Here are the top five mistakes I see veterinarians with student loans making with their student loans and suggestions for correcting those mistakes:
There are several types of income-driven repayment options: income-contingent repayment (ICR), two versions of income-based repayment (IBR), Pay as you Earn (PAYE), and Revised PAYE (REPAYE). Matching the most optimal plan to your situation is one of the hardest decisions to navigate.
For those with a student debt to income ratio greater than 1, and for those with starting federal student loan balances less than $350,000, PAYE will be the most flexible and financially beneficial income-driven repayment plan. If you qualify for PAYE, there is almost never a reason to choose IBR over PAYE. However, if you do not qualify for PAYE, choosing between IBR and REPAYE will depend on the specifics of your circumstances as well as your best guess of future changes to your situation. When your student debt balance is above $350,000 or when your student debt to income ratio is near or less than one, sometimes REPAYE can be a more beneficial plan than PAYE.
For many veterinarians, the minimum monthly student loan payment due based on their income does not cover the interest accrued each month. This negative amortization results in an increasing student loan balance over time. After making monthly income-driven payments for the maximum allowed time frame, any remaining student debt balance is forgiven.
Veterinarians using income-driven repayment do so because it results in the most beneficial monthly student loan payment for their situation. However, many are also paying more than the minimum payment required. Voluntarily paying more than the minimum reduces the benefit of using income-driven repayment.
If you anticipate having a balance forgiven, paying more than the minimum determined by your income will voluntarily increase your total loan repayment costs. The most financially beneficial income-driven repayment plan strategy for those projected to reach student loan forgiveness is to pay the minimum and plan for the tax due on canceled student loan balances.
In order to have your payment based on your income, you must provide income-documentation and re-certify annually. Submit your renewal information on-time and check with your loan servicer that the documentation has been received and processed each year.
If your annual documentation is not submitted, not complete, or not processed on-time, your payment will revert to the standard 10-year monthly payment due when you started repayment. Additionally, any unpaid interest balance will capitalize (gets added to your principal balance).
Interest capitalization increases your principal. Higher principal results in more interest accrual. More interest equals higher total repayment costs, even with student loan forgiveness. Renew on-time to prevent unpaid interest capitalization and to reduce your total loan repayment costs.
It seems almost reflexive to use deferment/forbearance when your income is low or decreases. For veterinarians, this occurs most commonly during internship or residency training, job moves, or maternity leave. During deferment/forbearance, you continue to accrue interest on the majority of your loans. When you exit the deferment/forbearance period, that interest is capitalized.
Alternatively, when your income decreases for any reason utilize income-driven repayment. You can have your payment adjusted downward to reflect the decrease to your income. If you’re already using income-driven repayment and your income decreases prior to your annual renewal due date, you can submit early to have your monthly payment recalculated.
Interest will still accrue on your student loans while your payment is lower or zero while using income-driven repayment. However, once your income increases again and your income-driven payment reflects the increase, your unpaid interest will not capitalize. The additional interest accrued while your payment is lower will remain unpaid interest. Unpaid interest does not accrue additional interest which can greatly reduce your total student loan repayment costs.