Occupational therapists earn a decent living, but their take-home pay is getting eaten up with student loan payments. How will they figure out the best way to pay back their debt? I’ll show you some common mistakes and a common scenario in this post
Occupational Therapy Practitioners work in a tremendous field. It’s meaningful work, pays well, and there is no shortage of jobs out there.
US News & World Report named occupational therapy as one of the best careers in their ranking. In the article, they interviewed Samia Rafeedie, OTD and another OT described the job this way:
Physical therapy teaches people how to walk, and occupational therapy teaches them how to dance.
What a great analogy. I love that!
History of Occupational Therapy
Many might not know this, but occupational therapy dates back more than 2,000 years.
The Greeks and Romans helped treat mental illness with massage, exercise, music, and therapeutic baths. They were way ahead of their time!
Occupational Therapy rose to prominence in the US before World War I when Eleanor Slagle used habit training as primary treatment and she opened an OT training program in 1915.
A couple of years later, what’s now known as the American Occupational Therapy Association (AOTA) was founded to improve the quality and training of therapy.
Occupational Therapists Have Many Available Career Paths
Bringing it back to present-day, most OTs can choose many different types of employment. According to OTMiri.com:
Occupational therapy practitioners work in a variety of settings including hospitals, schools, outpatient clinics (hand therapy & orthopedics), skilled nursing facilities, public and private schools, private clinics, mental health centers, and home health. Occupational therapy practitioners also work in corporate wellness, prison and detention centers, and industrial rehabilitative settings including ergonomics.
About half of OTs work in either a practice or for a hospital according to the Bureau of Labor Statistics. Then there’s a 3-way tie for working in schools, home health care, and nursing care facilities.
With the exception of working for a school, the average pay for the top five OT industries is fairly consistent and stable.
They can have their pick of the type of employer if they want to work with young people, or old people and live pretty much anywhere around the US.
What could be better than helping people function and perform daily activities? It’s a noble profession and a great career choice.
There’s one major headwind for Occupational therapists though.
Occupational Therapists Graduate with More Student Loan Debt Than Anticipated
When someone decides to pursue a career in occupational therapy, their focus is usually on having a fulfilling career with stable prospects of earning $80,000 to $90,000 per year, but after school OTs feel like they’ve bitten off more than they can chew with their student loans.
The average OT we have worked with here at Student Loan Planner has about $180,000 in student loans. Many have ventured into the $200,000+ range. Why is that the case when stated tuition is much lower?
The combination of higher living expenses, tuition increases each year, interest accruing on the loans, and some leftover loans from undergrad.
Most masters programs (MOT) are about 3 years and students can tack on another year or so to get their doctorate (OTD). For those who know that they want to become an OT, there are 5 year combined bachelors and masters degree programs out there.
But the cost to get a masters or doctorate in occupational therapy is getting more and more expensive as tuition rises.
The good news from a financial perspective is that a doctorate is not a multiyear add-on to the master’s program, and it’s not required to practice occupational therapy. This is vastly different for physical therapists as the shift has been made to the DPT designation.
The Biggest Mistakes Occupational Therapists Make Paying Back Student Loans
Look, we all know that figuring out the best strategy to pay back student debt is not the easiest thing in the world. It’s almost like the industry’s goal is confusion rather than get paid back.
The payment plans are hard to understand, borrowers get different information depending on which customer service rep they talk to, and there are companies out there preying on student loan borrowers with expensive services that don’t fix the problem and in some cases make it worse.
We’ve found that the best way to save money is to either (a) get aggressive and throw everything you can at them, or (b) do what you can to keep your payments low and maximize loan forgiveness whether it’s tax-free or taxable.
Here are the top two mistakes we see:
- Trying to pay back the debt in full over 15-30 years: OTs would end up paying a ton of extra interest on this path and they’d often be better off going for an income-driven plan with taxable loan forgiveness instead.
- Paying more than required when going for PSLF: When an OT is on the PSLF track, any extra money they throw at it goes into the oblivion, never to be heard from again. This usually takes the form of being on the wrong income-driven repayment plan or not doing everything to lower adjusted gross income (AGI) which then lowers their payments.
What’s The Best Student Loan Repayment Plan Strategy for an Occupational Therapist?
In our experience, occupational therapists have 3 solid options that will save the most money.
- Pay off their loans aggressively with a goal of being debt free in 10 years or less. This could involve refinancing.
- Work for a non-profit hospital or government employer (like a school) and go for Public Service Loan Forgiveness.
- Work in a practice or for a private home health or nursing care facility and go for taxable loan forgiveness on an income-driven repayment plan.
The best plan for an OT will be one of those three options. Period. Anything in between will mean thousands of dollars wasted.
To figure out which one of these 3 options would be best for an OT depends on their specific situation.
Case Study: An Occupational Therapist Saves a Boatload of Money with a Student Loan Plan
Jessica, OTR works in a practice and owes $210,000 in student loans with a 6.8% interest rate. She currently makes $85,000 and her husband makes $70,000 and has no student loan debt. Jessica has been making payments on the IBR plan since 2014.
They have a baby on the way, and Jessica plans to reduce her hours until their baby-to-be reaches Kindergarten. She thinks her salary will drop to $70,000 for those 5 years then will bump up to $90,000 with 3% increases in income each year.
Here’s her projected cost on IBR:
This is an extremely costly plan for Jessica to be on because of all the extra interest she’d pay. Even though it’s supposed to be an income-driven plan with taxable loan forgiveness, she’d end up paying back her 6.8% loan in full over the next 20 years or so.
Let’s compare this to pay as you earn (PAYE):
PAYE is a clear winner here. If we look at total projected out of pocket cost (total payments + taxes owed), Jessica is projected to save $120,000 on PAYE vs staying on IBR. Plus she’d be out of debt 4 years sooner.
More tangibly, she’d have lower payments along the way. IBR payments are based upon 15% of discretionary income while PAYE is 10%. That means that IBR payments are 50% more per month compared to PAYE.
One question that we spend some time on was helping her get over her fear of the tax bomb that comes from taxable loan forgiveness. This is a totally rational fear by the way. It’s a monster lump sum all due in one year!
But if borrowers plan accordingly, it could end up giving them huge savings.
Planning For The Tax Bomb
Jessica now sees that PAYE is projected to save her $120,000 and she’ll be debt free 4 years earlier vs IBR. The problem is that owning a projected $93,057 in 2034 is frightening, but it’s better than she thinks.
Though tax-free loan forgiveness would be better, the tax bomb is the next best thing. Let’s assume Jessica would pay about 40% in taxes on her forgiven loan balance. That means she’d only owe $0.40 for every $1.00 of student debt that gets forgiven. The other $0.60 is wiped away.
As a finance/numbers guy, this was hard for me to wrap my head around, but basically, for every $1.00 she does not pay over the years, she’ll only owe $0.40 on that in 2034 when the loans are forgiven. Plus, she has time to save up for it.
Here’s how Jessica can save up for the taxes:
Her IBR payment was $1,435 and her new PAYE payment is estimated to be $956. That’s a $479 monthly savings and she can use some of that extra cash to save up for the tax bomb.
If she were to save $349 per month in an investment account for the next 16 years and earn a 5% average annual return after taxes, she’d have the money to pay the tax bomb when it’s due in 2034.
All in, her total budget going towards student loans between the actual payment and the tax bomb savings is still less than her IBR payment would have been in year one alone.
At the end of the consult, we talked through all the action steps to put this plan into place. She’s so relieved to see that saving up for it is totally palatable as opposed to focusing on that huge tax bomb.
Aside from the massive amount of money she now gets to keep compared to IBR, Jessica is so relieved that she has a definitive plan to pay back her loans, understands all of the moving parts behind it, and can now focus on enjoying her new baby to be.
Occupational Therapists Can Get a Solid Student Loan Plan
OTs can find a clear path to pay back their student loans. A path that could not only save them significant money but give them a clear path that they understand and actions steps to get it done.
Student Loan Planner has done over 1,300 student loan consults for clients with over $350,000,000 of student loans. Whether you work for a private practice, a hospital or school going for PSLF, or at a home or nursing care facility, we can help you figure out the optimal path in just 1 hour.
I, Rob, work with borrowers who owe between $200,000-$400,000 in student loans. I’m usually the point person for our occupational therapist student loan consults. Feel free to email me at [email protected]
Our team can help anyone though, so feel free to choose the right consultant for you based on your individual circumstances.
Are you wondering if you’re paying too much toward your student loans? Book a consult with us!