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January 6, 2018 | Author: Anonymous | Category: Business, Economics
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Debt Management for Dental Students Jason DiLorenzo

Debt levels have more than tripled in the last 17 years

Changes in Student Debt Levels

~$203K

~$115k

~$50k

1993

2003

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

Changes in Student Debt Levels - Confidential Document, Property of Graduate Leverage, LLC -

2011

Agenda 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.

Sources of Funding

High Rate Private

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

Grad PLUS

Unsubsidized Stafford

Subsidized Stafford

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

Private Loans: •

Sometimes needed for Externships, Internships, or Residencies



Interest rates vary



Margins have decreased but minimum credit requirements have tightened

Low Rate Private

Grants/Scholarships

Low Cost To Borrower

Key to student loan management is finding the right balance between these two competing pressures. The right balance $1,000 will change over time! $1,000

Liquidity

$ 500

$ 150,000

$ 300,000

Total Cost of Your Student Debt Competing Pressures - Confidential Document, Property of Graduate Leverage, LLC -

Federal Loan Repayment Options Ways 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

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)

IBR and ICR-A

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

Savings opportunity immense – more stringent requirements.

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)

Tax Free Forgiveness

Understand the Loss of Federal Benefits

%

Private or Grad PLUS Loan

7.9%

3%

7.5%

4.9%

?

Current

Interest Rate Increase?

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

Private Loans or Federal Loans - Confidential Document, Property of Graduate Leverage, LLC -

Pay Down Quickly

Private Loan

Credit Card Debt 15%+

Grad PLUS 7.9% / 8.5%

Refinance to Lower Interest Rate

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

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 ICR-A* IBR*

Y1: Y1:

$264

$396

Y10: Y10:

$856

Y20:

$1,284

$1,303

Y20:

$1,955

Total Payments $329,435 $504,340

25 Year Extended Term

$1,901

$570,295

30 Year Consolidated Term

$1,774

$638,513

3 Year Forbearance + 10 Year

Y4:

$3,757

$450,799

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

Case #1

Present Value Savings of ~$90k

* PV analysis includes tax liability and assumes 3% annual increase in salary increase. Detailed assumptions available upon request. - Confidential Document, Property of Graduate Leverage, LLC -

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

ICR-A*

Y1:

$0

Y10:

$1,517

Y20:

$1,984

$342,963

25 Year Term 3 Year Forbearance + 25 Year

$1,286 Y4:

$1,553

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

Case #2

$385,901 $466,025

Case #2Refinance 9.5% Private Loan Total Paid $

$38,819

$31,820

9.5%

5.0% Loan

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

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

$924

$0

IBR

$583

$350

ICR-A

$389

$500

Case #3 Targeting

Targeted Repayment Plan

Typical Repayment Plan

L o a n s

Consolidation – 4.75%

Non-payment

Stafford – 6.8%

Non-payment

Grad Plus – 7.9%

Non-pay

6.8%

7.9%

9.25%

Private Loan - 9.25% Repayment Period 8 yrs

Effective Rate (APR) = 6.29%

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

Case #3 Targeting

4.75%

10 yrs

$11,675

0.5 yr

1 yr

5 yrs

7 yrs

9.5 yrs

Effective Rate (APR) = 5.69%

Savings of $6,566 earned in 28 months of prepayment. Targeting Private Loans Total Paid $

$12,422

$11,775

$9,146

$8,485

10 YEARS

10 YEARS 15 MONTHS

9.5%

9.5% w/$500 prepay

Case #3 Targeting

8.25%

28 MONTHS

8.25% w/$500 prepay

All Returns Here Are After Tax Returns PLUS Loan

16%

8.1% Average PLUS Return

S&P 500

8%

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

0%

1940

1960

1987

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

Case #3 - Should I Be Investing? - Confidential Document, Property of Graduate Leverage, LLC -

2001

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, NonFederal 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

- Confidential Document, Property of Graduate Leverage, LLC -

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 worth a) Properly allocate discretionary income

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

Jason DiLorenzo 415-722-8552 [email protected] If you have any questions or would like a personalized debt assessment, please call or visit our website. www.gladvisor.com

www.facebook.com/glAdvisor

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

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