Income-driven Repayment for those heading into Internships and Residencies
Conventional wisdom often says to defer your loans while pursuing internships and/or residencies. However, income-driven repayment (IDR) is often a better option for veterinarians with federal student debt pursuing advanced education.
What happens in deferment/forbearance?:
- If your internship/residency qualifies for deferment/forbearance, your federal student loan payment amount due is zero. However, interest continues to accrue on the majority of federal loans during the deferment/forbearance period.
- After exiting deferment/forbearance, all interest that has accrued will capitalize, meaning it will be added to your principal balance.
- Adding interest to your principal balance increases the amount of interest that accrues during the remainder of your repayment and will increase the total costs of repaying your loans.
Using IBR, PAYE, or REPAYE for advanced education:
Your payment under IBR (2009) is 15% of your discretionary income or 10% of your discretionary income under PAYE/REPAYE/IBR 2014.
With a low enough income (ie. during an internship, residency, fellowship, etc), it is possible to have a monthly payment equal to zero using IDR. These zero-dollar payments still count towards the monthly payments due before forgiveness.
You must provide annual documentation of your income in order to continue to have your payments based on your income under IBR, PAYE, or REPAYE. If you fail to provide timely annual documentation, your unpaid interest will capitalize and your payment will revert to a standard 10-year repayment amount due.
*** Veterinary colleagues do not let other veterinary colleagues defer their loans! ***
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BEWARE the Automatic Deferment: if you are enrolled in school at least half-time during an academic internship/fellowship/residency, your school will automatically report your status to the Department of Education. This will result in an automatic loan status change to “deferment." You may be able to prevent this automatic status change by providing oral and written notice to your loan servicer(s) to waive your in-school deferment and remain in repayment. Make sure to do this prior to starting your academic position and to have dated documentation of your request (ie certified mail).
What to do with your loans when you’re headed for an internship/residency
- File a tax return during your final year of veterinary school whether you need to or not
- Obtain your federal student aid data file and upload it to the VIN Foundation My Student Loans tool to help inventory your loans and see which IDR plans you're eligible to use.
- Consolidate your loans into a federal Direct Consolidation loan as soon as you graduate and enter your loan grace period. This will also give you a chance to consolidate non-Direct loans (FFELs, HPSLs, Perkins) into a loan type that will be eligible for the most beneficial IDR plans
- Choose your loan servicer during consolidation (FedLoan Servicing and Granite State are quitting and no longer available. Stay away from Navient and Nelnet if possible.)
- Select the most beneficial IDR plan for you (will depend on your loan details, family size, spouse details, and career plans).
- Utilize your Adjusted Gross Income (AGI) from your recently filed tax return or indicate that you currently have zero taxable income if you are consolidating prior to starting your internship/residency. This should result in a minimum payment amount due of $0/month for the next 12 months (depending on your family circumstances and tax filing status).
- Set reminders and follow along in the process: Make certain all loans have been consolidated, the appropriate loan repayment plan has been selected, and the expected payment amount due is calculated.
- Once consolidation is complete and your IDR plan is established, enroll in auto-debit with your loan servicer even if your payment amount due is $0/month. You will receive a 0.25% interest rate reduction with auto-debit.
- Set reminders to renew your IDR plan. Target 60 days before your IDR anniversary.
- Simulate your repayment scenarios using the VIN Foundation Student Loan Repayment Simulator each year
Revised Pay as you Earn (REPAYE) during internships/residencies
Depending on your student loan balance, family circumstances, and projected income, you might benefit from REPAYE during periods of advanced education even if you qualify for PAYE. Under REPAYE, you will receive an interest subsidy equal to 50% of the unpaid interest balance each month. This can reduce the rate of growth for your unpaid interest during periods where your student loan payments are well below your average monthly interest accumulation. This is particularly true during prolonged advanced education years.
For example, if your consolidated starting loan repayment balance is $200,000 at 6%, you accumulate about $1,000/mo of interest. If your minimum monthly payment is $0/mo, your REPAYE subsidy would be equal to $500/mo. Thus, after 12 months in REPAYE, your unpaid interest balance will be $6,000 vs. $12,000 under PAYE or IBR.
REPAYE is a particularly good choice for those who estimate their income to exceed their student debt after or shortly after their advanced education. This will reduce the total amount paid towards student loans as you can take advantage of the unpaid interest subsidy during your advanced education, which results in a lower amount paid to reach zero for your student loans.
REPAYE does have some other to consider, particularly if you are married. When you’re married, REPAYE requires you to provide and count your spouse’s income in your minimum monthly payment calculation. This may negate or minimize the impact of the REPAYE interest subsidy depending on your spouse’s income. REPAYE also runs for a maximum of 25 years, whereas PAYE runs for a maximum of 20 years. Make certain to review the specifics of REPAYE and PAYE before choosing this strategy.
When you switch repayment plans, the unpaid interest that accumulates will be capitalized. Thus it is imperative to anticipate the cost implications of utilizing REPAYE over PAYE, or utilizing a strategy that involves switching from REPAYE to PAYE. Try the VIN Foundation Student Loan Repayment Simulator to see the short and long-term impacts of student loan repayment for your situation.