The year 2014 is the last time I can find a public announcement from the AVMA on student loan statistics for veterinarians. For graduating veterinarians in that year, if you had to take out loans the average was $153,191. About 1 out of every 5 had student debt over $200,000. Based on debt growth stats I’ve seen in other professions as a student loan consultant, my estimate is that the average will be $180,000 for the class of 2017 once all the official reports come out.
Approximately 1 out of every 3 graduating veterinarians will leave with over $200,000 of student debt. The average salary for a new vet is only about $70,000. How do you pay back such a huge debt load with that income?
Since very few veterinarians work in the public sector, a huge percent of the profession will need to go for private sector loan forgiveness. You pay back your loans on IBR, PAYE, or REPAYE for 20-25 years, but then the remaining balance is taxable income.
Many veterinarians will find themselves owing a six-figure tax penalty in their 40s and 50s, and very few are ready for it. This article will show you how to prepare for the vet school student loan tax bomb if you owe more than twice your salary. Also, feel free to contact me about your personal situation and I’ll tell you if I think I can help.
After Vet School, Sign Up For REPAYE or PAYE Quickly
A big mistake I see with veterinarian clients in my student loan business is when veterinary graduates put off student loan repayment through deferment or forbearance. PLEASE do not defer or forbear your loans, especially if you are doing an intern year or a residency program. You want to start the clock on private sector loan forgiveness as soon as you can for a couple reasons.
First, if you’re eligible for PAYE and are not ever going to earn more than 50% of what you owe, then you need to prepare for the tax bomb in 20 years. That means you figure out what you’ll need to save each month to come up with 40% to 50% of the loan balance you’ll have in 20 years. That amount is the tax payment you’ll owe to the IRS.
If you might start your own practice or already own one, then REPAYE could be the better option because it comes with an interest subsidy. The government pays 50% of whatever interest is leftover after you pay your monthly payment under REPAYE. The downside? It takes 25 years until REPAYE forgives the loan. Then you owe tax on the remaining amount.
IBR is an older plan that will not be in your best interest in most cases. ICR is an even worse plan that nobody should use. So make sure your loans are eligible for PAYE and/or REPAYE and get going on the forgiveness clock. Choosing PAYE or REPAYE is highly dependent on individual circumstances, and that analysis is among the services I provide clients during a student loan consult.
Figure Out How Much You Need to Save for the Vet School Student Loan Tax Bomb
Say you have $200,000 in student loan debt that grows to $400,000 by the time it’s forgiven in 20 years on the PAYE plan. Assume you owe 40% on the remaining balance. You’ll need to come up with $160,000 all at once to send in a check to Uncle Sam. That sounds a lot scarier than it is.
First, this payment is made in a couple of decades, which is awesome! Inflation will eat away at the value of money. Therefore, $160,000 in 20 years might be a fraction of what it is today.
Therefore, you could put away $400-$500 each month in a Vanguard investment account hoping to earn 4% to 5% on the money. At the end of the period, you withdraw the lump sum and pay your tax bill without having to settle with the IRS.
Max Your Retirement Savings to Maximize Loan Forgiveness
If you are sure you’re going to use REPAYE, PAYE, or another future income driven student loan repayment program to pay your student loan debt, then you need to save a lot for retirement. The reason is because the government is subsidizing you to do so.
You can lower that adjusted gross income by up to $18,000 simply by saving as much as you can in a pre-tax retirement account like a 401k. The lower AGI from saving for retirement results in lower monthly student loan payments.
With REPAYE, the effect is more obvious as a lower income means a higher interest subsidy. With PAYE, you’ll have a larger loan balance at forgiveness in 20 years as there is not an interest subsidy.
However, considering you’ll pay a fraction of the total amount and that inflation will eat away at the value of that tax payment, you want to pay the absolute minimum on REPAYE and PAYE if you know you have no chance of paying the loans back.
In the Best Case Scenario, You Might Get to Keep the Savings You Saved for the this Student Loan Tax Bomb
In the next couple decades, I fully expect there to be mass defaults on the tax payments owed when millions of Americans have to come up with five and six figure sums all at once to pay the IRS. It’s anybody’s guess how future government officials will deal with this problem, but one scenario is certainly some version of a bailout.
If you owe less than 1.5 times your salary, I wouldn’t take the chance. I’d refinance and pay down the loan debt aggressively (you can check what your rates would be with the lenders in the sidebar at the right and get a bonus to you as well if you decide to go through with it).
However, if you know you’ll be reliant on these programs to pay back your loans (debt to income ratio greater than 2 for the foreseeable future), here’s another reason why you want to pay as little as possible on your loans.
What if the government decided to give public and private sector loan forgiveness the same tax treatment? That means they could hypothetically make loan forgiveness tax free for the private sector. If they did this, then the tens of thousands of dollars you were saving for the tax penalty is unneeded. That means the money is now yours to keep.
But In Case that Doesn’t Happen, My Clients Are Prepared
There are two kinds of veterinarians with huge student loans. One type doesn’t want to think about the problem or has never thought about a comprehensive strategy to pay them back.
The second kind knows whether to select REPAYE or PAYE, saves the right amount for the vet school student loan tax bomb, maxes out their retirement account, and is financially set to enjoy what they trained to do rather than stress about a six figure bill staring at them.
My goal is that every client of mine will fall into the second category after consulting with me.
So I encourage you to have a plan for your vet school student loans. Once you get a strategy in place, you’ll feel a whole lot better.
I Can Help You Find the Light at the End of the Vet School Loan Tunnel
I help veterinarians conquer huge student loan balances for a living and it’s incredibly rewarding. Too many veterinarians struggle with burnout, stress, and depression. Student loans can add to that by making you feel trapped.
The good news is that I’ve yet to find someone who is actually trapped. They just didn’t understand their options. Now, they’ve got a plan.
If you’re interested in how I could help you with your vet school loans, just hit the button below and I’ll get right back with you. You can also send me an email personally at [email protected].