Assessing Veterinary Student Loans, Repayment Options
Posted: Sept. 5, 2012, 3:30 p.m. EDT
About 2,600 students a year graduate from veterinary school to embark on a career they love, helping animals maintain their health and assisting their owners with managing their care.
Veterinarians tirelessly provide an invaluable service. But in spite of this tremendous value, many new veterinarians face an uphill battle with student loan debt.
The cost of veterinary school tuition varies from $18,000 to more than $42,000 annually, depending on the institution. The cost of veterinary education has increased consistently at a rate even higher than inflation.
The 2011 American Veterinarian Medical Association annual survey reported that debt levels continue to increase. The mean debt for 2011 graduates carrying a student loan balance was $142,613, a 10.3 percent increase from the 2009 mean debt of $129,216. Ninety percent of veterinary students graduate with some amount of debt (/redirect.aspx?location=https://www.avma.org/News/JAVMANews/Pages/120201a.aspx).
Veterinary students are eligible to borrow up to $40,500 in federal Stafford loans each year. But as of July 1, 2012, the subsidized Stafford loan for graduate level students was eliminated. Traditionally, up to $8,500 of the $40,500 in federal loans awarded annually to veterinary students could be subsidized Stafford loans.
Additional Financing Options
Students have the option to borrow from other programs such as the Graduate Plus loan, offered by the federal Direct Loans program, and private student loans offered by banks and financial institutions.
Graduate Plus loans can be used to cover any remaining costs. They follow a more relaxed underwriting model, and borrowers can be approved as long as they do not have an adverse credit history. The borrower’s credit score is not considered. As a result, Grad Plus follows a one-size-fits-all pricing plan, where anyone approved gets the same 7.9 percent fixed-interest rate.
An additional 4 percent guarantee and origination fee is included in this loan, and is charged to the borrower by subtracting from the requested amount. For example, a borrower approved for $10,000 would see $9,600 disbursed to his school, as the 4 percent fee of $400 is subtracted from the loan request.
Grad Plus offers the security of a guaranteed fixed rate, and may provide more flexible repayment options after graduation because it is backed by the Direct Loans program. However, given the current low interest rate environment, 7.9 percent is much higher than commonly quoted U.S. prime rate, which was 3.25 percent in early August. A high price in interest and guarantee fees must be charged to secure the 7.9 percent fixed rate and the safety net of more flexible repayment options.
Generally, private student loans carry a variable interest rate that may increase or decrease over time, though some lenders have recently begun to make fixed-rate products available. Private loans follow traditional underwriting, which considers the borrower’s complete credit history before assessing an interest rate.
Borrowers can generally strengthen their application with the addition of a co-borrower, who does retain responsibility of the repayment of a loan if the primary borrower is unable to do so.
Most private student loans no longer carry origination fees, though that can depend on individual lenders and specific loan products. Private loans typically follow a standardized repayment plan of 10-, 15- or 20-year terms but cannot offer the same attractive borrower benefits and flexibility of federal loans.
However, a borrower qualified for a low-interest-rate private loan, following an aggressive repayment strategy, could quickly pay off debt and mitigate the risk of future rate variability. Look for a private loan that does not carry a pre-payment penalty, because this could reduce the savings normally available to borrowers paying back their loans early.
Careful budgeting can help pay down a substantial student debt balance. Consider a borrower with $142,613 in federal Stafford loans at 6.8 percent and a 10-year repayment term. The required monthly payment would be $1,641.20. This may not be a realistic option for all graduates depending on the graduate’s employment.
Federal loan repayment options available to borrowers, such as federal student loan consolidation and income-based repayment (IBR), can be very helpful in better managing a graduate’s debt. Federal student loan consolidation helps simplify repayment and places all their loans under one rate. Income-based repayment allows qualified borrowers to reduce payments to a smaller percentage of annual income.
Let’s say a new veterinarian starts at $65,000 and has $142,613 in federal loans to repay. Because a payment of $1,641.20 would exceed 15 percent of discretionary income on a 10-year term, the Direct Loans program would consider the borrower under a “partial financial hardship,” qualifying him for a reduced payment of about $800 a month.
As the borrower’s income increases, the minimum payment due also increases as a percentage of income. If the borrower’s income were to remain low, IBR can be extended up to 25 years if necessary, and at the end of the term, any unpaid loan amount is forgiven and discharged, but the borrower would owe taxes for the amount of loan that was discharged. Veterinarians generally look forward to increasing income over time, so IBR may just be the solution.
Private student loans that enter repayment require consistent minimum monthly payments. Private lenders may offer forbearance for borrowers under financial hardship, where they could suspend minimum payments. However, during forbearance, the loan will continue to accrue interest and the borrower remains responsible for repaying the entire loan.
Private Loan Consolidation
Since 2006, more than 2 million borrowers received private student loans at interest rates over 7 percent. Private loan borrowers with high rates require larger monthly payments and have had limited access to refinancing opportunities.
Private student loan consolidation allows borrowers the option of one monthly payment, often refinanced at much lower rates. Borrowers simplify their finances and may save thousands in annual interest and payments.
Credit unions have recently begun offering consolidation to borrowers through the cuStudentLoans program. Not-for-profit credit unions generally offer lower rates on products, leading to more savings. Veterinarians carrying high-rate private student loan debt should explore their options.
Putting It All Together
Student loans can present quite a hurdle when transitioning into a full-time career. Here are some things to consider:
• Before starting school, look at debt from your undergraduate degree. If there is already a sizable amount of debt outstanding, you may need to postpone starting school.
• Owning a practice vs. corporate practice: Starting a practice on your own is challenging. Could you consider working for a veterinary services corporation to help pay down debts before starting a practice?
• Find your niche: Is there a particular field of study that needs your assistance the most? The laws of supply and demand affect this field like any other. If all veterinarians wanted to work on personal pets, there would not be enough to handle livestock. Choose your field considering market demands if earning income out of school is a priority.
Once student loans are under control, veterinarians can focus on what is most important, helping to provide more health services for pets, animals and the owners who love them.
Ken O’Connor is director of Student Advocacy for cuStudentLoans.org
This Education Series article was underwritten by Live Oak Bank, based in Wilmington, N.C.