Unfortunately, there is no one-size-fits-all repayment method for student loans. Every dentist has a unique situation that must be considered. However, it is possible to find the best way for your own life circumstances. Let’s explore the repayment options and determine who might be a good fit for each.
Debt-to-income ratio
Before we consider any repayment methods, you need to know your debt-to-income ratio. This ratio is your student loan balance divided by your gross income. For example, if your student loan balance is $170,000 and your gross income is $200,000, then your debt-to-income ratio is 0.85. If your student loan balance is $350,000 and your gross income is $125,000, your debt-to-income ratio would be 2.8.
This value helps determine which repayment method could be best for you. Your debt-to-income ratio isn’t the be-all and end-all number, but it’s a great starting point.
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Public service loan forgiveness (PSLF)
PSLF is tax-free forgiveness granted after certain circumstances are met. You must make 120 on-time payments (i.e., 10 years of monthly payments), and the payments must be made on an income-driven repayment (IDR) plan (e.g., IBR, PAYE, REPAYE, or ICR plans). While making these payments, you must be employed at a 501(c)3 nonprofit or government employer. For dentists, the most common qualifying employers are nonprofit hospitals, veteran’s affairs hospitals, and dental schools.
Is PSLF right for you?
The first thing to consider is whether you will work for 10 years at a qualifying employer. If you plan to work in private practice, PSLF would not be an option for you. If you know you’ll spend at least 10 years at a qualifying employer and have a debt-to-income ratio above 1.25, then PSFL might be right for you.
Another scenario in which PSLF might come into play is when you have a long residency. Most residencies and fellowships qualify as PSLF-eligible jobs. Perhaps you chose the oral and maxillofacial surgeon (OMFS) specialty and have a long residency of six years. You could follow that up with a few more years in public service and have your loans forgiven relatively quickly after residency. The one caveat to this is you would need to enter an IDR repayment plan during residency rather than pursuing in-school deferment. Your payments would likely be small since resident pay is generally not substantial.
Taxable forgiveness
Taxable forgiveness is granted after making 20–25 years of qualifying payments on any of the IDR plans. There are no additional employment requirements to be eligible. At the end of the repayment term, the remaining balance is cancelled and added to your income for tax purposes. This means you will owe more in tax payments that year even though you didn’t make any additional money.
Is taxable forgiveness right for you?
Taxable forgiveness could be the best financial strategy for you if you have a debt-to-income ratio of 1.25 or greater. The higher your debt-to-income ratio, the more beneficial this strategy can be. Pursuing taxable forgiveness also creates more cash flow flexibility early in your career. Your payments on an IDR plan will likely be much lower than the standard 10-year plan. This extra money you’re saving can be used in more beneficial ways such as buying a dental practice, putting a down payment on a home, or even starting a family.
The taxable forgiveness path also encourages pretax saving for retirement. This is most common in a 401(k) at your dental office or in a personal traditional individual retirement account (IRA). The pretax savings will lower your adjusted gross income (AGI), which in turn lowers your required student loan payments.
The main goal of taxable forgiveness is to pay as little as possible over time and have a large amount cancelled at the end of the repayment term. Under optimal circumstances, your payments plus the cancellation tax could end up being less than aggressive repayment in full. As of July 2022, there will be extra taxes due upon forgiveness. You will need to start saving additional funds for that potentially large tax burden down the road.
Private refinancing
When you refinance your federal student loans into private loans, you are issued a brand-new loan with a new repayment period and lower interest rate at a private lender. Refinancing should not be considered if you can’t acquire a lower interest rate.
Is private refinancing right for you?
If your debt-to-income ratio is 1.25 or lower, private refinancing is likely the most financially optimal solution for you. If your debt-to-income ratio is this low, and you were to pursue taxable forgiveness, you would end up paying the loan off before any forgiveness is achieved. Once you have refinanced to a lower interest rate, the goal is to pay off the loan as soon as you can so you pay as little as possible over the course of repayment.
The biggest consideration with private refinancing is that once you leave the federal system, there’s no going back. You must be sure this is the direction you want to pursue before committing to it.
What will work best?
If you plan to work in a qualifying public service job for at least 10 years and your debt-to-income ratio is 1.25 or greater, PSLF might be right for you.
If you plan to work in private practice, have a debt-to-income ratio of 1.25 or greater, and you don’t mind paying as little as possible on your loans for 20–25 years, taxable forgiveness might be right for you.
If your debt-to-income ratio is less than 1.25 or you can’t stand the thought of paying off your loans over a period of 20–25 years, private refinancing might be right for you.
This guide only details the potential repayment plans based on a few factors. There are many other things in your life to consider before choosing the repayment path that is right for you.
Disclaimer: Roots Financial Planning is a registered investment advisor in Texas and in other jurisdictions where exempted. None of the information provided in this article is intended as investment, tax, accounting, or legal advice. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
Editor's note: This article appeared in the October 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
