Navigating the Seas of Student Debt: Choosing and Managing Your Loans
Date: March 9, 2018
Date: March 9, 2018
As a dental student or recent graduate, you’ve likely incurred some level of debt. According to the American Dental Association (ADA), in 2014, those of you who took out student loans had an average debt total of $247,227 upon graduation. A substantial number, but even more alarming when viewed in light of the $122,491 figure recorded just a decade earlier.
In 2011, only 11.2 percent of your contemporaries reported having no debt, with the highest percentage (18.3 percent) clustered in the $150,000 to $199,999 range. In the 2016 Transition eSurvey conducted among THE NEXTDDS user community, the highest percentage (22.2%) was in the $200,000 to $250,000 range. Thus, most young dentists are left with the quandary of how to deal with overwhelming loan balances in a manageable manner. That liability has the potential to hamper a young professional just entering the field and impact all their financial decisions, such as buying a home or practice.
“When applying for a practice loan, for instance, underwriters take into account a borrower’s debt obligations, including student loans, and the feasibility of him or her paying that amount back,” says John Collins, Managing Director at GL Advisor, an advisory firm in Waltham, Massachusetts that specializes in comprehensive financial planning for medical professionals.
Dealing with this new debt can be an onerous process if you do not educate yourself before you graduate on your options in paying off your loans. There are resources available to aid you in managing student debt while growing a thriving practice. The federal government, loan servicers and even financial planners can provide guidance and information. Once you've gained a head of steam on managing your student debt, you will have a clear conscience knowing that you won't run into any financial trouble, such as a loss of credit.
What Type of Loan Do You Have?
Research Your Debt Payment Options before You Meet with an Advisor
There are two broad types of federal student loans: Direct and FFEL (Federal Family Education Loan). Direct loans, such as those made under the Stafford, Grad PLUS and Federal Consolidation Loan programs, originate directly from the federal government. FFEL loans, which include Subsidized and Unsubsidized Stafford loans, are issued by private lending institutions (such as Bank of America or Sallie Mae) and are essentially backed by the federal government. (FFEL are sometimes referred to as “private” loans, but they are actually federal loans. In addition to federal and private loans, there are state loans available to students. For student-friendly descriptions of the loans available by individual state, visit www.collegescholarships.org/loans/state.htm.
Students may opt to take out a private education loan (see www.studentaid.ed.gov/types/loans/federal-vs-private) from a bank, credit union, state agency or a school. Be aware that the provisions in federal and private loans are different. Private loans might be underwritten with variable interest rates that may be higher than those of federal loans. For this reason, it is beneficial to apply for a private loan with a cosigner (usually a parent or guardian) even if you could qualify for the loan independently, because interest rates are normally based on the higher of the two signer’s credit scores. If your cosigner has a higher credit score than you, your loan would have a lower interest rate. Generally, federal loans carry lower interest rates that are fixed. Repayment of a private loan, in some instances, may be mandated to start while you are in school. Federal loan payments generally do not commence until six months after you graduate.
Starting in the academic year 2010-11, all Stafford and Grad PLUS loans were given only under the Direct Loan program from the federal government. (This change was part of the Health Care and Education Reconciliation Act of 2010.) However, some students may have taken out FFEL loans prior to that year that continue to be serviced.
Both types of federal loans offer a variety of repayment options. For instance, monthly payments may be based on a percentage of your household income (for example, if you are married, it is calculated on the dual income of you and your spouse) with that amount increasing as your income increases. According to the U.S. Department of Education’s website, payments can be a fixed sum or an amount that gradually increases over a 10- to 25-year time span if you apply for a “Pay as You Earn” (PAYE) or “Income Based Repayment” (IBR) plan. For information on PAYE, go to http://studentaid.ed.gov/repayloans/understand/plans/income-based, and for information on IBR, see http://studentaid.ed.gov/repay-loans/understand/plans/pay-asyou-earn. Mitchell D. Weiss, Adjunct Professor of Finance at the University of Hartford and author of Life Happens - A Practical Guide to Personal Finance from College to Career, advises students on making payments. “To the extent that you can make extra payments, definitely do so. But make sure that those payments get applied directly to your principal or total amount owed—and not applied to future scheduled payments that would have interest accrued,” Weiss says. “Never give lenders the gift of interest they have yet to earn.”
Be Careful with Deferments and Forbearances
Both deferments and forbearances permit the borrower to temporarily postpone or reduce payments, but the conditions for being able to do so differ. For example, a deferment is granted if the borrower is enrolled in a graduate fellowship program or is serving in the military, among other stipulations. While a deferment may be the right choice for you, note that deferments can come with a high price tag if your loan is not subsidized. In this case, when you defer your loan, any unpaid interest is added to the total amount of the loan, which means that interest is then calculated on that higher amount. Deferments are best when your inability to pay is short-term, such as temporary unemployment. The longer the deferment, the more your debt will snowball. Therefore, if your income will not increase after the deferment, you have a daunting amount of debt ahead of you. With an increased monthly payment to make and the same income you had before the deferment, you may be headed for years of financial straits. It is much better to make any payment you can afford during a deferment period—and at least the new interest that accrues. By doing so, you prevent the debt from becoming unmanageable. If your loan is subsidized, interest will not accrue while you are in deferment.
If the borrower does not qualify for a deferment, he or she may request a forbearance period during which payments are either reduced or suspended for up to a year. There are two types of forbearance: discretionary (approved by the lender) or mandatory (which the lender is required to grant under certain circumstances). An example of a discretionary forbearance would be the inability to pay due to illness or financial hardship. Participation in a dental internship or residency program would meet the criteria for a mandatory forbearance. As is the case with a deferment on an unsubsidized loan, interest will accrue during a forbearance period.
For students planning to go into public service, look into Public Service Loan Forgiveness. Under this plan, after ten full years of service, federal loans are forgiven. For more information, see http://studentaid.ed.gov/repay-loans/forgivenesscancellation/charts/public-service.
Dealing with Loan Servicers
Some firms work with loan servicers on behalf of clients. Dentists who want to go it alone and talk to loan servicers directly should bear in mind that the interests of the loan servicer and the borrower are not always aligned. Sometimes, a servicer may push an option that is less costly to the operations of the firm but is not the most advantageous route for the borrower, such as a deferment or forbearance. Do your due diligence, and do not rely only on what the loan servicer recommends. Consult with peers, CPAs, financial planners and other financial experts to ensure you reduce your loan costs as much as possible. Also, if you need a decision from your loan servicer, follow up promptly and routinely. You do not want to be in a position of last-minute desperation when you make this decision. If you ask that the loan servicer make a change in your repayment plan, or any other action, confirm and make sure the loan servicer follows through with your request. If you don’t feel the representative understands your request or is giving misinformation, respectfully ask to speak to a supervisor. Keep written notes whenever you speak to your loan servicer’s representative. Jot down the name of the person you spoke to and the date and time.
Also, save all correspondence from your loan servicer. Make sure your loan servicer has updated contact information in the event that you move or change your phone numbers or e-mail address. If you want to change your repayment template, request a forbearance or deferment or otherwise needs a question answered, contact your loan servicer or the organization the lender hires to monitor the loan. For federal loans, the U.S. Department of Education must approve the loan servicer. To find the loan servicer for a particular loan, go to the National Student Loan Data System at www.NSLDS.ed.gov and click on “Financial Aid Summary” page, where the name of the loan servicer can be found. If there has been a change in the loan servicing agent, you as the borrower must be notified.
Graduation from dental school is an exciting time. Yet many young dentists face the daunting challenge of paying off student loans while trying to get their practices off the ground. There is a wealth of information online that you should take advantage of before you reach out to advisors. Before you graduate, contact your lender and find out how much you owe, especially if you have deferred payments during school. Come up with a payment plan before “real world” life begins. As Weiss says, “Take advantage of that time before your first payment is due. Get your arms around what it is you owe.” Early planning and a good relationship with your loan servicer will help you balance your new financial situation with the exciting challenges of beginning your dental career.
Tips for working with your loan officer
1. Document all conversations.
2. Ensure your loan officer always has your latest contact information.
3. Be diligent in your follow-ups.
Some dental school graduates may opt for a loan consolidation that essentially bundles multiple loans into one. Direct federal loans (including PLUS loans from FFEL) can be consolidated. Beginning in January of this year, borrowers have the option of choosing a loan servicer to oversee both the consolidation application as well as service the loan, according to the American Dental Education Association (ADEA).
“Early planning and a good relationship with your loan servicer will help you balance your new financial situation.”