Overview of the Optometry Student Loan Market: June 2024
KEY POINTS:
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The latest 2023 Optometry Income Report shows an average student loan debt of around $230,000, with about 8% of doctors having a debt burden exceeding $300,000.
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ODs within 10 years Public Service Loan Forgiveness (PSLF), this is typically the most financially prudent option. We recommend the SAVE plan.
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25 years Total Federal Loan forgiveness can be advisable for optometrists with a debt-to-income ratio of 2.0 to 1 or greater, or with severe health issues, as paying off $300,000 on a $100,000 salary would require severe budgeting and delayed retirement savings.
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Enrolling in the SAVE plan for 25 years of income-driven payments is recommended as it provides a 100% interest subsidy, preventing your loan balance from ballooning if payments don't cover the interest. While the principal won't decrease, this strategy helps mitigate a large tax bill at the end of the 25 years.
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If pursuing 25-year Total Federal Forgiveness, focus on making the minimum required payments based on your AGI income, similar to handling a tax bill.
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For doctors with a debt-to-income ratio under 2.0 to 1, refinancing federal loans to a lower private rate and aiming for a 5-10 year payoff is a more direct path to financial freedom than pursuing 20-25 year loan forgiveness.
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Refi Rates are higher at the moment but if you are planning to refi, SoFi offers a 0.675% doctor discount with rates starting at 4.61% fixed. Texas residents should look at Brazos for a low fixed rate of 3.99%.
With the incoming class of new optometry doctors entering the profession last month, new graduates today are facing a steeper hill regarding their student loans. The latest 2023 Optometry Income Report of around 2,000 doctors shows an average student loan debt of around $230,000, with about 8% of doctors having a debt burden exceeding $300,000.
In addition, the recent National Board Exam Pass Rates (NBEO), especially for Part 1, show a historically low pass rate of 68.7% for first-time test takers. While 83.5% of all students eventually pass all three parts, a significant number of graduating doctors (around 16.5%) are still unable to practice and, hence, unable to pay off their massive student loans, creating more obstacles to financial freedom.
While the Supreme Court overturned the administration’s student loan forgiveness plan, the executive branch continues to announce batches of forgiven loans. The administration recently celebrated forgiving $143.6 billion in student loans for around four million borrowers since taking office, transferring the financial burden from the students to taxpayers. And they aren’t stopping—the administration declared that “President Biden has vowed to use every tool available to cancel student debt for as many borrowers as possible, as quickly as possible.”
If student loan forgiveness lost in the Supreme Court, how are so many student loans still being forgiven? The answer is that while there are a lot of proposed bills by Biden, there is not a single student loan forgiveness plan that is approved. However, there are many plans, some of which are already up and running, such as the 10-year Public Service Loan Forgiveness (PSLF) and 20-25 year Total Federal Forgiveness via income-driven plans like SAVE. Be mindful of everything you hear in the media, especially with the upcoming November election.
With that being said, I am NOT going to debate the merits of student loan forgiveness or whether it is right or not. My approach to any financial situation is that you have to play to win with the cards you are dealt. So here is a rundown of what each optometrist should be doing.
Financial Strategies for Optometrists
Doctors with federal loans enrolled in the 10-year Public Service Loan Forgiveness (PSLF) program:
- Not all non-profit organizations qualify for PSLF; they must also be tax-exempt. Check with your HR department to confirm eligibility, usually VA, IHS, Academia are common non-profit that will qualify. As of August 2023, Kaiser optometrists, especially those in Texas and California, now qualify as employees of a non-profit organization and can apply for the ten-year PSLF program.
- In the meantime, enroll in an income-driven repayment plan like SAVE. Work with a ODoF student loan financial planner to review payment certification and explore vital tax strategies (such as married but filing separately), to reduce your monthly payment requirements.
- If you are one of the lucky few doctors that qualify for the ten-year Public Service Loan Forgiveness (PSLF) program, this is typically the most financially prudent option. Ensure you meet all the requirements and adhere to them for a decade. However, be cautious as some non-profit organizations are known for limiting associates to part-time hours—under 28 per week—to avoid offering benefits, which could disqualify you from the program. Worse, they might let you go unexpectedly before the ten years are up.
Doctors with Federal Student Loans Pursuing 25 Year Total Federal Forgiveness
Although we generally don’t advocate for loan forgiveness, there are specific situations where it might be advisable for optometrists to consider this option for their financial well-being, particularly for those with a debt-to-income ratio of 2.0 to 1 or greater, or with a life-threatening condition or disability. While it’s not impossible for an optometrist earning $100,000 to pay off $300,000 in student loans, doing so would require an extremely tight budget (think beans and rice), serious retirement savings delay, and would likely take much longer than five to ten years to achieve.
- A great strategy is to enroll in the SAVE plan, which offers 25 years of income-driven payments (or 300 qualified payments). This plan is recommended because it provides a 100% interest subsidy on any accruing interest. If your payments don’t cover the interest, you won’t be responsible for the interest that accrues. While your principal loan balance will NOT go down with time, this will prevent your overall loan balance from ballooning to over $500,000+ for example, which is particularly beneficial in reducing the massive tax bill at the end of the 25 years.
- If you are pursuing 25 year Total Federal Forgiveness, set aside any preconceptions about debt payoff. The objective of this program is to make the minimum required payment based on your AGI income throughout its duration. Think of it as a tax bill; aim not to pay the IRS more than what’s due. In other words, avoid leaving a tip.
- It’s advisable to consult with a student loan financial planner. Get a flat-fee consultation to make sure all paperworks are correct, and aim to touch base with them every two to three years. This ensures you remain on track, especially given the ever-evolving nature of student loans.
⚠ It’s imperative to be well-informed and mentally prepared to commit to this journey, as 25 years is a significant period. The worst thing that you can do would be to change your mind after five years due to life events or boost in salary, then proceed to refinance to a lower rate in order to aggressively pay it off. Lastly, begin setting aside funds for the massive tax bill you’ll face at the end of the 25 years in a separate brokerage account.
Financial Pearl
"SAVE plan for 25 years of income-driven payments is recommended as it provides a 100% interest subsidy, preventing your loan balance from ballooning if payments don't cover the interest. While the principal won't decrease, this strategy helps mitigate a large tax bill at the end of the 25 years."
Doctors with Federal Student Loans Not Pursuing Forgiveness and Aiming to Pay Off in 5-10 Years
We are biased because we know this is the more direct path toward financial freedom for doctors and where the majority of doctors should aim to be in. If your debt-to-income ratio (DTI) is LESS than 2.0 to 1, you do NOT need to pursue 20-25 year total federal loan forgiveness. Instead, consider refinancing your federal loans, which typically have a 6.8% interest rate, to a lower private rate with the goal of paying them off in 5-10 years. This is entirely achievable while working toward other financial goals.
- ⚠️ Unfortunately, refinance rates are high right now, with 5-year fixed rates starting at 4.00%-4.50% and going as high as 5.00%-5.50% for 10-year fixed rates, depending on your credit score, loan size, financial background, personal debt, etc. Not much saving compared to your federal loans
- Sofi, with its 0.675% doctor discount, starts at 4.61% fixed, and Laurel Road is at 4.92%. If you are a Texas resident, consider applying with Brazos, which offers a remarkably low fixed rate of 3.99% for student refinance.
- Opt for a 5-year fixed rate for the lowest rate if you can handle the monthly payment. But a 7- or 10-year term is acceptable if you need more cash flow but at a higher rate. Don’t worry if your rates are not better than your current federal rate; enroll in the SAVE plan for now and pay extra each month. You can try refinancing again in 1 or 2 years when rates drop or your financial profile improves.
⚠️ Underwriting Factors: Typically, a minimum credit score of 775 and a monthly cash flow (income minus expenses) of $10,000 will get you the lowest rate possible. Keep this in mind as you consider your refinancing options.
Financial Pearl
"Doctors with a debt-to-income ratio under 2.0 to 1, refinancing federal loans to a lower private rate and aiming for a 5-10 year payoff is a more direct path to financial freedom than pursuing 20-25 year loan forgiveness."
Summary:
The Biden White House has been the most aggressive presidential administration in history regarding student loan forgiveness. Despite many setbacks, the administration claims to have canceled a massive amount of debt. However, much of this “debt forgiveness” results from previous student loan programs now qualifying borrowers solely due to the timeline.
Similar to paying taxes, the key to financial freedom is paying what is required by maximizing every single loophole so we should do the same with student loan payment.
It is important to prepare for the resumption of loan payments and have a solid game plan to evaluate your options for refinancing or pursuing loan forgiveness based on your individual circumstances. You can always text STUDENT to 55444 if you need free custom guidance with Dat via email.
As always, make informed decisions based on your financial goals and risk tolerance. Cheers to financial freedom!
Want to learn how to manage your student loans? Check out The Optometrist's Guide to Student Loans
Want to get a full blueprint on how to Refi your student loans? Dive deep into The Optometrist's Guide to Student Loans Refi
Want to Compare the lowest ReFi Rates? Check Out RECOMMENDED STUDENT LOAN REFI
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