Unfortunately, there is no single repayment method for student loans. Each dentist has a unique situation that must be taken into account. However, it is possible to find the best way for your own life circumstances. Let’s explore the repayment options and figure out which might be right for each.
Debt to income ratio
Before considering any repayment method, you need to know your debt-to-income ratio. This ratio is your student loan balance divided by your gross income. For example, if your student loan balance is $170,000 and your gross income is $200,000, your debt-to-income ratio is 0.85. If your student loan balance is $350,000 and your gross income is $125,000, your debt-to-income ratio would be 2.8.
This value helps determine which repayment method might work best for you. Your debt ratio isn’t the ultimate number, but it’s a great place to start.
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Public service debt forgiveness (PSLF)
The PSLF is a tax exemption granted after certain circumstances are met. You must make 120 one-time payments (i.e. 10 years of monthly payments) and payments must be made under an income-based (IDR) repayment plan (eg IBR, PAYE, REPAYE or ICR plans ). While making these payments, you must be employed by a 501(c)3 nonprofit or government employer. For dentists, the most common qualified employers are non-profit hospitals, veterans hospitals, and dental schools.
Is the PSLF for you?
The first thing to consider is whether you will work for 10 years with an eligible employer. If you plan to work in private practice, PSLF would not be an option for you. If you know you’ll spend at least 10 years with a qualified employer and have a debt-to-equity ratio above 1.25, then PSFL might be right for you.
Another scenario where PSLF could come into play is when you have a long residency. Most residencies and fellowships are considered PSLF-eligible jobs. Perhaps you have chosen the specialty of oral and maxillofacial surgeon (OMFS) and have a long residency of six years. You could follow that up with a few more years in public service and have your loans canceled fairly quickly after residency. The only caveat to this is that you will need to enter an IDR repayment plan during residency rather than pursuing deferment in school. Your payouts would likely be modest since resident salaries are generally not substantial.
The tax rebate is granted after making 20 to 25 years of qualifying payments on any of the IDR plans. There are no additional employment requirements to be eligible. At the end of the repayment term, the remaining balance is canceled and added to your income for tax purposes. This means that you will have to pay more taxes that year, even if you did not earn any additional money.
Is the tax exemption right for you?
Tax forgiveness might be the best financial strategy for you if you have a debt-to-income ratio of 1.25 or higher. The higher your debt ratio, the more advantageous this strategy can be. Pursuing tax remission also creates greater cash flow flexibility early in your career. Your payments on an IDR plan will likely be much lower than the standard 10-year plan. This extra money you save can be used in more beneficial ways, such as buying a dental practice, putting down a down payment on a house, or even starting a family.
The taxable return path also encourages pre-tax savings for retirement. This is most common in a 401(k) at your dental practice or in a personal traditional Individual Retirement Account (IRA). The pre-tax savings will lower your adjusted gross income (AGI), which in turn will lower your required student loan payments.
The main objective of the taxable discount is to pay as little as possible over time and to cancel a large amount at the end of the repayment term. Under optimal circumstances, your payments plus the cancellation fee could end up being less than an aggressive full refund. From July 2022, additional taxes will be due upon handover. You’ll need to start saving extra funds for that potentially large tax burden down the road.
When you refinance your federal student loans to private loans, you receive a brand new loan with a new repayment period and lower interest rate from a private lender. Refinancing should not be considered if you cannot obtain a lower interest rate.
Is private refinancing right for you?
If your debt ratio is 1.25 or less, private refinancing is probably the most financially optimal solution for you. If your debt-to-income ratio is that low and you were to seek taxable forgiveness, you would end up paying off the loan before any forgiveness was obtained. Once you have refinanced at a lower interest rate, the goal is to pay off the loan as soon as possible in order to pay as little as possible during repayment.
The biggest consideration with private refinancing is that once you leave the federal system there is no turning back. You need to be sure this is the direction you want to pursue before you commit to it.
What will work best?
If you plan to work in eligible public service employment for at least 10 years and your debt-to-equity ratio is 1.25 or higher, the PSLF may be right for you.
If you plan to go into private practice, have a debt-to-equity ratio of 1.25 or higher, and don’t mind paying as little as possible on your loans for 20-25 years, the tax rebate could suit you.
If your debt-to-equity ratio is below 1.25 or if you can’t bear the idea of repaying your loans over a period of 20 to 25 years, private refinancing could be right for you.
This guide only details potential repayment plans based on a few factors. There are many other things in your life to consider before deciding which repayment path is right for you.
Disclaimer: Roots Financial Planning is a registered investment adviser in Texas and other exempt jurisdictions. None of the information provided in this article is intended as investment, tax, accounting or legal advice. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell any securities.
Editor’s note: This article appeared in the October 2022 print edition of Dental economy magazine. Dentists in North America can take advantage of a free print subscription. Register here.