We're two months into 2015 and headed toward tax season. It's time to start thinking about all the money you made (or didn't) last year and what that means for your student-loan repayment options. This is especially true if you're enrolled in or considering a federal income-driven repayment plan such as Income Based Repayment (IBR) and Pay As You Earn (PAYE), and/or working toward Public Service Loan Forgiveness (PSLF).
The government now uses the umbrella term Income-Driven Repayment, or IDR, to refer to programs including IBR and PAYE. To help you adjust to the addition in alphabet soup, I’ll do the same.
Changes in the programs abound. 2014 brought many updates and more information:
- The government introduced electronic annual recertification for IDR.
- Sallie Mae became Navient. (New name, same ol’ unreliable service.)
- “New IBR” debuted with a change in the law.
- New online tools help you analyze options.
This is a good time of year to review payment options because it's when you receive documents summarizing your earnings and certain payment activities from last year; 1098, 1099 and W-2 forms should have arrived by now for tax-filing season.
Even if you aren’t required to file taxes, if you are in or considering an IDR plan, filing is a great idea. That’s because your most recent tax return provides crucial information that will help you enroll, certify and/or decide whether to use an alternate form of income documentation to determine your loan repayment amount. (More about alternate income documentation below.)
Electronic option vastly eases the process
Another reason to file is related to a key improvement this year for applying for or reaffirming your participation in IDR. In a rare intersection of government and common sense, now you can have the required documentation sent electronically from the Internal Revenue Service directly to your loan servicer, provided you use a tax return that is no older than two years.
If you read my venting last year about the horrors of paper application, annual certification and dealing with loan servicers, let me tell you, that horror show was less horrible this year. My certification, or renewal, took fewer than 10 minutes and was received and processed by my loan servicer in fewer than 48 hours this time around.
So whether or not you made any money in 2014, everyone considering IDR definitely should file a tax return by April 15. That especially includes veterinary students graduating this year, who will find that having filed a return will make it easier to apply for IDR right after graduation.
Getting the process rolling is a simple matter of logging into your federal student aid account and clicking the Income-Driven Repayment plan request. This will walk you through the IRS Data Retrieval tool to transfer your federal tax information to your loan servicer.
You also will find instructions on how to submit a paper request to your loan servicer, useful for those whose tax return is not available for electronic transfer.
When, why, how
Supposing your income went up last year, you may wonder whether you’d be better off not providing updated income information to the loan servicer at this time. Good question.
First, congratulations on making more money last year! That’s never a bad thing.
Second, check your IDR annual certification date. If, like mine, it is not until fall, don't worry about rushing to update your income data. Enjoy the same monthly loan payment you've been making until your official annual certification documentation is due, then certify with your 2014 tax return. That gives you more flexibility with your money and time to update your loan-repayment strategy, taking into account your current financial situation.
What if you made less money or nothing at all last year? No problem. That's why IDR plans are available. If your 2014 tax return gives a reasonable depiction of your current financial situation, use it for your IDR-plan request. If your situation has changed and the tax return does not reflect your current finances, you may submit alternative income documentation (ADI in government-speak) that more closely reflects your financial reality. ADI might be pay stubs, an offer letter or a statement affirming zero income.
To apply or certify with ADI, electronic filing isn’t available, unfortunately — you must use paper. The important thing is to use the method that will result in the best repayment amount for you. So give yourself time to prepare and an extra dose of patience.
A brief word about Adjusted Gross Income (AGI) and ADI
AGI is a tax term for your gross income minus qualifying deductions such as student loan interest, moving expenses, certain retirement contributions and medical expenses. If you have any qualifying deductions, your AGI will be less than the gross income shown by your pay stubs. When considering student-loan repayment options, consider which number will be most beneficial for your repayment strategy.
For example, if you know that you are on a path toward loan forgiveness, the amount forgiven is likely to be subject to income tax. Therefore, you may want to minimize your loan repayment amount by reducing your AGI if possible — such as by depositing money into an Individual Retirement Account if your circumstances allow you to deduct it — and set aside the saved money for the eventual tax hit.
In general, I recommend using AGI rather than ADI as the basis for determining loan payments under IDR. That’s because under ADI, loan servicers have some discretion in how they estimate your annual gross income. In situations I’ve seen, there’s a tendency for loan servicers to overestimate gross income. The AGI, on the other hand, cannot be misinterpreted.
Since the choices are highly dependent on your individual situation, you may wish to consult a tax professional to review the options.
If you’re married, your filing status can have a big impact on the amount you pay, both in taxes and IDR. The good news is, you have choices. Run the numbers for filing jointly as well as separately. Filing separately might cost you a bit more in taxes but save you money in the long run under IDR. That’s because with a joint return, the government calculates the loan payment based upon the total income — yours and your spouse’s.
Again, I cannot overstate the importance of considering your individual or family circumstances. IDR plans have created a potential situation for many veterinarians in which paying off loans in full actually may cost more than managing them through to forgiveness. However, this requires paying close attention to rule changes and updates and analyzing the situation closely at least annually.
Certifying employment under PSLF
In addition to tending to the certification documentation required each year to remain in IDR, if working toward PSLF, do yourself a favor and certify your employment. PSLF is Public Service Loan Forgiveness, an IDR program under which education loans are forgiven after 10 years of full-time employment with government agencies or certain not-for-profit organizations.
Employment certification for PSLF is optional. However, I would argue that it should be required. Eligibility for PSLF is complicated and uncertain because no one will be officially eligible until at least 2017. Going through the certification will ensure that you and the government are on the same page.
The employment certification form and more information on this option are available online. If you are making what are known as "qualifying payments," your loans will be moved to a designated servicer, Fed Loan Servicing, with which you can monitor your progress and remaining payments as long as you continue to certify PSLF employment each year.
A shuffle here and a makeover there
On Oct. 13, we saw the financial services company Sallie Mae spin off federal loan servicing into a separate company named Navient. My wife and I have loans serviced by Navient, and I was optimistic that this would be a good thing. Let's face it. The bar was already set pretty low with nowhere to go but up, right? Well, the website was made over and looks nice when you log in. However, the adage about putting lipstick on a pig applies in this case. I’ve learned that the loan servicers still may be misinformed or misinterpret the rules. It's not that they're not knowledgeable; they just don't understand the infinite complexity that can exist among individual scenarios, so they often provide inaccurate advice.
If what your servicer is saying doesn't sound right, it probably isn't. Make sure you ask a lot of questions. Last year, we heard no shortage of ridiculous comments and misstatements made by all of the loan servicers, as described by inquisitive, debt-paying colleagues on the message boards of the Veterinary Information Network (VIN), an online community for the profession. Examples:
- Your loan interest capitalizes each year in IDR. Absolutely not true.
- Making extra payments toward your loans can result in being kicked out of IBR. Absolutely not true.
- You must consolidate loans in order to use IDR. Only true if you have certain loans that don't currently qualify for an IDR plan (and those are more rare than not). Most people's existing loans qualify for IDR without having to consolidate.
If you’re a VIN member, please run by the VIN community any questionable comments you hear from loan servicers. Or you may email me. (See links below.)
All bashing of loan servicers aside, they largely have increased the information and function available via online account portals this year, taking a step in the right direction, largely due to a flood of complaints received by the federal Consumer Financial Protection Bureau. Make sure to use this resource if you have or had an experience worthy of reporting.
IBR changes for new borrowers
Because it wouldn't be right if we didn't add another layer of intrigue to these confusing programs ...
IBR changed in 2014. However, the change applies only to borrowers who take out their first federal student loan on or after July 1, 2014, or who have paid off any previous federal student loans by that date. If you are an aspiring or first-year veterinary student who has paid off previous student loan debt and needs to borrow more, or you took your first federal loan last fall — congratulations! You qualify as a new borrower eligible for the 2014 version of IBR when it comes time to repay the loan.
New IBR is very similar to the current PAYE plan with a few minor differences that we can talk about when people start repaying under the new IBR protocol. For now, all you need to know is that “old IBR” provides for payments that are 15 percent of the enrollee’s discretionary income, whereas PAYE provides for payments that are 10 percent of discretionary income.
More exciting for those of us who are already repaying our loans is an executive action taking effect by the end of this year. This action might allow us "old IBR” folks to qualify for a PAYE-like plan, too. The exact rules and how this might be applied to existing loan holders are still being working out by the U.S. Department of Education and are subject to change if Congress passes a law superseding the executive action. So we'll have to wait to see on that one, but I'm cautiously optimistic.
Tools for analyzing options
Those with federal student loans can run loan repayment options using the Department of Education Repayment Estimator.
Another available tool is the VIN Foundation Student Loan Simulator. Designed specifically for veterinarians, the simulator lets you customize a projection to best match your personal situation. For example, you can see the impacts of internships, residencies, getting married, having children and relaxing your budget. As a member of the VIN team that helped develop the simulator, I hope you'll find that it is more reflective of the unique challenges that veterinarians face in student-loan repayment. We're constantly working to make it more relevant.
The VIN community contributes
One more exciting thing worth mentioning is the great response we had on VIN to an informal rounds on educational loans last year that resulted in an informative and popular discussion thread on student debt. We received excellent comments, questions, and personal scenarios that helped us all learn more about the challenges and realities facing the veterinary community regarding student-debt repayment.
As veterinarians, we are blessed with the unique position of testing the limits of the convoluted repayment plans and need to be extra-vigilant about the choices we make and their impact on our student-loan balances. If you haven't had a chance to do so, resolve to review your student loans and ask yourself, "Is this the best repayment strategy?" If the answer is anything other than yes, start asking more questions.
Please feel free to contact me or, if you’re a VIN member, post your questions on the message board. Together we can learn and better understand and navigate our loan repayment strategies.
About the author: Tony Bartels, DVM, MBA, is a 2012 Colorado State University graduate and employee of the Veterinary Information Network. His professional interests include small animal and exotic medicine, advocating for internship quality control and providing guidance on income-driven repayment programs. When he’s not staring holes into his family’s student-loan statements, he enjoys spending time with his wife Audra, a small animal internal medicine specialist practicing in New Jersey. Other family members include two back-alley street mutts named Oakley and Herbie and a tortoise named Leo, who now occupies a rather large territory in Arizona. During his rare instances of free time, you might find Dr. Bartels on the ice between the pipes as a goaltender or fly fishing anywhere travels take him.