2. Formulate a Debt Strategy

I’ve scoured the internet and books for a magic debt formula, and frankly…there’s not one.  I was able to categorize the advice into 2 main strategies:

A.      Strategy 1:  Pay as little as possible on debts through Income driven repayment (IDR) like IBR, PAYE, REPAYE.  You can go to the VIN foundation to plug your loan values in to see which results in the smallest cost.  This enables you to save more for retirement, and hopefully not just buy the latest and greatest phone. 

–       Pros: Save more money, might pay less on loans over lifetime, better lifestyle at the beginning of your career

–       Cons: gambling on forgiveness,  might have a huge tax bill at the end of forgiveness, might pay more on loans than a focused approach, live with the emotional burden of debt longer

–       ONLY a good choice if you can save money!  GREAT choice if you are planning a career of Public Service as you may qualify for public service loan forgiveness after 10 years of qualified work (if government keeps the PSLF program).

–       Tony Bartels is a proponent of strategy on the Vin Foundation

–       You can go on VIN and use the Student Debt Calculator (even if you are not a VIN member) to evaluate the cost of the different plans (IBR, PAYE, REPAYE)

•        https://www.vin.com/studentdebtcenter/

–       NOTE:  If this is your strategy, it makes more financial sense to invest extra money rather than throw it at loans.  If your income dramatically increases to the point it looks like you might actually pay off the loans, it may warrant re-evaluation of your debt strategy.  

2. Strategy 2:  Pay as much as possible on loans, save after you pay them off. 

–       Pros: get to “financial freedom” faster, can invest more of your income after debts are paid, if paid off with “gazelle intensity” may pay less interest over life of loan

–       Cons: delays saving for retirement, hard to make ends meet and have a family

–       Dave Ramsey promotes this via the “Debt Snowball,” a strategy that involves paying down the smallest debts first to get motivated.   As you pay off each debt, you apply the payments to the next loan.   He also recommends delaying saving for retirement until debts are paid.   (https://www.daveramsey.com/dave-ramsey-7-baby-steps)  The White Coat Investor  - Unless doing PSLF or loans with interest 1-3% (not your typical federal loans), goal is paying off student loans within 5 years.  “Live like a resident” for the first few years as an attending.

Consider when making a plan:

·        Does the thought of your loans growing every month for 20+ years cause you stress?

·        Are you able to trust that “forgiveness” will actually occur?  Or do you think our government will end IDR and forgiveness?

·        Are you disciplined enough to save for the tax burden at the end of the forgiveness?

·        Does the feeling of carrying debt make you crazy?

·        If paying off loans, will you still contribute to employer matched retirement plans (aka free money)?

·        If you commit to paying it off, and life throws you a BIG curveball, will you be able to switch payment plans later?  If you switch plans, it risks your interest capitalizing (ie, interest added to the principal to increase the future interest) and the payment countdown restarting to the new plan. 

·        IDR plans must be renewed yearly with the loan servicer.   If you lapse utilize forbearance the interest may compound!  If you have something unexpected (like job loss), consider having servicer recalculate your payment instead of applying for forbearance!  Your IDR payment could be 0 if your income is low enough!  Capitalization of loans depends on the individual type of payment plan you are on (IBR, PAYE, REPAE).  If you are considering one of these plans, it warrants further research to make sure you understand what you are getting into!

Consolidation

–       Combines several student/parent loans into one bigger loan.  “The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent.” (http://www.finaid.org/loans/consolidation.phtml)

–       Pros:  one payment to one lender.  If you don’t already qualify, this can provide access to repayment plans other than the standard 10 year.

–       Cons: your overall interest rate may be higher! For my vet school loans, consolidation was of no benefit as all my loans have the same servicer and same interest rate.