3 Take-Aways That Optometrists Should Know About Biden’s Student Loan Debt Relief
(1) Final extension of the student loan repayment + 0% Interest pause forbearance until 12/31/2022. DO NOT MAKE any payments until 1/2023
(2) Federal Student Debt Forgiveness up to $10,000 for practicing OD’s making less than $125,000 AGI (or <$250,000 Married), or up to $20,000 for ODs with undergraduate college Pell Grant loans.
(3) Student loans forgiven between 2021-2025 will NOT be federally taxed but might be taxed at the state level for the following 5 states: Arkansas, Minnesota, Mississippi, North Carolina and Wisconsin
(4) Any federal payments made since March 13, 2020 can be refunded to be eligible for the $10,000 forgiveness. Refinanced private loans are NOT eligible.
(5) New Proposed Income-Driven Repayment Plan Will Cap your Monthly Payment at 5% of discretionary income, instead of current 10%. This is great for ODs who are in forgiveness programs such as 10 years PSLF.
(6) 5 financial plans for optometrists on what to do next
On Wednesday, Aug 24, 2022, President Biden, along with the US Department of Education announced a three-part plan to help student borrowers with federal loans transition back to regular payments.
While this is a very controversial policy from a political point of view, especially with increasing inflation and federal spending, our goal for this article is to offer insights on what each optometrist should be aware of, and how to navigate these uncertain times to be financially successful.
In addition, we do want to let our members know that it took us a little while to gather our thoughts after the dust settled to address our community.. So let’s begin with the facts first and any questions that optometrists might have.
PART 1: Final extension of the student loan repayment + 0% Interest pause forbearance until 12/31/2022
For over two years, the administration has extended the student loan repayment pause quite a number of times that was established during the height of the pandemic. Because of this, optometrists with any federally-held loan did not have to pay a single dollar, along with 0% interest.
The forbearance was originally set to expire in 8/31/2022 but to allow for a smooth transition to repayment and prevent unnecessary defaults, the Biden-Harris Administration will extend the pause a FINAL time through December 31, 2022, with payments resuming in January 2023. This will happen automatically.
What should I do with my current federal student loans?
We have been expecting this for many months as the Department of Education has not given any borrowers any instructions on how to restart their payment leading up to this.
For the majority of optometrists with federal loans, take advantage of the 0% interest, deferment of payment and plan to adjust the monthly budget in Early November 2022 to prepare for regular payment at the typical 6.8% federal interest rate.
At the current moment, we do NOT recommend making federal loan payments and especially additional extra payments during this period of uncertainty until early 2023. While we are big advocates of aggressive student loan payments, there is still too much uncertainty during this election year.
In the meantime, we advocate using these “student loan payments” toward retirement or other investments like saving for a home down payment.
Part 2: Federal Student Debt Forgiveness up to $10,000 for practicing OD’s making less than $125,000 AGI (or <$250,000 Married), or up to $20,000 for ODs with undergraduate college Pell Grant loans.
Optometrists making an adjusted gross income (AGI) of less than $125,000 (for individuals) or $250,000 (for married couples or heads of households), will be eligible for up to $10,000 federal loan forgiveness. This will apply to most new OD grads whose income tends to be on the lower end as they start out. But for the majority of doctors, most of us will NOT qualify.
For current optometry students or doctors with existing undergraduate Pell Grant loans, the Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients.
Just as a reference, undergraduate Pell Grant recipients require an income level of less than $60,000 a year to qualify, and Pell Grant recipients typically experience more challenges repaying their debt than other borrowers.
How do I know what type of federal loans I have?
First of all, you have to know who your federal servicer is and how to contact them. Here is a list of all federal servicers and their contact information.
Then you can head over to StudentAid.gov under the “MyAid” tab which will show all your loans, types of loans and loan servicers.
What is the income limit for optometrists to get forgiveness?
As mentioned above, forgiveness only applies to single taxpayers whose adjusted gross income (AGI) is less than $125,000 per year or married filing jointly/head of household couples making less than $250,000 per year.
You can take a look at your tax return, specifically Line 11 to see your AGI income for 2020 or 2021.
"Remember that these income-based limits can apply for either the 2020 tax year or 2021, so use whatever lower AGI year to qualify, even if in the other year, you are above the income limit."
What do ODs need to do in order to receive loan forgiveness?
If the U.S. Department of Education doesn't have your income data - or if you don't know if the U.S. The Department of Education has your income data, the Administration will launch a simple application likely in early October.
Based on recent information, the application will be available before the pause on federal student loan repayments ends on December 31, 2022. If you would like to be notified by the U.S. Department of Education when the application is open, please sign up at the Department of Education subscription page.
Will student loan forgiveness be taxable?
Typically whenever a debt is forgiven, it is considered to be income and thus, almost always taxable (like for the 20-25 years total loan forgiveness program). But luckily since this policy is made under the federal American Rescue Plan Act, any student debt forgiven between 2021-2025 will NOT be federally taxed. But that might be different at the state tax level.
Currently there are 5 states that may tax student loan forgiveness: Arkansas, Minnesota, Mississippi, North Carolina and Wisconsin.
For example, borrowers who receive $10,000 in debt forgiveness could be liable to pay up to $490 in Arkansas and up to $985 in Minnesota, but taxes will depend on income.
We suspect that as we get closer to the end of the year, a lot of these states might enact state policies to fix it, since no state wants to be the single state taxing student loan forgiveness.
What if I pay down/pay off my federal student loans below the $10,000 during COVID student loan deferment, can I get a refund of my payments?
Remember that this only applies to federal loan borrowers. Any optometrists who made payments or paid off their federally held loans during the interest-free forbearance — by single payment or lump sum — are eligible for refunds. Any payment made since March 13, 2020, is eligible.
For any optometrists who paid off their remaining balance of $10,000, it is a no brainer to apply for a refund of their payments. Extra payments can also be refunded without question asked as well.
"For any optometrists who paid off their remaining federal balance of $10,000 after March 13, 2020, it is a no brainer to apply for a refund of their payments. Extra payments can also be refunded without question asked as well"
Will my refinanced student loan payment be eligible for a refund?
Unfortunately, we did confirm this with multiple Refi partners such as Laurel Road, there is no way to refund back $10,000 of refi student loan payments since it is held with a private bank and NOT with the federal department.
I suspect that in the upcoming months, a lot of refi lenders might feel the pressure to please their consumers by offering some kind of incentive.
As of the moment, there is NO way to differentiate/track refinanced student loan payment vs federal student loan payment.
How do I request a refund of my federal student loan payments?
The first step is to call your loan servicer. Your loan servicer representative could ask for your Social Security number to pull up your account. After they verify your account and identity, let them know you want to request a refund on payments made during the interest-free forbearance period.
- Your loan servicer’s phone number.
- Your Social Security number.
- Payment confirmation numbers or bank payment information.
- The address where you want your refund delivered via check (6-12 weeks) or Electronic deposit
Please expect long wait times due to high demand.
Part 3: New Proposed Income-Driven Repayment Plan Will Cap your Monthly Payment at 5% of discretionary income, instead of current 10%
The Biden-Harris Administration is proposing a rule to create a new income-driven repayment plan that will substantially reduce future monthly payments for lower- and middle-income borrowers. Remember this is just a proposal but will likely be active in 2023 if passed.
4 Key Points of Income-based Repayment Proposal |
(1) Require borrowers to pay no more than 5% of their discretionary income monthly on undergraduate loans. This is down from the 10% available under the most recent income-driven repayment plan.
(2) Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment.
(3) Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with loan balances of $12,000 or less.
(4) Cover the borrower's unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower's loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low.
How will the new repayment plan work?
The proposed income-driven repayment plan will CAP monthly payments to 5% of your discretionary income. Any unpaid interest will be covered by the Department of Education, meaning that interest won’t accrue and your loan balance won’t grow if you make your monthly payments.
If you borrowed $12,000 or less, any remaining balance is eligible for forgiveness after you’ve made regular payments for 10 years.
What counts as discretionary income?
Discretionary income is the amount you have left after paying for essentials like housing and food costs. In the context of federal student loans, discretionary income is the difference between your annual income and 150% of the poverty guideline for your family size and location.
However, the new repayment plan calculates discretionary income more favorably by raising the amount of income that is protected from repayment. This will guarantee that no borrower earning less than 225% of the federal poverty level (about $30,578 for 2022) will have to make a payment.
Therefore, most high-paying optometrists will have to pay some form of monthly payment, especially if their doctor’s salary continues to climb each year.
Who is eligible for this plan and when will it be in effect?
The eligibility criteria for this repayment plan has not yet been released.
The qualifications to enroll in existing income-driven repayment plans vary; some require you to meet certain income thresholds while others allow anyone with a federal student loan to sign up.
It’s not clear when this plan will be available for borrowers, but it almost certainly won’t be in effect until 2023. Currently, this plan is just a proposal and must go through several more administrative steps before borrowers can sign up.
What does this mean for ODs in forgiveness programs like 10 years PSLF or 20-25 Total Loan Forgiveness?
This is great news for our fellow ODs who are working for VA or non-profit institutions and going for 10 year Public Service Loan Forgiveness, along with optometrists whose debt load is too high compared to their income (over 3:1 DTI Ratio) and must enroll in 20-25 Year Total Loan forgiveness.
The whole goal of any forgiveness program is to make the least monthly payment during those years (usually in an income-based repayment plan), with the hope that the government will forgive the rest.
So therefore, cutting the discretionary income monthly payment in half, will save borrowers money in the long run.
"Reducing down to 5% discretionary income will making monthly payment cut in half, will save borrowers money in the long run. Please note that currently, this proposal only applies to undergraduate loans, but I suspect since many borrowers consolidate their undergraduate/graduate loan upon finishing up school, it will be extended to all types of federal loans"
For the last 5+ years, we have taught and advocated for optometrists, especially new OD graduates, to take fiduciary responsibility by living below their means, not relying on the uncertainty government policies, and taking charge of their student loan debt by refinancing to a low interest rate with the goal to pay it off completely within 5-10 years.
A majority of our ODoF members including us two co-founders have shown our profession that we are in charge of our own financial destiny and it is not impossible for us to aggressively pay off our student loans. So this policy went against some of our mission statement and countered a lot of financial lessons that we strive to reach our community.
Politics aside, we do want to first acknowledge that it was difficult for us to write this article because we understand the frustration of both sides of the camp. So here are our financial words of wisdom for our members.
Scenario #1: Optometrists Who Refinanced Their Student Loans
You did the RIGHT thing with the current information that you had at hand. Mathematically speaking, it was the right financial move to take your federal loan of 6.8% to a historically low rate of 2-3%. You likely were sick & tired of being a slave to your student debt, and wanted a solid game plan with an end goal in mind.
Originally many of you signed up for a 10 years fixed term, but I bet most of y’all are grinding hard by working extra days, paying extra monthly payment, and on track to be done by 5-7 years. Even more impressive that some of you rockstar ODs have done it in less than 3 years!
Should you have any regrets? HECK NO. You are probably better at budgeting, living below your means, hustling by any means necessary because you have to and each year that passes by, you are closer to achieving that debt-free life and will have a significant net worth by increasing your salary and lowering your debt.
Don’t feel upset, don’t feel envious of peers but rather be happy for them. $10,000 that goes to help your fellow ODs and boost our optometry profession is a good thing. Keep on crushing it!
Financial Game Plan
"Continue your financial plan and keep aggressively paying off that student debt each month with the goal of finishing off within 10 years. Any extra cash flow goes into debt payment or investment. "
Scenario #2: Optometrists with Federal Student Loans (Under $120,000 Income)
When I heard this announcement, I was like great! $10,000 will really help out a lot of new graduates whose starting salary is well-below the $120,000 AGI income especially for all my CA optometrists out there.
But I was surprised that some of my experienced ODs who are many years out in practice are still below that income-level. So this is even better! Because $10,000 forgiveness will help more ODs within our profession. But I urge you to think of the big picture… Why is your salary still stagnant at $120,000 after all these years? But that is another discussion for another day.
If anything, I feel like ODs that got the $10,000 are left with more uncertainty than anything on how to tackle their student loans.
Financial Game Plan
"This $10,000 gift is gravy on top, but remember this is a small drop in the bucket compared to your massive $200,000+ student loan.
Our advice is still the same, if you are not planning to go for loan forgiveness, plan to aggressively pay off your student loans starting 1/2023. Consider refinancing to a lower interest rate if rates are lower during that time.
Do NOT have a lukewarm financial plan when it comes to your student loans, life will always get in the way so student loans will often get forgotten and balloon to a massive amount years down the road. Have a goal to be debt-free by year 10. In the meantime, enjoy the 0% interest, do NOT make any payment until 1/2023 due to political uncertainty."
Scenario #3: Optometrists with Federal Student Loans (Over $120,000 Income)
For the majority of optometrists out there, we sincerely hope you are well above the income-based threshold and this news does not apply to you at all. Great, you are probably killing it as an OD and making $150,000+ annually.
Financial Game Plan
"Our advice is still the same for all ODs with federal loans, if you are not planning to go for loan forgiveness, plan to aggressively pay off your student loans starting 1/2023.
Consider refinancing to a lower interest rate if rates are lower during that time. Have a solid financial plan to finish off your student loans within 10 years. In the meantime, enjoy the 0% interest, do not make any payment until 1/2023 due to political uncertainty. "
Scenario #4: Optometrists within 10 years Public Service Loan Forgiveness (PSLF)
While the $10,000 forgiveness is great if you qualify for this, the biggest thing you should be excited about is the new proposed 5% Discretionary income that will lower your monthly payment starting 2023. This is assuming you are enrolled in a PAYE or REPAYE plan. Both options are currently at 10% of your discretionary income over 20 to 25 years.
The last 2+ years have been awesome for all my PSLF ODs out there, you had zero monthly payments but had over 24+ payments counting toward your 120 total payments!
Financial Game Plan
"Enjoy the 0% interest, do NOT make any payment until 1/2023. Start planning to resume your federal loan payment and watch out for any update to the new income-based repayment plan starting in 2023."
Scenario #5: Optometrists within 20-25 Total Federal Loan Forgiveness
This is the group of optometrists who likely are the most stressed out. While we are advocates for debt payment, we acknowledge that mathematically speaking, an optometrist with a massive debt load of $300,000, while still making $100,000 (greater than 2.5: 1 DT1 Ratio) will have a difficult time paying off debt, while investing for retirement unless their salary drastically increases or they literally LIVE ON BEANS/RICE for many years.
So similar to PSLF optometrists, the $10,000 forgiveness is great if you qualify for this and the last 2 years have also been great as well! Just make sure you consult with a student loan financial planner like Patrick Logue CFP to run the numbers since 20-25+ years is a long time.
Financial Game Plan
"Enjoy the 0% interest, do not make any payment until 1/2023. Start planning to resume your federal loan payment and watch out for any update to the new income-based repayment plan starting in 2023.
Invest the reserved “student payment” into a brokerage account and prepare for the massive tax bomb on the loan forgiven. Lastly, stay motivated because it is a long journey ahead."
In summary, while no one can predict what current/future administration’s policies will get passed, we strive to take the necessary information provided to our community and come up with the best financial game plan.
As always, we are always here to support and help guide each of you during this uncertain time and toward financial freedom.
Cheers to Financial Freedom, Dat & Aaron | Cofounders
Want to learn how to manage your student Loan? Check out The Optometrist's Guide to Student Loan
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