s) that pays off all of the loans included in the consolidation.  If you have made qualifying income-driven payments or PSLF payments to loans that you consolidate, you will lose credit for those qualifying payments.  Essentially, you reset your forgiveness clock on any loan you consolidate. That is another reason to start the Direct Consolidation Loan process as early as possible, ideally right after you graduate veterinary school.

“Should I consolidate my spouse’s federal student loans with mine?”

You can no longer combine federal student loans with your spouse as part of a federal consolidation loan.  That is likely a good thing because it is a mess to deal with in the event of separation/divorce.

You could probably still do a consolidation with your spouse using a private loan, but for many other reasons in addition to the fact it would still be a mess in the event of separation/divorce, I would highly discourage consolidating your student loans with your spouse’s student loans.

Have more questions? Post a comment below or email studentdebt@VINFoundation.org.