According to the American Dental Association (ADA), a typical dental school education costs $41,711 to $75,161 per year (those averages don’t including living expenses). And the American Dental Education Association estimates that the average indebted dental student in 2019 graduated with $292,169 in dental student loans.
Perhaps even scarier, four in five dental students graduate with debt. Sadly, those massive debt profiles do not even tell the full story.
Many dentists have to borrow even more after obtaining their DDS or DMD for tuition and fees during residency or other postgraduate specialty training.
To top it off, compound interest growth from forbearance and deferment during this training can easily result in a $400,000 to $600,000 student loan balance before newly minted dentists even earn their first “real” paycheck.
Pardon the pun, but dental student loans are drilling the future of the profession. In this article, we’ll explore why and discuss the best loan repayment options for dentists.
How dental student loans can grow to massive sums
The best way to visualize the educational debt problem facing dental students is with an example. Assume Tim graduates from a private out-of-state dental school without any grants or scholarships. After tuition, fees, and living expenses, he needs to borrow $75,000 each year over the four year program.
Most of his loans will be unsubsidized meaning that the interest accrues every year he’s in dental school at an average interest rate of 7% interest (the interest rates on federal student loans vary each year). I estimate his balance will be approximately $330,000 at graduation, of which $30,000 is accrued interest.
Now, Tim decides to complete a post-graduate program in pediatric dentistry with a two-year cost of $20,276. Because Tim earns a low stipend, he decides to use forbearance for his student loan balance. His dental student loans now grow at a compound interest rate of 7%, and he adds further loans to the total balance.
Now Tim’s loan balance stands at $424,443.66. Keep in mind, this massive sum assumes he has no undergrad debt. If Tim went to a moderately priced four-year college and came out with $50,000 of student loan debt from that degree program, the debt would be over $500,000 in total.
Confusion leads to many dental loan repayment mistakes
In my student loan consulting business, I’ve heard high income dentists say that they decided to join an Income-Driven Repayment plan, simply because they hoped they would receive some form of student loan forgiveness. Unfortunately, most dentists do not understand the consequences of that forgiveness.
Dental incomes are low enough after taxes that it’s very difficult to pay down a huge balance rapidly. However, they are also high enough that monthly income based payments are large. Therefore, most balances will eventually be repaid over 15 to 20 years before they’re eligible for forgiveness programs.
If, by some chance, there’s a balance remaining to be forgiven, it could be treated as taxable income. Due to COVID-19, taxes on loan forgiveness are currently suspended. But that suspension expires on December 31, 2025. That means if you receive forgiveness in 2026 or beyond, the IRS could expect a balloon tax payment on what could be hundreds of thousands of dollars.
Additionally, the pain of deferred gratification means many dental school graduates make a few large purchases a few months into receiving their first large paycheck. These income and spending realities further reduce the ability of dentists to pay large sums towards their debt.
IDR plans are not all created equal
Most dental school grads will use the Income-Driven Repayment (IDR) program recommended by their financial aid office. Let’s go back to Tim from our earlier example. His financial aid officer told him to use the REPAYE plan because “that’s what everybody else is doing. “
We will also assume that he got married during his pediatric dentistry program and started a family. He and his wife have 2 children together and are not planning to have any more. To simplify the modeling, we’ll say his wife stays home with the kids and does not earn an income or have student debt herself.
We also assume that he starts out at $196,000 in total compensation, which is the national media for pediatric dentists according to PayScale. To account for increasing earnings over time, let’s say Tim’s pay grows at a rate of 3% per year.
Remember that Tim decided to use the REPAYE plan because of an hour meeting with his financial aid officer. In my experience, financial aid officers are better trained in obtaining loans rather than giving advice on student loan repayment options for dentists.
In addition to the REPAYE plan, Tim could choose between the PAYE plan, the Standard 10-Year plan, and private refinancing. We’ll assume that Tim would owe a combined federal and state marginal income tax rate of 40% on forgiveness. Here are the total costs below.
Notice that the total cost of repayment for Tim’s dental student loans is over $773,000 DOLLARS under the REPAYE plan. That is the highest cost out of any of his available options. He wouldn’t be able to join old IBR if he was a new borrower after July 2014.
Best loan repayment options for dentists
Ok, so I think I’ve done a thorough enough job of highlighting the debt problems that many dentists face. But now let’s move on to the solutions. Here are some the best loan repayment options for dentists.
Income-Driven Repayment (IDR): best while you’re in residency or postgraduate training
For most dentists, PAYE will be a much better Income-Driven Repayment (IDR) plan. As with all IDR options, PAYE exists exclusively for borrowers with federal Direct Loans. And for the first three years of the plan, the federal government covers half of all interest payments not covered by the monthly payment amount.
If a dental resident can qualify as a full-time employee, their monthly payment could be as low as $0 a month depending on the size of their family and the size of their stipend.
So with Tim’s wife staying at home, their payment would be very low. The interest subsidy would be worth tens of thousands of dollars during each year of training. Most dentists make major mistakes by using forbearance or deferment during postgraduate dental programs.
But what really sets PAYE apart from REPAYE is that your payment will never exceed what it would have been on the 10-Year Standard Repayment plan. With REPAYE, your income will always be 10% of your discretionary income, which could mean that you’ll be making much higher payments as your income grows. And that could lead you to having very little to no balance left over to be forgiven.
REPAYE could also make sense for certain situations. The choice of repayment plan should be made on a case-by-case basis. However, starting payments as soon as possible (once the COVID-19 payment freeze is lifted) is a good rule for everyone to use. Even a couple hundred dollars per month would slow the growth of interest.
Student loan refinancing: Best once you’re earning a “real” paycheck
As you can tell from inspecting the excel sheet, the cost of the private refinancing is by far the cheapest option. Tim will save thousands of dollars using this strategy. He will also save that money on an after-tax basis.
Unlike mortgage interest, student loan interest is not tax deductible for all intensive purposes. To come up with $100,000 to pay student loan interest, dentists have to earn about $180,000 to $200,000 in pretax income. That $773,000 of REPAYE repayment plan cost is worth $1 million to $1.5 million in pretax income.
The extremely high cost of student loan interest for dentists means that many should consider refinancing their student debt. I will include links at the end of the article if you want to check your rates. It takes about five minutes to get an immediate offer online, and it doesn’t affect your credit.
Most dentists have high incomes and therefore strong cash flow above basic living expenses. Because of this, many would qualify for variable rates below 3% and fixed rates below 4%. Those interest rates are much lower than what most dentists have on their Direct Grad Plus and Direct Unsubsidized student loans.
Do refinanced loans still qualify for loan repayment assistance programs?
Yes! For dentists that happen to work for a qualifying employer or in an eligible community, there are several loan repayment programs they can qualify for regardless of loan type. Here are few popular examples:
- National Health Service Corps (NHSC) Loan Repayment Program: This programs offers up to $50,000 of loan repayment for dentists and other medical professionals who commit to working in a Health Professional Shortage Area (HPSA) for a service obligation of at least two years. The maximum award is $25,000 for half-time workers.
- National Institutes of Health Loan Repayment Programs: Eligible candidates (includes dentists, primary care physicians, and clinical pharmacists) can have up to $50,000 of their loans repaid per year in exchange conducting mission-relevant research.
- VA Education Debt Reduction Program (EDRP): With this program, you can receive up to $20,000 per year of educational loan repayments for a five-year award amount of $200,000. Dentists and other healthcare professionals are eligible provided that they agree to work for the VA in a difficult-to-recruit, direct patient care position.
- Indian Health Service Loan Repayment Program: The IHS Loan Repayment Program will pay up to $40,000 towards the student loans of eligible dentists (and other health professionals) who serve American Indian or Alaska Native communities.
None of these programs require borrowers to have federal loans to qualify. You will lose eligibility for the Public Service Loan Forgiveness program (PSLF) by refinancing. But, as we’ll see below, there’s a strong chance that you won’t qualify for PSLF anyway.
What about Public Service Loan Forgiveness (PSLF)?
Dentists get the short end of the stick under current student loan programs. To see why, in detail, consider an example I used in an this article showing the incredible student loan options available for doctors.
But the short explanation for why dentists are given such a raw real is that the Public Service Loan Forgiveness program categorizes not-for-profit hospitals as “qualifying employers.”
Many physician residencies and fellowships meet the “qualifying employer” criteria. Doctors have lower incomes during postgraduate training, which results in low monthly payments. These payments all count towards the 120 monthly payments required to have an entire student debt balance forgiven tax-free under the PSLF program.
In contrast, dentists do not have access to widespread government or not-for-profit jobs. The vast majority of dentists work for private employers. The reason is because of the structure of the Medicaid and Medicare program. The federal government just does not provide massive funding for dental care.
That means doctors have access to an incredibly valuable student loan loophole. A huge percentage of them will pay five figures to wipe out six figures of student debt.
Dentists have more options than other professions
Repaying dental student loans is an arduous task. However, my consulting experience has shown me that dentists should be hopeful. Looking at the issue from the “glass half full” perspective, the loan repayment options for dentists are much better than for other professions.
Contrast dentists with veterinarians, many of whom graduate with debt-to-income ratios above three to one. At that debt-to-income ratio, many people give up hope and just let the debt spiral out of control. With veterinarians, I have to come up with ways to optimize the government loan repayment programs. I also have to prepare them for a massive six-figure tax bill in 20 to 25 years. That is the only option available in many cases.
In contrast, most dentists qualify for a private refinancing option because of higher incomes. Even borrowers with DTI ratios of almost two to one sometimes get rates as low as 3.5% to 4.5%. If your debt to income ratio is below 1.25, you could qualify for an even lower interest rate.
The average dentist could save tens of thousands on student loan payments
Are dentists unfairly treated under student loan policy? Absolutely. However, you have options. Often, using private refinancing can save you thousands of dollars in interest. I have negotiated referral agreements with the top lenders in the marketplace that could help. These companies pay a refinancing bonus that is not available if you just visited their site directly.
Private companies do not offer PSLF or income-based repayment, but they often result in much lower interest charges. If you’re a private practice dentist, refinancing could be your best options once you start practicing. Feel free to check your rates with the links below.
I hope I’ve given you a decent education about the best loan repayment options for dentists. If you would like me to analyze the different offers and make sure private refinancing is the best option compared to optimizing an IDR you can hire one of our student loan advisors. Book your student loan plan here.
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Why do so many financial aid people recommend the IBR plan if it’s not the best option then?
IBR is the oldest income based plan so anyone who’s been out of school a couple years might not have had alternatives at the time. PAYE didn’t come around until about 2011 and REPAYE came into existence in December 2015. Anyone who graduates in spring 2016 or later will probably be informed of the REPAYE plan as an option. For dentists who graduated before that time though, no one from your dental school’s financial aid office is incentivized to reach out to you and inform you of the available options for student loan repayment.
I have a financial advisor who specializes in dentists, doctors, and other medical professionals. He says it’s fine to use the income based program for my student loans because I should build assets and save on taxes
I’d be very wary of working with any advisors who hold themselves out as specialists for medical professionals unless they are fiduciaries. Usually that’s a marketing front for whole life and variable annuity salespeople. They make promises that are way too optimistic to sell you financial products that they don’t even understand to make commissions of up to 10% of your investment.
Most of these advisors are salespeople, not professionals. Even the fiduciary professional advisors with CFP, CFA, or CPA credentials often have no idea on how to advise clients on student loans. They get paid to manage portfolios not know the federal repayment plans.
Dentists should definitely save in their 401k first and get all their employer match if they’re eligible. After saving for retirement, the first priority should be paying down your student loans because they aren’t tax advantaged like mortgages.
Yep pretty sure this is happening to me. Looking at how to save and my guy keeps pushing whole life. Refinanced my loans. Now What.
Thanks for commenting Gavin. If you wanted to reach out at [email protected] and have me do a saving vs loan paydown analysis I could do that in detail. But first step is to fire the advisor you’re working with. Any relationship or products you are using with him are full of huge fees and massive commissions. Any pitch on tax savings or liability protection is just a marketing gimmick that’s not really super accurate.
After you’ve fired the advisor, compare the rate on your loans to what you could get in savings. If you’re at 5% after the refinance, this is equivalent to earning about 7-8% in your 401k pre-tax. That’s risk free return to pay down the student debt, so I’d put 3 mos expenses in the bank and every other dollar I’d use to pay off the debt. Once that’s gone, use a low cost firm like Vanguard / Betterment / Wealthfront to pay 0.2% to 0.5% all in for investment expenses and watch your wealth grow.
How many times can you refinance with a private company like DRB or Sofi? For example, if I refinance now at the start of my career when I am making $X and qualify for 5.5% interest, as I start to earn more money in my career, can I refinance again with the same company when I am making more and potentially qualify for 2-3% interest? Can you refi multiple times like this without penalties/consequences, or is it better to wait until you are at your maximum income potential and refi then to get the best interest rate?
Just as with mortgages you can keep refinancing several times as you qualify for lower interest rates and there’s no penalty. The only catch is if you qualify for 5.5% now that interest rates might rise significantly and then the 2-3% rate wouldn’t exist anymore. Once you’re making a real out of school income for dentists it’s almost always better to take a private refinancing offer at a rate lower than what the government offers. The only time it wouldn’t be is if someone had an absolutely massive balance and needed REPAYE for the interest subsidy. But in short, if you have a lower rate refinance.
PAYE is great though since if you leave the plan the most accrued interest that will capitalize is 10% of your initial principal. So I’m currently saving up to make a big payment in a couple years and refinance at that time with a private lender at a lower rate. The low payment right now allows me to save and also get my feet off the ground.
One caveat with interest capitalization is that it’s only a big deal if you’re going to let the loan balance grow at 7% over many years. Interest capitalization means you’re not letting your interest earn interest. Interest that’s accrued is still owed even if it’s not capitalized. If you’re only talking about 3-5 years on a government plan before refinancing, I think folks need to check PAYE versus REPAYE with it’s unique interest subsidy for unsubsidized loans.
Another point Brian, I recognize that saving up a large amount for a big payment feels better, but it costs you mathematically. Your savings account or other investment vehicle is probably not coming close to earning 6 to 7% after tax. That means you could earn a guaranteed return of 10% pretax just by putting everything you have into your student loans until you can qualify for a good private refinancing offer. After saving three months expenses in an emergency fund, I can think of no better way to get on your feet than to fight back against high interest student debt.