I’ve been writing and talking about student loans a lot more lately now that it looks like they’re finally going to go back into repayment in September 2023. Most people have thought very little about their student loans for the past 3.5 years while payments and interest have been paused. Now that repayment is about the start again, everyone is trying to determine the best plan for their own student loans, especially with recent changes.
The big change that I wrote about recently is the introduction of the SAVE (Saving on a Valuable Education) plan, which is going to be taking the place of REPAYE (Revised Pay as You Earn). I’d long been an advocate of the REPAYE plan for healthcare travelers, so now that SAVE is taking its place, many travelers have been asking if they should switch to SAVE, or if PAYE (Pay as You Earn) or potentially even the standard 10 year repayment plan would be best for them.
There are many pros of the new SAVE plan over REPAYE, but also a few cons as well. If you’re unfamiliar with the differences, then check out this article to see what all is changing. You can also check out this video we made discussing the new changes.
Some of the questions that we’ve gotten after putting out the above article and video about the new SAVE plan caused me to sit down with an excel spreadsheet to model out some scenarios to determine what is the best choice for the average travel therapist. The conclusion from the article and video were that basically the best choice would depend on your situation, especially what you chose to do after traveling, but that doesn’t really help people practically speaking. I wanted to go more in depth with some numbers and charts to give people a look at what plan might be best for the average traveler, along with the considerations that would impact the choice.
Check out the hypothetical scenario and the results below, which should help you determine the right student loan repayment option for your own situation.
The Average Travel Therapist Scenario
We’ve interacted with several thousand travel therapists over the years and have seen a variety of different situations.
Some travelers travel for only a contract or two and then settle down. Maybe because they found a facility or city they loved and couldn’t leave, maybe because they found their soulmate and decided to stay, or maybe because they decided travel wasn’t a good fit for them so they went back home to find a permanent job.
Some travelers, like us, start traveling and then can’t stop traveling. Either because of the higher pay, the adventure, the freedom, and/or the flexibility, they end up doing travel therapy for 5+ years before settling down somewhere. Some even choose to do a version of semi-retirement and continue to travel indefinitely.
These situations are outliers though. The average traveler travels for 2-3 years before settling down into a permanent position. I wanted this scenario to be representative of the majority of travel therapists to help as many people as possible. So, for the hypothetical scenario below, I chose to assume that this travel therapist graduates from school, travels for three years, then settles down into a permanent position where they receive normal raises over the course of their career.
Here are all of the details:
- Single individual with no spouse or children
- Travel therapist for 3 years after graduation
- Working 48 weeks per year as a traveler and making $25/hour as their taxable wage
- $15,000/year contributed to 401k for retirement
- Permanent job starting after year 3 with a beginning salary of $75,000/year
- 3% annual raises on permanent job salary
- $15,000/year contributed to 401k for retirement
- $140,000 in federal student loan debt at graduation, all from grad school, with no private student loans
- 6% average student loan interest rate
- The Federal Poverty Line (used to determine payment amounts on SAVE and PAYE) continues to increase at 2.4% per year, which is the average over the last 10 years
The traveler wants to decide between SAVE, PAYE, and standard 10 year repayment for their student loans, with the goal of paying the lowest amount over time.
First, let’s look at what this traveler’s annual taxable income, Adjusted Gross Income (AGI) after 401k contribution, and the federal poverty line will look like over time, to get an idea of how those variables change throughout the repayment period.
Annual taxable income and AGI stay steady for the first few years while traveling before jumping up due to the higher (taxable) pay at the permanent job. (Remember, as travelers our taxable hourly pay is lower than at most perm jobs, and this is what is used to determine student loan repayment, while stipends are not accounted for). After year three, total income and AGI after 401k contribution both rise in tandem at a rate of 3% (assuming 3% raises each year), and assuming the 401k contribution of $15,000/year stays constant. At year 25, annual income ends just below $140,000/year. The federal poverty line increases at the recent average rate of 2.4% starting at $14,580 (the amount for 2023) and ending at just under $26,000 after 25 years.
Payments Over Time
Next, let’s look at how this traveler’s payment would change over time on each of the repayment plans.
On the standard 10 year repayment plan, the payment amount remains constant at $18,648/year ($1,554/month) for the full 10 year term.
The PAYE plan would start with start with a low payment while traveling (under $100/month) before jumping to $3,652/year when beginning the permanent job after year four. This payment would gradually grow over time to $7,103/year ($592/month) in year 20 when the remaining loan balance is forgiven.
The SAVE plan would start with a $0/month payment while traveling (due to the low taxable income) and then jump to $2,478/year ($206/month) when beginning the permanent job after year four. This payment would gradually grow over time to $6,656/year ($555/month) in year 25 when the remaining loan balance is forgiven.
An important thing to point out here is that even though the repayment term on SAVE is five years longer than PAYE, the ending payment amount (and all the payments along the way) on SAVE is lower than the ending payment amount on PAYE due to the difference in how discretionary income is calculated. PAYE bases payments on 10% of the amount over 150% of the poverty line whereas SAVE bases payments for grad school loans on 10% of the amount over 225% of the poverty line. In practice, this leads to lower monthly payments on SAVE than on PAYE for any given income level. You can also see on the graph how the rate of change for payment increases over time is slower on SAVE than PAYE due to this difference.
Increases in Interest on Loans Over Time
Now that we know what the payments would look like over time, let’s compare the interest accumulation on SAVE vs. PAYE.
Here is where you can see where the new SAVE plan shines. Even though payments are lower on SAVE throughout the repayment term, no interest accumulates on the loans at all, no matter how low the payment is each month. The accumulated interest is automatically subsidized each month, which means the loan balance never grows.
On the PAYE plan, interest accumulates more quickly the first three years due to payments being lower while traveling. After year three, the accumulated interest slows down each year since payments are now covering a larger portion of the interest each month, making the loan balance grow more slowly. On PAYE, capitalized interest is capped at 10% of the original loan balance, so no more interest is capitalized after year two, but the interest continues to accumulate on the loans throughout the full term, which will become important at the time of loan forgiveness.
It’s interesting to note that at no point during the repayment term on either of these plans does the monthly payment get high enough to exceed the amount of interest accumulating each month.
The standard 10 year plan isn’t included here since the payment is a fixed amount each month and the loan is paid in full at the end of the 10 year term.
Ending Balance at Time of Student Loan Forgiveness
Now that we know how much interest accumulates each year on SAVE and PAYE, let’s look at what the ending balance will be for each of the different plans at the end of the respective loan period.
The standard 10 year plan would have no remaining balance after year 10. The balance on SAVE would still be the original principal amount of $140,000 at the end of the 25 year term, due to no interest accumulating on the loans over the full repayment term. PAYE would end with a balance of a little over $231,000 since the loan balance gradually grew over time as interest accumulated each month.
Taxes Owed on Forgiven Student Loan Debt
Now that we can see the ending balances for each plan, let’s take a look at how much would be owed in taxes on the forgiven amount at the end of the loan terms.
Currently, taxes are owed on any student loan debt that is forgiven outside of the Public Service Loan Forgiveness (PSLF) program. I believe there’s a fairly high probability that this will change over time, but for now, it’s prudent to plan to pay taxes on any forgiven student loans on the PAYE or SAVE plan.
There’s no way to know exactly how much will be due in taxes, because tax rates and standard deduction amounts change each year, but we can estimate. I think that a realistic estimate is 35% of the forgiven amount for this individual working a full time permanent job at the time of loan forgiveness.
Assuming a 35% tax rate on the forgiven amount, $49,000 would be owed on SAVE, while just under $81,000 would be owed on PAYE. This is a sizable difference between the plans.
No taxes would be owed on the standard 10 year repayment plan since no student debt would be forgiven.
Total Paid Over Time
Now let’s look at the most important part of this hypothetical scenario: how much is paid in total over the life of the loans.
Despite SAVE having the longest repayment term, it would result in the lowest amount paid in total by nearly $30,000!
The total payments over time between SAVE and PAYE were pretty close, but the big difference was the taxes owed at the end of the repayment term, which is due to the very generous SAVE monthly interest subsidy. Not having your loan balance accumulate interest over time is a really big deal.
The standard 10 year repayment plan would be by far the worst choice in this scenario. Not only would this individual pay $42,000 more than on SAVE and $13,000 more than on PAYE, but it would also be paid over a much shorter time frame. This is important due to the effects of inflation over time. $1 paid at year 10 is worth significantly more than $1 paid at year 20 or year 25. A dollar lost over 40% of it’s purchasing power in the last 15 years, to illustrate how significant the effects of inflation can be over time. For that reason, the standard 10 year repayment plan is actually even worse than it looks on this chart in inflation adjusted terms.
In this hypothetical scenario for an average travel therapist, SAVE comes out significantly ahead of both PAYE and the standard 10 year repayment plan in terms of total amount of money paid.
Although I think this scenario is fairly close to the average traveler situation, of course everyone’s situation will be different in reality. For that reason, I want to now discuss how changes in various factors would change the outcome.
- As income increases, PAYE and the standard 10 year repayment plan start to become a better choice. Assuming all variables above stay the same, but starting income at the permanent job increases to $95,000/year with the same 3% annual raises, all three of the repayment plans are actually pretty equal in how much would be paid over time when adjusted for inflation.
- On the other hand, lower incomes heavily favor SAVE over the other two plans. This could also come into play for those that plan to switch to part time or PRN work at some point in their career, which means a lower income and favors choosing SAVE.
- The higher your student loan balance, the more the numbers favor SAVE. The lower your student loan balance, the more PAYE and the standard 10 year plan begin to be a better option.
- Higher interest rates favor SAVE. Lower interest rates favor PAYE and standard 10 year.
- Higher retirement account contributions favor SAVE due to the lower AGI. Lower retirement account contributions favor PAYE and standard 10 year.
- Getting married and/or having kids heavily favors SAVE. To illustrate this, let’s say that at the end of year 3, you get married (filing separately) and have twins. With all of the above variables staying the same, SAVE now would come out nearly $100,000 ahead of PAYE and $140,000 ahead of the standard 10 year repayment plan. This is due to how discretionary income is calculated on the plans as I mentioned above.
- Traveling longer before settling into a permanent job favors SAVE; whereas, traveling for a shorter period before settling down begins to favor PAYE and the standard 10 year repayment plan.
- There are also some situations where a traveler who thinks they’ll earn a very high income (well over $100k) once they settle down would be best off taking a mixed approach of SAVE while traveling to take advantage of the low payments and interest subsidy, and then paying off their loans ASAP once they stop traveling.
Taking a look at these variables, you can choose which options may more closely align with your actual situation. Then, try to determine which plan would be most favorable for you.
I hope that this article will give you some insight into how to plan for your own student loan repayment. Based on the numbers, it seems that most healthcare travelers will be in the best shape over the long term on SAVE, but there are a lot of variables to consider.
If you’re a traveler who plans to settle down into a normal paying perm job after a few years and have a family while saving for retirement, then it’s hard to make a case against SAVE.
If you’re a traveler who plans to stop traveling, start a business, earn a lot of money, and never have kids, then SAVE won’t be as beneficial.
If you’re a traveler who plans to travel for a long time while saving heavily, then only work part time/PRN when eventually settling down and having kids, then SAVE is a no brainer.
If you’re a traveler with a low student loan balance, then SAVE might not make sense and paying off the loans ASAP may be prudent.
Some people are very debt adverse, and even if it makes more sense mathematically to go on an IDR plan, they’d prefer to just get rid of their debt, and that’s understandable as well. Student loan debt repayment is basically a “choose your own adventure” where a lot of variables and psychological factors come into play. There’s no one size fits all answer for everyone, and sometimes even the best mathematical choice won’t be the right choice for you based on your life circumstances. But, assessing all your options and being well informed is vital.
If you aren’t sure what’s the best choice for you or want to double check your decision, I’d recommend creating an account at FitBux where they can help you assess your personal financial situation.
If you have questions about travel therapy or student loan repayment options for travel therapists, feel free to send us a message. We also have additional resources you can check out below!
If you’re interested in getting started as a travel therapist, check out our free Travel Therapy 101 Series and get connected with the best recruiters by filling out our Recruiter Recommendation form.
- Is it Better to Pay Off Student Loans or Invest?
- Travel Therapist Student Loan Forgiveness
- SAVE Student Loan Repayment Plan for Travel Therapists
Written by Jared Casazza, PT, DPT – Jared has been a traveling physical therapist since 2015. He has become an expert in the field of travel healthcare through his experience, research, and networking over nearly a decade.