Student Loan Debt: It’s Coming Sooner than You Think

After finishing a presentation at a dental school “Lunch and Learn,” a line formed with students who had questions for me on various topics. One particular student sticks out in my memory. She waited in line patiently to pose her question. I noticed she continued to let students go in front of her until she was the only student remaining. Before she spoke, I could sense something was bothering her.

Her question was very relevant. With $350,000 in student loan debt, plus orthodontic residency debt yet to be incurred and a small car note, could she ever be in a position to start her own orthodontic practice? Before responding, I listened to all the details, sensing her deep concern. When she ultimately said,

“What do you think?” I said, “Absolutely yes, you will—but the responsibility to prepare rests upon your shoulders and yours alone.”

Three Essential Steps to Take Control of Your Financial Future

Trenton D. Watrous, CPA, CFE, CVA

Increasingly, dental students are raising questions about school debt and the impact it can have on starting a practice or buying a home. Denying the impact that debt has on your overall financial future is not accepting the reality of your situation. Ignoring your credit obligations until a “more convenient” time is reckless to say the least. Instead, you should develop a

TRENTON D. WATROUS, CPA, CFE, CVA Getting Started

plan to repay your student loans so you can begin to take control of your finances.

decide not to complete your education, or you file personal bankruptcy (such as Chapter 7).

Repayment

Payments made on student loans are paid to a “loan servicer” and must be done on a regular and timely basis. Each loan servicer has a specific process for repayment. As the borrower, you bear the sole responsibility for making timely payments – even if, for example, your address changes and you don’t receive the new payment coupon booklet. Some loan servicers may provide the option of automated loan payment withdrawals from your bank account in exchange for a slightly lower interest rate on the loan.

Follow these three steps to build and maintain a strong financial foundation moving forward:

1. Understand Repayment of Your Student Loans

Student Loans are just like any other debt, they must be repaid over a period of time. You are responsible for repaying your student loans even if your personal financial situation becomes difficult, you

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Consolidation

Consolidating multiple loans into a single loan could significantly simplify your loan repayment process for two primary reasons. First, student loans may have varying interest rates which are above the current market rates. Consolidating all your loans together may reduce the combined interest rates on the outstanding indebtedness. Second, the potential exists to consolidate the loans into a single loan with a longer term—thus lowering the monthly payment.

Alternatively, reasons may exist for you to choose not to consolidate your loans, such as loss of loan cancellation benefits or loss of a fixed interest rate. Having all the pertinent facts available in the consolidation process is essential. You might also choose to seek advice from a Certified Public Accountant or Certified Financial Planner when making this decision.

Grace Period

Another important feature of loan repayment you should be aware of is the grace period applicable to your loan. The grace period is the amount of time after a borrower graduates or drops below half-time enrollment before payments are due. This period of time (which typically lasts six months) allows the borrower to become gainfully employed and prepare to start paying on the loans. Maximizing the grace period is critical – especially if you are considering opening a new practice.

Income-Based Repayment

If payments on your student loans become difficult, you may be eligible for the Income-Based Repayment Plan (IBR). This plan prevents your monthly payments from exceeding 15 percent of your discretionary income based upon qualifying factors. Although IBR may reduce your monthly payments, you will most likely incur more interest over the life of the loan and may incur income taxes on the forgiveness of debt after 25 years of repayment. Depending on your situation, use of the IBR can be a valuable tool in managing your cash resources.

2. Know Your Specific Debts

reality can have significant consequences. That’s why planning to allocate the resources you have toward your outstanding debts is essential. The best tool for managing your resources is a budget.

For students who

dream of owning their own practice,

The two primary areas of a budget are cash inflows and cash outflows. Inflows represent cash collected as wages or interest income. Outflows could include rent, student loan debt payments, credit card payments, and basic necessities such as food and clothing. The difference between the total inflows and total outflows should be a positive number. If not, changes must be made to better allocate the resources and meet your obligations.

managing debt effectively is key to

future success.

It can be a little hard to stomach, but it’s important to know exactly how much you owe. Start by outlining all of your debts—including each of your student loans and any consumer debts, such as cars or credit cards. For each debt: Determine “when” payments will become due, calculate “what” the monthly payments will be, learn “where” the payments must be made, and explore “how” your specific debts could be amended (such as through debt consolidation).

Why is creating a budget important now and in the future? Having a clear understanding of what outflows must be available to repay your student loan debts is essential to financial peace. Continuing to incur additional obligations, such as a new car note or consumer debt (i.e. credit cards), when your income will not support your obligations will create financial chaos. And that can limit your personal and professional options for years to come.

I often work with younger clients who have little knowledge of their outstanding debt and who continue to create new obligations with zero awareness of how their current income can or cannot support the monthly payments. Continuing to remain unaware of your personal obligations is reckless. Beginning to understand your situation or seeking the advice of professionals is a foundation of financial wisdom.

Manage Your Finances Today for Greater Success Tomorrow

Just like maintaining strong oral health, having the facts makes a difference. Knowing the terms of your student debt and how that student debt will impact your financial condition will ultimately empower you to a greater level of success. Plan for debt repayment by creating a budget and confidently know how your resources will be allocated to help you achieve your dreams. ■

For students who dream of owning their own practice, managing debt effectively is key to future success. Generally, opening a new practice or acquiring an existing practice will require you to borrow funds ranging from $400,000 to $600,000. Demonstrating to lenders, based on your credit record, that you are capable of handling the funds placed in your trust will move your dreams closer to reality. Protect your credit record from late payment or loan default comments by remaining proactive.

Trent Watrous leads the Dental Services Team at WSW CPAs. Offering a valuable combination of client service and expertise, Trent and WSW provide clients with industry specific knowledge, proven experience, and a willingness to work with young dental professionals. Discover the difference a dental specific CPA will make in your future success! Visit wswcpas.com to learn more and for a download of “From Dental Academics to Dental Professional: A Roadmap for the Journey”.

3. Create a Budget Let’s face it, we all have limitations in life. Understanding your unique financial resources and limitations is vital to your long-term financial health. Avoiding that

Home Mortgage

Physician Loans

BB&T has helped countless professionals in the dental industry to better manage and expand their businesses while improving their personal fi nances as well. We offer home fi nancing options designed exclusively for physicians.1 For example, with a BB&T Physician loan, you can borrow 100% of your loan amount, up to $650,00, with no money down. Other features include:

BB&T PHYSICIAN LOAN PROGRAM

Maximum loan to value (LTV) 100% up to $650,000 / 95% up to $850,000

Maximum Loan Amount* $850,000

Private Mortgage Insurance Not required

Minimum FICO LTV > 90% = 720 LTV ≤ 90% = 700

Student Loans Excluded from ratios if deferred for 12 months

Escrow for Taxes & Insurance Required

Occupancy Primary residence only

Eligible Property Types One-unit single family detached, warrantable condos and PUD's

Eligible Products 15- and 30- year fi xed rates, 5/1, 7/1, and 10/1 LIBOR ARMs (fully amortizing)

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