LOAN REPAYMENT: YOU HAVE OPTIONS

Now is the time when physicians preparing for the start of practice think about how they will be able to afford the monthly payments on their student loans. Before you choose repayment schedules for your loans, you will first need to know what your salary will be and develop a preliminary budget. You will then have an idea of how much you can afford to pay toward your student loans and can choose an appropriate repayment schedule.

Ideally, you should choose a plan that maximizes flexibility, while minimizing cost. Although options may vary from lender to lender, there are several basic types of repayment schedules. Keep in mind that the longer you take to repay a loan, the more costly it will be.

STANDARD REPAYMENT

This is the ‘default’ schedule that will be assigned to you if you do not request otherwise. For guaranteed Student Loans (GSL), Stafford Loans, Direct Loans, and Supplemental Loans for Students (SLS), payments are made over 10 years; for HEAL loans, the repayment period is 25 years. You may request a shorter term on HEAL if you wish. Payments under a standard schedule change only as the interest rate fluctuates.

GRADUATED REPAYMENT

Graduated schedules vary, but they all seek to accomplish the same thing – to give you payment relief when your income is lowest. This is accomplished by requiring only interest to be paid for an initial fixed period, followed by principal and interest payments over the remainder of the term. With some graduated schedules, the payment amount increases in several ‘steps.’ When the payment amount levels off, it is higher than it would have been under a standard schedule to make up for the amounts that were not paid earlier.

INCOME CONTINGENT REPAYMENT

This is a variation of the graduated schedule, and is not available on every educational loan. Payments are calculated as a percentage of your adjusted gross income, and only increase as your income increases. Payments are generally capped at an amount slightly less than required under a ‘standard’ schedule. As with graduated repayment, lower initial payments are balanced by inflated payments later.

EXTENDED REPAYMENT

If you are looking for a lower required payment, but could afford to make extra payments occasionally, an extended schedule may work best for you. By extending the term from 10 years to 25 or 30 years, you significantly decrease the required payment amount. Of course, you also significantly increase the total amount of interest paid over the life of the loan. You could combine the cost advantages of the standard schedule and the convenience of the extended schedule; by signing up for an extended schedule with a lower required payment, but making a payment equivalent to what you would have paid under the standard schedule (with the excess credited to the principal balance), you will pay the loan off in about 10 years, but will also have the flexibility to make only the lower required payment if emergency expenses arise. Keep in mind that making extra monthly payments requires some footwork, as lenders do not always credit unscheduled payments correctly. You might consider making a large lump-sum payment to principal each year.

COST VS REPAYMENT: COMPARING REPAYMENT SCHEDULE OPTIONS

Take a look at this comparison. In each illustration, we assume that total debt at the start of repayment (original principal borrowed plus accrued interest during school, grace, and deferment) is $150,000. The interest rate ordinarily would be variable, but is fixed at 8% for the purpose of this example. These figures are based on Direct Loan repayment terms; the specific provisions of graduated and income-contingent (or income-sensitive) schedules vary by lender and loan program.

Repayment Schedule*	Payment Amount	Total Cost to Repay
Standard – 10 Years	$1,820 for 120 months	$218,400
Graduated – 10 Years	$1,000 for 24 months $2,121 for 96 months	$227,616
Income Contingent – 15 Years	$413 for 6 months $434 for 12 months $1,575 for 12 months $1,633 for 150 months	$ 2,478 $ 5,208 $ 18,900 $244,950 ———— $271,536
Extended - 25 Years	$1,158 for 300 months	$347,400

*Assumptions: Repayment begins in January in Post Graduate Year Three (PGY3) of a four year residency when Adjusted Gross Income (AGI) is $33,075; 5% salary increase in PGY4; starting salary in first year of practice is $126,000 and increases 5% thereafter. Payment will cap at the amount required to pay original loan under a 12-year schedule ($1,633); maximum term is 25 years, after which remaining balance is forgiven if not paid-in-full.

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