Posted to Podiatry ONLINE, Oct 10, 2000

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FEATURE ARTICLE
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Student loan debt--and how to conquer it!  

by John L. Trench III, DPM
Terre Haute, IN
jltrench@gte.net

There has been a great deal of negativity concerning our profession posted to this and other online newsletters and forums, to which I have contributed. There has also been a significant amount of debate concerning the expression of negativity: some say it should never be done, while others point out that it is the only way to start the process of change for the better.

I am in the latter group. I acknowledge, however, the point made by some in the "anti-negativity" camp that expressing the negatives of this profession, however valid, without also offering solutions is merely so much griping and whining. With this in mind, I propose to offer solutions to one of the most negative aspects of our profession, a subject which serves to both discourage current students, residents, and recently-graduated practitioners as well as to dissuade prospective students from choosing podiatric medicine and surgery as a career.

The negative element I wish to address is the outrageous student loan debt load carried by students, residents, and recent graduates (defined here as those who graduated within the past ten to fifteen years).

Podiatry student debt has reached crisis proportions. New podiatrists are leaving school and residency and entering the work world saddled with an average of $140,000 to $150,000 in debt. Some secure associate-ship positions, but the salaries are generally low and rise very slowly during the first few years--and in many cases do not rise at all--allowing scant resources for beginning debt repayment while maintaining even a minimally-acceptable standard of living. A minority of new practitioners leaving residency and entering private practice are able to arrange to purchase an established practice, and while a few will do well quickly, many will not, and will be faced with the task of rebuilding patient bases and income production.  

Most of the new DPM's face starting up cold--this is particularly true of the graduates of non-surgical residencies, who find little demand for their skills and services among those established practitioners seeking new associates. (Here's a question for future discussion: if non-surgical podiatry is truly so important, so valuable, and so profitable--as the podiatrists who are trying to secure surgery for themselves as private turf, stripping so many of us of the ability to gain surgical board certification and hospital surgical privileges in the process, tell us ad nauseum--then why aren't there more associate-ship positions out there to snap up these "valuable" new non-surgical podiatrists? If that's really where the money is, as so many claim today, then why are the majority of associate-ship positions requiring surgically-trained podiatrists?)

As a result, student loans are generally placed in forbearance, usually for several years, and in many cases so many years that the podiatrists must pursue loan consolidation in order to access additional years of forbearance, as new practitioners struggle to build their practices and their incomes in an ever-tighter, Medicare-and-Managed-Care-dominated market. For a rapidly-growing number this is a futile struggle, for despite their best efforts they find their incomes growing at a rate significantly slower than their debts are growing. The struggle then becomes a juggling act, as the new podiatrists delay one set of bills to catch up on another, constantly "robbing Peter to pay Paul", with the result that they wind up behind on everything: home bills, mortgage or rent payments, practice-related accounts, taxes, and of course those rapidly-burgeoning student loans. It is difficult, if not impossible, to catch up once this process begins, and it quickly spirals out of control.

The ultimate end of this spiral is failure, bankruptcy, and financial ruin. The worst part of this terrible mess is that the student loans are, with rare exceptions (and I do mean rare), not dischargeable in bankruptcy. Unlike other businesses, where one can at least gain a fresh financial start in life if the business fails, the affected doctors can and will be hounded for life by the Department of Justice and the IRS, to pay money they do not have against debts they obviously cannot afford.

Aggressive action must be taken to reduce the debt burden borne by new practitioners--as well as to address the destructive debt burdens that are beginning to crush and destroy a growing number of recent graduates already out here struggling. Reducing tuition levels at the colleges, establishing more meaningful scholarship programs that pay more than the usual token amount of tuition for student recipients, getting podiatrists access to loan repayment/loan forgiveness programs, restoring the full tax deductibility of student loan interest, and making student loans dischargeable in bankruptcy so that those who do not make it can get a fresh start in life, and providing full-scope training and access to board certification in all practice areas to all podiatrists so that they can offer the broadest range of services possible, and thus be as marketable as possible, are all part of the long-term solution.

Until those things happen, however, the large-and-growing number of men and women currently suffering under the burden of huge student loan debts need something to at least lighten that burden, make it more manageable, and restore to them at least a modicum of control over their financial lives.

As one who has been there--and still is there, actually, facing some of the worst and most destructive of the effects  student loan indebtedness can impose--I have been forced to seek out solutions to the problem. Solutions are, I have discovered, few and far between, with those that do exist being woefully inadequate. I offer the following as short-term measures, meant not to replace the changes I've mentioned above, but to help people to survive and live a little better while long-term solutions are being put into place for the benefit of all:  

 

PHASE ONE: CONSOLIDATE ALL OF YOUR STUDENT LOAN DEBTS UNDER THE DEPARTMENT OF EDUCATION DIRECT LOAN PROGRAM

 

The Department of Education offers what I believe to be the only student loan consolidation program worth considering--all others offered by commercial lenders are merely ways to shift the burdens and profits around, increasing your burden and their profit (if it didn't, do you really believe they would consolidate your loans?)--I urge you to avoid them. Go directly to the Department of Education, and seek out their Direct Loan Program.

The Department of Education Direct Loan Program offers arguably the only realistic chance most of you have to avoid complete failure, bankruptcy, and lifetime financial ruin--I say "lifetime" because student loans, with rare (read: "never") exceptions, are not discharged in bankruptcy, but turned over to the Department of Justice, who then hounds you for life and enlists the aid of the IRS to seize everything you have or ever will have in order to feed that crushing debt. (Did they mention that part when they were telling you about how to finance your education back at the old Alma Mater? I didn't think so....) The Direct Loan Program offers several advantages which will, if not enable you to succeed, at least make your life easier and less stressful:

1. If you are currently in default, but not yet too far along in the process, consolidating your defaulted loans under the Direct Loan program will cure the default and get all the legal sharks and collection agency bottom-feeders off you. (Actually, it can help you even if you are too far along in the default process--you'll just have to do a bit more, grovel a bit more, etc., to get your current creditors to cooperate. Get a good lawyer to help you, however, if this is the case. Don't try to tough it out alone.) If you are a student, a resident, or a new practitioner not yet far enough over the edge to be in default, consolidating your loans under the Direct Loan program can help you avoid the pain and destructive effects of the process I have described above. I've been through it--I'm still going through it--and believe me, you don't want to know what it's like!  

By the way: consolidating your loans under the Direct Loan program will give you a fresh start with regards to being able to put your loans into forbearance. Do not do it! If you do, you will just extend out the agony you are going to suffer, and ultimately increase its intensity. You aren't going into all of this just so you can screw yourself further. Once you get into the Department of Education's Direct Loan program, you should avoid deferment and forbearance like the plague!

2. Once you have successfully consolidated your loans in the Direct Loan program (and, if you are already in Student Loan Default Hell, cured your default and gotten the bill collector monkeys off your back), you will have access to the single most important factor for enhancing your prospects of survival: a real, live, long-term income-contingent loan repayment schedule. You don't just get a few years of minimal relief, either--the Department of Education enrolls you in the income-contingent repayment option and checks your income annually directly with the IRS, calculating your monthly payments to reflect your income.

Now, be prepared: they are going to want as much money out of you each month as they can get. They are not going to be particularly understanding of any desire you may have to borrow money to finance a "doctor car", a boat, an airplane, a house, or what-have-you. Your situation with them on this income-contingent repayment program is still going to represent a financial pinch. It's a whole lot better than what most of you are going to face otherwise, however--and head and shoulders above what a lot of us out here in the real world are already having to endure. The Department of Education is, we should note, generally more reasonable than either the bill collectors, the DOJ, or the IRS will be. (Don't spread that around, as they are a government agency, after all--if it gets back to the government that one of their agencies is being reasonable or doing something that even borders upon being intelligent, somebody there is bound to smack themselves on the forehead and exclaim: "We can't have that, now can we?", and then they'll screw it all up so it matches all the other government agencies and programs!)

Stay on the income-contingent repayment option. If and when your income grows, your payments will grow--and you'll pay off your loans. That happens, by the way, over a twenty five year period. If your income never grows to match the demands of your debts, at least you survive.

If you are currently in default, you are required to enter the program on the income-contingent repayment option, and to sign a paper giving the Department of Education the right to access your tax records annually in order to recalculate your monthly payment amount. A small price to pay, believe me.

3. If after making twenty five years of consecutive monthly payments your debt has not been retired, the remaining balance will be charged off. That means that if you are never able to build your income up to a point where you can pay off the debt, and it just keeps growing ever larger with each passing year, you'll get out from under the student loans anyway.

It sounds like a great deal, and it really is--but don't go feeling all relieved just yet. You see, under current law the amount of the debt that is charged off is not forgiven--it is reported to the IRS as income in the year it is charged off. You will then owe a heap of taxes as a result. That means that if you owe $210,000 in student loans that are charged off, you would end up owing the IRS, what? $80,000 to $100,000, to pull a figure off the top of my head? Does that sound reasonably close? Too low? Too high? Anybody out there want to crunch the figures and share with the group? Anyway, that's the bad news.

Now here's the good news: there are groups and individuals who are working hard to get the law changed, so that the loan amounts charged off will actually be forgiven, and not reported as income. That makes a certain amount of sense, after all, since it is reasonable to assume that if you weren't able to earn enough money to pay off the debt, it is highly unlikely you will be able to pay off the taxes incurred by charging it off the books and declaring it to the IRS as "income". Besides, while it will be true that you haven't paid off the money the government loaned you to become a DPM, it will also be true that the government is partially at fault for your inability to earn a decent living--they are the ones playing fast-and-loose with Medicare reimbursement rates, after all, and Medicare patients will comprise the bulk of your practices, most of you--and society will nevertheless have received the benefits of the care you provide during your years of practice, reducing the rates of infirmity, disability, and lower extremity amputation, and thus saving society a huge sum of money in lost work hours and medical expenses. Fair is fair, after all.

Still, even if the law doesn't change, the IRS is probably going to be a whole lot easier to deal with than your student loans are right now. First, the amount you will owe in taxes for the charged off loan will probably only amount to about 30% to 40% of the total amount charged off. Depending upon how much that amount turns out to be, you might actually be able to figure out a way to scrape up enough money from family and personal assets by them to pay the taxes, perhaps over a reasonable installment payment period. (Then again, what with IRS interest rates and penalties and what-not, maybe not.) And if your financial circumstances are still really tight--and if you are one of the new breed of non-surgical podiatrists, and do not act early in your career to remedy that fact so you can offer the broadest range of skills possible including surgery, I can't see how your finances can ever be reasonably expected to be anything but really tight--you might be able to negotiate an acceptable Offer In Compromise with the tax authorities, and discharge your tax burden for a fraction of the amount owed. That's an option you unfortunately don't have with the student loans themselves.

It's kind of scary to think that owing a lot of taxes to the IRS is better than carrying the burden of student loans, isn't it? Nevertheless, it's true.

Once you get your ducks all in a row with the Direct Loan program, let's all start working to get the law changed so that it actually deals with financial realities, and doesn't merely exchange one onerous and unsupportable burden for another.  

Okay, you've gotten your loans consolidated under the Department of Education's Direct Loan Program, and you are on the income-contingent repayment schedule. Now what? You're still deeply in debt--not only with student loans, but probably a credit card or two as well, maybe an auto loan, and (if you're lucky) maybe even a mortgage. All those debts aren't going to go away fast--they are going to linger for years, sucking up tons of money in interest--anywhere from two to four times what you have borrowed. In the process, they will also suck the very life out of you. Debt, in general, is NOT a good thing. So, now what?

Yeah, yeah, I know: I've been complaining about how a lot of you don't stand much of a chance of making any significant amount of money at all--especially those of you who are being condemned to the non-surgical "specialist" trash heaps. And it's true. There are things you can do to change that, however. You can reject the unreasonable and arbitrary limitations, obtain the surgical training you need to round out your skills and your practice, and increase your income potential significantly, at the same time significantly increasing your personal and professional satisfaction level in practice. It will still be a hard row to hoe, and by no means a sure thing that you will survive or prosper, but your likelihood of survival will be much, much higher. One big drag on you, however, decreasing your chances of surviving long enough to reach the point where your practice is generating enough money for you to live on, is the debt burden you carry.

What I am going to share with you here is simple, yet very powerful. The AVERAGE person in America, carrying the average debt load (which is pretty significant) and earning the average annual income, can use the information I am going to put into this post and wipe out his/her debts completely in about five to seven years--including home mortgage. This is so in part because the credit system in the US is set up to ensure that people's debts remain relatively proportional to their incomes. It doesn't always work out that way in all cases, but it does for the majority.

You are in a unique position, however. DPM's come out of school and residency completely out of kilter, burdened with high debt levels and little or no income to cover the monthly payments. Your income will have to play catch-up with your debts--and for a lot of you, it's a race you are doomed to lose. Forbearance and deferment periods don't really help matters: at the very same time that you are struggling so hard to increase your income, constantly battling the Forces of Darkness who seek to drive our incomes down (Medicare, Medicaid, HMOs, PPOs, etc.), your note holders are merrily increasing the amount of your debt at an even faster rate. The result is that you'll have to be more creative and take more time to retire your debts. Still, if you do what is necessary to overcome the limitations being imposed upon you and earn more money, and implement the simple instructions below, you can do it.

Write out all your debts on a piece of paper. Put down every dime you owe: student loans, department store charge cards, bank credit cards, mortgage, auto loan, etc. List the total amount you owe, the monthly payment, and the interest rate for each of your debts.

On a separate piece of paper, write down you basic monthly expenses: rent/mortgage payment, phone bill, utilities, cable TV service, groceries, commuting expenses, insurance (health, life), entertainment, etc.--go through your check book register to help you. Ideally, take a month or two and keep a spending diary--write down everything you spend money on. And when I say everything, I mean EVERYTHING, not just the big-ticket items you buy. If you put a penny into the gum machine on the way out of the supermarket, write it down.

This is the most important thing you have to do--refrain from adding to your burden. You cannot hope to get out of debt if you are constantly adding new debt. So don't do it. Yes, yes, I know you are going to have to borrow at least SOME money to be able to purchase or start a practice--assuming you can find banks insane enough to loan money to young people fresh out of training with huge debts and no income or practical experience. (Just watch 'em line up all eager like! Wouldn't you be excited by the prospect, if you were a banker?)

Beyond that, however, don't do it. Don't borrow another dime. Don't take out credit cards, don't take out department store charge cards, don't take out personal loans. DON'T DEBT!

Take your monthly spending record and go through it with a fine-tooth comb. See where your money is currently going to. What you are looking for are non-essential expenses: that daily double-dose of overpriced designer coffee, magazines, spending sprees to make yourself "feel better", lottery tickets, candy bars, donuts--all the junk you spend your money on that you know you shouldn't. Be brutal--junk is junk and waste is waste, now matter how much you "like" it. And please spare yourself and me the usual "life shouldn't be all sacrifice and no joy" crap--you are going to have to sacrifice for quite a while if you expect to ever get to the "joy" part. No sacrifice, no joy--indeed, no survival.

Add up all the frivolous and unnecessary expenses you find in your record, If you can't come up with at least $250 to $300 per month right off the bat, you aren't trying--go over it again and begin eliminating some of your "can't live without it" frivolity.

Now total it up again. You should be able to come up with at least $250. This is the "debt repayment accelerator"--the money you are going to add to your monthly payments to accelerate the rate at which you get out from under your debt burden.

Using the information you wrote down on your piece of paper, you can now line them up for repayment in the order that will allow you to wipe out your total indebtedness in the fastest time possible. How you order them will depend upon your circumstances: if your total of monthly debt payments plus your basic living expenses is LESS than your after-tax income, then put your debts in descending order according to the interest rate--that will enable you to pay off your debts in the shortest possible period of time.

If your monthly debt payments plus your basic monthly living expenses is more than your after-tax income, however, then put you need to order debts in a different way. Start by dividing each debt by its monthly payment, which will give you a rough estimate of the number of payments needed to pay of each debt at that monthly payment amount. Then list them in ascending order according to the number derived, going from smallest to largest. This will enable you to free up money more rapidly, with an eye to enabling you to bring your monthly expenditures into line with your monthly after-tax income. After that, you can re-adjust your monthly repayment scheme to order your debts by interest rate.

Add your "debt repayment accelerator" to the monthly payment of the debt that is first on your list. Continue doing this month after month, until the debt has been repaid--your "debt repayment accelerator" will cause this to happen sooner than would otherwise be the case. Your progress will, however, seem slow at first, so keep faith and don't give in to the natural urge to go back to squandering your money on junk again. Stick to the program.

When you have paid off the first debt on your list, add the "debt repayment accelerator" PLUS the monthly payment amount for the first debt into the monthly payment for the second debt on your list. Continue to do this month after month, until the second debt has been repaid. Now add the "debt repayment accelerator" plus the monthly payment amount for the now-repaid first and second debts into the monthly payment for the third debt on your list, continuing this month after month until that debt has been repaid.

And so on and so forth, working your way through each debt on your list. By continuously rolling over your monthly payments down the list as instructed, the amount you pay out for your debts plus your "debt repayment accelerator" amount every month will remain the same, however, the RATE at which your debts are repaid will accelerate rapidly as you proceed down the list.