Student Debt Management

1. Student Debt Management David Anderson, D.O. Capt, USAF, MC

2. Disclaimers • This presentation is solely educational in nature and is not intended to give individuals specific advice as to what to do for any situation. • The author is not a financial professional. • The author is not responsible for any gains or losses of those who read this presentation. • The author does not endorse any particular product, investment, or institution. • The views expressed herein are solely the opinion of the author and do not necessarily represent the views of the Air Force, Department of Defense, DFAS, SAMMC, SAUSHEC, or any financial institution.

3. How This Presentation Goes • These things exist • This is how these things work • These are the risks and benefits of these things • This is what I wish I knew when I graduated med school and started military service • I will not specifically tell you to take any given action over another

4. Before you do anything with your family’s money: • Consult your family • Consult your financial advisor • Your bank may have this available for free • Ensure they have a fiduciary relationship (only to your best interest and not their own) • Thoroughly read any fine-print regarding any rules/regulations, fund prospectus, etc • Double and triple-check your math • Ensure you’re ready to follow through behaviorally

5. Introduction • While we don’t have as much as non-military physicians, some of us still have 6-figure debt from undergrad or from spouses’ education • Student loans can be very intimidating, especially with the rubbish 6% interest rates • The huge array of options for repayment can almost be as intimidating as the numbers!

6. Introduction • Debts should be viewed as reverse investments • If you were assured of making 6.8% on a $150,000 investment, you’d do it…right? • Student debt has many attributes which help it be more manageable than others • Make sure the math matches your behavior • Run your numbers and research ALL your options

7. Getting Started • One could argue the federal student loan system was designed for: • 2- to 4-year degrees from state schools • Low- to moderate-income earners • Debtors actually being able to get a job out of school and paying them back • Accepting a low-paying government or non-profit job if in a whole lot of debt

8. Getting Started • Doctors do this kind of weirdly… • Longer time before being able to pay them back yields more interest capitalization • Have you SEEN the price of med schools? • Making low incomes with high amounts of debt… • …then making very high incomes while eligible for programs intended for low incomes • Thanks to ROTC, the Academies, HPSP, and USUHS, this is not as big a problem for us as others • However, given higher income on the outside, it’s pretty much a wash in the end for most of us

9. Getting Started • Consolidation is likely the best option if you have federal loans or high interest rates (> 6.5%) • This disqualifies you from IDR/PSLF if you use a non-federal loan servicer • Previous PSLF-eligible payments reset at consolidation • Both spouses’ incomes are included for income-driven repayments if filing jointly • It may benefit you to file separately in this situation

10. The Three Basic Questions • How little can I get away with paying now, while I’m broke? • Income-driven repayment • Do I have to pay the whole thing back? • Public Service Loan Forgiveness • If I do have to pay the whole thing back, how can I keep it as low as possible? • Interest subsidization and re-financing

11. Student Loan Management Flowchart Med School Graduation Consolidate all possible loans to be eligible for Federal programs Federal Any private Get quotes from various lenders Re-finance private loans at lowest rate Calculate income-driven repayment(RePAYE, PAYE, IBR, ICR) Think you’ll be in military or work for 501(c)(3) for 10 years? Can’t afford RePAYE Usually best Lowest payment (prob PAYE) + PSLF No Yes Refinance or forbear RePAYE Residency/Fellowship Graduation Re-finance all loans to lowest rate Will you still be in military or work for 501(c)(3) for 10 years? I’m a quitter; show me the money! Lowest payment + PSLF for total 10 years Live like a resident until all loans are GONE! HOO-AH! (I’m stuck here forever…) Adapted from Dr. James Dahle, “What Should I Do With My Student Loans?” 7 March 2016. http://whitecoatinvestor.com/what-should-i-do-with-my-student-loans/

12. Repayment Plans • For federal loans, an income-driven plan such as IBR, ICR, PAYE, or RePAYE is almost always the best option • Based on AGI, family size, and state poverty level • Payment usually not more than 10-yr standard • Interest may be subsidized or accrue without capitalizing (i.e. adding to the principal, paying interest on interest) • Can count toward PSLF (even if $0) • Spouse’s income/debt not counted if filing separately • Always counted in RePAYE

13. Repayment Plans • A standard (10-year) plan may work for lower debts or higher incomes • Some income-driven plans revert to the 10-year standard amount if your income is high enough • At that point, you should pay more than the minimum and consider private refinancing for lower interest

14. Repayment Plans • Extended plans (25+ years) are generally a very bad idea due to the very high amount of capitalized interest • While the quoted terms for the IDR plans are 20-25 years, it may not get that far due to your high income • The non-IDR extended plans are ineligible for PSLF • This is a horrid, horrid racket at rates above 6% • Seriously, don’t even think about them

15. Forgiveness Options • Public Service Loan Forgiveness (PSLF) is available for 501(c)(3) and government employers, including the military • You must certify this at the beginning of your repayment • May be able to do it retroactively • Consolidation resets count to 0; if you have made PSLF-eligible payments, consider not reconsolidating those loans • After 120 qualifying payments (including income-driven $0 payments), the remaining balance is forgiven • Forgiven balance from PSLF does NOT count as taxable income • Other forgiveness, e.g. if you hit the term cap on IDR, does count

16. The Standard Plans

17. The Income-Driven Plans Income must be recertified once annually. Poverty lines are based on state and family size. For IBR/PAYE: If payment > 10-yr std, borrower remains in program, but payment becomes 10-yr std and interest capitalizes https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment.pdf

18. That’s…Interesting • Capitalization = adding of accrued interest onto the principal value • Basically, you begin paying interest on interest • Most non-student loans do this (i.e. compound interest) • No capitalization does NOT equal no interest or “freezing;” it’s still there, just not generating interest of its own • Interest always accrues whether it capitalizes or not • Exceptions: subsidized loans for first 3 years, economic hardship deferment, deployment deferment

19. That’s…Interesting • The only way to get out of paying interest is to have loan forgiven • Capitalizes when leaving any program, e.g. refinancing • Capitalizes in PAYE/IBR if no longer have PFH (PAYE: max +10%) • Payments are processed so as to pay off interest first • If you have accrued a lot of unpaid interest, it may take many payments before you even start eating away at the principal • Up to $2,500 of student loan interest is tax deductible • MFJ if AGI < $160,000, single if AGI < $80,000; MFS ineligible

20. Choosing a Plan in Residency • Use the Dept of Ed’s Repayment Calculator [Link] • Recognize that your Partial Financial Hardship (PFH) will probably not last after residency • PFH = IBR or PAYE monthly payment < 10-year standard • Required to start IBR/PAYE, but not required to stay in it • For most residents, do whatever gives the best balance of keeping options open and lowest monthly payment • More money for retirement, etc while the interest is being subsidized or at least not capitalizing • If you can afford RePAYE and might not do PSLF, it is usually best • If you plan on doing PSLF or can’t afford RePAYE, consider PAYE

21. Choosing a Plan in Residency

22. Choosing a Plan After Residency • Strongly consider PSLF if: • You will be in the military for 10 years • You will still have high debt upon leaving, and: • You are willing to work for the gov’t or a 501(c)(3) • No other job will pay you so much to make up the difference for the remaining years • Example: after 7 years in military, if you’d still have $60k after 10 years of PAYE/PSLF (3 more years to pay) • If > $20k/yr more after taxes, take the non-501(c)(3) job and re-fi • If you’d get more from forgiveness, take the 501(c)(3) job and PSLF

23. Choosing a Plan After Residency • If not doing PSLF: • Refinance your loans with a private servicer • SoFi, Darien Rowayton Bank (DRB), Common Bond, Lend Key, Earnest, Credible, LinkCapital, etc • Get several offers and compare them against one another • Variable APRs in 3s, fixed in 4s (as of Jul 2016) • Make a goal to pay it off in 5 years or less • If you can, consider a variable APR, as they tend to be lower, and variation is smaller over a shorter interval • Otherwise, choose the lowest fixed rate possible • Always, always, always double-check your math

24. …so I can just not pay all that money? • Residents are in a particular bind due to the high amount of debt and lower income compared to most other debtors • However, our non-profit jobs are comparatively high-paying • Hence, the “doctor’s loophole” of a high-paying 501(c)(3) job while doing PAYE + PSLF can be very useful • Income-driven plans are very low in residency • Once you are making attending dollars, the monthly payment cannot be more than the 10-year standard amount with PAYE • If you have a 6-year long GME course, you will most likely only be making 3-4 years of full payments before the it’s written off • The big question is: will they let us keep PSLF?

25. Student Loan Management Flowchart Med School Graduation Consolidate all possible loans to be eligible for Federal programs Federal Any private Get quotes from various lenders Re-finance private loans at lowest rate Calculate income-driven repayment(RePAYE, PAYE, IBR, ICR) Think you’ll be in military or work for 501(c)(3) for 10 years? Can’t afford RePAYE Usually best Lowest payment (prob PAYE) + PSLF No Yes Refinance or forbear RePAYE Residency/Fellowship Graduation Re-finance all loans to lowest rate Will you still be in military or work for 501(c)(3) for 10 years? I’m a quitter; show me the money! Lowest payment + PSLF for total 10 years Live like a resident until all loans are GONE! HOO-AH! (I’m stuck here forever…) Adapted from Dr. James Dahle, “What Should I Do With My Student Loans?” 7 March 2016. http://whitecoatinvestor.com/what-should-i-do-with-my-student-loans/

26. Most Likely Scenario for Most Residents Med School Graduation Consolidate all possible loans to be eligible for Federal programs Federal Any private Get quotes from various lenders Re-finance private loans at lowest rate Calculate income-driven repayment(RePAYE, PAYE, IBR, ICR) Think you’ll be in military or work for 501(c)(3) for 10 years? Can’t afford RePAYE Usually best Lowest payment (prob PAYE) + PSLF No Yes Refinance or forbear RePAYE Residency/Fellowship Graduation Re-finance all loans to lowest rate Will you still be in military or work for 501(c)(3) for 10 years? I’m a quitter; show me the money! Lowest payment + PSLF for total 10 years Live like a resident until all loans are GONE! HOO-AH! (I’m stuck here forever…) Adapted from Dr. James Dahle, “What Should I Do With My Student Loans?” 7 March 2016. http://whitecoatinvestor.com/what-should-i-do-with-my-student-loans/

27. Path for Higher Debts, Lower Incomes Med School Graduation Consolidate all possible loans to be eligible for Federal programs Federal Any private Get quotes from various lenders Re-finance private loans at lowest rate Calculate income-driven repayment(RePAYE, PAYE, IBR, ICR) Think you’ll be in military or work for 501(c)(3) for 10 years? Can’t afford RePAYE Usually best Lowest payment (prob PAYE) + PSLF No Yes Refinance or forbear RePAYE Residency/Fellowship Graduation Re-finance all loans to lowest rate Will you still be in military or work for 501(c)(3) for 10 years? I’m a quitter; show me the money! Lowest payment + PSLF for total 10 years Live like a resident until all loans are GONE! HOO-AH! (I’m stuck here forever…) Adapted from Dr. James Dahle, “What Should I Do With My Student Loans?” 7 March 2016. http://whitecoatinvestor.com/what-should-i-do-with-my-student-loans/

28. Other Non-Student Debts • Debts such as credit cards and personal loans should always be paid down as quickly as possible • Goal should be always to pay the full balance every statement to avoid any interest penalty • Credit cards should only be used for rewards programs and only if you already have the cash to pay it off • Minimum monthly payments are often hardly enough to cover the interest accrued each month

29. Other Non-Student Debts • Borrowing on margin, e.g. at a perceived lower rate and term than you could earn for years of compound interest, is inherently risky • Some people do this in med school to fund tax-sheltered retirement accounts, e.g. TSP, IRA, 401k, etc • The math might support having done this with student loans, given their mitigating factors and the tax-sheltered earnings • Given the relatively fragile financial state of a resident, this seems like a pretty bad idea • Inviting any debt at this point is a pretty bad idea as it is

30. Other Non-Student Debts • A common method is to pay off the smallest debt first, then add that payment to the next smallest, and so on • The Dave Ramsey “snowball” plan • The math may or may not support this, but it’s a simpler behavior to implement • Again, debt can be viewed as a backwards investment • If you could invest $2,000 and be assured of a 14% APR gain, you’d make it • Hence, “investing” that $2,000 to pay off that horrible credit card ASAP can save you hundreds

31. Other Non-Student Debts • The Servicemembers Civil Relief Act (SCRA) is useful for reducing interest rates on debts acquired before entering active duty • Loans, credit cards, etc • You may be refunded any past interest you paid over the reduced amount • See your bank’s website as to how to furnish them the necessary documentation (usually EAD order) • For more information: [Link]

32. Other Non-Student Debts • Mortgage debt, while it also has some mitigating factors, is still debt • Mortgage interest and real estate tax are deductible • If you do decide to take out a mortgage (different lecture), minimize your waste • Shortest term, lowest interest rate (e.g. 15-yr fixed) • Think twice about what you can/should actually afford • Financing a car with a negative 6-figure net worth is a very bad idea • Adding on debt to acquire a depreciating asset…? • Buy an inexpensive used (pre-depreciated) car with cash

33. What About the Emergency Fund? • It is generally recommended to have 3-6 months’ expenses set aside for emergencies as cash • However, it is arguable that debt is the emergency • Emergency credit is generally easy to obtain • Student debt (while still very bad) has mitigating factors which personal loans, car loans, credit cards don’t have • Consider downsizing the emergency fund in order to eliminate your non-student debts • “Live like a resident”

34. Before you do anything with your family’s money: • Consult your family • Consult your financial advisor • Your bank may have this available for free • Ensure they have a fiduciary relationship (only to your best interest and not their own) • Thoroughly read any fine-print regarding any rules/regulations, fund prospectus, etc • Double and triple-check your math • Ensure you’re ready to follow through behaviorally

35. Questions? (summary on next slide)

36. Summary • A good first step is to consolidate all possible loans into ones eligible for Federal programs • Refinance private loans at med school graduation and again at GME graduation • An income-driven repayment plan is almost always the best choice for most residents • Use the Dept of Ed’s Repayment Calculator: [Link]

37. Summary • Generally, the best pathways are: • Short GME courses, lower debts, less military time: • RePAYE while in training • Private refinance to lowest rate with a maximum 5-year plan • Longer GME courses, higher debts, or committed 10 years of military or government/non-profit employment: • RePAYE or PAYE while in training to lowest payment • PSLF after 10 years of payments • RePAYE during residency is usually the best mix of low payments, reduced interest, and flexibility for future plans

38. References and Useful Links • Dahle, James. The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing. [Link] • Medical Special Pays. Air Force Medical Service Knowledge Exchange. [Link, CAC] • Servicemembers Civil Relief Act. US Dept of Defense. [Link] • 2016 Military Pay Chart. Defense Finance and Accounting Service (DFAS), US Dept of Defense. [Link] • Public Service Loan Forgiveness. US Dept of Ed. [Link] • Income-Driven Payment Plans. US Dept of Ed. [Link] • Loan Repayment Programs. US Dept of Ed. [Link] • Fund Comparison Matrix. Thrift Savings Program. [Link] • IRS Withholding Calculator. Internal Revenue Service. [Link] • Credits and Deductions for Individuals. Internal Revenue Service. [Link] • Personal Financial Management and Taxes. Military OneSource, US Dept of Defense. [Link] • Bostock, Carter, and Tse. “Is It Better to Rent or Buy?” The Upshot, New York Times Interactive, 2014. [Link] Military OneSource is provided by the Department of Defense at no cost to active duty, Guard, and Reserve service members (regardless of activation status), and their families. It is a virtual extension of installation services. Visit Military OneSource today or call 800-342-9647.