Income Based Repayment….The Young Professionals Future Nightmare

September 17, 2017 by Andrew Spracklin

Now, I’m going to preface this by saying this is my opinion on this topic and I understand that people are under different circumstances and that there are numerous, rationale reasons to use the IBR system but I am going to advocate for individuals that have six figure student loan debt to not use the program.

When you graduate professional school, whether you are a doctor or a lawyer most people don’t really think about how they are going to pay off their student loans, they just think that they are going to rule the world based on the education that they just received.  It is a real slap in the face when you finally start to face the fact that these loans are going to need to be paid.

As I stated in the previous post, most government backed loans are at 6.8% and I believe that the interest is the same no matter what you select for your repayment plan.  The problem with this is that with individuals with a six figure loan amount, you are never able to get ahead of the interest on these loans, at one point, I believe I was paying a little over $900 a month in interest.

With many young professionals, you are not making much money when you graduate, most of the time as a young professional your salary might be minimal enough to pay very little, if any on your income based repayment plan.  Numerous chiropractors don’t pay themselves hardly anything when they are fresh out of school as they pour almost all the money that they make back into the business.  Now that sounds well and good, but when you start to analyze what the interest is doing while you are paying little to nothing on your loans, it will make your heart sink.

Another problem with income based repayment is that whatever you have left on your loans after 20 years of paying, will roll onto your personal income tax.  So the thought process is, if I pay the minimum amount for 20 years, the rest will be forgiven, but the caveat is that the “forgiven” amount is that it does show up on your income tax as income for that given year.

Let me give you an example, this will be very general in nature.  Let’s say you are a new chiropractor and you have $200K in student loans when you graduate.  The first five years you don’t make enough money to qualify to pay anything on your student loans…your interest will continue to accrue.  After five years of doing nothing you are up to $260K.  Now, after five years you start making a little money and you can pay a little every month, but you still aren’t touching the interest because your $900 is now $1000 a month, you can kind of see the perpetual cycle with this.  Now after 20 years of payments, you would be close to 45-50 years old and you could potentially have between $300-400K in student loans left.  If you roll that amount into your personal income, so in addition to paying on your loans for 20 years, you will now owe an additional $100-150K in taxes on the amount that is forgive.  This is a very brief explanation but if you can piece personal finance and compounding interest together, it is easy to see the vicious cycle that you can fall into at this point.

With all of that being said, if you are young medical doctor or lawyer that is going to go work for a non-profit and can have your loans forgiven after 7-10 years, then by all means, go for it.  But in the world of chiropractic, this is just not an option for young chiropractors.

The reason I write about this, is because I am all about personal responsibility, now if there is a program that you can take advantage of to make your life easier to pay off student loans, go for it.  I took out the loans, ultimately I am going to have to pay them back, and this is why I am becoming such an advocate for student loan refinancing.

There are options that are 20 year repayment, that means when you are done with the repayment after 20 years you are done paying and don’t have to worry about the tax implications.  But you will have to face the fact that your payment will start immediately and not when you can afford it.

I have been established in practice for over 5 years now, I have told myself that I want to pay off my loans as fast as possible.  Don’t ask, but I started to listen to Dave Ramsey and while I agree with him on the premise of debt reduction some of the steps that he indicates to take are not realistic when starting a practice and growing operations.  This why I have refinanced my loans twice and look forward to being student loan free in 2-3 years.  By refinancing I was able to reduce the interest that I pay from $900 a month to roughly $300, so the majority of my payments go towards principle plus Kristina and I have been getting super aggressive making extra payments.

Income based repayment is not a bad program, but I feel that it is a terrible program for young professionals that have no shot of working for a non-profit and have six figures in debt as you will never be able to get ahead of the interest while making minimum payments.  The taxes when it is all said and done will make you cringe if you wrap your mind around the numbers. 

Unless you are one of those fantasy thinkers that thinks that the government is going to forgive all student loans (it probably won’t), go ahead and get aggressive with your loans and get that huge monkey off your back.  If you have any interest in refinancing, I highly recommend Credible, as you get numerous options in one place and the options run the gambit.  Click on the referral link below to check it out.

Again if you have any questions or comments on this topic I would love to hear from you.


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