Income-Driven Repayment for Veterinary Internships and Residencies
Conventional wisdom often says to defer your loans while pursuing internships and/or residencies. However, income-driven repayment (IDR) is often a better option for veterinarians with federal student debt pursuing advanced education.
What happens in deferment/forbearance?:
- If your internship/residency qualifies for deferment/forbearance, your federal student loan payment amount due is zero. However, interest continues to accrue on the majority of federal loans during the deferment/forbearance period.
- After exiting deferment/forbearance, all interest that has accrued will capitalize, meaning it will be added to your principal balance.
- Adding interest to your principal balance increases the amount of interest that accrues during the remainder of your repayment and will increase your total loan repayment cost.
Using IBR, PAYE, or REPAYE for advanced education:
Your payment under IBR (2009) is 15% of your Discretionary Income or 10% of your Discretionary Income under PAYE/REPAYE/IBR 2014.
With a low enough income (ie. during an internship, residency, fellowship, etc), it is possible to have a monthly payment equal to zero using IDR. These zero-dollar minimum payments are still counted as forgiveness-eligible payments (should you reach forgiveness).
You must provide annual documentation of your income in order to continue to have your payments based on your income under IBR, PAYE, or REPAYE. If you fail to provide timely annual documentation, your payment will revert to a standard 10-year repayment amount due. If you are using IBR and do not renew your income information on time, your unpaid interest will capitalize. After July 1, 2023, no unpaid interest capitalization will occur for PAYE and REPAYE income-driven repayment plans.
*** Veterinary colleagues do not let other veterinary colleagues defer their loans! ***
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BEWARE the Automatic Deferment: if you are enrolled in school at least half-time during an academic internship/fellowship/residency, your school will automatically report your status to the Department of Education. This will result in an automatic loan status change to “deferment." You may be able to prevent this automatic status change by providing oral and written notice to your loan servicer(s) to waive your in-school deferment and remain in repayment. Make sure to do this prior to starting your academic position and to have dated documentation of your request (ie certified mail). In-school deferments will trigger the capitalization of any unpaid interest you have once that deferment ends, no matter which repayment plan you were using prior to receiving the in-school deferment.
What to do with your loans when you’re headed for an internship/residency
- File a tax return during your final year of veterinary school whether you need to or not
- Obtain your federal student aid data file and upload it to the VIN Foundation My Student Loans tool to help examine your loans and see which IDR plans you're eligible to use.
- Consolidate your loans into a federal Direct Consolidation loan as soon as you graduate and enter your loan grace period. This will also give you a chance to consolidate non-Direct loans (FFELs, HPSLs, Perkins) into a loan type that will be eligible for the most beneficial IDR plans
- Choose your loan servicer during consolidation; Mohela is your least terrible option (stay away from Aidvantage and Nelnet if possible).
- Select the most beneficial IDR plan for you (will depend on your loan details, family size, spouse details, and career plans), but you can never go wrong starting with PAYE (if eligible) or REPAYE.
- Use your Adjusted Gross Income (AGI) from your recently filed tax return or indicate that you currently have zero taxable income if you are consolidating prior to starting your internship/residency. This should result in a minimum payment amount due of $0/month for the next 12 months (depending on your family circumstances and tax filing status).
- Set reminders and follow along in the process: Make certain all loans have been consolidated, the appropriate loan repayment plan has been selected, and the expected payment amount due is calculated.
- Once consolidation is complete and your IDR plan is established, enroll in auto-debit (autopay) with your loan servicer even if your payment amount due is $0/month. You will receive a 0.25% interest rate reduction with auto-debit.
- Set reminders to renew your IDR plan. Target 60 days before your IDR Anniversary Date.
- Simulate your repayment scenarios using the VIN Foundation Student Loan Repayment Simulator each year or whenever your circumstances change.
Revised Pay as You Earn (REPAYE) during internships/residencies
Depending on your student loan balance, family circumstances, and projected income, you might benefit from REPAYE during periods of advanced education even if you qualify for PAYE. Under REPAYE, you will receive an interest subsidy equal to 50% of the unpaid interest balance each month. This can reduce the rate of growth for your unpaid interest during periods when your student loan payments are well below your average monthly interest accumulation. This is particularly true during prolonged advanced education years.
For example, if your consolidated starting loan repayment balance is $200,000 at 6%, you accumulate about $1,000/mo of interest. If your minimum monthly payment is $0/mo, your REPAYE subsidy would be equal to $500/mo. Thus, after 12 months in REPAYE, your unpaid interest balance will be $6,000 vs. $12,000 under PAYE or IBR (or deferment).
Get familiar with recently proposed changes to Income-Driven Repayment plans. Updates to REPAYE (possibly in 2024) will increase the unpaid interest subsidy to 100%. This will make REPAYE the best repayment option for any veterinary intern or resident scenario.
The current version of REPAYE is a particularly good choice for those who estimate their income to exceed their student debt after or shortly after their advanced education. This will reduce the total amount paid towards student loans as you can take advantage of the unpaid interest subsidy during your advanced education, which results in a lower amount paid to reach zero for your student loans.
However, the current version of REPAYE does have some details to consider, particularly if you are married. When you’re married, REPAYE requires you to provide and count your spouse’s income in your minimum monthly payment calculation. However, the proposed changes will allow a married borrowers to exclude their spouse's income if they have filed a recent tax return separately. Under the current rules, married veterinary interns and residents may not benefit from using REPAYE, depending on your spouse’s income (at least until the proposed changes take effect). Make certain to review the specifics of REPAYE and PAYE before choosing between these two strategies.
After July 1, 2023, when you switch from PAYE or REPAYE to another repayment plan, your unpaid interest will not be capitalized. This leaves open the opportunity to switch from PAYE to REPAYE once the proposed changes take effect. OR, you can start with REPAYE and switch to PAYE without an unpaid interest capitalization. Be aware that the proposed changes that will improve REPAYE will also phase out PAYE. If you are eligible for PAYE (and not IBR 2014) then you may want to explore if getting your loans into PAYE before it is phased out makes sense for you. Whatever you do, try to not choose IBR as you're getting started in repayment. For legal reasons, switching from IBR to another plan will still result in unpaid interest capitalization. Better to start with PAYE (if you're eligible) or REPAYE and switch from one of those plans than to incur an avoidable unpaid interest capitalization by mistakenly choosing IBR first.
Try the VIN Foundation Student Loan Repayment Simulator to see the short and long-term impacts of student loan repayment for your situation.