Student Loan Advice for Dentists

Student Loan Debt

Student debt, particularly dental school loans, is unique and cannot be compared to typical debt. Unlike other forms of borrowing, dental education loans’ substantial amount and specialized nature mean that simply focusing on interest rates isn’t enough. Financial guru Dave Ramsey’s advice to pay off loans as quickly as possible might not always be the best approach for dentists. Instead, new dentists should consider Income-Driven Repayment (IDR) plans when their income is less than their student loan balance, which can lower monthly payments based on income. This strategy frees up cash flow, allowing for investments, starting a dental practice, or pursuing continuing education, maximizing long-term financial growth and career opportunities.

 

What Should You Do With Student Loans Right After Graduating From Dental School?

Right after dental school, most graduates enter a grace period during which loan repayment is temporarily deferred. However, interest continues to accrue, and graduates might not be eligible for Income-Driven Repayment (IDR) plans during this time. A strategic first step for many is to consider consolidating their loans. Consolidation enables new dentists to begin the path toward loan forgiveness through IDR. By consolidating during the grace period, graduates can enroll in repayment plans like Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE), and the new Income-Based Repayment (IBR). These plans often offer interest subsidies and help accrue months towards loan forgiveness, providing significant financial relief and long-term benefits.

 

Dentists in Residency 

After eight years of mandatory schooling, some dentists opt for residency programs that usually last between 1-3 years, but some last longer. Once you’ve entered a residency program, you no longer qualify for in-school deference and forbearance for your student loans. You have to start repayment or enter into a medical residency forbearance.

 

Time spent working in a residency program can be considered for public service loan forgiveness (PSLF). However, you must continue working for a qualified non-profit employer after your residency program ends to complete the requirements for PSLF. Many dentists go into private practice after residency, making public service loan forgiveness not an option. 

 

While in residency, SAVE may be the best option due to the interest subsidies and lower monthly payments. However, PAYE and New IBR may be better long-term fits since you’ll have access to a shorter track to loan forgiveness. 

Related Reading: How Dentists Can Maximize Income

PAYE & New IBR vs. SAVE

Pay As You Earn (PAYE) (NEW IBR for newer borrowers) and Saving on a Valuable Education (SAVE) are usually the two repayment plans you might consider. Your loan servicer and unqualified financial advisors may recommend SAVE or refinancing. While these routes can lead to student loan payoff, they may not be the best option for an associate during residency or the early years.

 

The new SAVE plan was formerly known as Revised Pay As You Earn (REPAYE). The Department of Education and the Biden Administration wanted a modified repayment option that combats interest accrual and negative amortization. Negative amortization has been a common feature of income-driven repayment plans since your repayment term is designed for forgiveness programs. With IDR, your monthly income may keep your required payments artificially low. If your required payment on IDR is lower than the interest accrual, your interest accrual will increase your loan balance over time. IDR is similar to interest-only payments if your income is significantly lower than your student loan balance. 

 

PAYE is generally preferred over SAVE if you expect a significant income increase beyond your student loan balance since your loan payments will not exceed the 10-year Standard Repayment plan. In this scenario, you’d go from an associate’s salary to a high-income dental practice owner. Therefore, under PAYE, your required payment term will be lower (20 years vs. 25 years for graduate loans). 

 

On the other hand, SAVE may be the best option if you have a high debt-to-income ratio. A great candidate for SAVE would be an associate dentist who expects to earn an income of $200,000 but has $400,000 (or more) in student loans. This same dentist doesn’t have a goal to start a practice or grow their income significantly. 

 

Starting a practice or purchasing a home is more straightforward if you have lower payments. New grads should consider SAVE because dental student loans are much higher than ever. You could financially harm yourself by prioritizing student loans over buying your own practice and investing. 

 

To qualify for PAYE, you must meet the following criteria: 

• You must be a new borrower who has taken loans after October 1, 2007, and at least one Federal Direct Loan issued after October 1, 2011. 
• You must have eligible loans. You must have Direct Loans as issued or Direct Loans from consolidation. 
• You must have a high debt-to-income ratio. 
• Your loan payments need to be lower than they would be under the standard 10-year repayment schedule. 

Associate Dentists

As an associate dentist employed in a private practice, you’re most likely looking to purchase a home or start your practice. Managing student loan debt and developing a repayment strategy is critical to accomplishing those goals. 

 

If you’ve elected PAYE during residency, it may not be time to change. PAYE should keep your payment lower than refinancing or under SAVE. Therefore, you’ll be able to save more towards your goals and have an easier time qualifying for a loan because your required payment is lower. 

 

If you haven’t elected PAYE during residency, you may not qualify as an associate because your income is too high. You’ll want to consider all options, such as other income-driven repayment plans,  to keep your payment as low as possible during the early years as an associate. 

 

Refinancing your student loans could make sense once you’re making real money and practice ownership isn’t in your future. Refinancing may be your best option when you’re trying to pay down your debt quickly and have the cash flow to do so – more on this below. 

Related Reading: Dentist Compensation Models

Practice Owners

In the early stages of practice ownership, your cash flow may decrease as you build your client base or expand your business. In this case, being flexible with your student loan repayments is essential. Income-driven repayment plans could still help you during the early stages of starting a practice. 

 

Once your practice generates actual cash flow, it’s time to consider private refinancing. You’ll usually lower your interest rate through private refinancing and pay your loans faster. Private refinancing is an irrevocable decision that causes your federal student loans to become private. 

Related Reading: How To Buy A Dental Practice

Should You Privately Refinance Your Student Loans?

Is it worth refinancing student loans to get a lower interest rate? In most cases, it is best to keep your federal student loans and aim for forgiveness. Once your income has increased significantly and forgiveness is no longer viable, you should compare interest rates to the 10-year standard repayment plan offered by federal loans. For refinancing with a private lender to make sense, the private rate should be considerably lower than the 10-year standard federal rate. This ensures that refinancing will provide substantial savings and outweigh the benefits of federal loan protections and potential forgiveness options.

 

Refinancing to private student loans will initially hurt your credit score. However, if you continue to make consistent monthly payments, the student loan refinancing won’t negatively impact you. 

 

Who Shouldn’t Private Refinance

Private refinancing usually doesn’t make sense if you’re an associate dentist looking to start a practice. Flexible payments can help dentists with cash flow obligations that come with starting a practice. With private refinancing, you lose most of this flexibility in your repayment plan. 

 

With private refinancing, you’re amortizing your student loans over some time. You must make payments regardless of your current income and financial situation. You will lose some of the protections offered with federal student loans. 

Private refinancing pays down your federal student loans and starts new loans from private institutions. Therefore, you’re giving up access to income-driven repayment plans, taxable loan forgiveness, public service loan forgiveness, deferment, and forbearance options. Early career dentists usually benefit from holding federal loans instead of refinancing them. 

 

We highly recommend that you consult a financial advisor who understands student loans before you make an irrevocable decision like private refinancing. Before moving forward, you need to consider an IDR plan, the benefits of the federal government programs for student loans, and your taxable income. 

 

Taxable Loan Forgiveness

Taxable loan forgiveness works best when your student loan balance is much higher than your income, and you don’t qualify for PSLF. You’re likely an associate dentist who’s decided not to start a practice or has a very high student loan balance. Repayment plans such as IBR, SAVE, or PAYE count towards taxable loan forgiveness.

 

Taxable loan forgiveness means your remaining balance after the required payments are taxable. Saving and investing to pay the taxes due is essential for this plan. A thorough analysis of your situation should show that you’ll spend less towards your student loans and the required savings for tax payments upon forgiveness than aggressively paying down your loans. 

 

Designing the right repayment strategy for your student loans will be one of the most impactful financial decisions you can make. In many cases, the best way to pay off your student loans is to optimize taxable loan forgiveness to achieve other financial goals. Even if you refinance and are offered a lower rate, you may end up worse off due to the opportunity cost of delaying investing and buying a dental practice. 

 

Government, Military, and Non-Profit Employers 

Government and non-profit dental positions make up less than 10% of dentists. You’re likely a public service loan forgiveness (PSLF) candidate if your employer is a government or non-profit. 

To pursue PSLF, you must meet the below criteria. 

1. You must have a qualifying non-profit or governmental employer
2. You must work on their definition of full-time employment
3. You must have the correct loan type – federal direct loans. 
4. You must have an income-driven repayment plan. 
5. You must make 120 payments with all of these requirements combined. 

Additional Dentist Forgiveness Options 

Here is a list of additional programs available to dentists. They are uncommon as most dentists go into private practice in populated areas. 

1. Military programs for loan forgiveness
   • Army
   • Navy 
   • Air Force
2. HIS Loan Repayment Programs
3. NHSC Loan Repayment Programs
4. Veterans Affairs student loan repayment program
5. Medical school loan repayment assistance programs – vary by state. 

What It Takes To Become a Dentist

There are more than 200,000 practicing dentists in the United States. After undergraduate prerequisites, dentists attend accredited dental schools to obtain a DDS or DDM degree. With an increased demand for dentists, younger dentists enter the industry at higher volumes than ever. 

After graduation, they’re faced with additional training and likely becoming associate dentists with a practice owner looking to retire. With over 40% of dentists under 45, quite a few dentists have student loan balances. Therefore, obtaining loans for practice transitions can be difficult, and home purchases are often delayed.

It’s no surprise that dentists often graduate with mortgage-sized student loans. According to the American Dental Education Association (ADEA), only 17% of dentists reported having no education debt. The median dental school loan balance for new graduates in 2021 was $301,583, with many carrying debts in the $300k-$500k+ range. Specialists in orthodontics, oral surgery, periodontics, and pediatrics often have even higher balances due to additional borrowing during residency.

This burden is hefty for younger dentists, as tuition costs have skyrocketed over the years without corresponding salary increases. This disparity puts many dentists in a precarious financial position regarding their dental school loan debt.

Income Demographics

There is plenty of income disparity between dentists geographically and in terms of whether they choose a specialty. The average income for a general practitioner in the United States is around $200,000, while the average for a specialist is more than $320,000. 

Additionally, more than 60% of dentists are practice owners, leading to additional complexity as you decide about your student loans. The variables to determine your student loan repayment strategies work best when tailored to your income and employment status (self-employed vs. an associate in another practice).

There’s no one-size-fits-all, but this article will dive into common scenarios for dentists. 

Bottom Line

Designing the right repayment plan, depending on your goals and career stage, is essential. Making the correct choice allows you to better plan for starting a practice and purchasing a home.

Nearly all loan servicers and financial advisors haven’t had the proper training to help you optimize your student loan repayment strategy. If you want guidance on optimizing your loan repayment strategy, ensure your advisor has the appropriate credentials, such as the Certified Student Loan Professional (CSLP®), and understands dentists’ unique challenges.