My Student Loan Interest Is Crushing Me. Help! What Can I Do?

My student loans from veterinary school total $350,000. That’s after I consolidated at graduation in 2014 with a seven-percent interest rate. That’s roughly $2,041 of interest accumulating monthly, which then compounds at the end of the year. There is absolutely no way to pay this off, seeing as to how I would have to pay over $2,000 monthly to even get through the accumulating interest. These are federal loans. I have a lot of other details I could add. But with that basic information, what recommendations would you give? — Wesley A. Dyer, DVM via email.

Damn, Wesley. That’s a pretty massive student loan debt load for a profession that most people enter for the love of it – not the exorbitant salary. Unless you’re starring in a pet rescue show on TLC — or have a Doctor Dolittle-esque team of animals that can help you chip away at the debt — I can totally understand why you’re feeling the squeeze. The average student loan interest rate is tough.

Since yours is a consolidation loan, the first thing you probably want to figure out is whether you’re in the right repayment plan. There are eight options for repaying federal loans. Theoretically, that should be a boon to borrowers. But it also leads to a whole lot of head-scratching, as folks try to figure out how each plan will affect them both now and over the long haul.

In your case, the two that might make the most sense are Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE). There are some important differences between the two, but the key thing is that both cap payments at 10 percent of your discretionary income. For someone with your level of debt, that could be huge. Both plans are also compatible with the Public Service Loan Forgiveness (PSLF) program, which wipes out your debt after ten years if you work for a government-run or nonprofit employer.

So, between PAYE and REPAYE, which is a better fit? In large part, that comes down to your marital situation. PAYE only takes your income into consideration when calculating discretionary income, as long as you file an individual tax return.

However, REPAYE factors in the money that you and a spouse make, regardless of how you file. If you’re married to someone with a substantial income and little or no student loan debt, 10 percent of discretionary income is going to be a much bigger number than it would under PAYE. With both of these plans, you’ll have to update information about your earnings and family size to determine how much discretionary income you actually have.

The decision also depends on whether you’re eligible for PAYE, which is a bit more restrictive. The plan is available to those who took out loans on or after October 1, 2007 (even if they’re fully paid) and obtained a Direct Loan on or after Oct. 1, 2011. Given the timeline you described, it sounds like you probably fit that category.

For borrowers with a high debt-to-income ratio, these plans can extend your term well beyond the 10-Year Standard Plan. While they may result in a smaller monthly payment, you could potentially fork over more in interest over the course of the loan. The good news is that – even if you don’t qualify for Public Service Loan Forgiveness – any remaining balance from your account is wiped out after 20 years with PAYE. Graduate loans are forgiven after 25 years with REPAYE.

But there’s a big asterisk here: Uncle Sam is going to make you pay income tax on any amounts that get erased after that length of time (something that doesn’t happen with PSLF). In your case, it’s a good idea to sock away about $300 a month to get ready for that massive bill down the road, says Jan Miller, a Portland, Oregon-based student loan consultant.

Those tax implications are a factor that might tilt things in favor or REPAYE if you have a more modest income of, say, $125,000 or less. Why? Because, unlike PAYE, REPAYE has a monthly interest subsidy whereby half of all unpaid interest is waived, tax-free. Borrowers with lower incomes receive a lower monthly payment under these plans, increasing the amount of unpaid interest each month. That results in a bigger subsidy benefit, which lowers the amount forgiven – and thus the size of your tax bomb – after 20 or 25 years.

“With higher incomes, the (monthly) payment is also higher,” says Miller. “Therefore, there is less interest left over to be waived by REPAYE’S subsidy benefit.” The bottom line: REPAYE may work out better for you if this unpaid interest subsidy saves you more than the extra five years’ worth of payments you would be required to make with this plan.

Given the recent plunge in short-term interest rates, it might be tempting to go another route altogether: refinancing your federal loan with a private lender. If you look online these days, you’ll see some ridiculously low rates, some in sub-two percent territory. In theory, that probably sounds like a dream come true; the reality is a bit more complicated.

There are the usual pitfalls of leaving the federal loan program – namely less flexibility should you need to defer your loans or go into forbearance. And you wouldn’t be able to take advantage of the Public Service Loan Forgiveness program, which is probably a deal-breaker if you work for a non-profit.

But there’s also a big question about whether you’d really be able to lower your payments with a private loan. Miller says most lenders have much shorter terms than what you’re allowed with a federal consolidation loan. So even if you could get a better rate (something that might be tricky unless you have very high income), your monthly bill could actually be higher than what you face now.

A 10-year loan of $350,000, even if you only paid four percent interest, would result in a monthly payment of more than $3,500 a month, says Miller. For that reason, it’s an option that probably only makes sense if you make in excess of $225,000 a year.

Any way you slice it, a huge loan like this would be a big monkey on any veterinarian’s back. But there are ways to make this thing more manageable. Changing your repayment plan, or possibly refinancing, might be the perfect medicine. Best of luck to you.