2011 Special Edition SOMA Newsletter

Transcription

1 2011 Special Edition SOMA Newsletter J A U R A R Y, T H E S T U D E N T D O C T O R Food for Thought No matter if you are approaching the last few months of your third year or you are facing the last few days before The Match as a fourth year, the one thing that might not be on your priority list is how to pay off that medical school debt you are going to be responsible for. It is the white elephant in the room that nobody wants to talk about, but the reality is.you NEED to talk about it. Maybe you don t have a clue how you are planning to pay it off. Maybe you believe that once residency begins, you are going to finally have some cash to spend, or maybe you are like me and just need to find someone who knows more than you do about the repayment process to help guide you. Whatever your reality is, the truth is that we need as much help as we can get in this arena. Stephanie Marcy, OMS III SOMA PR Director pr@studentdo.com SOMA has teamed up with an organization called the GL Advisors. They are experts in the loan repayment process and can help you make wise choices when it comes to paying back your debts. I have put together this Special Edition Newsletter specifically for the third and fourth year osteopathic medical students to encourage you all to make wise financial choices and utilize the many benefits that SOMA has to offer. Wherever you are in your journey...congratulations and best of luck to all of you in your future endeavors. Stephanie Marcy, OMS III

2 P A G E 2 A Strategic Approach to Managing Medical School Debt- What Every Medical School Student Must Know This article will cover the following topics: 1. Managing Medical School Debt 2. Case Study of Two Osteopathic 2011 Graduates 3. Action Plan for Medical School Graduates Federal Loan Repayment Programs Overview With the cost of higher education increasing, student loan debt for medical students has more than tripled over the last 15 years with the national average surpassing $165,000 in 2009*. The combination of high debt levels and relatively low salaries during residency puts many medical school graduates in a difficult position. Therefore, it is important for all students and recent graduates to understand their student loan repayment options and make the best decisions regarding debt. Your financial aid office is a great place to start and we hope the following information will also serve as a valuable resource for you. Many medical residents rely upon forbearance to postpone payments during residency and forgo thousands of dollars of potential savings. Fortunately, the government created programs that provide medical school graduates with the opportunity to improve their liquidity and lower the cost of their student loan debt. Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF) are two programs that have the potential to save borrowers thousands. IBR: Limits monthly loan payments to 15% of a borrower s discretionary income, and for up to three years after repayment begins, the government will pay the outstanding subsidized interest. The subsidy can result in thousands of dollars in savings and enrolling in IBR is necessary to take full advantage of the forgiveness program described below. PSLF: Provides tax-free loan forgiveness to borrowers after making 120 qualifying payments while working for an eligible employer such as a non-profit health system, hospital or university. Unlike other forgiveness programs, there are no limitations regarding geography, type of medicine practiced, or type of patients treated. Most residents are eligible and based on recent employment trends, a growing number of physicians will be employed by an eligible entity. Unfortunately, many student loan borrowers are not aware of the benefits of these programs or do not fully understand the qualification requirements, and thus, are missing out on the opportunity to save thousands of dollars. In order to educate borrowers on these programs and other repayment strategies, GL Advisor provides SOMA members and other health professionals student debt assessments and hosts financial seminars at schools, hospitals and chapter meetings outlining the value of these programs for medical school graduates. An online presentation describing the benefits of these government programs in more detail is available on GL Advisor s website or at the following URL: medicalpresentation All SOMA members receive a FREE personalized assessment that outlines your student loan history and highlights savings opportunities resulting from government programs and other repay-

3 P A G E 3 ment strategies. Member benefits also include individual consultations in which we review your assessment and answer any questions you have. You can sign up at Additionally, as part of our relationship with SOMA, GL Advisor will speak on these issues and present to you and your fellow 2011 graduates either in person or online. If you are interested in coordinating a presentation, feel free to contact us at or clientservices@gladvisor.com. The Numbers: A Comparison of Two Medical School Graduates To further illustrate the potential of these programs we have outlined two potential scenarios. Two Osteopathic graduates finish school with $190,000 in federal student loan debt prior to entering their residency. Their loan portfolios are identical and include federal loans from the Direct Loan Program and federal loans from another lender. The average interest rate is 7.1% as their portfolios include both Grad PLUS and Stafford Loans. Graduate A: This graduate decides he will manage his student loan debt after completing his four year residency and use Residency Forbearance on all of his federal loans as they enter repayment. He prefers this option because he will not have to make any payments during residency and can essentially postpone managing this debt. Graduate B: This graduate is more informed and does research and analysis to determine the best approach to minimize the cost of her debt. She follows the steps outlined in the next section of the document to ensure her loans are positioned to benefit from both IBR and PSLF 1. During her first two years of residency she makes small payments on her loans of approximately $37 per month. In her final two years of training she makes payments averaging $333 per month. Following residency, both physicians take positions in practices that are owned by a non-profit hospital system. Their first year salaries are $200,000 annualized. Graduate A: He is now coming to grips with the fact that he needs to begin repaying his loans and realizes that during residency his debt increased by $53,584. He decides to enter a 10 year repayment term since he understands that by extending the repayment term, his total cost of debt will increase. Under the 10 year repayment term, his monthly payment is $2,837. Graduate B: She has been making payments and is still participating in IBR. Since this program bases her payment on her Adjusted Gross Income, it does increase to $352 and then to $1,294 the next year, but she understands that it will not exceed $2,211 while she is in IBR. The Results: Graduate A: He retires his debt in 2025 after entering a 10 year repayment term following residency. The sum of his total payments over that period equals a staggering $340,390. Graduate B: Following residency she continues with IBR and PSLF for another six years in order to reach the 120 qualified payments that the Public Service Loan Forgiveness program requires. At the end of this period the government forgives $189,655 of her student loan debt (tax free). This is equivalent to receiving an increase in taxable income of $316,092. During her 10 years of repayment she pays a total of $134,766.

4 P A G E 4 The Results: Grad A Pays a Total of $340,390 Grad B Pays a Total of $134,766 The difference in total paid in this scenario is $205,624. While job selection, salary, and family size could all have an impact on the above scenario, this example highlights the importance of fully understanding your options and positioning yourself to benefit from these programs. Every Member of the Class of 2011 Must Consider the Following Actions Below is a list of actions that medical students must consider prior to graduation. Prepare and file taxes How and when a medical student/resident files their taxes may have a direct impact on the potential savings obtained through federal loan repayment programs. All members of the class of 2011 should file their 2010 taxes regardless of income level Accurately calculating Adjusted Gross Income (AGI) will reduce monthly payments and enable you to receive government subsidies The impact of loan forgiveness, Income-Based Repayment and targeted repayment all must be considered as part of tax preparation. Determine and evaluate the trade-off and impact of filing jointly or separately with a spouse, if applicable Consolidate Loans Consolidating with the Direct Loan Program will position loans for maximum benefits if performed correctly. Consolidation can take months to complete, so delaying the process will affect savings. Majority of medical students will need to perform multiple consolidations in order to ensure repayment flexibility. Consolidation should be grouped by interest rate. Variable rate federal loans should be consolidated separately to lock in at a historically low rate. Institutional loans or HPSL loans should not be included. Enroll in Federal Repayment Programs Medical students with debt should position themselves to benefit from federal repayment programs. Consolidation will be required for many borrowers prior to enrolling in these programs. Income-Based Repayment (IBR): Benefits include a reduced monthly payment and interest subsidies. Providing accurate income documentation is critical to achieving the highest subsidy and the lowest payment. Public Service Loan Forgiveness (PSLF): Direct Loan borrowers can receive tax-free loan forgiveness on their outstanding federal debt after 10 years of qualifying payments.

5 P A G E 5 Must work at a qualified public service entity such as a non-profit health system, hospital or university. Ensure Sufficient Liquidity to Make Payment To ensure liquidity needs are met, it is important to consider a repayment strategy that offers reduced payments. Loans can be structured for any payment based on your liquidity Must make sure payments do not exceed level that would result in lower forgiveness Determine the Best Use of Discretionary Funds To achieve the highest return on discretionary funds (i.e. any extra money), it is important to perform a comprehensive analysis of potential options that include investing, saving and debt repayment options. For instance you only invest when returns exceed cost of debt and liquidity issues are met. For example, a medical school graduate can achieve a greater return by repaying their PLUS loan at an after tax rate of 8.1% versus investing in the S&P at 7.4%.** About GL Advisor GL Advisor is a unique service designed to help medical students and residents manage their student debt burden and other financial matters. We work on our clients behalf to help them lower the cost of debt, obtain payment relief as needed, and save time so they can focus on their career in medicine. Our service also spans beyond student loan debt and provides clients with comprehensive financial planning, tax preparation services and professional investment advice.*** As previously stated, GL Advisor offers all SOMA members a FREE personalized assessment that outlines your student loan history and highlights savings opportunities resulting from these government programs and other repayment strategies. Included as a member benefit, we provide individual consultations in which we review your assessment and answer any questions you may have. Sign up at Overview of Federal Loan Repayment Programs Income-Based Repayment Income-Based Repayment (IBR), a new program that became available on July 1, 2009, can significantly reduce monthly payments for high debt/lower income borrowers. To be eligible for IBR, a borrower must first demonstrate that they have a Partial Financial Hardship (PFH). A borrower is considered to have a PFH when the annual amount due on all of their eligible loans exceeds 15% of the difference between the Adjusted Gross Income (AGI), as reported on their most recently filed federal income tax return, and 150% of the annual poverty line amount for their family size and state of residence. Once PFH is determined, payments will be calculated as outlined below: PFH Payment Amount = (.15(AGI 1.5(poverty line income)) /12 If the PFH amount is less than $5.00, then the monthly payment amount becomes $0 If the PFH amount is between $5 and $10, then the monthly payment amount becomes $10 If a borrower s monthly payment does not cover the total interest accrued on their Subsidized Stafford loans, the government will pay the remaining interest for the first three years after IBR begins. After 25 years of qualifying monthly payments, any remaining balance on the applicable loans will be eligible

6 P A G E 6 for forgiveness. In 2014, program enhancements will go into effect for new borrowers that will reduce monthly payments from 15% of a borrower s discretionary income to 10% and decrease the time period to achieve loan forgiveness from 25 years to 20 years. Currently, the forgiveness amount obtained through this program is considered taxable income. Public Service Loan Forgiveness Under Public Service Loan Forgiveness (PSLF), the government will forgive a borrower s remaining federal debt balance after making 120 qualified monthly payments while working full-time in certain public service jobs. Borrowers pursuing a career in Local, State, or Federal Government, a 501(c)(3) non-profit organization, AmeriCorps, the Peace Corps or another public service organization may recognize significant savings on the cost of their debt from this program. Qualifying loans include: Direct Subsidized Stafford Loans, Direct Unsubsidized Stafford Loans, Direct PLUS Loans, and Direct Consolidation Loans. To request forgiveness, borrowers must submit an application and provide proof of their employment history and 120 qualifying payments to the Direct Loan Servicing Center. If approved, the government will forgive the remaining principal and interest on the qualifying loans. Unlike IBR, the forgiveness amount under PSLF is not considered taxable income. Economic Hardship Deferment Economic Hardship Deferment is an option that allows qualifying borrowers to defer payment on their federal loans. Benefits include: Postponement of payments on their federal loans during the deferment period The government will pay the interest on all subsidized loans during the deferment period Forbearance Forbearance provides payment relief and temporary liquidity by placing a borrower s federal loans in a non-payment status. Borrowers should note that they are responsible to pay all interest accrued during forbearance. Forbearance is granted at the discretion of the lender but is usually available for borrowers demonstrating need. Federal Loan Consolidation Federal Loan Consolidation enables borrowers to lock in a low, fixed rate on variable rate Stafford Loans as well as combine and/or transfer multiple federal loans to a single lender. On July 1, 2010, the interest rates for variable rate Stafford Loans adjusted to historically low rates and until June 30, 2011, borrowers who consolidate their variable Stafford loans will recognize the following rates: Variable Stafford loans that are currently in an in school, grace or deferment status will lock in at 1.875% Variable Stafford loans that are currently in a repayment status will lock in at 2.5% Many borrowers utilize consolidation to transfer their federal loans to the Direct Loan Program in order to participate in the PSLF program. Additionally, until June 30, 2011, eligible in-school borrowers can take advantage of consolidation prior to graduation. In-school consolidation can position eligible borrowers to benefit from these federal programs immediately upon graduation. Considerations for taking advantage of this opportunity include the loss of grace period and certain borrower benefits. Every borrower must evaluate their consolidation options, as timing, structuring, and benefits of loan consolidation are unique to each borrower.

7 P A G E 7 * Based on data collected by AAMC, AMA and GL internal student database. **Sources: Yale Econ/Robert Shiller, Standard & Poor s, Federal Reserve, Bloomberg. ***Investment services are provided by Graduate Leverage Investment Advisory Services, LLC. GL Advisor is a division of Graduate Leverage, LLC. GL Advisor does not offer all services to residents of Nevada, New Hampshire, Idaho, and North Dakota at this time. FINANCIAL ASSUMPTIONS Income-Based Repayment and PSLF Calculation: The Public Service Loan Forgiveness and Income-Based Repayment estimates are based on the requirements of these programs as defined by the Department of Education and the programs continued existence. GL Advisor is not affiliated with the U.S. Department of Education or its assigned service providers. Poverty rates used to calculate IBR payment amounts are based on figures published by the Department of Health and Human Services. Calculations based on individual s family size of one and taxes are filed as an individual unless different information is provided. Calculation of monthly payment amounts are estimates based on loan portfolio information gathered and for IBR payment amounts, expected income and family size. The taxable equivalent figure represents income that an individual would need to earn to pay off the federal loan balance at the conclusion of the 10 years of qualified PSLF payments. Annual Accrued Loan Forgiveness is the estimated value of the PSLF benefit that builds through the first year of participation in IBR under the Integrated Financial Plan GL Advisor will provide. Qualification for PSLF requires 120 ontime payments made under qualifying repayment programs. The value of the accrued or aggregate forgiveness amounts could vary based on the use of deferments or forbearances, income or family size changes and/or payment habits. Salary: Medical resident salaries are based on the averages determined and reported by the AAMC as of March 1, Post residency salary is estimated at $200,000. Salaries increase 3% annually. Adjusted Gross Income for calculation of IBR Payment amount assumes $3,000 of adjustments (reduction) to salary income. Tax Rates: Client s federal tax rate is 35% for the purpose of calculating tax savings related to deducting student loan interest payments from taxable federal income. The taxable equivalent amount of the PSLF benefit assumes a federal tax rate of 35% and a state tax rate of 5%. Your tax rate may vary. A special thanks goes out to the GL Advisors for helping put this wonderful overview together for our SOMA 3rd and 4th year students and for giving SOMA students an opportunity to achieve amazing savings through the services you provide.

8 Insurance Options for SOMA Medical School Graduates With graduation approaching, participation in most school health insurance programs may terminate before eligibility in a residency health plan is available (July 1, 2011), or a residency health plan may have a waiting period (up to 3 months) before becoming eligible for the residency health insurance plan. The SOMA health insurance plan can be used as a bridge for the current SOMA insured to continue health insurance coverage until they may become eligible for the residency health insurance plan. Those SOMA members covered under a school health plan that terminates at graduation can apply for the SOMA plan which will provide insurance coverage until eligibility is available under a residency health insurance plan. A second plan to consider is the SOMA group term life insurance plan which offers an affordable way to help cover financial responsibilities to be paid in the event of an untimely death from an accident or sickness. Benefits from $50,000 to $250,000 are available. Information and enrollment in the SOMA health or term life insurance plan can be accessed through the SOMA website

9 Well that wraps up this newsletter. Stay tuned for more up-dates about SOMA events to come! Check us out online at Feel free to contact me at if you have any questions. Best of luck to you all with school, rotations and applying to residencies! Stephanie Marcy, OMS III SOMA Director of Public Relations SOMA Board of Trustees: President Crystal Lenz Vice President & Webmaster-Nick Perkins Treasurer Jeremy Curtis Region I Trustee Jennifer Luo Region II Trustee-Jessica Barnes Region III Trustee-Daniel Nolan Region IV Trustee-Mona Amin Foundation Chairperson-Kathryn Miner Foundation Director-Matt Reynolds Membership Coordinator-Lauren Brankle Member-at-Large & Director of Minority Affairs Gloria Lopez SOMA National Board: Clinical Clerkship Coordinator: Crystal Scott Convention Coordinator: Lisa Marie Piwoszkin Director of Political Affairs: Phil Eskew Director of Public Health Jeffrey Whitener Foundation Associate Director of Scholarships & Grants: K. Adam Lundberg Foundation Associate Liaison: Vi Song Tring Foundation Associate Director of Financial Affairs: Natalie Wessel Director of Pre-SOMA: Robyn Young International Health Programs Director: Kristin Lynch OPP Coordinator: Andi Wenner Director of Research & Development: Joe Prinsen Programs & Benefits Coordinator: Heather Bruce Unity Campaign Task Force Director: Alicia Isom Director of Public Relations: Stephanie Marcy