Student Debt Q&A from students
The following are questions asked during recent Climbing Mt. Debt sessions with 3rd year veterinary students at U.S. colleges of veterinary medicine. They will be graduating in 2024, likely facing an updated student loan repayment framework.
With all of the recent changes to federal student loans (current and pending), repayment strategies will look at different for their and future graduates compared to past veterinary school graduates.
Jump to veterinary student recent questions and answers
How do you choose how much of your income can go to student loan repayment?
Ideally, your budget will help you answer that question. Good news — you never have to pay more than 10% of your discretionary income for your student loans. If you’re having a hard time figuring out how much to pay, let an income-driven repayment plan pick the minimum payment for you. Plans like Pay as you Earn (PAYE), Revised PAYE (REPAYE), and the newer version of Income Based Repayment (IBR 2014) will set your minimum monthly payment at no more than 10% of your discretionary income. Run repayment simulations to see if you’re projected to reach forgiveness with a plan like PAYE, REPAYE, or IBR 2014. If so, pay only what your income requires and plan for the potential tax on forgiveness.
If you’re not projected to reach forgiveness, you can use a plan like REPAYE in the first couple of years to have a very low or zero payment while you build and refine your budget. After maximizing the critical elements of your financial wellness plan, target a student loan payment that is 10%-15% of your discretionary income to accelerate your student loan repayment. You can use the STD 10, IBR 2009, and REPAYE plans in the simulator as a monthly payment guide.
The key to any student loan repayment strategy is to make sure you’re not sacrificing critical elements of your financial wellness to pay more than is required for your student loans. Your federal student loans are the most flexible debt you will ever have. Prioritize other elements of your financial wellness before making extra payments to your student loans.
When you submit a payment towards your student loans, does it/should it go towards the principal balance or interest?
Unfortunately, you can’t control how your federal student loan payments are applied. By law, payments first go towards any interest and fees due for a given loan. After those are covered, then any remaining payment amount will go toward the principal. You can read more about how payments are applied to your student loans in your Master Promissory Note (MPN).
During school and while you are borrowing, it’s better to borrow less or return excess funds within 120 days of receiving them. Borrowing less and returning loans will reduce your principal. Making payments may cover only interest. Review the VIN Foundation Borrow Better resource for additional information and in-school student loan strategies.
After school when you enter repayment, a minimum monthly payment will be due for your student loans each month. That payment will depend on the repayment plan you choose. If you don’t choose a plan, the standard 10 year plan will be assigned to your loans once your grace period ends. Any payment first will cover any interest and fees due for a given loan, then any remainder will be applied to principal.
Is it recommended not to make any student loan payments in the first year post-grad if we file a tax return before graduation?
It is recommended, particularly if your minimum monthly payment is zero using REPAYE with the recently proposed income-driven repayment changes (should be in effect for at least the 2024 graduating class).
Filing a tax return before you graduate will help you to secure a very low or $0/month payment during the first 12 months of repayment using the new version of REPAYE. Paying more toward your student loans while receiving REPAYE’s 100% unpaid interest subsidy is a literal waste of money. Any amount you pay above what is due will reduce the unpaid interest subsidy you’re due to receive. Making additional payments using REPAYE does not make sense until/unless your minimum monthly payment covers your monthly interest accrual and you are not projected to reach forgiveness.
Upload your student aid data file into the VIN Foundation My Student Loans tool and use the In-School Loan Estimator to project your graduation balance and average monthly interest accrual. You can then use the Student Loan Repayment Simulator to see when your income will cover your monthly student loan interest and whether or not you’re projected to reach student loan forgiveness.
When you are projected to reach forgiveness, it is mathematically more favorable to pay the minimum required by your income and plan for the potential tax due on forgiveness.
Whether predicted to reach forgiveness or not, these initial years of $0 or low monthly student loan payments can be very beneficial to your overall financial wealth and wellness. Use the initial financial flexibility to jump-start your financial wellness. This includes critical items like building an emergency fund, contributing toward tax-advantaged accounts (retirement savings, Health Savings Accounts, or Flexible Spending Accounts), or saving for a down payment on a home.
Is it best to pay off the highest interest rate loans first?
Paying off loans with the highest interest rates first is commonly referred to as the “debt avalanche” method. While this may be a method to consider for other types of debt, like credit card debt or personal loans, your federal student loans have special benefits that may not respond well to an avalanche strategy. Specifically, making extra payments can be a literal waste of your money while using a plan like REPAYE when your minimum payment is less than your monthly interest accrual (a common situation for recent graduate veterinarians).
Newly proposed changes to REPAYE provide an unpaid interest subsidy that will eliminate any interest that your minimum payment does not cover. Making extra payments essentially voids the unpaid interest subsidy. Better to wait until your minimum monthly payment is greater than your monthly interest accrual before you consider making extra payments to your student loans. In the meantime, use the low payment and unpaid interest benefits to jump-start other more critical areas of your financial wellness.
Use your student debt-to-income ratio (DIR) at graduation as a guide. Until or unless your DIR is < 1.5, your minimum REPAYE payment is likely to be less than your monthly interest accrual. Take advantage of that unpaid interest subsidy for as long as you can. When you no longer receive the unpaid interest benefit, then run simulations to see if you’re expected to reach forgiveness or pay your student loans to zero before reaching forgiveness.
If you’re projected to reach forgiveness, continue using an income-driven repayment approach, paying the minimum and planning for the potential tax on forgiveness. If you’re not projected to reach forgiveness, you can consider making extra payments to the higher interest rate loans first as long as you’re not sacrificing other critical elements of your financial wellness to do so. Remember, your federal student loans are the most flexible debt you’ll ever have. Your critical financial wellness items will yield you bigger returns than making extra payments to your federal student loans.
Can you change your repayment plan after already selecting one?
You can change repayment plans in the future. However, make sure it makes sense before doing so. For example, many recent veterinary graduates may benefit from starting with REPAYE and then switching to IBR 2014 (if eligible) in the future. Doing so will allow you to benefit from the 100% unpaid interest subsidy while your payments are low, but receive forgiveness after 20 years of payments allowed for in IBR 2014 (vs. 25 years in REPAYE). You will have to switch before reaching 120 payments in REPAYE or before you would fail the partial financial hardship requirement for IBR 2014, whichever comes first.
For those with a DIR less than one at or soon after graduation, switching to any other plan may not make sense. Simulations show us that these graduates are likely to pay their student loan balance to zero before reaching forgiveness. Sticking with REPAYE allows these borrowers to receive the unpaid interest subsidy in the first couple of years after graduation and accelerate their repayment as their payments increase and their income exceeds their student debt balance. Doing so also preserves the valuable student loan insurance that comes with your federal student loans.
Use the Loan Repayment Simulator to determine which repayment plan makes the most sense for you and your student loans. If you have additional questions, ask them on the student debt message board area on VIN.
What is the best repayment option for a veterinary internship and/or residency?
REPAYE is the best student loan repayment option during an internship and/or residency. Both the proposed changes to REPAYE and recently finalized changes taking effect this July 1, 2023 limiting unpaid interest capitalization make REPAYE the best plan to use during your internship and/or residency training. Whether you stick with REPAYE after your training will depend on your post-training student debt-to-income ratio (DIR).
If you file a tax return before you graduate, you will have an excellent chance of securing a $0/month “payment” for the first 12 months (at least) using REPAYE. REPAYE provides an unpaid interest subsidy that will cover most (if not all) of your interest while your payment is low or zero. With the proposed updates to REPAYE, monthly unpaid interest will no longer accrue. Zero-dollar payments using an income-driven plan count towards forgiveness. There is some recent data available for veterinary internship and residency incomes. Unfortunately, less information is available for specialty incomes. Use the VIN Foundation Student Loan Repayment Simulator to preview your student loan payments for internship and residency years.
Here is a sample simulation to illustrate how the newly proposed version of REPAYE can help during your training. Your monthly payments are never more than $36/mo and you will accrue zero unpaid interest — super helpful, whether you end up paying your balance to zero or reaching forgiveness.
Would a veterinary internship through an academic institution count as a post-graduate program, like a residency?
Great question! When we talk about post-graduate veterinary programs in the context of student debt, those are usually ones that have you enrolled at least half-time as a student. Examples would be MPH, MBA, Ph.D., or certain academic residency programs. Veterinary internships generally do not have formal academic enrollment. Being enrolled at least half-time as a student can result in your student loans being automatically deferred — like they are when you’re in veterinary school. After you graduate from veterinary school, you do not want your loans to enter a deferment. In-school deferments do not count towards forgiveness and they can result in unpaid interest capitalization (adding of interest to your principal) after they end.
You should not have to worry about the automatic deferment for internships. That said, don’t request a deferment for your student loans during an internship. It’s much better to have your loans in repayment using an income-driven plan during your internship(s) than in deferment. However, for post-graduate programs that include at least half-time student enrollment, you will have to prevent that automatic deferment from happening. You can (and should) contact your loan servicer to request your student loans remain in repayment during this time. Monitor your loans closely (at least once per semester) to make sure they are in repayment and not in deferment.
If you are starting one of these post-graduate academic programs shortly after graduating from veterinary school (during your veterinary school loan grace period), you will need to use a Direct Consolidation Loan to end your grace period early. If you don’t, you risk your veterinary school loans re-entering an in-school deferment before the grace period expires, which will have them stuck in that status until you finish your post-graduate academic program. This is particularly problematic for Ph.D. programs due to their length. It’s best to have your loans in an income-driven repayment plan, like REPAYE, during your post-graduate training to log forgiveness qualifying time and prevent any unpaid interest from later capitalizing. You may even be able to log some Public Service Loan Forgiveness (PSLF) credit during your post-graduate training.
When interviewing for post-graduate and/or residencies, ask about PSLF credit. Consider bringing a PSLF employer certification form to the program coordinator and ask if they have helped current or previous candidates earn PSLF credit. Review the WikiDebt resource for a guide to the fastest route to PSLF for a veterinarian.
What would repayment look like if we plan to use the Public Service Loan Forgiveness (PSLF) program?
Public Service Loan Forgiveness (PSLF) is not a repayment plan, rather it is a benefit. A PSLF qualifying payment has three main elements: 1) payments made to federal Direct Loans only, 2) being repaid using an income-driven repayment plan, 3) while working for an eligible organization (U.S. federal, state, local, or tribal government or 501(c)3 not-for-profit organization). After 120 monthly qualifying payments (they do not have to be consecutive) you can apply for PSLF. PSLF is tax-free forgiveness. Review the WikiDebt resource for a guide to the fastest route to PSLF for a veterinarian. You will pay dramatically less toward your student loans if you earn PSLF. Use the “Planning to work toward Public Service Loan Forgiveness (PSLF)” switch in the Borrower Information section of the Student Loan Repayment Simulator to see how that may play out for you. Here is the same simulation we used for the internship plus residency scenario with the PSLF switch turned on.
Is PSLF better than income-driven plans because debt is forgiven tax free?
A common point of confusion: PSLF is not a repayment plan, but rather, a benefit you can be eligible for if you do all of the right things. One of those right things requires you to choose an income-driven repayment plan for your Direct Loans while working for an eligible employer, full-time or at least 30 hours per week on average (whichever is greater).
If your career goals align you with a PSLF-qualifying employer, then you’ll want to make sure you’re using an income-driven plan, like REPAYE, to keep your payment low and increase the chance for you to have the maximum amount of your federal student loan balance forgiven tax-free.
If you do not work for a PSLF-qualifying employer, then you can still have your federal student debt canceled through an income-driven plan. As the name implies, your payment would be a percentage of your income. If you still have a balance remaining after 20 or 25 years of payments (depending on the plan you’re eligible for and choose to use), it would be forgiven. This type of forgiveness, however, can be treated as taxable income. Use the VIN Foundation Student Loan Repayment Simulator to see if your student debt, income, and family specifics could benefit from forgiveness using an income-driven repayment plan.
Will having high student loans prevent you from getting a home loan?
Obtaining a loan for a home is doable with any amount of federal student loan balance. The first step, check your credit report. Good credit health and history will improve any mortgage application. If there are any errors or unfavorable findings, work to correct those before seeking a mortgage.
You need to show a bank that you’re not a risky bet, meaning you can pay back the mortgage. The higher your regular monthly expenses compared to your gross income (debt to income ratio, DTI), the less likely you’ll be a good candidate for a mortgage. Different banks will use different DTI measures depending on the type of loan you’re seeking. Note that this is different from the student debt to income ratio (DIR) that we use as a guide for choosing a federal student loan repayment plan.
Your student loans are only one piece of your DTI, but ideally, you want your student loan payment to be as low a share as possible of your DTI. Income-driven repayment plans are a great strategy for minimizing the amount your student loans contribute to your DTI. If you use a plan like REPAYE for your student loans, your monthly student loan payment will contribute no more than 10% to your DTI. Keep your DTI less than 40% to qualify for most mortgages. This is why using aggressive repayment plans like a fixed-10-year payment plan for your student loans can make it more difficult to obtain a mortgage. For many recent graduate veterinarians, a fixed 10-year plan payment can be more than 40% of gross income. If your student loans represent that high a share of your gross income, you have very little chance of qualifying for a home loan.
Save for a down payment. The more money you can bring to the purchase, the more options you’ll have for obtaining a favorable home loan. Try for a down payment equal to 20% of the purchase price of the home to avoid having to pay mortgage insurance. Make sure you have an adequate emergency fund (6 months of your average monthly expenses), and be prepared for closing costs, insurance, as well as home repair and maintenance.
During the Climbing Mt. Debt sessions, we encourage new graduate veterinarians to file a tax return and secure a $0/mo payment using an income-driven plan for (at least) the first 12 months of repayment. Buying a home when your student loan payment shows $0/month can lead to some complications during the mortgage application and underwriting process. During this time, some lenders may use a monthly payment estimate between 0.5% and 1% of your total student loan balance. While you can try to provide documentation that shows what your monthly student loan payment will be and when it will be greater than zero, you may want to wait until you have a student loan payment that is greater than zero before applying for a mortgage. Use the zero-payment student loan time to save for your home down payment, boost your emergency fund, and better prepare yourself for home ownership.
When deciding on a repayment plan, how do you avoid the fear that your loans will keep growing due to high-interest rates and then getting stuck paying more than if you had paid quickly?
Let’s unpack the myths and misconceptions in that question. First, paying student loans quickly does not mean paying less, particularly if your starting student debt to income ratio is two or more. That means you can actually end up paying more while trying to pay quickly vs. paying less and receivin forgiveness in a plan like REPAYE or IBR 2014. Second, your federal student loans are the most flexible debt you will ever have; recent graduate school interest rates are fixed at a similar rate to a 30-year mortgage at the time you received your loans. That’s pretty amazing considering your student loans are unsecured debt not requiring a credit check (a mortgage rate is secured by your home and your creditworthiness). Third, with recently proposed changes to REPAYE and the elimination of most unpaid interest capitalization, growing balances will largely be a thing of the past.
When deciding on a federal student loan repayment plan, focus first on what your income requires you to pay (no more than 10% of my discretionary income), then maximize critical elements of your financial wellness. We know that your federal student loans will be eliminated in one of two ways: 1) your income is high enough to generate a payment that pays the balance to zero before reaching forgiveness, or 2) you reach forgiveness with or without a tax. If you anticipate a tax, build a forgiveness savings plan into your financial wellness strategy.
Will you cover how to save for the “tax bomb”? What resources can we use for making savings decisions and helping our money grow?
“Tax bomb” has become slang for the potential tax liability incurred when/if you reach student loan forgiveness using an income-driven repayment plan, like IBR, PAYE, or REPAYE. Currently, there is a tax exemption on ALL student loan forgiveness received through the 2025 tax year. Thus, there will only be a “tax bomb” if:
A) you have a balance remaining when you reach the maximum repayment period for an income-driven plan (eg 20 years after IBR 2014 or 25 years after REPAYE), and
B) the law allows for taxation of your canceled student debt.
Use the VIN Foundation Student Loan Repayment Simulator to see if you are likely to have a balance remaining to forgive. In most cases, the “tax bomb” yields a significant discount for your remaining student loan balance. The Forgiveness Planning Module in the simulator and Preparing for the Tax Bill blog post can help you get started.
How do you not worry about relying on student loan forgiveness when it isn't always a guarantee and could go away depending on the government?
I would suggest that you review the history of student loan forgiveness as well as your federal student loan Master Promissory Note (MPN), and the regulations governing income-driven repayment options. Student loan forgiveness is written into the laws describing your repayment options. As such, they are more of a guarantee than not.
In general, we have only seen the federal student loan repayment options become more flexible and beneficial over time, including the additions of PAYE and REPAYE, as well as updates to IBR. Recent changes have only supported this trend. There is a tax exemption in place on all student loan forgiveness received between the 2021 and 2025 tax years. Current veterinary students have significantly benefited from the pause of interest on all student loans since March 13, 2020. And those in repayment have further benefited from no payments and receiving forgiveness credit during that same time.
While there have been a number of technical changes impacting the number of forgiveness-eligible repayment options available and how the monthly payment is calculated, student loan forgiveness is law. Like any law, there are those who agree or disagree with some or all of its provisions, and some who seek to change it. The reality is hundreds of thousands of borrowers have had billions of dollars of student loans forgiven thus far. The options are available, and VIN & VIN Foundation can help you navigate the benefits and challenges to improve your success in student loan repayment.
What’s the best repayment route if your student debt-to-income ratio is less than 1?
Newly proposed changes to REPAYE make it the “best” repayment for a new graduate starting with a debt-to-income ratio less than one or for a new graduate who expects their debt-to-income ratio to be less than one shortly after graduation or after their advanced training.
The updated REPAYE will provide a 100% unpaid interest subsidy for any period where your payment does not cover the monthly interest accrual. Nearly every new graduate has the opportunity to have a very low or zero student loan payment using REPAYE as long as they file a tax return before graduating. With a 100% unpaid interest subsidy, there is no financial reason to make a payment above what your income requires as long as your payment is below your monthly interest accrual. Instead, use the time when you benefit from the unpaid interest subsidy to jump-start your overall financial wellness.
Once your taxable income generates a REPAYE payment that is greater than your monthly interest accrual, you can either pay more to accelerate your student loan repayment or continue paying the minimum and accelerate repayment as your income increases.
Doing so will likely result in a repayment of your student loans in less than 10 years at a cost lower than a standard 10-year repayment plan while still providing the financial flexibility that income-driven repayment provides to folks with a debt-to-income ratio that is greater than 1.
This VIN Foundation Student Loan Repayment Simulation for a 2023 grad with $60,000 of student debt and a $125,000 starting income illustrates this concept, mathematically.
The resulting student loan payoff using the updated version of REPAYE (“RE-REPAYE” in the simulator) will take less than 9 years with a total cost below a standard 10-year plan payment even with a zero minimum payment for the first 12 months and a minimum payment below the monthly interest for the second 12 months.
How does spousal income influence the choice of repayment plan?
Spousal income alone does not influence the choice of a repayment plan. However, spousal income, spousal student debt, your state of residency, your income, your student debt, and whether or not you work for a PSLF-qualifying employer can all influence that choice. If your personal student debt to income ratio is greater than one and your spouse does not have student debt, then look at the difference between an income-driven plan payment using only your income vs. the payment using your combined incomes. If there is a significant difference, then consider filing your taxes separately and using an income-driven repayment plan.
If you would otherwise reach student loan forgiveness using only your income to calculate your monthly student loan payment, then consider filing your taxes separately, using an income-driven repayment plan, paying the minimum, and planning for the potential tax on forgiveness. Just like it doesn’t make sense to pay more when you’re projected to reach forgiveness, it doesn’t make sense to use someone else’s money to do so either. Better to keep the student loan payment low, max out your respective financial wellness, and look for other ways to boost your overall household wealth and wellness.
If both you and your spouse have student debt, then you will likely benefit from filing jointly and each using an income-driven repayment plan. If there is a significant difference between your respective student debt balances, and incomes, or one of you is working towards PSLF, then it could make sense to file separately. I would recommend running simulations using the VIN Foundation Student Loan Repayment Simulator to see which combination of tax filing status and repayment plan selection will help you keep the most income in your overall household budget. You can add spousal information and tax filing status to the Family Information section of the simulator.
What would be a situation where we would benefit from refinancing a student loan?
If you have unfavorable private student loans, consider refinancing into a more beneficial private loan.
Refinancing federal student loans is very risky. There are no private loans that have any of the benefits or insurance that your federal student loans already have. Most private refinances will also require a co-signer (especially for new grads with a limited credit history) in order to obtain reasonable interest rates and terms. Your federal student loans are your responsibility only. If something should happen to you, your federal student loans go away with you. Adding a co-signer to a refinance will make someone else responsible for repaying your loans should something happen to you.
With recent increases in interest rates, it’s unlikely that you (as a new veterinary school graduate with little credit history) would be eligible for an interest rate more beneficial than you have now for your federal student loans. Additionally, the lowest rates are often available for shorter repayment terms. That means you’ll be significantly increasing your minimum monthly student loan payment compared to what your minimum would be with your federal student loans. You never know when you might need your federal student loan insurance. The minimal potential savings of a private refinance is not worth the federal student loan benefits you forfeit by refinancing.
If you have a favorable student debt-to-income ratio, set your minimum monthly payment using an income-driven plan like REPAYE and use your budget to decide how much more you can pay above the minimum. Accelerating your federal student loan repayment can help you eliminate your student loans faster and cheaper (if you’re not projected to reach forgiveness) while maintaining all of the federal student loan benefits should you need them.
Over the last several years, we have seen special benefits extended to federal student loan holders above the normal benefits already included in your federal student loan master promissory note. Those have included special cancellation benefits, postponement of interest and payments, granting additional forgiveness qualifying time, and improved repayment options. Anyone who refinances a federal student loan into a private loan is not eligible for future student loan benefits. There is no way to undo a private refinance of federal student loans; so it’s best to not start one.
As a significant portion of income goes to taxes and student debt repayment for many, how does this impact retirement savings and other investments?
Build a budget. Look at your most recent adjusted gross income (AGI) from your recent tax return, and estimate your post-graduation taxable income. If you haven’t filed a recent tax return, then file one. At least have one on file by the time you graduate that is no more than two years old. If you’re using your recent AGI to calculate your student loan payment, then your student loans will not require a significant portion of your income.
Everyone with an income pays taxes. You can estimate how much of your gross income will be left after taxes by using widely available payroll calculators, like the ADP Salary Paycheck Calculator. When it comes to retirement savings, target 10-15% of your gross income to retirement savings. Direct those first to tax-advantaged options available to you. If you cannot get 10-15% into those tax-advantaged options, then put the remainder into taxable savings options.
If you need help with taxes, look for a tax planner or Certified Public Account (CPA). For retirement savings help, seek out the assistance of a fiduciary financial planner. Certified Financial Planners (CFPs) are usually fiduciary planners, but make sure you ask.
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.