Becoming a veterinarian is an incredible journey filled with challenges and rewards. It demands years of dedication and hard work. However, the financial hurdles associated with veterinary education have cast a shadow over the profession, potentially discouraging aspiring vets from embarking on this path, with the American Veterinary Medical Association (AVMA) stating that the average veterinary student loan debt exceeds $140,000.1
As a current veterinary student, a recent graduate, or an established veterinarian, you are familiar with the financial strain of pursuing this degree. However, you may not be aware of the solutions and resources available to you.
Several loan repayment plans can minimize debt, and loan forgiveness programs can even help eliminate it altogether after a term period. With qualifying criteria met, these could help reduce or eliminate your debt burden over time.
Below are some factors to consider when looking at your veterinary student loan debt.
Understanding your interest rate
Federal student loan interest rates are determined by the federal government at the time you take out your veterinary loans, and many borrowers believe you can only change the stated interest rate by refinancing with a private bank. However, federal student loans often have a lower effective interest rate than what the stated interest rate reads. This is because of income-driven repayment, interest subsidies, and student loan forgiveness.
A federal student loan can have a stated interest rate of seven percent and an effective interest rate of as low as negative 100 percent, meaning the borrower will not spend a single penny servicing the debt and have the loan forgiven entirely with public service student loan forgiveness in that case.
Something else to note is undergraduate loans are often lower than graduate loans and parent-plus loans the parents of veterinary students take out.
Private student loans are based on credit and can have variable or fixed interest rates. Technically, federal student loans are not considered variable, but you can get a lower effective interest rate by having a lower income-driven repayment and monthly interest forgiveness in the Student Aid and Vocational Education (SAVE) income-driven repayment (IDR) plan. Whatever interest you do not pay each month does not accrue and is forgiven, essentially dropping your effective interest rate to zero percent if you did not pay any money to service the loan due to qualifying for a $0 payment based on income and family size.
Many borrowers consider refinancing to get a lower interest rate. However, this only makes sense for borrowers who earn a very high income, fully understand how to calculate their federal student loan effective interest rate forecast, and have determined they will not qualify for any amount of forgiveness. This does not make sense for most borrowers. If you already have private student loans, refinancing those with a private bank is just a matter of what interest rate and terms are better and lower for longer.
It is important to remember the difference between stated and effective interest rates with federal student loans. Your federal interest rate makes almost no difference at all if your effective interest rate is lower than your stated interest rate because of income-driven repayment and interest forgiveness subsidies.
Knowing repayment and forgiveness options
Most borrowers do qualify for loan forgiveness and interest forgiveness, so the narrative of worrying about interest rates is not the correct way to look at this financial decision.
Federal student loans are almost always mismanaged. After working with tens of thousands of borrowers and financial advisors for 10 years, I would say less than five percent are taking full advantage of their repayment reduction options.
Student loan repayment works more like taxes than debt. They are complex, and there are real ways to navigate the plans to reduce the amount spent servicing your loans dramatically. Federal student loan debt is the “friendliest” debt you can have. Below are a couple of the income-driven repayment (IDR) and forgiveness options you have with a federal loan:
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- Student Aid and Vocational Education (SAVE) plan. The SAVE plan is an IDR plan that determines payments according to a borrower’s income and family size rather than their loan balance and offers forgiveness for remaining balances after a specified number of years. This has significant benefits to borrowers as it is calculated using 225 percent of discretionary income, which means borrowers can earn more before a payment is due. Negative amortization forgiveness is 100 percent, making federal student loans interest-free—even with $0 payments. Borrowers who can sustain $0 payments over the life of their loan will pay taxes on the forgiven student debt based on the original loan amount.
- Public Service Loan Forgiveness (PSLF). PSLF encourages people with higher education degrees to pursue careers in government agencies and public service organizations like nonprofits and charities. Under this program, some eligible full-time employees may qualify for loan forgiveness after making 120 consecutive monthly payments while employed in a qualifying field.
State-specific loan forgiveness programs for veterinarians can vary. It is advisable to research your state’s veterinary loan forgiveness programs or consult with your state’s governing body for veterinary medicine to explore all available options and determine each program’s eligibility requirements and benefits. More information on these is available at the USDA National Institute of Food and Agriculture website.
All these options are part of the efforts to make higher education more affordable and manageable for students. Reviewing and understanding each loan option’s specific terms and conditions is essential to make an informed decision based on your circumstances.
Preparing for taxes after forgiveness
This year, new tax waivers were released on federal student loans, benefiting over 43 million Americans. However, many borrowers are unaware of how to capitalize on these new rules, how they will be impacted when their debt is forgiven, and whether it will trigger a tax event.
Of the 8.5 million borrowers, more than a quarter are enrolled in IDR plans. These plans limit payments to a percentage of their discretionary income and can lead to loan forgiveness after 20 or 25 years. The program’s aim is to ease the burden for those struggling with standard repayment plans.
The American Rescue Plan Act introduces two key provisions for student loans. First, a waiver allows past payments, irrespective of loan or repayment type, to count toward forgiveness. This waiver, which expires on April 30, 2024, encourages borrowers to consolidate their loans in the Direct Loans Program by the deadline to benefit from retroactive qualification. Please note not everyone should consolidate.
Secondly, there is a federal tax exemption for all student debt canceled through 2025. Typically, canceled debt is taxable, but until Jan. 1, 2026, canceled student debt will not incur taxes. However, this exemption does not apply to state taxes in select states, including Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
Where to look for help with your loans
Similar to how taxpayers seek guidance from trained and licensed tax professionals to ensure accurate tax filings and prevent overpayment, borrowers should have the opportunity to consult with licensed professionals regarding their student loans.
At this time, there is no licensing system for these student loan debt professionals, so borrowers should look for reputable companies with proven track records. Only a limited number of professionals provide both student loan guidance and management of loans. It is recommended to seek a professional capable of offering both services.
It is crucial to ensure the professionals you bring on are insured against errors and omissions and they collaborate with a law firm to communicate with loan servicers on your behalf. Evaluating reviews is also vital; experts in debt management typically garner numerous positive reviews over the years.
Additionally, a satisfaction guarantee should accompany any financial investment you make in their services, ensuring their capability to deliver.
Lastly, inquire about a free consultation. Engaging with multiple options increases your chances of finding someone deeply versed in the complexities of student loans. Although student loans pose a complex and disheartening financial challenge, with the proper guidance and expertise, devising a successful repayment strategy is achievable.
Zack Geist founded Student Loan Tutor in 2015. As an expert in federal student loan repayment, Geist and his team have taught thousands of student loan borrowers all over the country how to save money and hassle. Geist currently splits his time between his farm on the Hamakua Coast of Big Island Hawaii and Salt Lake City, Utah, the location of Student Loan Tutor’s corporate offices.
Reference
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- https://www.avma.org/blog/chart-month-good-news-student-debt
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