By: Drew Hinrichs, CPA, CEO of Engage Advisors
In 2021, 83% of dental students graduated with student loan debt. The average amount of loans per student was $304,824; graduates from public dental schools owed an average of $270,125, and private school graduates owed $349,730.
Those figures can seem formidable but with the right strategy, paying off your student loans is totally manageable. We recommend a three-step process for re-payment that doesn’t restrict your cash flow and allows you to pursue your goal of owning a practice.
Step 1 Consolidate Loans
Instead of having multiple loans with variable interest rates, consolidate the different loan processors into one loan with the federal government which offers programs with more flexibility and benefits than private financing. This will give you a single, fixed interest rate and you will have the option to choose your amortization period, which can extend up to 30 years.
Step 2 Apply for the Income-Based Repayment Program
An income-driven repayment plan is a government program that sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size. Your payment amount will be a percentage of your discretionary income based on which of the following four repayment plans you choose:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan) is generally 10% of your discretionary income.
- Pay As You Earn Repayment Plan (PAYE Plan) is generally 10% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.
- Income-Based Repayment Plan (IBR Plan) is generally 15% of your discretionary income but never more than the 10-year Standard Repayment Plan amount
- Income-Contingent Repayment Plan (ICR Plan) is the lesser of the following options:
- 20% of your discretionary income
- What you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income
The obvious benefit for a young dentist is to lower their monthly payments while they start their career, which often coincides with the added costs of starting a family. If you are looking to purchase a practice in the near future, we recommend you stay in the income-based repayment program through the qualifying process. The lower student loan payments help with the ratios banks use to make lending decisions.
Step 3 Private Financing
While an Income-Based Repayment Program is a good strategy for managing cash flow early in your career, you don’t want to stay with the federal program forever. It’s possible to accrue more interest than you pay off each month, which runs the risk of increasing your loan balance.
Once you’re a business owner and your cashflow is sufficient from a financial planning perspective, the next step is to begin paying off your student loans at a much faster rate. To do this, you will need to refinance your student loans with a private lender, usually at a lower interest rate but over a shorter period of time. Typically, this will be a 10-year loan, although if you can pay it off faster, you should.
A Good Investment
While the cost of earning a dental degree is high, so are the rewards. Dentists continually rank at the top of the U.S. News Best Jobs list. In 2021, dentists ranked fifth among all health care jobs, and came in ninth among all occupations. But the rewards go beyond financial, with dentists reporting that what they like most about their job is the opportunity to meaningfully help their patients.
If you have questions about the best strategy for paying off your dental student loans, schedule a call with our team at Engage Advisors. We are ready to help you tackle your debt and get your career off to a great start.