Dear Dr. Debt: I want to repay my loans as soon as possible – News
Dear Dr Debt: I want to repay my loans as soon as possible
Dear Dr. Debt is a new monthly column of advice on managing student debt in the veterinary community. It is adapted from the Veterinary Information Network and VIN Foundation message boards where veterinarians and veterinary students ask questions and get answers to help them approach borrowing and repayment strategically.
Over the years, thousands of these online conversations have taught VIN members the good, the bad, and the bad of student loans. With Dear Dr. Debt, the VIN News Service extends the conversation to the wider veterinary community, with advice from student debt expert Dr. Tony Bartels.
Since graduating from vet school over 24 years ago, I’ve paid nearly triple the original balance of my $84,000 federal student loan. Because most of what I paid was interest, I still owe $41,251 in principal.
I am a business owner and single parent, recently divorced. My goal is to repay the loans as soon as possible as part of my newly divorced debt release plan.
For emergencies, I have savings equal to at least three months of expenses.
Here are the details of my finances:
Federal student loan principal: $41,251
Unpaid interest balance: $183
Weighted average interest rate on student loans: 6.25%
Repayment plan or strategy: refinancing a private student loan
Expected minimum monthly payment: $650
I pay $100 a month more than the required minimum.
Expected remaining term to repay the loan: Five years
Other debt: residential mortgage of $55,000; $38,000 car loan
Salary structure: Salary plus employer-provided benefits including licensing fees, health insurance, liability insurance, disability insurance, and pension plan, including employer matching.
Tax status: single (one dependant)
Adjusted gross income from the last return filed: $80,000
Average monthly expenses: $3,500
As a new grad, counselors at our vet school told me to refinance my loans. In the long term, I think my situation is worse than if I had stayed in the federal program. Nevertheless, I am grateful for my education.
— Ready to be debt free
I applaud your desire to be debt free. It looks like you have turned your education into a rewarding career and removed other stresses from your life. Paying off your student loans would eliminate another stressor.
It’s understandable that you’re tired of paying and not making great progress. No one wants to pay more than necessary for anything, let alone student loans. One of the most common concerns I hear in student loan discussions is, “I don’t want to pay more interest than necessary.” Unfortunately, paying nearly three times your original balance over 25 or 30 years is the digital result of the limited traditional repayment options available to you when you graduate – it’s a feature, not a bug. The longer you repay, the more you’ll pay, and most of those repayments will serve as interest. It’s common for veterinarians using mortgage-style student loan repayment plans to pay more than double what they borrowed over extended periods of time. Anyone with a mortgage will experience the same if they are actually paying over 30 years.
Like many of your colleagues, you graduated before the more advantageous income-driven repayment options became available, in 2009. If they had been offered to you, you would probably have paid much less at this point and you would be on the point of reaching student debt forgiveness. (With income-contingent repayment, borrowers can get their loan balance forgiven after making payments for 20 to 25 years, depending on the plan.) In the thousands of student loan repayment simulations I’ve have made over the years for colleagues. with interest rates similar to yours, I rarely see projections where borrowers pay twice their original balance whether or not they reach discount (and potentially need to pay tax on the discounted balance ). This is a feature of the new income-oriented repayment plans.
Unfortunately, that was not an option for you. There is good news, however!
With the changes announced by the US Department of Education this year, you have a chance to receive student loan forgiveness very soon.
Before we get to that, let’s clear up a common confusion about student loan refinancing and consolidation.
In fact, you have not privately refinanced your student loans. From your federal student loan record, I can see that you have consolidated multiple times. And that’s OK. There have been many changes over the years that have provided various reasons for doing so. If you truly refinanced with a private entity, such as a bank, you would have no balance left in your federal student aid data file and you would not be eligible for federal student loan benefits.
People often confuse student loan consolidation with refinancing. They are essentially the same thing. When you consolidate and end up with a more favorable interest rate, this process is commonly referred to as a refinance. When you consolidate and your interest rate is largely unchanged (as with a direct consolidation loan), it’s called a consolidation. During the recent period of extremely low interest rates, a student loan refinance generally referred to paying off student loans with a private loan that would not be eligible for any of the benefits we describe here.
When I look at your student aid data file in the VIN Foundation’s My Student Loans tool, I see $41,251 in Federal Family Education Loan (FFEL) private principal. Even when private like yours, FFELs are government-backed, which sets them apart from loans obtained directly from a private lender.
The important point is that you did not do private student loan refinancing and you never left the federal student loan system. If so, your repayment options would be limited to repaying your loans as you did or expediting payments as you suggest.
Now on to the good part. You and borrowers like you have a special opportunity to get student loan forgiveness sooner. You may be able to pay off your student debt even faster than expected and at a much lower cost, by taking advantage of a unique offer recently announced federal student adjustment of the number of loan cancellations.
The adjustment treats all payments made (and certain deferment and forbearance periods) on federally held student loans as eligible for forgiveness, whether or not the borrower is using an income-driven plan. Since your remaining loans are held by private interests, if you left them as they are, they would not be eligible for the adjustment. You can change this by (again) consolidating your loans into a direct consolidation loan before the end of the count adjustment period. According to the Ministry of Education, “borrowers who do not have qualifying loans will need to apply for consolidation no later than May 1, 2023, to ensure they benefit from the single account adjustment.”
With at least 24 years of repayment (and possibly longer, given some of the older loans I see in your loan history), you could very well qualify for student loan forgiveness in 2023. That’s true – next year.
The maximum repayment period before reaching student forgiveness is 25 years. Thus, after the adjustment, you will have already crossed the threshold of forgiveness or you will only be one year old.
Even better, if your loans are canceled in 2023, you won’t be subject to federal income tax on the canceled amount. As noted in last month’s Dear Dr. Debt column, there is a special exemption that makes any student loan forgiveness received through 2025 tax-free!
To be clear, to become eligible for the adjustment, you must consolidate your loans into a direct consolidation loan so that your previous repayment history is taken into account. You can start the federal direct consolidation loan process at this link. For more information, see the VIN Foundation consolidation “how to” video and blog post.
Don’t worry too much if, in consolidation, your interest rate goes from 6.25% to 7.25%. With a direct consolidation loan, the interest rate is a weighted average of your rates minus any discounts. It looks like you are currently getting interest rate discounts, and they maybe not transfer on. It’s not clear – we’ve heard from some vets who had discounted rates before, even after consolidation. Either way, I think the benefit of a short-term discount is worth making maybe a year more payments at a slightly higher rate. Think of it this way: would you rather make six more years of 6.25% payments or maybe one more year of 7.25% payments?
To recap, it is possible and beneficial to consolidate federal student loans that have been consolidated before. Try not to dwell too much on the jargon. Even if you have already consolidated your student loans multiple times, you can still convert your previously consolidated private federal loans to a federally held direct consolidation loan that is eligible for these new benefits.
Do not be too long. With all the new consolidation incentives, applications are taking longer than usual to process. I suggest you start as soon as possible to ensure your application is submitted well before the one-time adjustment ends.
What do you think? Sounds like a plan?