In the last episode, we walked through the Public Service Loan Forgiveness (PSLF) program.
It’s the most common way physicians get their loans forgiven.
But, once you decide to enroll in that program… you have to wrestle with the incredibly tough question of, which repayment plan should I choose?
In this podcast, we explore when, why, and how you should choose a given repayment plan.
Check it out and let Dave know what you think!
(Note: I outsource transcription efforts, please forgive in advance any grammatical errors. I just simply don’t have time to review it all)
Hey everyone this is Dave Denniston and welcome to the Freedom Formula for Physicians Podcast. Did you give the code red, did you give the code red?
Welcome to the freedom formula for physicians podcast with all about slashing your debt and taxes and creating a liberated lifestyle. And now, your host, with the love of fantasy books and funk and the hatred of running more than three miles; Dave Denniston.
Ok, so today we are going to be talking about the difference between IBR income base repayment and PER. So last week you guys we talked about PSOF and every thing going on there which is so cool so make sure to go back and check on that podcast out. Now the two main programs that we talked about that are best fir for many physicians have been income base repayment and pay as you earn. PER or Pay E as many people refer them to.
Now you guys basically at the end of the day they all accomplish the same goal right which is minimizing your student payment while you are in residency and fellowship and then paying back your student loans at a higher rate with more money once you are making more deal. Now here is what`s interesting both of these things require a partial financial hardship which basically means they want to know in comparing their student loan compared to a standard repayment.
Is it lower or higher than IBR or PER? And basically what they do is they take a look at discretionally income guidelines. So what are the poverty guidelines that are published by the government? IBR is fifteen percent of that discretionary income that the government defines what’s PER is only 10%. Now how do they know what to charge here?
How do they determine your income? Are they going to be looking at your student loans or are they going to be looking at how much of a car loan you have? Are they going to be looking at your kids? Are they going to be looking at your budget and the answer is no they are not going to be looking at your budget.
They are going to look at your tax return. So everything on your tax return is important if you truly one to go for debt forgiveness. You want to minimize your payments whether you are on IBR or PER your best thing you can do is to lower your taxable income. Because you are taking a snap shot of your income after your pretax production for your falling ??. after pretax reeducations for health savings account. After deductions for any active business losses or capital gift losses or any of that stuff.
Now also you guys this means that if you ended your residency offers in June and you started your first contract in July you would likely not start making higher payments until the following year. So for example let’s say you finished your residency in June of 2016, your hire payments aren’t going to take effects more than likely until January of 2017. More likely April or May or June, it all depends on when you first signed up. Now take into consideration that these payments, they don’t look at your overall debt loan, they don’t really look at your age or mortgage or car loan, none of that stuff. And this gets really interesting when you look at the bigger debt load picture.
Now I put in my workbook five steps to get out of debt for physicians it was in my main book the freedom formula for physicians ?? that I wanted to walk you guys through. Now what I did in this table I said this person is married, I said that they have no kids, I said that they have no spouse or ?? go on loans, that the original loans were 20 to 30000 dollars below the current loan amount and that industry was 6.8%, sounds familiar right? And what you could easily qualify for IBR loan on residency. What`s interesting is as you mum up your comp the calculator on the website doesn’t allow me to calculate the payment for a 200 000 dollar income level with IBR.
It says it doesn’t qualify. Well what`s interesting because remember that they don’t look at your loan amount in terms of determining your payment, they only look at your compensation. So for example at a 150 000 comp, a 150 000 dollars loan with IBR you are paying close to 16 00 dollars a month. With PER you are paying close to a thousand dollars a month ok. So that’s a 150 000 dollars compensation, a 150 000 dollars a loan amount. Now let’s take a look at another example; a 150 000 dollars compensation, same compensation doesn’t change. The loan amount is 250 000 dollars.
Now your loan isn’t a 150 it`s 250. Your payment doesn’t change is the same exact thing because your comp doesn’t change. So that’s 16 00 dollars a month is the same IBR, that`s 1000 dollars a month that’s the same with PER. Now what if your compensation does jump, you move from 150 to 200. Well we can guess on the IBR that that`s going to be 22 00 dollars a month because that’s what happens at 250 000 dollars a lone which still haven’t to do with the calculator. PER is as slightly less than 1500 dollars a month. So if you see this you guys there is huge difference between IBR and PER is nearly 600 dollars a month when you are making 150 grand. And it’s almost 700 dollars a month when you are at a 200000 dollar compensation level.
Can you imagine that? Can you see how IBR and PER it doesn’t change as and when the amount goes up. And remember this is all because is primarily dependent on income.
Now there is one big caveat here which is becoming less and less of a deal to originally have qualified for PER. You could not have any ?? that originated before 2007 however with a repay, which is something I am going to talk about in a further podcast this is changing you guys so is this something that you’re going to have to pay very close attention to. Let me just talk about the way things have been and will discuss a few trick here in another podcast.
Ok so what does all these have to do with loan forgiveness program? So let’s take a look at an example where we have two physicians; Dr. Jones and Dr. Smith and both of these guys they started the ?? at the very start of their residency. So they had an equal amount of debt coming out of med school.
We will see doctor smith he is in a residency for three years so he`s made 36 payments in his ??. he went right into practice. He is making a 150 grand a year. Meanwhile Dr. Jones is also made a residency for three years, he is also 36 payments in ?? and he is also just entered into practice. And he is making 200 000 dollars a year. But let`s examine the difference you guys of what would happen if each of them enrolled in IBR PER after start of residency.
So here is what happened; with Doctor Smith making a hundred and fifty thousand dollars if he was in PER he would be making lifetime payments of a hundred and thirty three grand for the rest of his career, for the remaining seven years of his career. Whereas PER is only about 90 000 dollars, 40 grand difference.
Now meanwhile Doctor Jones is making 250 000 dollars a year, his lifetime payment under IBR is hundred and six thousand with PER hundred and twenty four. So can you see how the more and more you make the bigger and bigger the difference between the two? And obviously the larger and larger you are on loan can you imagine the difference at 7% interest rate on 300 000 dollars you are compounding more and more interest especially as a resident. So it becomes bigger and bigger and bigger.
So just give me an example 250 000 dollars of loan 150 000 dollars of compensation, you would have paid that 190 000 dollars in PER. But that’s not all principled, a big chunk of that interest. So you would approximately have 225000 dollars worth of ?? versus IBR which is 265 with PER. So can you see the power of that you guys.
That’s why PER is superior to IBR. And again going through the same example where you have this same interest rate so you are paying back 1700 dollars a month over seven years you might have paid a hundred and twenty-four grand. And you have debt forgiveness of at least 250 000 dollars. Now if you consider guys right now this is tax free, 250000 dollars of debt forgiveness is worth at least 360 grand.
So you have to weigh one opportunity versus the other, you might have to look at a hundred thousand worth of compensation spread out over a few years. So even with IBR you guys you still have a huge amount of debt forgiveness. But PER is definitely better so here is my guideline, here is what I want you to think about.
Is if you aren’t sure, if you want to go into private practice or if you want to work for a hospital for the rest of your career what I would like you to do is to enroll at a minimum in IBR or possibly just go ahead and refinance your debt through one of the private lenders that we haven’t talked about. DRB and Link Capital, those guys.
Now meanwhile if you know you want to work for a big public hospital you don’t have to deal with private practice, absolutely go for PER because is going to be that much larger of a debt forgiveness for you. So definitely consider that and I would like to hear from you guys. Are you looking at a debt forgiveness program?
What are you weighing as considerations? Have you signed up of IBR or PER or did you refinance your debt? Why? So definitely make a comment send me email at email@example.com I would love to hear from you, I would love to hear your thoughts and as I mentioned things are changing here with these programs. We want to talk about repay, a new version of PER here in the future. Thank you so much for listening my name is Dave Denniston feel free to reach out anytime. Have a good one.
Hey this is Dave Denniston I hope you liked today`s episode. If you did hey please do me a favor and go to iTunes and give this five star review. We have to get those reviews on up so more people can discover how to slash their debt and their taxes and create a liberated lifestyle. As a matter of fact each month I am giving out a price package to one of our viewers for the month. So make sure to go to iTunes right now and place your review. Thanks so much and I will talk to you next time.