A Strategic Approach to Managing Student Debt: Best Practices for 2016 Medical Graduates

Transcription

1 A Strategic Approach to Managing Student Debt: Best Practices for 2016 Medical Graduates Florida Atlantic University by Jason DiLorenzo Founder & Executive Director

2 Agenda Repayment Marketplace Overview Loan Forgiveness and Legislation Update Savings Case Studies The Refinancing Marketplace Training Exit Interview Taxes and Other Considerations Available Resources Q&A

3 Changes in Student Debt Levels $300k ~$220k ~$50k ~$89k Debt levels have quadrupled in the last 20 years

4 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

5 Repayment Timeline After Graduation Spring 2016: Graduation, File 2015 Taxes Fall 2016: End of Grace Period on Stafford/Grad PLUS Training Exit Analysis: PSLF / Standard / Refinance July 2016: Begin Residency IDR Renewal every 12 Months / Review Profile and Legislative Changes 3/30/2016 5

6 Repayment Options Upon Graduation Forbearance / Deferment IBR MOST COSTLY! MPH/other students CAN waive deferment if in residency 15% of discretionary income Available if loans outstanding on Oct 1, 2007 PAYE 10% of discretionary income Available if no loans outstanding on Oct 1, 2007 REPAYE 10% of discretionary No borrowing restriction, no PFH required Refinancing Standard or Extended Term Available with attractive underwriting profile, may be appropriate for some graduates Most Housestaff need payment relief during training

7 Forbearance: No Payment, No Problem? 6.21% Salary: $ 50,000 $51,500 $53,045 $54, Year Standard Payment: Extended Term Payment: $1,961 $1,961 $1.961 $1,961 $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

8 Pay As You Earn for 2016 Graduate 6.21% Salary: $50,000 $51,500 $53,045 $54, Year Standard Payment: Extended Term Payment: $1,961 $1,961 $1.961 $1,961 $1,154 $1,154 $1,154 $1,154 PAYE Payment: $ 0 $ 57 $261 $262 Almost $7,000 in interest paid Potential subsidy from undergrad, and no capitalization PSLF Eligible

9 Pros: Cons: REPAYE: Pros and Cons 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 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

10 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 7% $14k $11,000 x 50% = $5,500 savings less than 4% effective rate in training!

11 REPAYE for 2016 Graduate 6.21% Salary: $50,000 $51,500 $53,045 $54, Year Standard Payment: Extended Term Payment: $1,961 $1,961 $1.961 $1,961 $1,154 $1,154 $1,154 $1,154 PAYE Payment: $ 0 $ 57 $261 $262 Almost $7,000 in interest paid Roughly $20,000 not charged - If uncertain of PSLF track, huge benefit PSLF eligible

12 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

13 Public Service Loan Forgiveness Eligible Loans: Direct Stafford & Grad PLUS (FFEL, Perkins, HPSL and LDS can be consolidated for eligibility) Specific requirements: Borrower must make 120 qualifying payments on a Federal Direct 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 trigger transition to FedLoans as servicer Approximately 80% of hospitals are non-profit

14 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

15 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

16 10 Year Case Study: 2016 Graduate

17 Obama 2016 Budget Proposal Repayment Under Obama's Proposal Income Driven Repayment Calculation Loan Forgiveness Limited to 10% of discretionary income Cap on payments removed 10 Years if working in the Public Sector AND loan balance less than $57, years for borrowers with total loan balance less than $57, years for borrowers with total loan balance greater than $57,500 Expansion of PAYE to all federal loan borrowers Removal of cap on payments (REPAYE) New cap on amount forgiven through PSLF $57,500 limit, based on max borrowing amount for independent undergrads Balances above $57,500 will not be forgiven until years of participation Household income used for documentation instead of MFS (REPAYE) 20 and 25 year forgiveness options to be tax-free (still waiting)

18 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

19 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 Considerations for Loan Consolidation 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

20 A Physician s Fork in the Road

21 To Re or Not to Re: That is the Private Question 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

22 Recommended Refinancing Process 1. Identify if refinancing is suitable! 2. Review existing financial and credit profile to determine if refinancing is available Debt-to-income ratio considered No negative credit history, min 680 score Adding co-signer can improve results 3. Approach marketplace 4. Once terms and rates are quoted, select option in the context of your liquidity needs Work with an Advisor Deferment/Low payments in residency available Better rates available for shorter terms, but can you afford higher payment right after training?

23 Training Exit Strategy

24 EXIT INTERVIEW After 4 years of training, a graduating resident contemplates the next step in her career. How does loan forgiveness impact the economics of working for a non-profit? Original Debt: $250,000 Debt after training: $308,000 Non-profit salary offer: $155,000 For-profit salary offer: $205,000

25 EXIT INTERVIEW 1,000, Costs and Benefits of Career Opportunities 853, , , , , , (200,000.00) PV of Earnings in Years 5-10 (77,175.54) PV Total Spent (400,000.00) (435,303.98) (600,000.00) PSLF For-Profit (Standard 10 Year Payoff Amount)

26 Salary Equivalent Public VS Private $300, $250, Additional from Public Service derived from forgiveness Actual For-Profit Practice Salary $200, $94, $150, $100, $155, $205, $50, $- Actual Public Service Salary Public/Non-Profit Base Salary Added Salary Equivalent for PSLF For-Profit Assumptions: PAYE eligible. The taxable equivalent amount assumes a marginal federal tax rate of 20% and a marginal state tax rate of 5%.

27 Repayment Timeline After Graduation Spring 2016: Graduation, File 2015 Taxes Fall 2016: End of Grace Period on Stafford/Grad PLUS Training Exit Analysis: PSLF / Standard / Refinance July 2016: Begin Residency IDR Renewal every 12 Months / Review Profile and Legislative Changes 3/30/

28 Wishing You The Best of Luck With Your Career in Medicine Doctors Without Quarters til DEBT do us part Jason DiLorenzo

29 DWOQ Services Personal Consultations: $250 ($400 for couples) Review federal and private loan portfolio Repayment options overview, including Income-Driven options and loan forgiveness opportunities Overview or completion of consolidation and repayment application Review loans for refinancing opportunities Tax, credit & legislative considerations overview Assist in creating a budget Income protection and financial goals (home/practice purchase, etc) Develop a timeline of action items Annual add-on service for $50 quarterly available Feb 15th Refinancing Marketplace Complimentary review of loans, savings opportunity, introduce partner, rate/term selection consultation

30 Income Protection: For YOUR Occupation Disability Insurance protects your ability to earn an income Residents are eligible for up to $5k/month in coverage This helps hedge risk against losing all that education and training that a doctor has spent learning over the past 10 years Work with a broker, not an agent! Group policies often not sufficient Taxable benefit Not specific to your OWN occupation Coverage Considerations Guaranteed Insurability OWN occupation coverage

31 Income Protection: Coverage Comparison

32 Questions from Housestaff If I m in IBR, is it possible that some or all of my federal loans could not be PSLF eligible? Is it better to choose a deferment if I m eligible for one? What happens to our loan debt if we die? Could you address Obama s 2016 budget changes and how, if implemented, they would affect those of us who are already submitting paperwork for loan forgiveness (e.g. is there a possibility that we would be grandfathered in through the original program)?

33 Loan Forgiveness True Cost of Debt 4-Year Residency $395,160 Standard $164,590 IBR $109,726 PAYE Residency 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th Standard Repayment IBR Payment PAYE Payment

34 Can I Buy a Home During Training?