Getting Off to a Good Start Part II (Student Loans)

This post is a continuation of Getting Off to a Good Start Part I.

There is no doubt about it, dental school is expensive. So expensive that I’ve even written a post titled “Dental School Costs Too Much”. Nevertheless, if you are reading this post, you have probably already taken the plunge and are on your way to carrying more than a quarter million dollars of student loan debt.

Deciding how one will manage their student loans after dental school is typically one of the most pressing questions young dentists have. In general, it is recommended that a new graduate with a student loan obligation in excess of 1.5 times his expected gross income enter into an income-based repayment plan until a solid plan can be put in place. New graduates should choose either REPAYE or PAYE depending on their tax filing status (single, married filing jointly, or married filing separately) and their expected annual earnings during the next 36 months.

There are some notable differences between REPAYE and PAYE that you should be aware of and the details of both plans is beyond the scope of the blog post. However, let’s touch on five main points. REPAYE is an alternative to PAYE, IBR, and ICR. If you are graduating soon, you only need to concern yourself with PAYE and REPAYE as both plans are superior to IBR and ICR.

1. PAYE and REPAYE both limit your annual student loan payments to 10% of your discretionary income (Discretionary income = Gross income – 150% of the federal poverty line).
2. Only direct loans qualify for forgiveness.
3. At the end of both programs (PAYE and REPAYE) the outstanding balance is forgiven as “taxable income”.
4. Loans in PAYE are forgiven after 20 years and loans in REPAYE are forgiven after 25 years.
5. Payment calculations in PAYE can exclude your spouse’s income if you are married and file separately. REPAYE closed the married filing separately loophole.

Earnings during the first three years matter because the interest that accrues on these loans is significant and one of the benefits of REPAYE is an interest subsidy. However, one of the downsides to REPAYE is that the loan is forgiven after 25 years of on-time payments whereas PAYE is forgiven over 20 years of on-time payments. 20 years into your dental career should be close to peak earnings so those extra five years of payments will likely add up to some significant contributions to your student loan.

If you’re not sure what any of this means, you need to familiarize yourself with all of the IBR plans available. In general, if you are going to enter a residency program, enter into REPAYE to receive the interest subsidy to reduce the amount of interest that accumulates while you are a resident.