Dear Dr. Debt: Must pay off loans before child goes to college

Borrower can't afford daughter's tuition while her own student debt lingers

January 16, 2023 (published)
By VIN News Service staff

Art by Cristina Rózsa

Dear Dr. Debt is a monthly advice column about student-debt management in the veterinary community. It is adapted from Veterinary Information Network and VIN Foundation message boards where veterinarians and veterinary students ask questions and get answers to help them approach borrowing and repayment strategically.

Over the years, thousands of these online conversations have enabled VIN members to learn the good, bad and ugly aspects of student loans. With Dear Dr. Debt, the VIN News Service extends the conversation to the wider veterinary community, featuring advice from student debt expert Dr. Tony Bartels.

Dear Tony,

My daughter is going to college this year. I'm not sure how we will afford it, especially while paying down my own student loan debt. I am a 2003 graduate of a U.S. college of veterinary medicine. I work in a companion animal practice.

After making payments on my student loan for nearly two decades, I'd like to be free of this obligation as fast as possible, or see if my debt qualifies for a forgiveness program offered by the federal government. Here's a breakdown of my finances:

Federal student loan principal: $20,973

Unpaid interest balance: $31

Student loan interest rate: 3.25%

Type of student debt: Privately held Federal Family Education Loan (FFEL)

Repayment plan or strategy: As fast as possible. I've been paying for 19 years.

Monthly payment: minimum of around $300; currently paying $450

Expected time to finish paying the loan: Three years, I think

Other debt: $228,147 mortgage; $35,960 in auto loans; $37,834 in personal debt

Pay structure: salary and production bonus, plus employer-provided benefits that include a continuing education allowance, paid vacation and sick leave, license fees, life insurance, liability insurance and retirement plan.

Tax status: married, filing jointly; two dependent children

Adjusted gross income (AGI) from most recent return: $156,374

Current annual income: $92,000

Spouse's annual income: $95,000

Average monthly expenses: $5,200

My student loan is privately held, which I am guessing will need to be consolidated into a federal Direct Consolidation loan in order to benefit from the one-time cancellation announced by the Biden administration in August. However, it seems that the program could fall through, due to challenges in the U.S. Supreme Court. I don't want to get stuck in something that doesn't work and end up paying more over time. I am also confused about whether I qualify for student loan forgiveness after 20 to 25 years. If so, what determines if it is 20 years or 25 years before your balance is forgiven? What are my options?

Anxious to Pay

Dear Anxious to Pay,

Congratulations on your daughter starting college this year! I can understand the anxiety around paying for your child's college when you're still paying off your own.

You have options. I know the various programs and new benefits are all starting to sound similar and blend together, so let's make sure that you know what you are eligible for.

I suggest that first, you consolidate your privately held Federal Family Education Loan into a Direct Consolidation Loan in order to be eligible for the one-time forgiveness count adjustment or the recently extended pandemic forbearance benefits that put interest and payments on pause into 2023.

Unless you submitted your consolidation application before Sept. 29, 2022, you are not eligible for the Biden administration's one-time student loan forgiveness program, which could cancel up to $20,000 from borrowers' balances. In any case, as you noted, the cancellation plan is on hold while it's being challenged in the Supreme Court.

You have a better chance of benefiting from the one-time forgiveness count adjustment that I mentioned earlier. Because you have made at least 19 years of payments on your student loan debt, you should receive 19 years of qualifying forgiveness time once the forgiveness count is complete (no later than July 2023). At that point, you would have about six years of payment remaining. Those remaining payments will need to be made using a forgiveness-qualifying plan,  either a standard 10-year loan repayment plan or one of the income-driven plans.

Many borrowers have been confused by the 20 or 25 years of forgiveness wording. Forgiveness of most graduate school loans requires making payments for 25 years, unless the borrower is eligible for newer income-driven repayment plans like Pay As You Earn (PAYE) or the new version of Income-Based Repayment (IBR 2014). Because you are not a new borrower as defined by PAYE or IBR 2014, and you would not meet the partial financial hardship provisions, you most likely would need to make 25 years of eligible payments to achieve forgiveness.

Let's say you consolidate into a Direct Consolidation Loan and choose a standard 10-year plan after the forbearance benefits end or the forgiveness count is applied (whichever comes first). Your minimum monthly payment would be about $205. You'd pay that for five or six years before reaching forgiveness. Because forgiven student loan balances usually are subject to federal income tax, you'd potentially have a tax bill of $3,100. (This assumes that a tax exemption on federal loan forgiveness that's in place through 2025 is not extended.) There also could be state income taxes applied to the forgiven balance, depending on your state.

This plan puts your total remaining costs at about $16,000, which is less than what you have remaining now.

If you continue, as you have been, to pay about $450 a month, you will pay off your student loan in a little more than four years at a total cost of about $22,480.

Not only does taking advantage of the one-time forgiveness count adjustment free up valuable cash flow for you to help your daughter get started in college, but you're projected to pay less in about the same amount of time. That's some pretty compelling evidence to get your consolidation started as soon as possible. The sooner you do so, the sooner you'll also benefit from the extended pandemic forbearance benefits — no payments, no interest and logging forgiveness credit until those benefits end.

I know you're afraid to get stuck in a repayment plan that doesn't work out and costs more over time. Even if something happens to derail the one-time forgiveness count, you could decide to pay what you're paying now on your new consolidation loan and maintain your current repayment pathway. There really is little risk to consolidating your loans to set yourself up for a more beneficial scenario.

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