Maybe you weren’t lucky enough to attend medical school at NYU for free. If that’s the case, you’re likely one of the doctors who graduated medical school with a median loan debt north of $200K. In case you missed our recent post on how to avoid being a broke doctor, step three is to deal with your student loan debt load. With that in mind, we put together this quick reference guide for various student loan repayment options. In the coming weeks, we’ll review the ins and outs of each option.
The first two options are for doctors who have the money to pay their loans, but would like to streamline their finances a bit, and maybe save a little money in the process.
Consolidation vs. Refinancing
Think of consolidation as a way of keeping things simple. Instead of paying off multiple federal loans, you combine them. That means you only have one monthly payment to worry about. Consolidating might also make you eligible for other repayment options or forgiveness. More on that later. Only federal loans are eligible for direct loan consolidation.
Refinancing also simplifies things. Your loans — public and private, all or some — get combined into a single private loan, hopefully (if you’ve done your homework and your credit is good) with a lower interest rate.
Next up, let’s say you didn’t land your dream job, or you overestimated what being a pediatrician in Buford, Wyoming would pay. You may qualify for a repayment plan that scales based on your take-home pay, through income-driven repayment.
Income-driven repayment options offer the loan holder the ability to scale their required monthly payments according to their income level. Only federal loans are eligible for these plans. There are four income-driven repayment options:
- Revised Pay-As-You-Earn Repayment Plan (REPAYE): Payments are 10 percent of your discretionary income, divided by 12.
- Pay As You Earn (PAYE): This plan is the same as the previous plan, but to qualify, you must be a new borrower as of Oct. 1, 2007 and have received a loan disbursement on or after the same date. This also only applies to Direct Loans.
- Income-based Repayment (IBR): You’ll find the same formula here: 15 percent of discretionary income (or 10 percent for new borrowers) divided by 12 months gets you your monthly payment. This covers FFEL Program and Direct Loans. Caveat: Consolidation loans that include at least one Parent PLUS Loans and Parent PLUS Loans themselves do not qualify.
- Income-contingent Repayment Plan (ICR): With this plan, your monthly payment will be the lesser of either your payment under an income-adjusted, monthly payment plan over 12 years, or, 20 percent of discretionary income, divided by 12 months. This plan also has some caveats. It’s the only option available for Parent PLUS loans. Parent borrowers can consolidate Direct PLUS or Federal PLUS loans to form a Direct Consolidation Loan, then repay the new loan using Income-contingent Repayment.
But what if you just don’t feel like paying your whole loan? Can’t say I blame you. You didn’t hear this from us, but you may not have to.
Forgiveness and Public Service Loan Forgiveness (PSLF)
If you’re in an income-driven repayment plan and you’ve made 240-300 qualifying payments, then you may qualify for having your balance forgiven. Income-driven plans are available to all, regardless of your employer. The primary benefit is lower monthly payments while your income is low. The major drawback of this option is that you will owe income tax on the amount forgiven. It’s essential to compare the amount that you’ll owe in taxes with your loan balance to determine if it’s worth it.
To obtain PSLF, you must:
- Be participating in an income-driven plan
- Be working for an eligible non-profit
- Complete annual employment certification, proving that you work for an eligible non-profit
PSLF applicants must make 120 qualifying payments while meeting all three of the aforementioned criteria. The primary benefits are fewer payments (compared to 240-300 under regular forgiveness), and you won’t have to pay taxes on the amount forgiven. The drawback: You may be limiting your career prospects by only working for qualifying non-profits. But be forewarned, you need to make 10 years’ of qualifying payments while working for a non-profit to obtain PSLF, so make sure it’s a job you enjoy.
Now, let’s say you’ve experienced a major financial hardship, like a disabling medical condition or suffer a long stretch of unemployment. You may qualify for loan deferment or forbearance.
Deferment temporarily suspends student loan payments. The loan balance remains the same, you’re just delaying future payments rather than defaulting on the loan. Generally, the loan holder needs to show some kind of hardship or inability to pay. Read the qualifications carefully. With some types of loans, you don’t have to pay accruing interest while in deferment.
Like deferment, forbearance is a temporary suspension of student loan payments due to hardship or inability to pay. Unlike deferment, the loan holder must pay accruing interest, but gets a break from paying the principal. Accrued interest gets added to the principal. Again, read the qualifications carefully.
Are you able to make your loan payments, but want to simplify things a bit and/or possibly get a lower interest rate? Then consolidation or refinancing may be your best bets. Not bringing in as much money as you thought you would? You could look into Income-Based Repayment. Hit some financial hardship? You may qualify for forbearance or deferment. Maybe you have a government job and a have made a number of payments already? Look into loan forgiveness.
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