By Andrew Paulson, CSLP, Lead Student Loan Consultant and Co-Founder of our partner site StudentLoanAdvice.com
I recently met with a client whose Public Student Loan Forgiveness (PSLF) situation is perhaps the best I've seen in the hundreds of student loan consults I've conducted. I’ll call her Jade.
The key factors contributing to this surgeon's success are:
- Enrolling in an Income-Driven Repayment (IDR) plan during residency
- A long training period, five years in a surgery residency, and two years in a subspecialty fellowship
- Two years of no payments due to COVID forbearance
- Living in a community property state with a stay-at-home spouse
Now that the Biden administration has once again extended the student loan holiday until May 2022, let's tell the story of one doctor who is using PSLF and that loan freeze to her advantage.
Student Loans Accumulated from School
Jade had to borrow to pay for her undergraduate schooling, her graduate degree prior to medical school, and then medical school. After undergrad, she was uncertain if she wanted to go to medical school. Her graduate degree solidified her interest to become a doctor, and she entered medical school the same year she finished grad school.
In total, she borrowed $26,000 for undergrad, $136,000 for grad school, and $270,000 for medical school totaling $432,000. This doesn’t even account for the fact that most of her loans were unsubsidized and that they started accruing interest the day they were disbursed.
From undergrad to med school, Jade made little to no payments and owed $485,000 in total when she graduated from medical school. The additional $53,000 was from the interest that accrued during her time in school.
Direct Federal Consolidation During Intern Year
Instead of entering the automatic six-month grace period, she consolidated all of her student loans through a direct federal consolidation. This converted her family federal education loans (FFEL) from undergrad and grad school to direct federal ones and allowed her to move into repayment one month into residency.
This is a great move for new grads to begin repayment four to five months sooner. It means low monthly payments—most likely $0 payments for an intern year—and begins payment credit for the PSLF and its 120 qualifying monthly payments even earlier than expected.
Those who don’t consolidate their student loans during their intern year and end up pursuing PSLF will ultimately make 4-5 more payments as an attending; this situation usually equates to $2,000-$3,000 per month and an additional $8,000-$15,000 paid on your loans. These savings can be realized by the timely completion of a direct federal consolidation.
If you’re considering a direct federal consolidation but have loans from undergraduate or other degree programs, you may be eligible to consolidate them with your medical school loans and bring up the payment history for all of your loans. Speak to a student loan expert if you need help deciding whether now is the right time to consolidate your federal student loans.
Loan Repayment During Training
During her intern year, Jade enrolled into Pay As You Earn (PAYE) and made $0 payments because she had filed her taxes as an MS4 when she didn’t have any income. Each of those $0 payments would count toward PSLF.
In postgrad year 2 (PGY2), she made payments based on her income from intern year; effectively one-half of her $50,000 resident salary. Due to the poverty line deduction of two (she and her husband), she had zero dollar payments for an additional year.
From PGY3 – PGY5, she made roughly $200-$250 monthly payments. After five years in training, she had paid about $9,500 on her student loans—less than $2,000 per year.
Her PGY6 started in summer 2019 and ended in summer 2020. Due to COVID forbearance, she made no monthly payments from March until June. After six years in training, she had paid $11,000 on her student loans.
PGY7 was also during COVID forbearance, and no payments were required.
After seven years in training—five years in a general surgery residency and two years in a trauma fellowship—Jade graduated having made $11,000 in student loan payments with a loan balance of $618,000. During training, her loans had grown from $485,000 to $618,000 due to interest accrual and interest capitalization. Her loans have grown nearly $200,000 since she graduated from med school . . . boy, there's nothing like those high 6%-8% fixed federal interest rates that nearly double loan balances for many medical professionals, huh?
She missed about a year of payments from forbearances and has just less than four years left to obtain PSLF.
Loan Repayment as an Attending
After two months of working as an attending, Jade met with StudentLoanAdvice.com (SLA) to ensure she was on the optimal track to PSLF. SLA reviewed her current plan and identified a couple of key considerations:
- Community Property State Taxes
- Tax-Deferred Contributions
- PSLF Side Fund
Let's explore those a little bit more.
Community Property State Taxes
There are nine community property states in the US, and their tax laws differ from common law states. Community property tax laws can be quite beneficial for student loan repayment.
Jade, our surgeon client, is living in a community property state with a stay-at-home spouse who earns little to no income. Income is halved between spouses 50-50 when taxes are completed married filing separately in a community property state.
For example, a surgeon earning $450,000 with a stay-at-home spouse will only report 50% of their income on their tax return if they file their taxes married filing separately. This effectively drops that income from $450,000 to $225,000 on the income certification form.
Monthly payments in PAYE:
$450K * 10% = $45K / 12 = $3,750
$225K * 10% = $22.5K / 12 = $1,875
SLA identified the opportunity to cut her student loan payments in half by utilizing married filing separately. Please note: married filing separately generally increases taxes paid. Everyone needs to assess their personal situation.
If you’re interested in using this strategy to reduce your monthly payment, review our post How Does Married Filing Separately Affect Student Loans?
Tax-Deferred Contributions
Tax-deferred contributions are an easy way to drop your student loan payments. Adjusted gross income or AGI is most often the number your loan servicer uses when calculating your monthly student loan payment. Contributing to a 403(b), 401(k), 457, HSA, and FSA are all ways to reduce your adjusted gross income, thereby reducing your monthly student loan payments.
By maxing out her employer's 403(b) retirement plan, SLA could drop Jade's payment a few hundred dollars per month. Note: tax-deferred contributions from 2021 will result in lower payments in 2022 and future years when she contributes.
Contributions for 2021 = $19,500
Contributions for 2022 = $20,500
Monthly savings in 2022 = $19,500 * 10% = $1,950 / 12 = $162
Maxing out her retirement plan will drop Jade’s student loan payment $162 per month over the next four years while she’s on track to PSLF, and it will save her $7,800 in student loan payments. This amount doesn’t account for the savings in taxes and the money Jade contributes to her retirement accounts.
Retirement savings in four years, contributing $20,000 per year
=FV(7%/12,4*12,1667,0,0)
This result assumes a normal investment rate of return and monthly contributions to the retirement account.
PSLF Side Fund
A PSLF side fund is a backup plan in case the government changes the PSLF program for existing borrowers and makes it taxable or completely scraps it. SLA believes it’s highly unlikely the government will change the program for existing borrowers. It’s extremely difficult for the US Department of Education to retroactively change a provision on the master promissory note that borrowers signed when they took out federal student loans.
Our crystal ball is cloudy on the future of PSLF. The potential changes could be worse or better for borrowers.
Jade is expected to have ~$750,000 in loans forgiven in four years, thanks to PSLF. To prepare for this, we recommend saving up just in case the forgiven loan balance becomes taxable.
Assuming a 50% tax on $750,000, $375,000 would be the tax bill owed in the year loans are forgiven.
=FV(7%/12,4*12,6792.5,0,0)
By investing $6,793 each month for the next four years and with a reasonable rate of return, Jade will have enough cash on hand to pay that tax bill. If PSLF stays the same and the loans are forgiven tax-free, she then has significant savings to help with her financial goals. Here’s a post to help you learn how to invest for a PSLF side fund.
Over the next four years, she will only pay about $38,881 toward her student loans.
In 2022, she won’t make payments until May 1, and assuming she doesn't have to recertify her income until 2023, she’ll have $0 payments the rest of the year.
In 2023, she can recertify her income prior to filing 2022 taxes and use her 2021 tax return to certify her income. During 2021, she worked half as a fellow and the last two months as an attending. Monthly payments in PAYE = $319. Therefore, her 2023 annual payment = $3,831.
In years 2024 and 2025, she will finally begin making payments on her attending income and the payments will significantly increase. We assume she makes the same income for both years. Monthly payments in PAYE = $1,460. Therefore, 2024 and 2025 annual payments = $17,525 and $17,525.
Jade, our high-earning surgeon, will only pay about $50,000 toward her student loans and will have the rest forgiven tax-free via PSLF. Her loan balance forgiven will be roughly $750,000.
PSLF can have a massive value-add for many healthcare professionals—in particular, those who have extended training periods and plan on working at a qualifying PSLF eligible employer.
Make sure you’re maximizing your opportunity for PSLF by booking a consultation with us at StudentLoanAdvice.com.
Do you have a similar story to Jade? Have you saved a ton of money thanks to PSLF? How much has the COVID student loan holiday helped you with your student loans? Now that the holiday has been extended until May 2022, what are your student loan plans? Comment below!
Assuming payments begin due May 1st and recertification wouldn’t be due until 2023, why would there be $0 payments the rest of the year? Wouldn’t the payments go back to the previous amount from February 2020?
ThePines,
Her payments prior to the pandemic were $200-$250 and she was filing her taxes single as she hadn’t married yet. In 2020 she married, had her first child, filed taxes married filing separately and recertified her income.
This impacted her student loan payments by:
-Increasing her poverty line deduction from $19,320 (as single) to $32,940 (family of 3)
-Halved her resident income of $63k to her and her husbands tax returns with each reporting about $31.5k.
Her new AGI (2020) is now lower than the poverty line deduction of a family size of 3. Which results in $0 payments for the remainder of 2022.
Andrew StudentLoanAdvice
This article is extremely helpful! Thank you!
A few things that were game changers for my wife’s situation, a few of which are described in this article.
1. We saw in the forums a recommendation to skip the 6 month grace period after residency and applied for loan consolidation immediately upon med school graduation. We were a bit suboptimal as she actually had two $0 payments between med school and residency when she hadn’t yet started residency, which don’t count as “qualified payments,” but trading those expensive payments in months 115-120 for $0 payments in the beginning is huge!
2. Upon residency graduation, we were set on refinancing and just paying her loans off, strictly based on assumptions we were making about her future job. However, she graduated residency right when the payment freeze began in 2020, and this forced us to recrunch the numbers. 18+ $0 payments has certainly helped.
3. Perhaps the biggest impact though was from understanding her compensation deferment options once she accepted a position. Before she had job offers, we had some assumptions around what her salary would be and what her income would be to determine he income based repayment amounts. She ended up selecting a public institution rather than a higher salary private institution, so PSLF was still on the table. The real game changer though was she has the ability to contribute to a 401a, 457b, 403b, and we learned recently a 415m if she exceeds the 401a. On ~$258k in earnings in 2021 as a hospitalist, she was able to shelter ~$100k from taxes (including employer match in the 401a), which was huge but additionally, a significant chunk of that $100k is also sheltered from the calculations determining her student loan payment.
I have not recrunched the numbers since this latest payment freeze extension, but my previous calculations suggests if we had refinanced, we would have ended up paying ~$220k to pay off the loans, while now we will only pay ~$75k in total, with the ability to invest the difference along the way.
She was in REPAYE beginning two months before residency, then completed a 3 year residency for IM, and we plan to stay in REPAYE until the next recertification when we need to switch to PAYE as we got married in 2021 and need to split our tax filing status.
Can’t thank this site enough for the information we have learned and money we have saved. I’m sure we’ve made small mistakes along the way, but the few things we’ve done right will have saved us a significant amount of money.
I do have one question that is touched on in the article and that is in regards to recertification in 2022. We were originally scheduled to recertify sometime in 2021 and that has obviously been pushed out with all the payment freezes. The last recertification date I saw before the most recent freeze extension was Feb 28, 2022.
The article seems to suggest the client won’t need to recertify at all in 2022, which is something I have been curious about. Is there any clear guidance on this?
My wife started her first attending position in August of 2020 in the middle of the first freeze so her W2 for that year is based on pay for half residency and half attending, and we got married in 2021. So I had been expecting to need to switch to PAYE Feb 28th when we recertified her income, based on a 2020 W2, and this all would have happened before filing taxes for 2021. If our recertification gets pushed back past the tax filing deadline, we should still recertify and switch to PAYE before then right? But if recertification won’t take place at all in 2022 then we should do nothing.
DrJ,
https://studentaid.gov/announcements-events/covid-19/income-driven-repayment
On studentaid.gov it states the earliest you might be asked to recertify is August 2022. But that page hasn’t been updated since the payments were moved back from Feb to May. Loan servicers have also been cryptic about when recertification is set to resume. I’ve also seen clients who aren’t set to recertify until 2023.
Recertification has been a complete mess since covid with studentaid.gov saying one thing and your loan servicers saying another.
There isn’t anything super concrete from servicers or the federal government about recertification. My guess is recertification isn’t required until end of 2022 or even into early 2023.
Without knowing the details of your income and debt you should probably have her switch from REPAYE to PAYE now and file taxes married filing separately. PAYE has a partial financial hardship requirement which most trainees are eligible for. As an attending it is harder to meet the partial financial hardship. Which effectively could make her ineligible to enroll into PAYE. I would do it as soon as possible to ensure you’re eligible for it. You don’t want to get stuck in REPAYE which will always incorporate both of your incomes for her student loan payments.
Andrew StudentLoanAdvice
Thanks Andrew. When I tested things in the Loan Simulator on studentaid.gov, it seemed like she would qualify, but now I’m nervous. I suppose what we can do is wait it out a bit longer until closer to the tax deadline before switching to PAYE, and hope there is concrete guidance on recertification, and I’ll double check the qualifications for PAYE.
Thanks!
DrJ,
The most basic way to determine if you’re eligible for PAYE is comparing her federal student loan debt to income. Above you mentioned her AGI is ~$160k. If her AGI is less than her student loan debt you should be able to enroll into PAYE. If her AGI is higher than her student loan debt, you might need to dive a little deeper into partial financial hardship calculations to determine if she’s able to enroll into PAYE.
If you have her recertify now, it would use her 2020 tax return which should qualify as she was still single and working half year as a resident and half year as an attending. If you wait until you’ve filed your 2021 tax return which will reflect her first full year as an attending and your income, this is where you could have trouble enrolling into PAYE.
Andrew StudentLoanAdvice
I’m not sure if a surgeon would qualify for any state loan repayment funds but that is one avenue I often see left out of the PSLF discussion. An even more perfect PSLF situation would be to apply and receive loan repayment funds from the state or federal govt for working at a clinic for the under-served. These funds can then be used to make the PSLF payments, bringing the payments coming out of your own pocket to an even smaller percentage. I am currently doing this and plan on qualifying for PSLF by paying a minuscule amount of my own money towards the 120 required payments.
HopefulBorrower,
Another great point is loan repayment assistance. Definitely apply for it in your state if you fit the parameters and search for it when you’re looking for jobs. There’s a multitude of other loan repayment or forgiveness programs based on your state, employer and what type of work you’re doing.
I most commonly see physicians applying for loan repayment assistance from the National Health Service Corps (NHSC), the National Institutes of Health (NIH ) or even working at a place like the VA due to the significant student loan repayment benefits.
Andrew StudentLoanAdvice
I am a practicing doc 7 years out of fellowship training. I paid for undergrad myself and paid off all my med school loans (~200k) within 5 years of finishing training. I lived like a resident and have been a life long practitioner of delayed gratification. I am all for taking advantage of opportunities available, but for some reason this article rubbed me the wrong way. Avoiding a nearly 750k bill for education (undergrad, grad school and medical school) and going into a profession where half a million dollar starting base salary is the norm seems wrong. Especially the deliberate steps that were taken and are being planned to lower any out of pocket payment more . This does not sit well. Anyone else share this sentiment?
I mean, someone (me, you, and others) is paying this bill.
I understand how you feel. I spent four years in the military paying for my school including two deployments. I’m not going to argue that I think PSLF (or even the student loan holiday) is good policy. There are actually a lot of things the government does that I do not agree with. You’re absolutely right that the taxpayer is picking up the bill for this, just like investing in a retirement account, having a baby in med school on Medicaid, taking out a PPP loan, or getting a welfare check.
However, what we do here at WCI is explain how the financial world works and how you can legally save money on taxes, invest, get insurance, protect your assets, plan your estate, and yes, manage your student loans in the most profitable way. We don’t write the laws. We don’t write the rules. We just tell you what they are and explain how you can take advantage of them to improve your own financial situation.
Thanks for the reply Jim. I totally understand the position of the young surgeon, and if the shoe were on the other foot, I would walk an identical path. I think it is the scale that is bothering me. I mean, doing a backdoor roth (which I do yearly for myself and wife at 6k each), seems like taking advantage of a smaller loophole than dodging three quarters of a million dollars in unpaid bills.
Write your congresspeople and tell them to limit PSLF to $50K. The Obama administration proposed that one year in their budget but it never went anywhere.
It’s the same issue with the student loan holiday and any sort of mass forgiveness. Who are we really helping out? Is it the least fortunate among us? No, it is the most educated and usually highest earning among us. Generally speaking the more education you get and the more you can earn the more you can get forgiven. It’s awfully generous as it currently stands and I would guess that without any changes 90%+ of the benefits of PSLF go to doctors over the next decade. Similar to 529s that way. 529s are a tax break for the wealthy. Lower earners don’t pay capital gains taxes and don’t have the ability to save as much for college anyway.
But as long as the laws are written as they are, we’re going to tell our readers about them.
Personally, I’d favor dramatic simplification of the tax code, elimination of all this stuff (including even the standard deduction), and then just a general lowering of tax brackets. Eliminating the jobs of 90%+ of the tax prep industry would be a sign of success in my view.
I have definitely had some similar thoughts to you at times, and certainly feel a bit uneasy when discussing our loan situation with others when it comes up. I am not in medicine, but my wife is a physician. I paid all of my undergrad loans and paid my entire grad school out of pocket, but we are pursuing PSLF for her. However, a few thoughts do come to mind in regards to your comment.
1. I could be wrong here, but I believe, generally speaking, the people getting PSLF are arguably giving something up by working at a 501c3. Now this isn’t always the case, but I view PSLF as part of my wife’s pay. She had significantly higher salary offers at private institutions, but there was no PSLF, however, she would earn more to payback the loans without it. And if someone working at a private hospital earning more pays back every dime of their loans themselves, who ultimately paid for that higher salary? I honestly don’t know but is it different from the people paying for PSLF? “forgiveness” is certainly in the name of the program, but is it forgiven or is it part of the compensation package that should be compared with other offers that don’t include PSLF?
2. This does not make PSLF right or wrong, but is more philosophical. Is it right that the Department of Ed is more than happy to give out 6% student loans for education, and why did all of that education cost the client $750k to begin with? Tack on the fact that tuition costs have outpaced wage growth and I think it’s clear we’ve gotten into a really messy situation. We are now seeing universities with plans to eliminate student loans entirely as this path we are on can’t continue. Is PSLF making up for this weird period of time where tuition costs have gotten out of control? It didn’t exist at all for prior docs and might not be necessary for future docs.
3. Yeah the physician in the post might earn a significant salary of $500k, but they are 11 years post undergrad before they are earning that first $500k. I understand the salary is high because of the extra training and skill, but the cost of delaying those earnings 11 years is also extremely expensive on top of the loans you have to pay. Is $500k/yr 11 years from the start in line what what should be expected from $750k in loans for training? Or should it be more, which PSLF accounts for? You mentioned the scale bothers you, but one thing I’ve learned from this site is you can’t take one specific scenario in a vacuum. The scale is significant here, but it’s also partially a factor of the length of training involved in this scenario.
I don’t know what is more frustrating, the education system or the tax laws.
For sure, arguments can be made in favor of it. But it’s hard to argue that a surgeon should never make a single payment as an attending before getting $750K forgiven just because she spends 2 years in academia after fellowship. Put that case in front of 100 Americans and 99 will say it isn’t fair.
I agree tuition isn’t fair either.
My son is an internal medicine resident 1st year, up until his 4th year of medical studies, he has student loan higher than $400,000, .please suggest best ways for him on loan forgiveness or loan repayments. Thanks.
Two good options: # 1 Do a GI or cards fellowship, then live like a resident for 3 years, refinance it, and pay it all off.
# 2 Go into academic medicine for a few years after finishing training and get PSLF.
There are other options, but those are the best two!
I see your 7 year training program and raise you to 9! (Med/Peds, Ped Cards, ACHD). Don’t make that specialty surgeon kinda salary but PSLF all the way! *fingers crossed*
Wow. That’s a lot of training. Thanks for doing that.
I honestly don’t know how any one of you can pursue PSLF with a clear conscience. The notion that you all, in many cases the highest paid members in society, are going to take your financial obligations and offload them to society to be covered by future taxpayers making much less than you on a real basis, and that you do that without any concern for the ethics… Shame on you to be totally honest. My wife is a physician and we both considered PSLF but both registered on the side of “this is wrong, we can afford to pay these loans.” Now that her colleagues have their loans being forgiven and they’re going out and buying extra properties, it strikes me as even more wrong now than it did then. By all means, maximize your investments, figure out how to take advantage of tax advantaged accounts. Even backdoor Roth and mega backdoor Roth are somewhat ok to me. But pay your debt! My wife often laments how physicians are losing status in society and people just view them as money hungry people not motivated by patient care. I know that’s not true, but I just want to say that stuff like taking advantage of PSLF is how that perception continues.
Not sure why you put it in a different category than a Backdoor Roth IRA, a REPAYE subsidy, having babies on Medicaid in med school, or 457 plans, but if you don’t feel right about it, you certainly don’t have to apply for it.
I’m not sure Congress intended for the highest earners to get the most forgiven, but any program that affects student loans is going to provide the greatest benefit to those who borrow the most.
Adam,
There is much to debate on whether PSLF should be available to high earners.
My job is to be objective and interpret these programs in a way to help you save money on your situation.
Andrew SLA
I am now starting my first attending job after 5 years of training, and I am going for PSLF. I’ve been told by my loan servicer that my loan payments will simply pick up where they left off before the forbearance, and that I will be due to recertify my income in April 2023. My question is regarding the timing of filing my taxes. If I recertify my income on April 1, 2023 but don’t file my 2022 taxes until April 15, 2023, it would seem that I would continue making payments based my 2021 training salary rather than based on my higher 2022 attending salary- does anyone know if they will accept recertification of income based on a tax return filed 13 months previously? Or will they make me file my 2022 taxes first, and then recertify my income? My loan servicer wasn’t able to give me a straight answer, so I was curious if anyone knows… Thanks!!
I think the former. I don’t think they can force you to file your taxes at some specific time.
Dan,
You are correct they will use your most current tax return (2021 in this case) or pay stub. Use your 2021 tax return to have low payments from April 2023-March 2024.
Andrew SLA