One of the most exciting events for soon to be pharmacy school graduates is the hooding of Doctor of Pharmacy candidates prior to commencement. Family and friends alike gather to celebrate the accomplishments of the students who earned the right to call themselves a Doctor of Pharmacy. Although this signifies the end of a big chapter in a soon to be pharmacist professional's life, a new career is just beginning. Unfortunately for many students, this new career is also adjoined with student loan debt. For borrowers with federal student loans, the repayment options are vast and complicated. Meaning that one of the first big decisions a new PharmD graduate will face is deciding which federal loan repayment plan they would like to pursue.
- Learn how a Standard Repayment Plan works
- Understand how Graduated and Extended Repayment Plans could benefit your repayment goals
- Learn the basics of Income Based Repayment Plans
- Learn what the five Income Based Repayment Plan options are for borrowers
Before you go any further, download this complimentary checklist: What-Issues-Should-I-Consider-When-Paying-Off-My-Student-Loans-2021.pdf
Do you prefer video over blog? No problem, we've got you covered! Enjoy this PharmD Video exploring the four outcomes of student loan repayment
Standard Repayment Plan
A standard repayment plan is one of the most common forms of student loan repayment for pharmacy school graduates. It's also the default option for many loan servicers. Meaning, if you don't take any action in deciding what student loan repayment options you want to use, the standard repayment plan option is the one you will automatically be selected into. The minimum payment in this option is $50/month. Under this repayment plan option, the repayment term is for 10 years. Just like a mortgage, the loan servicer will calculate the exact amount you will need to pay each month. If you make this exact payment each month, your loan will be repaid in exactly 120 payments (10 years). This is considered a traditional amortized loan. You can also make payments that are more than that standard repayment amount if you want to pay the loans off faster than 10 years.
An area you need to be aware of is the term length changes for consolidated loans. If you do a federal consolidation of your loans, depending on loan balance, you could end up with a standard repayment plan that has a term of 30 years! The payment will be much smaller than a traditional 10 year term, but you will end out paying far more in interest. And quite honestly, most people would rather pay these loans off faster if their financial means allow them that option. So just note that if you do a federal consolidation of your loans, make sure you are not opting into the 30 year repayment term if you don't want student loan debt hanging over your head for the next 30 years.
Graduated and Extended Repayment Plans
Two other repayment options that are not as popular as the standard repayment plan are the graduated and extended repayment plans. The graduated repayment plan is not as useful as it used to be thanks to the creation of income driven repayment plans (we'll get to these later). In a graduated repayment plan your payments are lower at first and increase every 2 years. In theory this helps individuals who are going to experience increases in their wages as they advance in their careers. These increased wages can be used to offset the increasing student loans payments every 2 years. The repayment term is up to 10 years. If you consolidate your loans, that repayment term could increase to 30 years. The graduated repayment plan is hardly ever the best option for borrowers. If this is something you are considering, you should be carefully comparing this to the income driven repayment options available to you.
The extended repayment plan is a repayment plan with a term of 25 years. These payments could be fixed or graduated. This is not the same as a standard repayment plan with a longer term. The key difference is that the extended repayment plan is for borrowers who owe more than $30,000 in FFEL or (NOT AND) Direct Loans to qualify. The extended term will reduce the payment you are required to make each month but it will also increase the amount of interest you will pay over the course of the repayment period. This could be a viable option if you only have FFEL loans and can't afford the traditional 10 year repayment monthly amount.
Income Driven Repayment Plans (IDR)
Here we go. This is where the water gets muddy. This is where repayment options can get very complicated to figure out. With income-driven repayment plans, you initially have little idea of how long until these loans will be paid off. It depends on a borrower's income over time and what kind of loan forgiveness you are trying to obtain. To learn more about this basics of IDR, check out the Federal Student Aid Website here. The big reason that a borrower of student loans would pursue an income driven repayment plan is in hopes of having some of this debt forgiven. There are two primary federal provisions for forgiveness, Long-Term IDR forgiveness and Public Service Loan Forgiveness (PSLF).
Long-Term IDR Forgiveness
Long-Term forgiveness is the pursuit of having your loans forgiven after a period of 20 or 25 years. You pay on these loans (the amount is dependent on many different factors) for either 20 or 25 years and at the end of that term, these loans are wiped away. There isn't even an employment requirement to take advantage of this. This long-term forgiveness option is a great way for those people with low incomes and high debt. There is one last caveat of long-term forgiveness that you need to be aware of. The amount that is forgiven is considered taxable income in that year. So just be aware that there could be a big tax bill you should be prepared to pay if forgiveness is the outcome you are pursuing.
Public Service Loan Forgiveness (PSLF)
If you can make 120 qualified payments, the loan amount that is left over may be forgiven in its entirety, tax free. The key factor in this is making sure that your payments are considered qualified. A lot is involved and required when making a qualified payment. We won't get into the specifics here, but we will explore this in more detail in another blog.
It's important to note that income driven repayment plans are not amortized like other more traditional repayment plan options. Monthly payments are calculated without regard for the balance of the loan. Payments are instead tied to your income. More specifically, these payments are directly tied to you discretionary income. This is defined as the amount by which the borrower's income exceeds 150% of the federal poverty guidelines for the borrower's family size. To sum it up, the lower you can make your income, the smaller your required payment will be each month. And it doesn't matter if that smaller payment isn't enough to even cover the amount of interest due on your loans each month. The whole point is to pursue forgiveness of this debt, so the less you pay means the higher that debt will get (when interest on that debt is growing faster than what you are actually paying). The bigger your debt is after 20 or 25 years means you get that much more in forgivable loans.
Income Driven Repayment Plan Options
Currently there are five different income driven repayment plan options a borrower can consider. Each of these options require different standards to be met in order to be taken advantage of. We will not get into these specific standards now because they deserve a more in-depth analysis in a future blog post. However, we can list these different options out to make you aware they are there.
Income Contingent Repayment Plan (ICR)
This repayment plan is usually only used by parents that have borrowed PLUS loans. Loans that are allowed to be used under this plan are direct loans only. Finally, you can have any direct loans under this plan regardless of the date you took on the loan.
Income Based Repayment Plan (IBR)
A partial financial hardship is required. Direct and FFEL loans qualify under this type of repayment plan. Like the ICR, loans for this type of repayment plan can be taken on at anytime to qualify.
Income Based Repayment Plan New (IBR New)
Direct loans are the only loans that can be used under this repayment plan. Also, only loans that were created on or after July 1st, 2014 qualify. If you have student loans that were disbursed before this date, you can't use this type of repayment plan for those loans. It's why the disbursement date of loans are so important to understand.
Pay As You Earn (PAYE)
This repayment plan can only be used for direct loans. It also is only available for borrowers that have disbursed student debt on or after October 1st, 2007. Along with that, a borrow must also have borrowed after October 1st 2011. Basically to qualify for this type of loan repayment option, you can't have had loans before 10-1-2007 and MUST have at least one loan after 10-1-2011.
Revised Pay As You Earn (REPAYE)
This is a spin-off of PAYE. However, its easier to qualify and to take advantage of this repayment plan compared to PAYE. You can only use direct student loans but can have loans disbursed at anytime. You don't have the same type of date restrictions as you do in PAYE.
Understanding which repayment plan options that are available to you is just the beginning. There are many more factors to consider when deciding how to most efficiently tackle your student loan debt. It can become extremely confusing and time consuming for borrowers to go at it alone. The ultimate gut punch is thinking you have it figured out only to learn years from now that you made the wrong decision, and that wrong decision might have cost you a lot of money. But if you decide to take this repayment journey alone, understanding what repayment options are out there for you to take advantage of is a great first start. Listen to Ep 6: A Breakdown of Student Loans of the PharmD Money podcast to learn more.