0% Interest

The last two weeks have brought many changes to student loans. I have delayed publishing any information regarding these changes because the details of a policy was yet to be defined. COVID-19 has interrupted our lives and the dental profession has many unanswered questions regarding how we will move forward during and after this crisis. Many readers are aware that student loans held by the government have had their interest rates temporarily reduced to zero and there is an option to enter emergency forbearance for 60 days.

Readers should be aware that exiting forbearance is one of the eight events that trigger capitalization of outstanding interest. However, it appears that outstanding interest will not be capitalized when a borrower exits emergency forbearance during COVID-19 (according to FedLoan). FedLoan has changed its stance regarding outstanding interest and is now stating that any outstanding interest prior to March 13th, 2020 “may” be capitalized at the expiration of forbearance. You can learn more here: FedLoan has provided some clarification and outstanding interest will not be capitalized if the borrower enters and then exits emergency forbearance. You can learn more here: https://myfedloan.org/borrowers/covid

Borrowers who have seen a reduction in income and are pursuing PSLF or taxable forgiveness may want to consider requesting that their IDR payment be re-calculated instead of entering forbearance.

You should contact your servicer and request more information before taking any action.

Current students and new graduates, due to the current circumstances, the student loan course I created is now free for the rest of the year: https://embrasurespace.com/product/understanding-managing-and-repaying-student-loans-for-dentists/

[EDIT] Great Lakes and Fed Loan published different responses regarding how outstanding interest will be treated when exiting emergency forbearance. Great Lakes says: During this forbearance, no payments will be due. Until further notice from ED, interest will not accrue on your account. When we apply the coronavirus forbearance to any account, any unpaid interest that had accrued prior to the 0% interest rate reduction effective 3/13/20, may be added to your principal balance at the end of the forbearance. This is called capitalization, and it increases the overall amount you’ll have to pay on your loan.

This discrepancy highlights how important it is to contact your servicer prior to taking any action.

Should You Buy a Home or a Dental Practice First

It is typically recommended to delay home ownership until after a practice purchase because the practice generates income, while the home does not. Furthermore, ownership of a person’s primary residency is often more of an emotional transaction (it is a lifestyle decision) as opposed to a financial one. With this in mind, it is often wiser to purchase a practice before purchasing a home for two reasons:

1) Your debt to income ratio when you go to purchase a practice will likely be higher if you have a mortgage. Depending on the size of your mortgage, the practice you have identified to purchase may not have enough cash flow to support all of your monthly obligations.
2) More importantly, when you own a home, the radius that you are interested in buying a practice is often limited and it is easier to find a home near your practice than to find a practice near your home. Once you own a home, you are often emotionally invested in the community – you build relationships and develop habits that are difficult to leave behind regardless of how good the opportunity may be.

Art Widerman is a CPA in Tustin, CA who focuses on dentists. He has a podcast called the Art of Dental Finance and the episode linked below explores home ownership and practice purchases.

Another Orthodontist with 1 Million Dollars in Student Loans

Deciding to become an orthodontist is an expensive commitment. We have already learned about Mike Meru (the first orthodontist to be highlighted for his outrageous student loan burden by the Wall Street Journal). Some interesting conclusions have been drawn from Mike’s student loans and Business Insider does a good job of explaining why dentists, doctors, and lawyers are no longer that rich in comparison to their tech or business counterparts. You can read the Business Insider article here.

Recently, another orthodontist called Dave Ramsey to talk about the cost of his education. You can watch the video by clicking on this link or clicking play below.

Dave Ramsey doesn’t offer good advice here. While he offers reasonable advice for most Americans, his reluctance to use one of the income-driven repayment plans to optimize this student’s cashflow is unfortunate. An orthodontist with a seven-figure student loan balance would benefit from Revised Pay as You Earn (REPAYE). Ignoring that REPAYE exists, and the benefit that the interest subsidy will have for this borrower is negligent.

This borrower is not necessarily doomed because orthodontists have excellent earning potential if they acquire or build a great practice. A reasonable strategy for this borrower would be to:

1. Do not consolidate student loans (assuming all loans are direct).
2. Enter REPAYE and take advantage of the interest subsidy.
3. Spouse improves her income by pursuing a more lucrative position.
4. Begin associating at multiple practices part-time, creating a flexible full-time schedule
5. After 12-24 months of working full-time and building cash reserves, start searching for an ortho practice to acquire.
6. After acquiring the practice, analyze cash flow and decide if it makes financial sense to begin paying down the student loan balance or if the most appropriate strategy is to pursue taxable forgiveness after 25 years.

Public Service Loan Forgiveness Works

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A lot of questions surround the Public Service Loan Forgiveness (PSLF) program since 99% of first-time applicants were denied forgiveness in late 2017 and early 2018. Since then, the program has been temporarily expanded and still has problems. You can learn more on NPR here.

The rules about who qualifies and what loans qualify for tax-free forgiveness after ten years of on-time payments are specific, and if you are working for an organization that allows you to pursue PSLF as a dentist, you should be very familiar with the nuances of the program. This week Travis Hornsby at Student Loan Planner, interviewed a married couple who successfully saw a large portion of their loans forgiven under the PSLF program. The episode is worth listening to if PSLF is an option for you. You can find the episode below:

While the program is far from perfect, and borrowers are still confused about its requirements, some people are receiving forgiveness – proof that the program is real and will likely work if you follow the rules.