Debt Management for
Dental Students
Jason DiLorenzo
Debt levels have more than tripled in the last 17 years
Changes in Student Debt Levels
~$203K
~$115k
~$50k
1993
2003
* Based on data collected by ADEA and GL internal student database
Changes in Student Debt Levels
- Confidential Document, Property of Graduate Leverage, LLC -
2011
Agenda
1. Federal Loan Basics
2. Federal Loan Repayment Options
3. Private Loan Repayment Options
4. Dental Case Studies
5. How to Calculate Payments
6. Review and Q & A
Key Takeaway: How recent and upcoming regulations will help address the
mounting debt burden facing many dental students.
Sources of Funding
High Rate Private
High Cost
To Borrower
Federal Loans: (Stafford, Grad PLUS)
•
•
Federal Stafford: Fixed Rate 6.8% (since
July 1st 2006)
•
Subsidized: government pays interest
during school and deferment
•
Unsubsidized: all interest accrues
Grad PLUS
Unsubsidized Stafford
Subsidized Stafford
Direct Graduate PLUS: Fixed Rate 7.9% (all
interest accrues)
Perkins
Private Loans:
•
Sometimes needed for Externships,
Internships, or Residencies
•
Interest rates vary
•
Margins have decreased but minimum credit
requirements have tightened
Low Rate Private
Grants/Scholarships
Low Cost
To Borrower
Key to student loan management is finding the right balance
between these two competing pressures. The right balance
$1,000 will change over time!
$1,000
Liquidity
$ 500
$ 150,000
$ 300,000
Total Cost of Your Student Debt
Competing Pressures
- Confidential Document, Property of Graduate Leverage, LLC -
Federal Loan Repayment Options
Ways to Postpone Payments:
•
Forbearance:
• NO SUBSIDY – All loans accrue interest.
•
Economic Hardship Deferment (EHD):
• FULL SUBSIDY – Unsubsidized accrue interest.
•
In-School Deferment:
• FULL SUBSIDY – Unsubsidized accrue interest
Ways to Make Full Payments:
•
Standard 10 Year Term
• NO SUBSIDY – Shortest term available
•
Prepaying
• Prepayment allowed without penalty on all federal repayment programs.
Federal Loan Repayment Options
Ways to Reduce Payments:
• Extended 25 Year Term:
• NO SUBSIDY
• Consolidated 30 Year Term:
• NO SUBSIDY
• Available for consolidated loans $60,000 or greater
• Income-Based Repayment (IBR):
• PARTIAL SUBSIDY
•
Pay As You Earn (ICR-A):
• PARTIAL SUBSIDY
• No loans before Oct. 2007 + loan post Oct. 2011
Partial Financial Hardship
• Limit monthly payment to 15% of discretionary income,
capped at 10-year standard payment
2012/2013: 10% (ICR-A)
Government Subsidy
• Subsidized interest not covered by reduced payment is
paid by government
• Subsidy is provided for maximum of 3 years
Taxable Loan Forgiveness
• After 25 years any outstanding balance is forgiven
2012/2013: 20 years (ICR-A)
IBR and ICR-A
Many Graduates Not Taking Advantage Of New Tax Breaks
Taxes during final year school:
1. Lifetime Learning Tax Credit
2. Tuition and fees tax deduction
3. Married Filing Jointly or Separately
Decision Process:
• Tax benefit of each option calculated
• Changes in subsidy benefit added back for final number
Savings opportunity immense – more stringent requirements.
PSLF – Public Service Loan Forgiveness
Federal program enacted by Congress in 2007
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
• New Employment Certification Form (released 2012)
Tax Free Forgiveness
Understand the Loss of Federal Benefits
%
Private or Grad PLUS Loan
7.9%
3%
7.5%
4.9%
?
Current
Interest Rate
Increase?
For illustrative purposes only. Assumptions based on good credit & sample lenders.
Private Loans or Federal Loans
- Confidential Document, Property of Graduate Leverage, LLC -
Pay Down Quickly
Private Loan
Credit Card
Debt
15%+
Grad PLUS
7.9% / 8.5%
Refinance to Lower
Interest Rate
Important Considerations
– Federal Loan Benefits: Evaluate loss of federal repayment
plans / forgiveness opportunities
– Fees: Application or origination fees may erode savings
potential
– Interest Rate: Evaluate rate difference and type: Variable vs.
Fixed
Solutions for High Rate Debt
Case Details
• 2013 graduate, unmarried, family size of one
• $260,000 total debt, all Federal debt ($159K Stafford / $101K Grad PLUS)
• $100,000 starting salary increasing by 3% annually
• high monthly expenses
Monthly Payments
ICR-A*
IBR*
Y1:
Y1:
$264
$396
Y10:
Y10:
$856
Y20:
$1,284
$1,303
Y20:
$1,955
Total Payments
$329,435
$504,340
25 Year Extended Term
$1,901
$570,295
30 Year Consolidated Term
$1,774
$638,513
3 Year Forbearance + 10 Year
Y4:
$3,757
$450,799
* Total payments under ICR-A and IBR include tax liability generated from forgiven loans.
Case #1
Present Value
Savings of ~$90k
* PV analysis includes tax liability and assumes 3% annual
increase in salary increase. Detailed assumptions available upon
request.
- Confidential Document, Property of Graduate Leverage, LLC -
Case Details
• 2013 graduate, married, family size of three (one child)
• $202,000 total debt
• $25,500 Subsidized Stafford and $136,500 Unsubsidized Stafford @ 6.8%
• $20,000 Grad PLUS @7.9% and $25,000 Private Loan @ 9.5%
• 1 year of general practice residency at $25,000, salary increases to $120,000
• Spouse salary of $60,000
Monthly Payments
Total Payments
IBR*
Y1:
$0
Y10:
$2,078
Y25:
$2,078
$334,185
ICR-A*
Y1:
$0
Y10:
$1,517
Y20:
$1,984
$342,963
25 Year Term
3 Year Forbearance + 25 Year
$1,286
Y4:
$1,553
* Total payments under ICR-A & IBR include tax liability generated from forgiven loans.
Case #2
$385,901
$466,025
Case #2Refinance 9.5% Private Loan
Total Paid $
$38,819
$31,820
9.5%
5.0%
Loan
Lowering interest rate on private loan by 4.5% saves
$7,000 in interest costs. Greater savings for larger
principle amounts.
Case Details
• 2013 graduate, unmarried, family size of one
• $96,000 total debt
• $80K Stafford @ 6.8%
• $8K Private @ 8.25%
• $8K Private @ 9.5%
• $130,000 starting salary increasing by 3% annually, NO FORGIVENESS
1st & 2nd Year Monthly Payments
Extra Cash Flow
10 Year Standard
$924
$0
IBR
$583
$350
ICR-A
$389
$500
Case #3 Targeting
Targeted Repayment Plan
Typical Repayment Plan
L
o
a
n
s
Consolidation – 4.75%
Non-payment
Stafford – 6.8%
Non-payment
Grad Plus – 7.9%
Non-pay
6.8%
7.9%
9.25%
Private Loan - 9.25%
Repayment Period
8 yrs
Effective Rate (APR) = 6.29%
*Assumes $168,000 in federal debt and $8,000 in private loans
Case #3 Targeting
4.75%
10 yrs
$11,675
0.5 yr
1 yr
5 yrs
7 yrs
9.5 yrs
Effective Rate (APR) = 5.69%
Savings of $6,566 earned in 28 months of
prepayment.
Targeting Private Loans
Total Paid $
$12,422
$11,775
$9,146
$8,485
10
YEARS
10
YEARS
15
MONTHS
9.5%
9.5%
w/$500 prepay
Case #3 Targeting
8.25%
28
MONTHS
8.25%
w/$500 prepay
All Returns Here Are After Tax
Returns
PLUS Loan
16%
8.1% Average
PLUS Return
S&P 500
8%
7.4% Average
S&P Return (A/T)
0%
1940
1960
1987
Sources: Yale Econ/Robert Shiller, Standard & Poor’s, Federal Reserve, Bloomberg
Case #3 - Should I Be Investing?
- Confidential Document, Property of Graduate Leverage, LLC -
2001
What every dental student with
loans should do:
1. Understand Your Debt
a) What kind of loans do I have? (Federal Stafford, GRAD Plus, Perkins, etc.)
b) Who is my lender? (Federal Direct, Federal through Private Lender, NonFederal Private Lender)
c) What are the interest rates on my loans? (fixed, variable, 6.8%, 7.9%, 8.5%,
etc.)
2. Position Loan for Appropriate Balance Between Liquidity and
Total Cost
a) Calculate monthly payment options and compare to monthly budget
b) Take advantage of “exceptions to the rule” – targeting and forgiveness
c) Evaluate refinancing opportunities
- Confidential Document, Property of Graduate Leverage, LLC -
What every dental student with
loans should do:
3. Prepare & File Taxes Advantageously
a) Preparation in fall of final year to understand tax implications for loan
subsidy programs
b) Understand the trade-off of filing jointly with spouse
c) File taxes in final year as appropriate
4. Manage your Financial Net worth
a) Properly allocate discretionary income
b) Only invest when returns exceed cost of debt and liquidity issues met
Jason DiLorenzo
415-722-8552
jdilorenzo@glAdvisor.com
If you have any questions or would like a personalized debt
assessment, please call or visit our website.
www.gladvisor.com
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Thank You
*The information in this presentation is for informational purposes only.
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