Student Loan Repayment Simulator – Rules, Assumptions, and Discussion

Be sure to check out the Disclaimer section at the end of this document to better understand how the simulator calculates your results.

Admit it; you kind of want to know what’s going to happen to those loans once they stop being documents you signed at the beginning of vet school and become monthly bills.  Or, maybe you don’t want to know, but isn’t it better to have an idea of what you're getting into so that life doesn't sneak up behind you while your head is buried in the sand?

Let's play a game. A wise person once said: "Life is what happens to you while you are planning it."   At this point in your career, you can't know for certain what will come.  But this student loan simulator lets you run "what if" scenarios illustrating how student debt repayment works and how life choices you may make in the coming years can impact your future.

How does it work?  What will it tell you?  What won’t it tell you?

First off, this simulator is a teaching/illustrative tool, not a crystal ball.  We’ve entered rules for standard student loan repayment programs.  You enter your expected student debt, expected salary and rate of salary increase.  You also get to select your imagined lifestyle and family situation. It’s obviously impossible to account for every factor that can affect personal finances, but playing with these options will help you see how small differences can have a large impact over time.

The Loan Simulator will give you an idea of what lifestyle you can afford depending upon your level of debt, repayment plan and other choices. Compare your total loan payments, consumer debt, tax burden, and cash on hand after loan pay off under various conditions.  It will not tell you the consequences of maternity leave, a prolonged illness or disability, career change, unemployment, or divorce, among other things.

But this is a game, right?  It’s a game and it’s your life.  Pick any life you want.  Run a bunch of different scenarios.  Imagine yourself with kids.  Without kids.  With a partner, or not.  A partner who contributes income to the family unit, or not. Picture yourself living on boxed mac n’ cheese with yard sale furniture, or eating out every night and furnishing your house with the latest tech toys.  Give yourself different salaries.  Run the simulator with different repayment plans.  This is your chance to get an idea of what decisions may work best for you.

So, let’s get started…

Input Your Information

Use the introductory screens to input your best guesses about your future. 

 

You can use the yellow buttons across the top of the input screen to switch between categories, or you may move from one section to another using the “next” and “previous” buttons at the bottom.

Once you have completed the initial inputs, you may change your scenario at any time by clicking on the NEW SCENARIO slide out tab on the left side of the screen or by clicking the orange CHANGE SETTINGS button on the right side of the screen.. Run multiple scenarios to get an idea of how changes to your income, loan program, family size, or spending habits may affect your financial future.

Loan Tab ver 2.10.8

 

Graduation Year – This is self-explanatory. Just choose your year of graduation from the drop down menu.   

What is the total amount you expect to borrow – The simulator will input a default amount based on the projected average debt for your graduation year, but if you know your anticipated total student loan amount here (vet school, undergrad, graduate school – the whole shebang), go ahead and input it.  If you graduated a few years ago, and have begun making payments, enter your total balance as it stands TODAY, not the original amount of your loans.

Eligibility tab ver 2.10.8

Eligibility -- The dates of your outstanding loans will determine which form of Income-Based Repayment you may qualify for. 

PAYE eligibility ver 2.10.8

If you had outstanding student loans before July 1, 2014, you may be eligible for an Income Based Repayment (IBR) plan that would involve monthly payments that generally would be 15% of your discretionary income (but no more than that you would pay in a Standard 10 year repayment program)  over a period of 25 years.

If you are a new borrower as of July 1, 2014, you may be eligible for an IBR plan where your monthly payments would generally be 10%  of your discretionary income (but no more than that you would pay in a Standard 10 year repayment program)  over a period of 20 years.

 

Income ver 2.10.8

Income – Check the radio buttons indicating whether you intend to pursue an internship and/or residency.  If you check "yes" indicate the duration of the program and your expected salary during the program.  Enter your anticipated salary once you enter practice.  If you aren't sure what to expect for income, use the defaults, based on the averages for companion animal practitioners.

Salary Growth – Input your expected salary increase over the years.  You'll probably have to guess since there can be significant variation between associates and owners, general practitioners and specialists, by compensation type, and by region.  However, a reasonable average is about 3.5% growth per year.

Update Income Projection -- Click this button once you have entered your internship/residency information to see the effect on your projected salary.  These values will also update automatically when you click to the next page.

Lifestyle ver 2.10.8

Change Your Lifestyle – Who wants to live like a student forever? The Loan Simulator assumes that you will begin life after graduation the way you lived in vet school – fairly frugally. This default is set at 2 times the poverty level for your sized household as defined by the federal government. 

You may not want to survive on ramen and cheap pizza forever.  You might want to buy a house, or a car that doesn’t still have a cassette player.  You might want to take your family on the occasional vacation. You may choose a date to “Relax your budget."  This level sets your minimum monthly spending at 3 times poverty level. 

 

But maybe you think that you should be earning enough after a few years to live your dreams – bigger house, bigger cars, resort vacations.  You may choose to “Take on More Expenses.” This setting increases your minimum monthly spending to 4 times the poverty level. 

 

 

Life Partner ver 2.10.8

Live-in Partner –From the drop down menu, select a year (if any) you plan to move in with a partner.  If you already live with a partner, choose your graduation year.

Partner’s Net Household Contribution – Combining households changes expenses.  If your partner brings in a net income, your finances may change for the better.  However, if you provide more than half of your partner’s support, your partner will count toward the size of your household and expenses will increase accordingly. Don’t forget to deduct your partner's debts and personal expenses, such as student loans, hobby expenses, and personal support, from his or her pre-tax income when calculating this number.  This simulator assumes that you will file income taxes separately regardless of marital status.

Family ver 2.10.8

Start a Family – If you plan to have children, select a year from the dropdown menu.

Number of Children – For the purposes of the simulator, your children will arrive two years apart whether you are ready or not.

Run Scenario -- See how your hypothetical life looks!

 The Simulation

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Tabs across the top of the simulator allow you to choose between views of the various loan repayment programs.  The simulator opens by default to a comparison page which plots graphs for each of the major government loan repayment programs.

You can check or un-check the boxes for each program in the legend bar of the top graph in order to view or hide each program.  The top graph charts the changes in the amount owed on your loan over time.  This amount includes loan principle plus the accrued interest on the loan.

Comparison ver 2.10.8

The vertical red bar at the left hand margin of the graph indicates the original amount of the loan.  This number may differ from the amount owed depending on graduation year since interest begins to accrue during school on loans taken after 2012.  Interest accrues during the grace period and is added to the loan principal at the start of repayment.  Since students graduating before 2016 may have some subsidized loans for which the interest accrual did not begin during school, the graph for these students will show a smaller differential between the repayment amount and original loan amount than it will for students graduating after 2016.

This trend is shown for each of four repayment programs:

• Standard 10 year repayment --Known as "Standard Repayment," this is the basic repayment program for government loans.  Under this plan, you pay a fixed amount each month until your loans are paid in full, over a period of no more than 10 years.

• Standard 25 year Repayment -- This plan is known as "Extended Repayment."  To qualify for this plan, you must have more than $30,000 in Direct Loan debt (an easy feat for the average veterinary student!), and you must not have an outstanding balance on a Direct Loan as of October 7, 1998.  Under this plan you may make either fixed or graduated monthly payments.  For the purposes of this simulation, monthly payments under the 25 year plan are assumed to be FIXED.
• Income Based Repayment (IBR) -- IBR is a program available for certain government loans. http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp.  Under IBR, if you had student loans issued before July 1, 2014, your total annual payment is set at 15% of your discretionary income. If the payment does not cover the interest, the unpaid interest is accumulated separately from the principal.  During the first 3 years of the program, the unpaid interest on any government-subsidized loans is covered by the government.  Any principal and interest unpaid after 25 years will be forgiven under the program.   For borrowers with new loans as of July 1, 2014, the payments are set at 10% of discretionary income over a period of 20 years.  However, federal tax is charged on the forgiven debt.  For the purposes of this simulator, that tax is calculated at 30% of the forgiven amount.  IBR is designed for people with a “partial financial hardship.”  If at any point, your calculated monthly payment under IBR is greater than what would be owed in a Standard 10 year repayment plan, you will no longer be considered in “hardship.”  At that point, the accrued, unpaid interest is capitalized, and you will begin to pay the standard 10 year loan payment.  For the simulator, your IBR payment will be calculated based upon your previous year's salary.  For the first year after graduation (since most students graduate in May or June) the income is assumed to be 50% of the year one salary, or the same as the year one salary if you choose an internship.
• Pay As You Earn (PAYE) -- Like, IBR, PAYE http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn sets your payments based upon household income.  With this plan, however, the annual payment is based on 10% of Adjusted Gross Income (AGI) and payments are made over 20 years rather than 25.  You also must be a new borrower as of Oct. 1, 2007 and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You are a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan as of Oct. 1, 2007, or had no outstanding balance on a Direct Loan or FFEL Program loan when you received a new loan on or after Oct. 1, 2007. 
  Under PAYE, there is a limitation on the capitalization of interest—While you have a partial financial hardship, interest that accrues but is not covered by your loan payments will not be capitalized, even if interest accrues during a deferment or forbearance. Unpaid interest capitalizes if you are determined to no longer have a partial financial hardship, but the total amount of interest that capitalizes while you are repaying your loans under the Pay As You Earn plan is limited to 10% of your original principal balance when you begin paying under Pay As You Earn.

The income tax due on any debt forgiven at the end of the repayment terms for IBR and PAYE is shown by a vertical bar that corresponds to the line color for each program.

For the purposes of the simulator, a 25% income tax rate is assumed.  This rate is applied to all income throughout the simulator.

For the IBR and PAYE programs, the monthly loan payment during first year is reported as a range from $0 to the estimated maximum based on your projected first year salary. Loan servicers have discretion as to how they calculate your AGI in your first year.  Some servicers may use your reported income as the basis for a full year, even though you graduated school in June, others may use the 6 months that you actually work as the AGI, and others may use the income from your past year in school.  Since graduates have reported a variety of outcomes, we've programmed the loan simulator to give a range for the first year.

The lower graph takes a look at your monthly expenses. The "Amount Available to Live On Each Month" reflects your income after your loan payments and income taxes (25% of gross income) are deducted.  The “red zone” is a baseline threshold for standard of living.  We have set this default at two times the federal poverty level (2012 data) for your size household, so you will see this level shift over time and if your family size increases.

Obviously, the cost of living varies significantly from one region to another – an average mortgage or rent for a mid-sized house in a small town in the Midwest might not even get you a room in a flat in a major metropolis such as New York or San Francisco.  It’s important to look at the amount available for living expenses (hover over the dots on each line to see the precise number) in terms of your region(s) of interest.

A brief summary of the numbers is provided in a table to the right of the graphs.  However, if you prefer a more detailed breakdown of loan payments and living expenses, click on the “Report” Tab just above the upper graph in the center of the page.

report chart year 1 ver 2.10.8

In order to allow you to focus on each phase of the loan simulation, the report unfolds in stages.  Just click the large orange button in order to show the next section.  Once the report has completed, you can view it again by hitting “Replay” at the bottom.

Report summary ver 2.10.8

Your feedback on this tool is welcomed and appreciated.  Click the “Give us feedback” button to let us know how the simulator worked for you and how we can improve it.

Click “Discuss This” to join the discussion on student debt.

 

Individual Plan Screens

Select the corresponding tab to get a more detailed view of how the each program might work for your scenario.  As with the comparison page, the top graph tracks the evolution of your debt while the bottom graph breaks down your finances on a monthly basis.  However, these graphs are a bit different from those seen on the comparison page.

On the top graph, each line represents a different aspect of your finances over the life of the repayment program.  For IBR and PAYE, the vertical column at the end of the pay-off shows the taxes you may owe on the forgiven debt. 

IBR 10-20 ver 2.10.8

Watch out for the red line!  A red line in the top graph is not your friend.  This line represents consumer debt.  Depending on the living standard you selected, the simulator sets your living expenditures at a certain multiple of the federal poverty level for the size of household you selected.  If your expenditures, loan payments, and taxes exceed your net income, the simulator assumes you have been forced to break out the plastic and incur credit card or other consumer debt.

 Ok, but student debt is nothing new.  Graduates in just about every field have to take out loans these days, don't they?

 

What's the big deal?

You only have to open your web browser, turn on the TV or radio, or pick up a magazine or newspaper to find an article on student debt.  Lawyers, physicians, engineers, dentists, veterinarians – it seems like everyone is affected by the rising costs of higher education.  However, circumstances particular to our profession place veterinary graduates in a unique and somewhat undesirable financial position. 

While veterinarians incur similar debt to that of other professions – $162 K average debt for veterinary graduates in 2013 compared to $75K-$125K for law students[i], $141K for medical students[ii], and $25K for engineers[iii] with a bachelor’s degree, the debt to income ratio is disproportionate.

Now compare starting salaries for these professions.  Full disclosure, salaries within a profession will vary depending upon field or specialty and advanced training or education.  For simplicity’s sake, let’s assume “starting salary” to mean the first year out of school or advanced training.  Veterinarian – the average starting salary in 2013 for a small animal veterinarian in private practice was roughly $67 K.  Lawyer – Average salaries for lawyers tend to cluster around two points.  Public law starting salaries average $40-65K while some private law firm salaries are in the $140-160K range.[iv] There is a huge range in medical salaries depending upon specialty, but $160K is a fairly conservative estimate.[v] Engineering salaries also vary depending upon the field, but $60K appears to be a reasonable average.[vi]

If you click the New Scenario slider bar, at the top menu bar and choose Sample Scenarios, you will find scenarios comparing high-end and average veterinary debt (with and without internships), physicians, and engineers.  These graphs illustrate some of the discrepancies between debt and income for veterinarians compared to other licensed professionals.

Let’s take a look at a veterinarian with average debt who enters private practice right after graduation:  This veterinarian has a starting debt of $170,000 and an expected starting salary of $67,000.  Can this veterinarian pay off these loans within the standard 10 years?  Yes, but the standard of living during those years will be very low, and may not be sufficient to support any dependents or even to maintain the expenses of a professional, such as insurance, continuing education, licensing fees, and more.  A graduated, income-linked plan will defray some of this hardship.  However, both the IBR and PAYE programs were designed for students with a smaller gap between debt and income.  Look at the sample graphs for physician and engineer to compare the differences in how these programs work from one profession to another.

 

Average debt ver 2.10.8

 

Now, what about the average physician? Since physicians generally have a 3-5 year residency period after graduation, we have used conservative income numbers in this simulation, but you should still see the difference.

 

Physician ver 2.10.8

The sample physician living at the same standard as the sample veterinarian will fall out of hardship within ten years of graduation, and will pay off the loans in their entirety within fourteen years.

An engineer, graduating with a Bachelor’s degree, will typically have lower total debt, but a comparable starting salary to a veterinarian.

 

Engineer ver 2.10.8

Under IBR, this sample engineer falls “out of hardship” within eight years and has paid off the loans completely within eleven years, with no additional tax burden.

Now let's get grim.  What happens to the veterinarian with higher than average debt -- someone who attends an out-of-state or out-of-country school?

 

High debt ver 2.10.8

 Veterinary students have long had a higher debt to income ratio than comparable professions, but prospective veterinarians should be aware that current trends show a sharp divergence between the rates of debt increase and salary growth.

 

student debt 2013

The high debt to income ratio for veterinarians presents some interesting twists in student loan repayment for veterinarians.  Play with this simulator a little.  Every choice has a consequence. Run scenarios at various standards of living, with varying salaries and family sizes.  The simulator won’t predict your future, but it may help you decide what future is manageable for you.

Loan Simulator Disclaimers:

Graduation year, Grace Period, and Initial Repayment details:
To the point: For loan simulation purposes, the expected salary that you enter is halved in your graduation year to represent a June/July start date in order to better simulate actual IBR/PAYE payments in your graduation year.  This is the only year for which special salary and repayment considerations are made in the simulator.

Details: The graduation year is the most difficult to simulate due to all of the variables occurring in such a short time period: mid-year graduation, grace periods, interest accumulation, mid-year salary, etc.  However, it is also the most important year for illustrating the major differences among loan repayment programs. 
•    First, your unsubsidized loans have been accruing interest throughout school and will continue to during your grace period.  Thus, your loan principal balance upon entering ANY repayment program will be higher that then amount borrowed. 
•    Second, most veterinary students graduate in May and subsequently enter a six-month grace period.  This means that most veterinary students will only make two loan payments in their graduation year.
•    Third, if you start your job or advanced education program in June, then you are only making a maximum of 6-months of salary for tax-year purposes.  This is beneficial for income dependent programs and will make your loan payments much lower than estimated by the calculators which that utilize a full year of income to calculate estimated payments. 

Three year subsidized interest bonus for income dependent programs (IBR/PAYE)
To the point: Under the loan simulator assumptions, for students graduating in 2016 or later, interest accrues on the number you enter as the full amount borrowed.  Earlier graduates may have subsidized loans, and the interest that accrues during the first three years will likely be lower if you enroll in IBR/IPAYE.  This is reflected in a smaller disparity between loan amount and initial repayment amount in the simulator.

Details: As with any loan, interest accrues on your outstanding balance each month.  However, while you are enrolled in IBR/PAYE and in partial financial hardship, only simple interest accrues on your student loans.  This means that interest does not accumulate on the unpaid interest until you fall out of financial hardship or exit the program.

Since the IBR/PAYE payment amounts are a function of income, it is very possible that your payment amount will be less than the interest accruing on student loans, a phenomenon known as negative amortization.  To partially alleviate this negative amortization, the government will cover the interest which accrues on the subsidized portion of your loan balance for three consecutive years upon entering IBR/PAYE. 

So what happens to your payments?  Since the government is covering the subsidized interest, your payments will go toward the unsubsidized interest that is also accruing.  If your payments are greater than the amount of unsubsidized interest that is accruing, then the remainder of your payments will be applied to principal.  The reality is that subsidized portions of total loan balance are pretty small for most veterinary graduates. 
 
Please note that government-subsidized student loans were discontinued as of July 2012.  Therefore the subsidized portion of veterinary student loan totals will diminish for 2013, 2014, and 2015 veterinary graduates, with some exceptions of dual degree graduates.  Because the proportion of subsidized loans within the total loan balance will vary greatly among students, the loan simulator provides a conservative estimate of interest accrual during the first three years of the income-dependent programs. 



 Blended Interest Rate
To the point: To account for variability in loan amounts and interest rates, the loan simulator assumes that the first $40,500* per veterinary school year of federal loans are obtained as unsubsidized Stafford loans at the interest rate determined by the year of disbursement (see table).  Amounts in excess of $40,500 are assumed to be obtained via Grad Plus loans at the interest rate determined by the year of disbursement (see table). The simulator will calculate a blended interest rate using proportions of Stafford loans to Grad Plus loans for the duration of veterinary school. "

Details:

Before 2006, federal loans had variable interest rates.  Since 2006, new federal loans are at fixed interest rates set by Congress.  Beginning July 1, 2013, rates for new loans are tied to the market as follows:

Rates for subsidized and unsubsidized loans to undergraduate students are:

10-year Treasury rate plus 2.05 percentage points (presently 3.86 percent), capped at 8.25 percent

Rates for unsubsidized loans to graduate students are:

10-year Treasury rate plus 3.60 percentage points (presently 5.41 percent), capped at 9.50 percent

Rates for GradPLUS and Parent PLUS loans are:

10-year Treasury rate plus 4.60 percentage points, (presently 6.41 percent) capped at 10.50 percent

Direct Consolidation Loans are at fixed interest rates based on the weighted average of the underlying loans.  Rates for Direct Consolidation Loans are capped at 8.25 percent for consolidation loans borrowed before July 1, 2013.  For Direct Consolidation loans borrowed on or after July 1, 2013, there is no cap.

 

  
 
Salary vs. Adjusted Gross Income (AGI)
To the point: The loan simulator treats total income (salary) as equal to AGI.  Please be aware that this assumption will slightly overestimate your IBR/PAYE monthly payment amounts.

Details: The loan simulator allows you to enter an estimated salary to approximate your income.  In reality, both IBR and PAYE are based off your AGI, an amount that will actually be less than your total income.  Your AGI is a function of your total income and the type of deductions you take when filing your taxes.  Thus, AGI is highly dependent on individual circumstances.

 

Glossary