MDNews - Minnesota

June 2015

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of their debt load but are sketchy on the details — the exact amount, the rate, and whether or not it's subsidized — of each loan. Normally a strong, six-figure student loan portfolio is comprised of several kinds of federal loans and possibly some private loans, all at interest rates that can vary significantly. Unless the pri- vate loans are at very low rates, I like to see those loans paid off first. Generally, the borrower of a government-backed loan can defer payments if he or she becomes unemployed, which is not the case with most private loans. Available Options The next step is to look at repayment options, which include the Standard Repayment Plan of 10 years of fixed monthly payments and variations on the standard plan that allow for gradu- ated or extended repayment. Reviewing both current income and the amount of interest that would be paid over the life of the loan makes it relatively simple to determine the benefit from either the extended or graduated repayment plan. T here is a lso a n Income -ba se d Repayment Plan (IBR), which is a little more difficult to evaluate. These plans calculate payment based on income and family size instead of a standard amor- tization method using the interest rate and amount of debt. These plans can substantially reduce the debt burden for both recent and future borrowers. There are several versions of IBR Plans, but all share three characteristics: 1) Monthly income payments are capped at a percentage of the borrower's discretionary income — typically 10 to 15 percent. 2) Loan length is limited to 20 to 25 years. 3) A remaining balance at the end of the loan term is forgiven and taxed as regular income. I have recommended using the IBR plan to many physicians. Physicians don't a lways begin ma king a lot of money and can't handle a standard 10-year repayment plan because the payments are too high — $300,000 of government debt at 6.8 percent equates to monthly payments of more than $3,000. For a resident making $50,000 per year, this is simply too much. However, IBR plans don't always make sense for higher earners. If your income exceeds what you owe, the IBR option won't work. It's possible you could reach the end of the payment period with no debt left to forgive, or you could end up paying off your debt too slowly, thus paying a lot more inter- est than necessary. Physicians who work at public or qualif ying nonprofit hospitals might also qualif y for Public Service Loan Forgiveness (PSLF). Under this option, payments are made and remaining debt may be forgiven at the end of the loan term, just as with a standard IBR plan, but there's one huge bonus — the forgiven amount is tax-free. These plans aren't a great fit for every- one, however. Paradigm is working with a young physician who is employed in a nonprofit hospital and whose income is in the $300,000 range. But he also owes nearly $300,000 of mostly medical school loans. He is eligible for PSLF. In his case, an income-based repayment plan combined with tax-free debt for- giveness won't leave anything to forgive. A more traditional 20-year standard repayment plan is a much better fit, as it allows him to save for some of his other goals while paying off his medical school debt. IBR and PSLF are available only to borrowers with federal student loans. These include the Stafford, PLUS, and consolidation loans under the Federal Direct Loan Program or the Federal Family Education Loan (FFEL) Program. Federal Direct Loans are issued by the Department of Education. FFELs were issued by financial institutions and guaranteed by the Department of Education, but on March 30, 2010, FFELs were eliminated by the Student Aid and Fiscal Responsibility Act, and the Department of Education became the sole issuer of federal student loans. Parent PLUS loans and private student loans are not eligible for IBR plans or PLSF. In addition, Parent PLUS loans and private student loans are typically higher-rate loans. For Federal Direct borrowers who took their first loan after September 30, 2007, the IBR plan is even more generous. Loans issued by the FFEL program are not eligible. Payments are capped at 10 percent of discretionary income and the loan term is capped at 20 years. A not her o p t ion i s ref i n a nc i n g through organizations such as SoFi and CommonBond. We've seen some loans refinanced through these organizations for rates as low as 3 percent. The biggest downside to refinancing is giving up the option to use one of the income- based repayment options. Refinancing works great as long as the employment situation remains stable. A Healthy Action Plan There is no one-size-fits-all remedy for student debt relief. Gaining a full understanding of your total debt load (student loans, credit card debt, home mortgage etc.) is key. A professional financial advisor can help you sort through the many available options to make a smart action plan tailored to your current financial situation. The sooner you start your repayment plan, the sooner you will be on the road to recovery from the heavy burden of debt. Bill Strand, Founder and Principal, has over 30 years of experience in the financial services industry, and founded Paradigm: Strategies in Wealth Management LLC in 1995. Strand has particular expertise work- ing with physicians, helping them not only achieve financial success but also devising creative strategies to preserve the wealth they have worked so hard to build for themselves and their families. Strand meets a lot of physicians who are extremely busy practicing medicine, but they have no investment plan for financial independence. Find out more at planparadigm.com or by contacting Strand at 763-201-1025, or via email at bstrand@ planparadigm.com. ■ M D N E W S . CO M ■ MD NEWS Minnesota | 1 1

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