A Strategic Approach to Managing Student Debt: Best Practices for 2016

Medical Graduates

Florida Atlantic Universityby Jason DiLorenzoFounder & Executive Director

www.dwoq.com

Agenda

• Repayment Marketplace Overview

• Loan Forgiveness and Legislation Update

• Savings Case Studies

• The Refinancing Marketplace

• Training “Exit Interview”

• Taxes and Other Considerations

• Available Resources

• Q&A

Changes in Student Debt Levels

~$50k

~$89k

1993 2000

~$220k

2015

$300k

Debt levels have quadrupled in the last 20 years

3/30/2016 4

• Anesthesia: $276k

• Emergency Medicine: $231k

• Family Medicine: $161k

• IM, General: $180k

• OBGYN: $220k

• Pediatrics: $160k

• Psychiatry: $179k

• Surgery, General: $275k

• Surgery, Neuro: $520k

Physician Starting Salaries by Specialty

Higher Salaries Reduce Forgiveness Benefit

3/30/2016 5

Repayment Timeline After Graduation

Spring 2016: Graduation,

File 2015 Taxes

July 2016: Begin

Residency

Fall 2016:

End of Grace Period on

Stafford/Grad PLUS

IDR Renewal every 12 Months / Review

Profile and Legislative Changes

Training Exit Analysis:

PSLF / Standard / Refinance

Repayment Options Upon Graduation

• MOST COSTLY!

• MPH/other students CAN waive deferment if in residency

Forbearance / Deferment

• 15% of discretionary income

• Available if loans outstanding on Oct 1, 2007IBR

• 10% of discretionary income

• Available if no loans outstanding on Oct 1, 2007PAYE

• 10% of discretionary

• No borrowing restriction, no PFH requiredREPAYE

• Available with attractive underwriting profile, may be appropriate for some graduatesRefinancing

• Most Housestaff need payment relief during trainingStandard or

Extended Term

Forbearance: No Payment, No Problem?

Extended Term Payment:

10-Year Standard Payment:

Salary:

• Payment unmanageable during residency

• Deferment regulation changes necessitate forbearance

$1,961 $1,961 $1.961 $1,961

$1,154 $1,154 $1,154 $1,154

$ 50,000 $51,500 $53,045 $54,636

Monthly interest cost = $906

Total interest accrual = $43k+

No subsidy benefits

Not PSLF Eligible

$175k @ 6.21%

Pay As You Earn for 2016 Graduate

Extended Term Payment:

10-Year Standard Payment:

Salary: $50,000 $51,500 $53,045 $54,636 $175k @ 6.21%

PAYE Payment: $ 0 $ 57 $261 $262

Almost $7,000 in interest paid

Potential subsidy from undergrad, and no capitalization

PSLF Eligible

$1,154 $1,154 $1,154 $1,154

$1,961 $1,961 $1.961 $1,961

REPAYE: Pros and Cons

REPAYE not appropriate for high income households

Pros:

• 50% of accruing interest paid by government (Unsubsidized loans become partially Subsidized!)

• Previous payments made towards 120 for PSLF count

• Prorated for married borrowers: If John owes 30% of the combines total eligible loan debt and Jane owes 70% of the combined total eligible loan debt, John's calculated payment amount would be $120 and Jane's would be $280

Cons:

• Household income will be used regardless of how you file taxes

• 25 year taxable forgiveness for graduate students, not 20 like PAYE

• No cap to payments (10-year standard in IBR & PAYE)

How Revised Pay As You Earn Works:

~$200k

@ 7% $14k

$250/month x 12 months = $3000

$14,000 - $3000 =

$11,000 outstanding

$11,000 x 50% =

$5,500 savingsless than 4% effective rate in

training!

Requires 10% of discretionary income like PAYE, but

50% of accruing interest not charged when payments

don’t cover interest!

REPAYE for 2016 Graduate

Extended Term Payment:

10-Year Standard Payment:

Salary: $50,000 $51,500 $53,045 $54,636 $175k @ 6.21%

PAYE Payment: $ 0 $ 57 $261 $262

Almost $7,000 in interest paid

Roughly $20,000 not charged

- If uncertain of PSLF track, huge benefit

PSLF eligible

$1,154 $1,154 $1,154 $1,154

$1,961 $1,961 $1.961 $1,961

Switching Programs

• Borrowers are permitted to switch to/from

REPAYE

• Payments count towards PSLF

• Conversion requires “reduced payment”

forbearance, 1 month

• Capitalization will occur when exiting, but

impact minimal if PSLF achieved

Public Service Loan Forgiveness

Eligible Loans: Direct Stafford & Grad PLUS

(FFEL, Perkins, HPSL and LDS can be consolidated for eligibility)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

• Employment Certification Form is available, not mandatory• Will trigger transition to FedLoans as servicer

Approximately 80% of hospitals are non-profit

• Bans the practice of physician self-referral, there are loopholes• Some states have more restrictive interpretation than others• Specialties with higher likelihood of for-profit employment after training:

– Emergency Medicine– Anesthesia– Radiology

• Paths with higher non-profit opportunity:– Family Medicine/Primary Care– Pediatrics– Academic– States where non-profit hospitals more inclined to employ directly

Stark Law Overview and Impact

Non-profit “Setting” May Not Qualify as Public Service

10-Year Case Study: 2016 Graduate

Profile:• Debt - $220k• Specialty – OBGYN• PSLF Eligible, unsure of employer after training• Future expected income - $250k• Marries in 2019, spouse earns $125k

10 Year Case Study: 2016 Graduate

Obama 2016 Budget Proposal

Repayment Under Obama's Proposal

Income Driven Repayment Calculation

Limited to 10% of discretionary income

Cap on payments removed

Loan Forgiveness

10 Years if working in the Public Sector AND loan balance less than $57,500

20 years for borrowers with total

loan balance less than $57,500

25 years for borrowers with total loan balance greater

than $57,500

• Expansion of PAYE to all federal loan borrowers

• Removal of cap on payments (REPAYE)

• New cap on amount forgiven through PSLF

• $57,500 limit, based on max borrowing amount for independent undergrads

• Balances above $57,500 will not be forgiven until 20-25 years of participation

• Household income used for documentation instead of MFS (REPAYE)

•20 and 25 year forgiveness options to be tax-free (still waiting)

Income Documentation

If 2016 Graduate uses pay stubs only, payment will be based on inflated AGI

$0 tax return can result in $0 payment

- Without proper planning, this can add cost

Tax return remains preferred method of income documentation

Alternative Documentation in online application

• When selected, forms required to be mailed, delays processing

Married Filing Jointly/Separate: Case-by-Case

• Do I need to consolidate?

– PSLF and PAYE are available for Direct Loans only

– IBR available for FFEL loans but not PSLF eligible

– Perkins, HPSL, LDS (some don’t appear on NSLDS!)

• Option to choose servicer

– FedLoans is PSLF servicer

– Varying turnaround times for processing applications

– Varied standards for income verification (best to file tax return)

– Service considerations

• Servicer Errors

– Eligible loans not included in consolidation

– Wrong repayment plan implemented

– Incorrect advice regarding consolidation for forbearance,

IBR/PAYE/PSLF

Considerations for Loan Consolidation

You have 10 business days to make changes once

Loan Summary Sheet is issued

A Physician’s Fork in the Road

Considerations:

• Loss of subsidy/forgiveness benefits on Federal education loans

• Liquidity, as forbearance and deferment typically not allowed after refinancing

• Origination and other fees may erode savings

• Fixed vs. variable rate loan types have significant impact on long-term vs. short-term savings

• Your time horizon for paying off the particular debt

• You CAN refinance an already refinanced loan

Private RarketplaceTo Re or Not to Re: That is the Question

Opportunity:

• Lending marketplace increasingly crowded and highly competitive

• Transaction-focused, not consultative

• Rates can be competitive, fixed as low as 3.5%

• Available in training for some Housestaff

• For graduates with $75k or less in federal debt, PSLF likely holds little value, refinancing may make sense

1. Identify if refinancing is suitable!

• Debt-to-income ratio considered

• No negative credit history, min 680 score

• Adding co-signer can improve results

2. Review existing financial and credit

profile to determine if refinancing is available

3. Approach marketplace

• Work with an Advisor

• Deferment/Low payments in residency available

• Better rates available for shorter terms, but can you afford higher payment right after training?

4. Once terms and rates are quoted, select option

in the context of your liquidity needs

Recommended Refinancing Process

Training Exit Strategy

EXIT INTERVIEW

After 4 years of training, a graduating

resident contemplates the next step in

her career. How does loan forgiveness

impact the economics of working for a

non-profit?

Original Debt: $250,000

Debt after training: $308,000

Non-profit salary offer: $155,000

For-profit salary offer: $205,000

EXIT INTERVIEW

645,702.11

(77,175.54)

853,993.11

(435,303.98)

(600,000.00)

(400,000.00)

(200,000.00)

0.00

200,000.00

400,000.00

600,000.00

800,000.00

1,000,000.00

PV of Earnings in Years 5 - 10 PV Total Spent

Costs and Benefits of Career Opportunities

PSLF For-Profit (Standard 10 Year Payoff Amount)

$155,000.00

$205,000.00

$94,076.74

$-

$50,000.00

$100,000.00

$150,000.00

$200,000.00

$250,000.00

$300,000.00

Public/Non-Profit For-Profit

Base Salary Added Salary Equivalent for PSLF

Salary Equivalent Public VS Private

Assumptions: PAYE eligible. The taxable equivalent amount assumes a marginal federal tax rate of 20% and a marginal state tax rate of 5%.

Actual Public

Service Salary

Actual For-Profit

Practice SalaryAdditional from

Public Service

derived from

forgiveness

3/30/2016 27

Repayment Timeline After Graduation

Spring 2016: Graduation,

File 2015 Taxes

July 2016: Begin

Residency

Fall 2016:

End of Grace Period on

Stafford/Grad PLUS

IDR Renewal every 12 Months / Review

Profile and Legislative Changes

Training Exit Analysis:

PSLF / Standard / Refinance

Jason DiLorenzo

help@dwoq.com

www.dwoq.com

314.787.7399

Wishing You The Best of Luck With Your Career in Medicine

www.DWOQ.com

Doctors Without Quarters“til DEBT do us part…”

DWOQ Services

Personal Consultations: $250 ($400 for couples)

Review federal and private loan portfolio

Repayment options overview, including Income-Driven options and loan

forgiveness opportunities

Overview or completion of consolidation and repayment application

Review loans for refinancing opportunities

Tax, credit & legislative considerations overview

Assist in creating a budget

Income protection and financial goals (home/practice purchase, etc)

Develop a timeline of action items

Annual add-on service for $50 quarterly available Feb 15th

Refinancing Marketplace

Complimentary review of loans, savings opportunity, introduce partner,

rate/term selection consultation

• Disability Insurance protects your ability to earn an income• Residents are eligible for up to $5k/month in coverage• This helps hedge risk against losing all that education and training that a

doctor has spent learning over the past 10 years• Work with a broker, not an agent!• Group policies often not sufficient

– Taxable benefit– Not specific to your OWN occupation

• Coverage Considerations– Guaranteed Insurability– OWN occupation coverage

Income Protection: For YOUR Occupation

Income Protection: Coverage Comparison

Questions from Housestaff

• If I’m in IBR, is it possible that some or all of my federal

loans could not be PSLF eligible?

• Is it better to choose a deferment if I’m eligible for one?

• What happens to our loan debt if we die?

• Could you address Obama’s 2016 budget changes and

how, if implemented, they would affect those of us who

are already submitting paperwork for loan forgiveness

(e.g. is there a possibility that we would be grand-

fathered in through the original program)?

Loan Forgiveness – True Cost of Debt

4-Year Residency

0

500

1000

1500

2000

2500

3000

3500

Residency 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th

Standard Repayment IBR Payment PAYE Payment

$395,160

Standard

$164,590

IBR

$109,726

PAYE

Can I Buy a Home During Training?