Debt Management for Dental StudentsJason DiLorenzo

- Confidential Document, Property of Graduate Leverage, LLC -

Changes in Student Debt Levels

Debt levels have more than tripled in the last 17 yearsDebt levels have more than tripled in the last 17 years

~$50k

~$115k

1993 2003

~$203K

2011* Based on data collected by ADEA and GL internal student database

Changes in Student Debt Levels

1.Federal Loan Basics

2.Federal Loan Repayment Options

3.Private Loan Repayment Options

4.Dental Case Studies

5.How to Calculate Payments

6.Review and Q & A

Key Takeaway: How recent and upcoming regulations will help address the mounting debt burden facing many dental students.

Key Takeaway: How recent and upcoming regulations will help address the mounting debt burden facing many dental students.

Agenda

Unsubsidized Stafford

Subsidized Stafford

Perkins

Grants/Scholarships

Grad PLUS

Low Cost To Borrower

High Cost To Borrower

Federal Loans: (Stafford, Grad PLUS)

• Federal Stafford: Fixed Rate 6.8% (since July 1st 2006)

• Subsidized: government pays interest during school and deferment

• Unsubsidized: all interest accrues

• Direct Graduate PLUS: Fixed Rate 7.9% (all interest accrues)

Private Loans:

• Sometimes needed for Externships, Internships, or Residencies

• Interest rates vary

• Margins have decreased but minimum credit requirements have tightened

High Rate Private

Low Rate Private

Sources of Funding

- Confidential Document, Property of Graduate Leverage, LLC -

Key to student loan management is finding the right balance between these two competing pressures. The right balance

will change over time!

Key to student loan management is finding the right balance between these two competing pressures. The right balance

will change over time!$1,000

Competing Pressures

Liquidity

Total Cost of Your Student Debt

$1,000

$ 500

$ 150,000 $ 300,000

 

Federal Loan Repayment OptionsWays to Postpone Payments:

• Forbearance:

• NO SUBSIDY – All loans accrue interest.

• Economic Hardship Deferment (EHD):

• FULL SUBSIDY – Unsubsidized accrue interest.

• In-School Deferment:

• FULL SUBSIDY – Unsubsidized accrue interest

Ways to Make Full Payments:

• Standard 10 Year Term

• NO SUBSIDY – Shortest term available

• Prepaying

• Prepayment allowed without penalty on all federal repayment programs.

 

Federal Loan Repayment Options

Ways to Reduce Payments:

• Extended 25 Year Term:

• NO SUBSIDY

• Consolidated 30 Year Term:

• NO SUBSIDY

• Available for consolidated loans $60,000 or greater

• Income-Based Repayment (IBR):

• PARTIAL SUBSIDY

• Pay As You Earn (ICR-A):

• PARTIAL SUBSIDY

• No loans before Oct. 2007 + loan post Oct. 2011

IBR and ICR-A

Partial Financial Hardship

• Limit monthly payment to 15% of discretionary income, capped at 10-year standard payment

2012/2013: 10% (ICR-A)

Government Subsidy

• Subsidized interest not covered by reduced payment is paid by government

• Subsidy is provided for maximum of 3 years

Taxable Loan Forgiveness

• After 25 years any outstanding balance is forgiven

2012/2013: 20 years (ICR-A)

Many Graduates Not Taking Advantage Of New Tax Breaks Many Graduates Not Taking Advantage Of New Tax Breaks

Taxes during final year school:

1. Lifetime Learning Tax Credit

2. Tuition and fees tax deduction

3. Married Filing Jointly or Separately

Decision Process:

• Tax benefit of each option calculated• Changes in subsidy benefit added back for final number

Tax Free Forgiveness

PSLF – Public Service Loan Forgiveness

Federal program enacted by Congress in 2007

Specific requirements:

• Borrower must make 120 qualifying payments on a Federal Direct Loan

• Borrower must work for a public service entity as defined by the program, such as a Federal, State, Local, or non-profit organization

• New Employment Certification Form (released 2012)

Savings opportunity immense – more stringent requirements.Savings opportunity immense – more stringent requirements.

- Confidential Document, Property of Graduate Leverage, LLC -

Private Loans or Federal Loans

Understand the Loss of Federal BenefitsUnderstand the Loss of Federal Benefits

For illustrative purposes only. Assumptions based on good credit & sample lenders.

%

Current

3%

Interest Rate Increase?

7.9%

4.9%

Private or Grad PLUS Loan

?

7.5%

Important Considerations– Federal Loan Benefits: Evaluate loss of federal repayment

plans / forgiveness opportunities– Fees: Application or origination fees may erode savings

potential– Interest Rate: Evaluate rate difference and type: Variable vs.

Fixed

Solutions for High Rate Debt

Pay Down Quickly

Refinance to Lower Interest Rate

Private Loan

Grad PLUS7.9% / 8.5%

Credit Card Debt15%+

Case Details• 2013 graduate, unmarried, family size of one• $260,000 total debt, all Federal debt ($159K Stafford / $101K Grad PLUS)• $100,000 starting salary increasing by 3% annually• high monthly expenses

Monthly Payments Total Payments

ICR-A* Y1: $264 Y10: $856 Y20: $1,303 $329,435

3 Year Forbearance + 10 Year Y4: $3,757 $450,799

* Total payments under ICR-A and IBR include tax liability generated from forgiven loans.

30 Year Consolidated Term $1,774 $638,513

25 Year Extended Term $1,901 $570,295

IBR* $504,340Y1: $396 Y10: $1,284 Y20: $1,955

Case #1

- Confidential Document, Property of Graduate Leverage, LLC -

Present ValueSavings of ~$90k

* PV analysis includes tax liability and assumes 3% annual increase in salary increase. Detailed assumptions available upon request.

Case Details• 2013 graduate, married, family size of three (one child)• $202,000 total debt

• $25,500 Subsidized Stafford and $136,500 Unsubsidized Stafford @ 6.8%• $20,000 Grad PLUS @7.9% and $25,000 Private Loan @ 9.5%

• 1 year of general practice residency at $25,000, salary increases to $120,000• Spouse salary of $60,000

Monthly Payments Total Payments

IBR* Y1: $0 Y10: $2,078 Y25: $2,078 $334,185

25 Year Term $1,286 $385,901

3 Year Forbearance + 25 Year Y4: $1,553 $466,025

ICR-A* Y1: $0 Y10: $1,517 Y20: $1,984 $342,963

* Total payments under ICR-A & IBR include tax liability generated from forgiven loans.

Case #2

Case #2Refinance 9.5% Private Loan

$38,819

$31,820

Lowering interest rate on private loan by 4.5% saves $7,000 in interest costs. Greater savings for larger

principle amounts.

Lowering interest rate on private loan by 4.5% saves $7,000 in interest costs. Greater savings for larger

principle amounts.

Total Paid $

9.5% 5.0%Loan

Case Details• 2013 graduate, unmarried, family size of one• $96,000 total debt

• $80K Stafford @ 6.8%• $8K Private @ 8.25%• $8K Private @ 9.5%

• $130,000 starting salary increasing by 3% annually, NO FORGIVENESS

1st & 2nd Year Monthly Payments Extra Cash Flow

10 Year Standard $0$924

$583IBR $350

$389ICR-A $500

Case #3 Targeting

Consolidation – 4.75%

Stafford – 6.8%Loans

Repayment Period

Typical Repayment Plan

Private Loan - 9.25%

Grad Plus – 7.9%

8 yrs 10 yrs

Effective Rate (APR) = 6.29% $11,675$11,675 Effective Rate (APR) = 5.69%

Non-payment

Non-payment

Non-pay

9.25%

0.5 yr

Targeted Repayment Plan

7.9%

1 yr 5 yrs 9.5 yrs

4.75%

6.8%

7 yrs

Case #3 Targeting

*Assumes $168,000 in federal debt and $8,000 in private loans

9.5% 9.5%

w/$500 prepay

8.25% 8.25%

w/$500 prepay

15MONTHS

Targeting Private Loans

Total Paid $

10 YEARS

$12,422

$8,485

10 YEARS 28

MONTHS

$11,775

$9,146

Savings of $6,566 earned in 28 months of prepayment.

Savings of $6,566 earned in 28 months of prepayment.

Case #3 Targeting

- Confidential Document, Property of Graduate Leverage, LLC -

Case #3 - Should I Be Investing?

1960 1987 2001

7.4% Average S&P Return (A/T)

7.4% Average S&P Return (A/T)

0%

8%

16%

1940

PLUS Loan

S&P 500

Returns

8.1% AveragePLUS Return

8.1% AveragePLUS Return

Sources: Yale Econ/Robert Shiller, Standard & Poor’s, Federal Reserve, Bloomberg

All Returns Here Are After Tax All Returns Here Are After Tax

- Confidential Document, Property of Graduate Leverage, LLC -

What every dental student with loans should do:1. Understand Your Debt

a) What kind of loans do I have? (Federal Stafford, GRAD Plus, Perkins, etc.)

b) Who is my lender? (Federal Direct, Federal through Private Lender, Non-Federal Private Lender)

c) What are the interest rates on my loans? (fixed, variable, 6.8%, 7.9%, 8.5%, etc.)

2. Position Loan for Appropriate Balance Between Liquidity and Total Cost

a) Calculate monthly payment options and compare to monthly budget

b) Take advantage of “exceptions to the rule” – targeting and forgiveness

c) Evaluate refinancing opportunities

What every dental student with loans should do:3. Prepare & File Taxes Advantageously

a) Preparation in fall of final year to understand tax implications for loan subsidy programs

b) Understand the trade-off of filing jointly with spouse

c) File taxes in final year as appropriate

4. Manage your Financial Net wortha) Properly allocate discretionary income

b) Only invest when returns exceed cost of debt and liquidity issues met

Thank You

If you have any questions or would like a personalized debt assessment, please call or visit our website.

www.gladvisor.com

Jason DiLorenzo415-722-8552

jdilorenzo@glAdvisor.com

*The information in this presentation is for informational purposes only.

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