Mailbag: Dealing With Big Debt for a Physical Therapy Degree

Michael Lux Blog, Mailbag, Student Loans 0 Comments

In today’s mailbag we will take a look at Natalie’s student debt issues.  Natalie took out a massive amount of student loans to fund her education as a Physical Therapist.  She might be able to afford the standard repayment plan, and fears that if she banks on loan forgiveness, she will be screwed.  If you have a question for the Sherpa, feel free to ask us!

Natalie writes:

Hey Student Loan Sherpa,

I have been scouring the internet in hopes of getting some guidance and it’s so hard to figure out who is a reliable source regarding my situation.

I am a physical therapist who graduated in 2013.  I was given the advice by a mentor to “bite the bullet” and take out whatever loans I need to in order to get through school, which I sadly did.  I have been taking advantage of the IBR program, which has proven to me how sad of a state I am in financially, as my principal balance continues to climb.  If I take advantage of IBR until I’m eligible for forgiveness, I will have close to $1 million in loans given the exponential increases occurring with my IBR payments.

I have looked into and am currently enrolled in PSLF, however with the question of that being taken away with our government’s new budget proposal, I am quite nervous.

Do you have any advice as to whether I should start trying to pay the $3,000 monthly payment or continue to stay on the IBR track in hopes that I will still get my loans forgiven?  I know it’s hard to predict the future but I just feel so lost.

Thanks,

Natalie

Growing Interest and an Uncertain Future

Natalie has two fundamental issues with her mountain of student loan debt.  First, her monthly payments are far less than the interest that accrues each month.  As a result her balance threatens to balloon out of control.  Second, her current plan is dependent upon the Public Service Loan Forgiveness Program.  There is plenty of talk out of Washington that the program will be eliminated, which would be a major problem for Natalie.

Hedging Your Bets

One thing that Natalie can do right away would be to sign up for the Revised Pay As You Earn Plan.  If her loans are eligible for PSLF, then they should likewise be eligible for REPAYE.  Switching to REPAYE has two major advantages.  First, her monthly payment is lowered from 15% of her discretionary income to 10%.  Lower payments mean more flexibility.  Secondly, REPAYE is unique among the income-driven repayment plans in how it treats extra interest each month.  For borrowers who pay less than the monthly interest, REPAYE immediately wipes half the extra interest off the balance.  This means that if Natalie’s loans generate $1,300 of interest each month and her monthly payment is $300, she will only have $500 of extra interest added to her balance each month, rather than the full $1,000.  (Note: anyone in this situation should educate themselves on student loan interest capitalization and the events that trigger it.)

Switching to REPAYE and slowing the growing balance only fixes part of Natalie’s problem.  She still faces the uncertainty of PSLF.  She can hedge her bet on PSLF by continuing to certify her payments (we suggest doing this every year — if you are not certifying your payments you risk losing out on years of public service).  While she is actively chasing PSLF she can try to set aside that $3,000 per month as a rainy day fund in case public service ends up disappearing.  This money can be conservatively invested so that the interest growing on the student loans is mitigated by the interest growing in the rainy day fund.  As far as the future of Public Service is concerned, while it is definitely in jeopardy, there is a very real possibility that if it were eliminated it would only apply to future borrowers.

Changing Strategy

Many medical professionals are caught in Natalie’s situation.  Advanced education is very expensive and a change to PSLF could have devastating consequences.

One reason Natalie might switch strategies would be if she got a higher paying job in the private sector.  This switch would have a major impact in two ways.  First, Natalie’s new employer would no longer be eligible for Public Service Loan Forgiveness.  Second, the additional income might put Natalie in a position where she could comfortably afford to pay of her debt aggressively.

Generally speaking, we suggest borrowers to stick with federal student loans because of the flexibility of repayment plans and forgiveness programs.  However, for borrowers with federal debt that will certainly be paid in full and high job security, consolidation on the private market is an option.  The advantage to this route is that borrowers can get a much lower interest rate to facilitate paying off the debt quickly.  The disadvantage is that the federal programs are gone forever.  As a result it is a big gamble if you are not sure you will be able to pay off the loan in full.  Once the ability to pay off the loan in full is no longer in question, we suggest investigating the many private loan refinancing companies.

Bottom Line

Natalie faces some difficult decisions with her mountain of student loan debt.  The good news is that she doesn’t have to go all in on public service or aggressive repayment.  For now, she can hope Public Service Loan Forgiveness works out, but if it doesn’t she can have a backup plan and a bunch of cash ready to go if it doesn’t.  Best case scenario: Natalie’s loans get wiped out via PSLF and she has a bunch of cash set aside that can be used for a down payment on a house or retirement.