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Debt Management for Dental Students

Debt Management for Dental Students. Jason DiLorenzo. Debt levels have more than tripled in the last 17 years. Changes in Student Debt Levels. ~$203K. ~$115k. ~$50k. 1993. 2003. 2011. * Based on data collected by ADEA and GL internal student database. Changes in Student Debt Levels.

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Debt Management for Dental Students

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  1. Debt Management for Dental Students Jason DiLorenzo

  2. Debt levels have more than tripled in the last 17 years Changes in Student Debt Levels ~$203K ~$115k ~$50k 1993 2003 2011 * Based on data collected by ADEA and GL internal student database Changes in Student Debt Levels - Confidential Document, Property of Graduate Leverage, LLC -

  3. Agenda • Federal Loan Basics • Federal Loan Repayment Options • Private Loan Repayment Options • Dental Case Studies • How to Calculate Payments • Review and Q & A Key Takeaway: How recent and upcoming regulations will help address the mounting debt burden facing many dental students.

  4. High Cost To Borrower Low Cost To Borrower Sources of Funding High Rate Private • Federal Loans: (Stafford, Grad PLUS) • Federal Stafford: Fixed Rate 6.8% (since July 1st 2006) • Subsidized: government pays interest during school and deferment • Unsubsidized: all interest accrues • Direct Graduate PLUS: Fixed Rate 7.9% (all interest accrues) • Private Loans: • Sometimes needed for Externships, Internships, or Residencies • Interest rates vary • Margins have decreased but minimum credit requirements have tightened Grad PLUS Unsubsidized Stafford Subsidized Stafford Perkins Low Rate Private Grants/Scholarships

  5. Key to student loan management is finding the right balance between these two competing pressures. The right balance will change over time! $1,000 $1,000 Liquidity $ 500 $ 150,000 $ 300,000 Total Cost of Your Student Debt Competing Pressures - Confidential Document, Property of Graduate Leverage, LLC -

  6. Federal Loan Repayment Options • Ways to Postpone Payments: • Forbearance: • NO SUBSIDY – All loans accrue interest. • Economic Hardship Deferment (EHD): • FULL SUBSIDY – Unsubsidized accrue interest. • In-School Deferment: • FULL SUBSIDY – Unsubsidized accrue interest • Ways to Make Full Payments: • Standard 10 Year Term • NO SUBSIDY – Shortest term available • Prepaying • Prepayment allowed without penalty on all federal repayment programs.

  7. Federal Loan Repayment Options • Ways to Reduce Payments: • Extended 25 Year Term: • NO SUBSIDY • Consolidated 30 Year Term: • NO SUBSIDY • Available for consolidated loans $60,000 or greater • Income-Based Repayment (IBR): • PARTIAL SUBSIDY • Pay As You Earn (ICR-A): • PARTIAL SUBSIDY • No loans before Oct. 2007 + loan post Oct. 2011

  8. Partial Financial Hardship • Limit monthly payment to 15% of discretionary income, capped at 10-year standard payment • 2012/2013:10% (ICR-A) • Government Subsidy • Subsidized interest not covered by reduced payment is paid by government • Subsidy is provided for maximum of 3 years • Taxable Loan Forgiveness • After 25 years any outstanding balance is forgiven • 2012/2013:20 years (ICR-A) IBR and ICR-A

  9. Many Graduates Not Taking Advantage Of New Tax Breaks • Taxes during final year school: • Lifetime Learning Tax Credit • Tuition and fees tax deduction • Married Filing Jointly or Separately • Decision Process: • Tax benefit of each option calculated • Changes in subsidy benefit added back for final number

  10. Savings opportunity immense – more stringent requirements. • PSLF – Public Service Loan Forgiveness • Federal program enacted by Congress in 2007 • Specific requirements: • Borrower must make 120 qualifying payments on a Federal Direct Loan • Borrower must work for a public service entity as defined by the program, such as a Federal, State, Local, or non-profit organization • New Employment Certification Form (released 2012) Tax Free Forgiveness

  11. Understand the Loss of Federal Benefits % Private or Grad PLUS Loan 7.9% 3% 7.5% ? 4.9% Interest Rate Increase? Current For illustrative purposes only. Assumptions based on good credit & sample lenders. Private Loans or Federal Loans - Confidential Document, Property of Graduate Leverage, LLC -

  12. Important Considerations Federal Loan Benefits: Evaluate loss of federal repayment plans / forgiveness opportunities Fees: Application or origination fees may erode savings potential Interest Rate: Evaluate rate difference and type: Variable vs. Fixed Pay Down Quickly Refinance to Lower Interest Rate Private Loan Grad PLUS 7.9% / 8.5% Credit Card Debt 15%+ Solutions for High Rate Debt

  13. Monthly Payments Total Payments Y1: $264 Y10: $856 Y20: $1,303 $329,435 ICR-A* $504,340 Y1: $396 Y10: $1,284 Y20: $1,955 IBR* $1,901 $1,774 $570,295 $638,513 30 Year Consolidated Term 25 Year Extended Term Y4:$3,757 $450,799 3 Year Forbearance + 10 Year • Case Details • 2013 graduate, unmarried, family size of one • $260,000 total debt, all Federal debt ($159K Stafford / $101K Grad PLUS) • $100,000 starting salary increasing by 3% annually • high monthly expenses * Total payments under ICR-A and IBR include tax liability generated from forgiven loans. Case #1

  14. Present Value Savings of ~$90k * PV analysis includes tax liability and assumes 3% annual increase in salary increase. Detailed assumptions available upon request. - Confidential Document, Property of Graduate Leverage, LLC -

  15. Monthly Payments Total Payments $334,185 Y1: $0 Y10: $2,078 Y25: $2,078 IBR* $342,963 Y1: $0 Y10: $1,517 Y20: $1,984 ICR-A* $385,901 $1,286 25 Year Term Y4: $1,553 $466,025 3 Year Forbearance + 25 Year • Case Details • 2013 graduate, married, family size of three (one child) • $202,000 total debt • $25,500 Subsidized Stafford and $136,500 Unsubsidized Stafford @ 6.8% • $20,000 Grad PLUS @7.9% and $25,000 Private Loan @ 9.5% • 1 year of general practice residency at $25,000, salary increases to $120,000 • Spouse salary of $60,000 * Total payments under ICR-A & IBR include tax liability generated from forgiven loans. Case #2

  16. Case #2 Total Paid $ $38,819 $31,820 5.0% 9.5% Loan Refinance 9.5% PrivateLoan Lowering interest rate on private loan by 4.5% saves $7,000 in interest costs.Greater savings for larger principle amounts.

  17. Case Details • 2013 graduate, unmarried, family size of one • $96,000 total debt • $80K Stafford @ 6.8% • $8K Private @ 8.25% • $8K Private @ 9.5% • $130,000 starting salary increasing by 3% annually, NO FORGIVENESS 1st & 2nd Year Monthly Payments Extra Cash Flow $924 $0 10 Year Standard $350 $583 IBR $389 $500 ICR-A Case #3 Targeting

  18. Targeted Repayment Plan Non-payment 4.75% Non-payment 6.8% 7.9% Non-pay 9.25% 1 yr 5 yrs 0.5 yr 7 yrs 9.5 yrs Typical Repayment Plan Consolidation – 4.75% Stafford – 6.8% Loans Grad Plus – 7.9% Private Loan - 9.25% Repayment Period 8 yrs 10 yrs $11,675 Effective Rate (APR) = 6.29% Effective Rate (APR) = 5.69% *Assumes $168,000 in federal debt and $8,000 in private loans Case #3 Targeting

  19. Targeting Private Loans Total Paid $ Savings of $6,566 earned in 28 months of prepayment. $12,422 $11,775 10 YEARS 10 YEARS $9,146 $8,485 28 MONTHS 15 MONTHS 9.5% 9.5% w/$500 prepay 8.25% 8.25% w/$500 prepay Case #3 Targeting

  20. Returns PLUS Loan 8.1% Average PLUS Return S&P 500 7.4% Average S&P Return (A/T) All Returns Here Are After Tax 16% 8% 0% 1940 1960 1987 2001 Sources: Yale Econ/Robert Shiller, Standard & Poor’s, Federal Reserve, Bloomberg Case #3 - Should I Be Investing? - Confidential Document, Property of Graduate Leverage, LLC -

  21. What every dental student with loans should do: Understand Your Debt • What kind of loans do I have? (Federal Stafford, GRAD Plus, Perkins, etc.) • Who is my lender? (Federal Direct, Federal through Private Lender, Non-Federal Private Lender) • What are the interest rates on my loans? (fixed, variable, 6.8%, 7.9%, 8.5%, etc.) Position Loan for Appropriate Balance Between Liquidity and Total Cost • Calculate monthly payment options and compare to monthly budget • Take advantage of “exceptions to the rule” – targeting and forgiveness • Evaluate refinancing opportunities - Confidential Document, Property of Graduate Leverage, LLC -

  22. What every dental student with loans should do: 3. Prepare & File Taxes Advantageously • Preparation in fall of final year to understand tax implications for loan subsidy programs • Understand the trade-off of filing jointly with spouse • File taxes in final year as appropriate 4. Manage your Financial Net worth • Properly allocate discretionary income • Only invest when returns exceed cost of debt and liquidity issues met

  23. Jason DiLorenzo 415-722-8552 jdilorenzo@glAdvisor.com If you have any questions or would like a personalized debt assessment, please call or visit our website. www.gladvisor.com www.facebook.com/glAdvisor www.twitter.com/glAdvisor Thank You *The information in this presentation is for informational purposes only.

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