Dear Dr. Debt: I want to pay off my loans as soon as possible

New option at hand for veterinarian who has paid three times what they borrowed

November 14, 2022 (published)
By VIN News Service staff

Art by Cristina Rózsa

Dear Dr. Debt is a new 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,

Since graduating from veterinary school more than 24 years ago, I have paid nearly triple my original federal student loan balance of $84,000. Because most of what I paid was interest, I still owe $41,251 in principal.

I am a business owner and single parent, recently divorced. My goal is to pay off loans as soon as possible as part of my newly divorced, freedom-from-debt plan.

For emergencies, I have savings equal to at least three months' worth of my expenses.

Here is a breakdown of my finances:

Federal student loan principal: $41,251

Unpaid interest balance: $183

Weighted average student loan interest rate: 6.25%

Repayment plan or strategy: Private student loan refinance

Anticipated minimum monthly payment: $650

I pay $100 per month more than the minimum required.

Expected remaining time to repay the loan: Five years

Other debt: home mortgage of $55,000; auto loan of $38,000

Pay structure: salary plus employer-provided benefits that include license fees, health insurance, liability insurance, disability insurance and retirement plan, including an employer match.

Tax status: single (one dependent)

Adjusted gross income from most recently filed return: $80,000

Average monthly expenses: $3,500

As a new grad, I was told by our veterinary school advisers to refinance my loans. In the long run, I think I am worse off than had I remained in the federal program. Nevertheless, I am grateful for my education.

Ready To Be Clear of Debt

Dear Ready,

I applaud your desire to be debt-free. It sounds like you have turned your education into a rewarding career and cleared other stresses from your life. Paying off your student loans would remove another stressor.

It's understandable that you're tired of paying and not making great headway. No one wants to pay more than they have to for something, let alone student loans. One of the most common concerns I hear in student loan discussions is, "I don't want to pay more interest than I have to." Unfortunately, paying nearly three times your original balance over 25 or 30 years is a numerical outcome of the limited traditional repayment options available to you when you graduated — it's a feature, not a bug. The longer you're in repayment, the more you'll pay, and most of that goes to interest. It's common for veterinarians using mortgage-like student loan repayment plans to pay more than twice what they borrowed over extended time frames. Anyone with a mortgage will experience the same thing if they actually pay over a full 30 years.

Like many of your colleagues, you happened to graduate before the more beneficial income-driven repayment options became available, in 2009. If they had been available to you, you likely would have paid much less at this point, and be on the cusp of reaching student debt forgiveness. (With income-driven repayment, borrowers are eligible to have the balance of their loans forgiven after making payments for 20 to 25 years, depending on the plan.) In the thousands of student loan repayment simulations I've run over the years for colleagues with interest rates similar to yours, I rarely see projections in which borrowers pay two times their original balance, whether they reach forgiveness (and potentially need to pay a tax on the forgiven balance) or not. That is a feature of the newer income-driven repayment plans.

Unfortunately, that was not an option for you. There is good news, however!

With changes announced by the U.S. Department of Education this year, you have a chance to receive student loan forgiveness very soon.

Before we get to that, let's clear up some common confusion on student loan refinance and consolidation.

You actually didn't do a private refinance of your student loans. From your federal student loan record, I can see that you consolidated a couple of times. And that's OK. There have been a lot of changes over the years that provided various reasons for doing so. If you truly refinanced with a private entity, like a bank, then you no longer would have a balance showing in your federal student aid data file, and you would not be eligible for federal student loan benefits.

Ask Dr. Debt

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For more information, visit the VIN Foundation student debt help page.

People often confuse student loan consolidation and refinance. They are essentially the same thing. When you consolidate and end up with a more favorable interest rate, that process is commonly called a refinance. When you consolidate and your interest rate is largely unchanged (as with a Direct Consolidation Loan), it's called a consolidation. During the recent period of extremely low interest rates, a student loan refinance usually referred to paying off student loans with a private loan that would not be eligible for any of the benefits we describe here.

When I review your student aid data file in the VIN Foundation My Student Loans tool, I see $41,251 of privately held Federal Family Education Loan (FFEL) principal. Even when privately held like yours, FFELs are government-backed, which makes them distinct from loans obtained directly from a private lender.

The important point is, you didn't do a private student loan refinance and never left the federal student loan system. If you had, your repayment options would be limited to paying on your loans as you have been, or accelerating payments as you are suggesting.

Now to the good part. You and borrowers like you have a special opportunity to reach student loan forgiveness sooner. You may be able to clear your student debt even faster than you planned, and at a much lower cost, by taking advantage of a recently announced one-time federal student loan-forgiveness count adjustment.

The adjustment treats any payments made (and some periods of deferment and forbearance) on federally held student loans as forgiveness-eligible, regardless of whether the borrower was using an income-driven plan. Because your remaining loans are privately held, if you left them as is, they wouldn't be eligible for the adjustment. You can change that by consolidating your loans (again) into a Direct Consolidation Loan before the count adjustment period ends. According to the Department of Education, "Borrowers who do not have eligible loans will need to apply for consolidation no later than May 1, 2023, to ensure they benefit from the one-time account adjustment."

With at least 24 years of repayment (and possibly more, considering some of the older loans I'm seeing in your loan history), you could very well receive student loan forgiveness in 2023. That's right — next year.

The maximum repayment time before reaching student forgiveness is 25 years. So after the adjustment, you will have crossed the threshold to forgiveness already or be only one year away.

Even better, if your loans are forgiven in 2023, you will not be assessed federal income tax on the forgiven amount. As discussed in last month's Dear Dr. Debt column, there is a special exemption in place making any student loan forgiveness received through 2025 tax-free!

To be clear, to become eligible for the adjustment, you need to consolidate your loans into a Direct Consolidation Loan to have your prior repayment history counted. You can start the federal Direct Consolidation Loan process at this link. For more information, see the VIN Foundation consolidation "how to" video and blog post.

Don't be too concerned if, in consolidating, your interest rate goes from 6.25% to 7.25%. With a Direct Consolidation Loan, the interest rate is a weighted average of your rates, less any discounts. It looks like you are receiving some interest rate discounts right now, and they might not transfer over. It's unclear — we have heard from some veterinarians who are receiving previously discounted rates even after consolidating. Regardless, I think the benefit of near-term forgiveness is worth making maybe one more year of payments at a slightly higher rate. Think about it this way: Would you rather make six more years of payments at 6.25% or maybe one more year of payments at 7.25%?

To recap, it is possible and beneficial to consolidate federal student loans that have been consolidated before. Try not to get too hung up on the lingo. Even if you have already consolidated your student loans multiple times, you can still convert your previously consolidated, privately held federal loans into a federally held Direct Consolidation Loan that is eligible for these new benefits.

Do not delay. With all of the new incentives to consolidate, applications are taking longer than usual to process. I suggest starting as soon as you can to be sure your application is submitted well before the one-time count adjustment ends.

What do you think? Sound like a plan?

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