How your student loans could double, triple or worse

I talked to a student recently who graduated dental school a few years ago with $300,000 of student debt (a figure some of you would be happy to have!). For a variety of reasons, she hadn’t worked in the last three years and spent some time overseas before that. Her outstanding debt is now closer to $450,000. In just a few years her outstanding debt increased 50 percent. What happened?

The borrower I’m referring to chose to enter one of the government’s income-based repayment programs. Entering one of these programs puts a borrower in a situation that is unlike any other. Your payment is based on your income, which may or may not cover the interest due. In addition, the interest is not “amortized” over a certain time period like a 30 year fixed mortgage. Rather, it works more like a home equity line of credit (HELOC) or a credit card, in which only the interest is due each year. But typically with a HELOC, you must pay at least the annual interest due. So if you borrowed $100,000 against your home equity with a HELOC and your interest rate was 6%, you would only have to pay $500 a month ($6,000 a year). Your principal would not go down (the $100,000 you borrowed) but neither would it go up because you are paying your annual interest.

This is where things start to deviate for your student loans. If you have $450,000 in outstanding debt, your interest rate is 6.5% and you have entered PAYE, your annual interest would be roughly $29,250. If you are making $130,000 (AGI) a year (a common starting salary for new grads), your monthly payment might be around $1,000. This means that not only did you fail to pay any of your principal, but you didn’t even cover all of your interest due. So what happens to the interest you didn’t pay? It goes and sits in a separate “bucket” called accrued interest. In this example, the total outstanding debt after the first year is now $467,250. This is how your debt actually grows even while you are making payments. If we run this scenario out for 20 years assuming 3% income increases, your total outstanding debt in year 20 is around $700,000. The technical term for this is called “Negative Amortization” although even that term doesn’t totally describe what’s going on here. Under negative amortization, the principal typically increases and so does the amount of interest due. Under the government Income-Driven Repayment programs, the amount of money on which you are paying interest ($450k in this case) doesn’t increase unless your interest “recapitalizes”. The most common way this occurs with an IDR program is missing your annual deadline for filing your income certification paperwork required. So don’t be late on filing your paperwork!

Under current legislation, any outstanding debt at the end of 20 or 25 years is forgiven if you meet the parameters of the various repayment programs. Again, this too is unique to the world of federal student loans. And also, keep in mind that this forgiveness is taxable so be prepared to cover any tax bill that might be due in the year of your forgiveness. It would probably be wise for most dental grads to work with a CPA and Financial Planner who are familiar with the nuances of these payment plans as the uniqueness of the lending instruments demands unique repayment strategies. Whatever you do, don’t bury your head in the sand while your outstanding debt continues to grow. For many people, it will make the most sense to make the minimum payment, experience forgiveness and deal with the tax bill. For others (in particular those with the highest incomes), it will make the most sense to pay off the debt as fast as possible. Either way, be intentional and come up with a plan.

~Ryan Schulte, financial advisor

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About Ryan Schulte

Ryan Schulte is a CERTIFIED FINANCIAL PLANNER® that specializes in working with dentists. He is also the founder of, a student loan consultant group that works with dentists across the country to help them gain an understanding of their debt, their various repayment options and to create a plan for repayment. You can learn more at and contact Ryan at

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Comments (3)

  1. Sergio

    Some what misleading title and article. The author failed to mention total payments made under PAYE equal approximately $300,000 given the assumptions. Compared to a fully amortized 10 year or 25 year repayment, total costs $613,000 or $911,000 and $5,109/month or $3,038/month payments respectively. You must also consider the PAYE (or any IDR program) “tax bomb” as it is affectionately known. Assuming a 40% effective tax rate on $700k forgiven, the PAYE cost of loan is $300k paid based on income + $280k tax bomb = $580k. This is lower than the 10 year cost with an addition 10 year in PAYE.

    Managed properly, Income Driven Repayment programs are an cost effective repayment strategy.


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