Veterinary student debt

I have run thousands of student-loan repayment simulations for veterinarians. The results have taught me that when it comes to borrowers with student debt greater than their incomes, the most flexible and lowest cost repayment strategies can be counterintuitive.

Contrary to conventional wisdom, loans with shorter terms and lower interest rates don’t necessarily constitute the best deals in the confusing world of student debt, particularly for recently graduated veterinarians. Paying more than the minimum monthly payment, even if the additional payments are coming directly from your employer, often does not make financial sense.  This is because the U.S. Department of Education offers several plans known as income-driven repayment (IDR) that are meant to ease the load. 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, it also doesn’t make sense financially to pay more than is determined by your discretionary income for your annual IDR repayment schedule.

Calling all associates

Before considering an employee student debt-relief benefit, making additional monthly payments or pulling the trigger on a lower interest rate private refinance of your federal student loans, make sure you go through these steps:

1. Determine your loan repayment eligibility using the VIN Foundation My Student Loans tool
2. Run loan simulations at the VIN Foundation Student Loan Repayment Simulator
3. Minimize your loan repayment costs
4. Maximize your monthly cash flow
5. Negotiate the best compensation benefits for your situation

Review IDR and 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 employers

Before offering an employee student loan assistance program, make sure you go through these steps:

1. Get knowledgeable about IDR at the VIN Foundation Student Debt Center
2. Will a direct student loan contribution reduce your associates total repayment costs?
3. Consider the tax implications and logistics of a direct student loan contribution
4. Are there other compensation benefits that will result in a larger value to you and your associate than a student loan contribution?
5. Cater a plan that matches both your and your associates 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, 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 benefit of an employer contribution is to reduce the employee’s tax liability, then, taking a tax rate of 30 percent, the benefit from a $150 monthly contribution is $45. Over 20 years, $36,000 in employer-paid student loan payments translates to a reduction of $10,800 in total repayment costs for a borrower who reaches forgiveness.

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.

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.