A Strategic Approach to Managing Student Debt: Best Practices for 2016 Medical Graduates Florida Atlantic University by Jason DiLorenzo Founder & Executive Director www.dwoq.com w.dwoq.com
Agenda • Repa paymen yment t Mar arketpl tplac ace e Overvi rview ew • Loan an Forgivene giveness ss an and Legis islat ation ion Up Updat ate • Sav avin ings gs Cas ase Studi dies es • The Refin inan anci cing ng Mar arketp tplac lace • Trai aining ing “Exit Interview” • Tax axes s an and Other r Considerati iderations ons • Avai ailab able e Resou ourc rces es • Q&A &A
Changes in Student Debt Levels $300k ~$220k ~$89k ~$50k 2000 2015 1993 Debt levels have quadrupled in the last 20 years
Physician Starting Salaries by Specialty • Anesthesia: $276k • Emergency Medicine: $231k • Family Medicine: $161k • IM, General: $180k • OBGYN: $220k • Pediatrics: $160k • Psychiatry: $179k • Surgery, General: $275k • Surgery, Neuro: $520k Higher Salaries Reduce Forgiveness Benefit 3/30/2016 4
Repayment Timeline After Graduation Fall 2016: Training Exit Spring 2016: End of Grace Analysis: Graduation, Period on PSLF / File 2015 Stafford/Grad Standard / Taxes PLUS Refinance July 2016: IDR Renewal Begin every 12 Residency Months / Review Profile and Legislative Changes 3/30/2016 5
Repayment Options Upon Graduation Forbearance / • MOST COSTLY! • MPH/other students CAN waive deferment if in residency Deferment • 15% of discretionary income IBR • Available if loans outstanding on Oct 1, 2007 • 10% of discretionary income PAYE • Available if no loans outstanding on Oct 1, 2007 • 10% of discretionary REPAYE • No borrowing restriction, no PFH required • Available with attractive underwriting profile, may be Refinancing appropriate for some graduates Standard or • Most Housestaff need payment relief during training Extended Term
Forbearance: No Payment, No Problem? $175k @ 6.21% Salary: $ 50,000 $51,500 $53,045 $54,636 10-Year Standard Payment: $1,961 $1,961 $1.961 $1,961 Extended Term Payment: $1,154 $1,154 $1,154 $1,154 • Payment unmanageable during residency • Deferment regulation changes necessitate forbearance Monthly interest cost = $906 Total interest accrual = $43k+ No subsidy benefits Not PSLF Eligible
Pay As You Earn for 2016 Graduate $175k @ 6.21% Salary: $50,000 $51,500 $53,045 $54,636 10-Year Standard Payment: $1,961 $1,961 $1.961 $1,961 Extended Term Payment: $1,154 $1,154 $1,154 $1,154 $ 0 $ 57 $261 $262 PAYE Payment: Almost $7,000 in interest paid Potential subsidy from undergrad, and no capitalization PSLF Eligible
REPAYE: Pros and Cons Pros: • 50% of accruing interest paid by government (Unsubsidized loans become partially Subsidized!) • Previous payments made towards 120 for PSLF count • Prorated for married borrowers: If John owes 30% of the combines total eligible loan debt and Jane owes 70% of the combined total eligible loan debt, John's calculated payment amount would be $120 and Jane's would be $280 Cons: • Household income will be used regardless of how you file taxes • 25 year taxable forgiveness for graduate students, not 20 like PAYE • No cap to payments (10-year standard in IBR & PAYE) REPAYE not appropriate for high income households
How Revised Pay As You Earn Works: Requires 10% of discretionary income like PAYE, but 50% of accruing interest not charged when payments don’t cover interest! $250/month x 12 months = $3000 $14,000 - $3000 = $11,000 outstanding ~$200k $11,000 x 50% = @ 7% $14k $5,500 savings less than 4% effective rate in training!
REPAYE for 2016 Graduate $175k @ 6.21% Salary: $50,000 $51,500 $53,045 $54,636 10-Year Standard Payment: $1,961 $1,961 $1.961 $1,961 Extended Term Payment: $1,154 $1,154 $1,154 $1,154 $ 0 $ 57 $261 $262 PAYE Payment: Almost $7,000 in interest paid Roughly $20,000 not charged - If uncertain of PSLF track, huge benefit PSLF eligible
Switching Programs • Borrowers are permitted to switch to/from REPAYE • Payments count towards PSLF • Conversion requires “reduced payment” forbearance, 1 month • Capitalization will occur when exiting, but impact minimal if PSLF achieved
Public Service Loan Forgiveness El Eligibl ble Loans: Direct t Staffo ford rd & Gr Grad d PLUS (FFEL, Perkins, HPSL and LDS can be consolidated for eligibility) Specifi ific requi uirement rements: s: • Borrower must make 120 qualifying payments on a Fe Fede deral al Direct t Loan • Borrower must work for a public service entity as defined by the program, such as a Federal, State, Local, or non-profit organization • Employment Certification Form is available, not mandatory • Will trigge ger r transi sition on to FedLoan oans as servi vicer er Approximately 80% of hospitals are non-profit
Stark Law Overview and Impact • Bans the practice of physician self-referral, there are loopholes • Some states have more restrictive interpretation than others • Specialties with higher likelihood of for-profit employment after training: – Emergency Medicine – Anesthesia – Radiology • Paths with higher non-profit opportunity: – Family Medicine/Primary Care – Pediatrics – Academic – States where non-profit hospitals more inclined to employ directly Non- profit “Setting” May Not Qualify as Public Service
10-Year Case Study: 2016 Graduate Profile: • Debt - $220k • Specialty – OBGYN • PSLF Eligible, unsure of employer after training • Future expected income - $250k • Marries in 2019, spouse earns $125k
10 Year Case Study: 2016 Graduate
Obama 2016 Budget Proposal • Expansion of PAYE to all federal Repayment Under Obama's loan borrowers Proposal • Removal of cap on payments Limited to 10% of Income Driven (REPAYE) discretionary income Repayment • New cap on amount forgiven Cap on payments Calculation through PSLF removed • $57,500 limit, based on max 10 Years if working in borrowing amount for the Public Sector independent undergrads AND loan balance less than $57,500 • Balances above $57,500 will not be forgiven until 20-25 20 years for years of participation Loan borrowers with total Forgiveness loan balance less • Household income used for than $57,500 documentation instead of MFS (REPAYE) 25 years for borrowers with total • 20 and 25 year forgiveness loan balance greater options to be tax-free (still waiting) than $57,500
Income Documentation If 2016 Graduate uses pay stubs only, payment will be based on inflated AGI $0 tax return can result in $0 payment - Without proper planning, this can add cost Tax return remains preferred method of income documentation Alternative Documentation in online application • When selected, forms required to be mailed, delays processing Married Filing Jointly/Separate: Case-by-Case
Considerations for Loan Consolidation • Do I need to consolidate? – PSLF and PAYE are available for Direct Loans only – IBR available for FFEL loans but not PSLF eligible – Perkins, HPSL, LDS (some don’t appear on NSLDS!) • Option to choose servicer – FedLoans is PSLF servicer – Varying turnaround times for processing applications – Varied standards for income verification (best to file tax return) – Service considerations • Servicer Errors – Eligible loans not included in consolidation – Wrong repayment plan implemented – Incorrect advice regarding consolidation for forbearance, IBR/PAYE/PSLF You have 10 business days to make changes once Loan Summary Sheet is issued
A Physician’s Fork in the Road
To Re or Not to Re: That is the Question Private Rarketplace Opportunity: • Lending marketplace increasingly crowded and highly competitive • Transaction-focused, not consultative • Rates can be competitive, fixed as low as 3.5% • Available in training for some Housestaff • For graduates with $75k or less in federal debt, PSLF likely holds little value, refinancing may make sense Considerations: • Loss of subsidy/forgiveness benefits on Federal education loans • Liquidity, as forbearance and deferment typically not allowed after refinancing • Origination and other fees may erode savings • Fixed vs. variable rate loan types have significant impact on long-term vs. short-term savings • Your time horizon for paying off the particular debt • You CAN refinance an already refinanced loan
Recommended Refinancing Process 1. Identify if refinancing is suitable! 2. Review existing • Debt-to-income ratio considered financial and credit • No negative credit history, min 680 score profile to determine if • Adding co-signer can improve results refinancing is available 3. Approach marketplace 4. Once terms and rates • Work with an Advisor are quoted, select option • Deferment/Low payments in residency available in the context of your • Better rates available for shorter terms, but can you afford higher payment right after training? liquidity needs
Training Exit Strategy
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