Plans on tackling debt after school?

[cheathac]

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Two common mistakes regarding student loans:

Deferring federal loans during internship and residency. It's almost always better to use a Federal Direct Consolidation loan immediately after graduation, waive your grace period, and get into an income-based repayment plan for your first 12 months. Renew based on your continued internship/residency income each year.

Trying to aggressively pay off loans as soon as possible. For the typical recent graduate with a low income to debt ratio (say <0.5) you will generally be better off going with one of the income-based repayment plans.

So we would be better off doing IBR vs paying it off aggressively? When I used the VIN simulator it looked like paying it off in 10 years (1300/month payment) would be 25k cheaper overall compared to one of the IBR payment plans. I'll be in about 90-100k debt and wanting to do a residency in lab animal medicine.

 

[Jess Monster]

You do realize those two years won't count towards your vet school loans though? Like if you made 24 qualifying payments on your $30k undergraduate loans, you still need to make 120 qualifying payments on your however many hundreds of thousands of dollars of your vet school loan starting after the grace period. Also if you end up consolidating your previous direct loans with any of the federal loans in vet school in the event you end up needing to consolidate loans upon graduation, or you'll even lose the 24 credits you already have on your undergrad loans. (Def look into it because I have no idea what happens to your minimal payments if you have them split up like that on two different timelines).

From the Feds:
If you have both Direct Loans and other types of federal student loans that you want to consolidate to take advantage of PSLF, it’s important to understand that if you consolidate your existing Direct Loans with the other loans, you will lose credit for any qualifying PSLF payments you made on your Direct Loans before they were consolidated. In this situation, you may want to leave your existing Direct Loans out of the consolidation and consolidate only your other federal student loans.

You’re not telling me anything I didn’t already know. I have over $100,000 in federal direct loans between undergrad and grad school, all of the proper type to qualify for PSLF. My loans have never been consolidated (and my older ones never will be because I would lose all my previous qualified payments). My new loans, obviously, aren’t in repayment yet, so I still have to make 120 payments on them to be eligible for forgiveness, but I will have fewer payments to make on my earlier loans before they would be eligible for forgiveness. Those loans will easily be a third of my final school debt.

When your loans go to the federal loan servicer after you file your employment paperwork for PSLF, you’re able to track how many payments are left on specific loans before PSLF eligibility is reached. When I meet work eligibility requirements again after vet school, there will still only be one monthly payment for all of my federal direct loans, even if there are “two timelines” running for my undergrad + grad school loans and my vet school loans.

Of course, that’s if things work out career-wise and PSLF stands as it does today.

 

[Caiter92]

So we would be better off doing IBR vs paying it off aggressively? When I used the VIN simulator it looked like paying it off in 10 years (1300/month payment) would be 25k cheaper overall compared to one of the IBR payment plans. I'll be in about 90-100k debt and wanting to do a residency in lab animal medicine.

That’s why they mention the income to debt ratio. At 90-100k in debt, your income to debt ratio is going to be almost 1:1 if you’re in a big city area, so then it wouldn’t make sense to do forgiveness. But if you’re 200k+ in debt, you’ll pay less in the long run with forgiveness options.

 

[VIN-Foundation]

So we would be better off doing IBR vs paying it off aggressively?

In many cases yes. But as I mentioned it depends on your income to debt ratio. The lower it is, the less portion of the loan you will repay with income-based repayment plans and the more that is forgiven. Many veterinary students these days are graduating with debt of $200,000 or more and starting incomes of only $70-80K. In this typical scenario, an income-based repayment plan is almost always better.

The main reason I bring this up is that the conventional wisdom for debt is the sooner you pay it off the better. Because it's the interest that kills you. But that doesn't necessarily apply to veterinary student debt anymore. So it's important for everyone to look into their specific situation.

 

[Minnerbelle]

So we would be better off doing IBR vs paying it off aggressively? When I used the VIN simulator it looked like paying it off in 10 years (1300/month payment) would be 25k cheaper overall compared to one of the IBR payment plans. I'll be in about 90-100k debt and wanting to do a residency in lab animal medicine.

It's a matter of how doable it is for you. If paying off at $1300/month during residency and possibly more after you're done with residency is doable, and the total cost is less than the "cheapest income driven plan" then it may be worth it. Especially worth it if you would be able to put a lot of the pay bump from your first real job into your loans to pay it off quickly. Like, if you go from $40k during residency to >$100k with your first job and be able to put in $30-40k per year instead of the <$16k per year you'd be paying on a 10 yr plan, you would save significantly.

If the total savings over 20+ years is only $25k and that will allow you to not live without hardship and also allows you to invest better such that you'll end up with more overall wealth after 20 years, it may be worth it to do an income driven plan.

You'll also want to consider the psychologic cost too. Ten years is a long time to commit to essentially a second mortgage. If that's going to prevent you from living life, having an emergency fund, and delaying things like starting a family and buying a home, and building a retirement fund (which builds on compound interest rather than simple interest like student loans, so time is precious), it may make sense to take that "25k hit" if it's going to take you the 10yrs to pay it off. When you consider inflation over 20yrs, $25k isn't as bad.

There is also significant psychologic stress from knowing that you have a large ever growing debt load looming over your head that you are largely ignoring. But if you have a plan for it and can just put it on a back-burner and Meditate away the stress it may not be that bad.

For me and hubs, we had the option of Dave Ramsey-ing it and knew we could pay it off, live not that comfortably but without hardship, be done with it in 3-5 years, and save $50k over PAYE (on a $150k principal), so we did that. We thought about the pros and cons of investing instead, but with as high an interest rate we have for student loans and the short time frame I could for sure pay it off (6 to 7% interest is a lot to overcome), and the fact that salaries in my region are pretty high so PAYE isn't all that cheap, we went with it.

 

[cheathac]

It's a matter of how doable it is for you. If paying off at $1300/month during residency and possibly more after you're done with residency is doable, and the total cost is less than the "cheapest income driven plan" then it may be worth it. Especially worth it if you would be able to put a lot of the pay bump from your first real job into your loans to pay it off quickly. Like, if you go from $40k during residency to >$100k with your first job and be able to put in $30-40k per year instead of the <$16k per year you'd be paying on a 10 yr plan, you would save significantly.

If the total savings over 20+ years is only $25k and that will allow you to not live without hardship and also allows you to invest better such that you'll end up with more overall wealth after 20 years, it may be worth it to do an income driven plan.

You'll also want to consider the psychologic cost too. Ten years is a long time to commit to essentially a second mortgage. If that's going to prevent you from living life, having an emergency fund, and delaying things like starting a family and buying a home, and building a retirement fund (which builds on compound interest rather than simple interest like student loans, so time is precious), it may make sense to take that "25k hit" if it's going to take you the 10yrs to pay it off. When you consider inflation over 20yrs, $25k isn't as bad.

There is also significant psychologic stress from knowing that you have a large ever growing debt load looming over your head that you are largely ignoring. But if you have a plan for it and can just put it on a back-burner and Meditate away the stress it may not be that bad.

For me and hubs, we had the option of Dave Ramsey-ing it and knew we could pay it off, live not that comfortably but without hardship, be done with it in 3-5 years, and save $50k over PAYE (on a $150k principal), so we did that. We thought about the pros and cons of investing instead, but with as high an interest rate we have for student loans and the short time frame I could for sure pay it off (6 to 7% interest is a lot to overcome), and the fact that salaries in my region are pretty high so PAYE isn't all that cheap, we went with it.

This is a great reply thank you! I guess I will see how it all works out when I'm out working. I also sent you a PM!

 

[Mattcj]

I will be forcing my two cats and two bunnies to be working the corners late at night to earn their keep