How Does PSLF Work?

How Does PSLF Work

One of the best ways to manage federal student loans for doctors over the last 15 years has been Public Service Loan Forgiveness or PSLF. And what this is, is this is a program available to not just doctors, but to anybody that is employed full time, which is defined as at least 30 hours in a week, full time by a nonprofit, aka 501(c)(3) or government employer.

If you're working for the military, if you're working for the VA, if you're working for a nonprofit hospital, all these sorts of places and most academic centers, you are eligible for Public Service Loan Forgiveness. Under the program, you need to make 120 monthly payments, i.e. you have to pay on your loans for 10 years in an approved program. And then the remainder, whatever else you owe, whether it's $40,000 or $400,000 is forgiven. And that forgiveness, unlike many other forgiveness programs, is totally tax free. You do not pay state income taxes on it. You do not pay federal income taxes on it. It's like if you had $200,000 forgiven, it's like your net worth instantly goes up $200,000. It's pretty awesome.

And the cool thing about it is, at least under current law, and laws for this are always changing, payments you make during your training, during residency, during an internship, during fellowship, almost always count. And the reason why they count is because those programs are run by nonprofits and by government employers. You're usually a university employee while you're an intern or a resident or a fellow. And so those payments all count.

Now, the way you make payments is typically through an income-driven repayment program. There are always changes being made to these programs. You have to stay as up to date as you can on which one you should be in. But as a general rule, these programs certify your income only periodically. And they typically do it by going back to your last tax return that you filed and looking at what your income was on that tax return.
What a lot of docs do is they file a tax return their last year of medical school, even though they're not required to, but they file a tax return that says their income's zero. And so, for the next year or two, their payments are zero. But those $0 payments count. They count for these 120 monthly payments.

And even after that, you'll certify with a year where you had no income for half the year and an intern income for half the year. So, those payments aren't going to be very high. And then you'll certify using some residency payments where your income's not very high. So you're not making very large payments. And even when you come out of residency, you've got a year where you only have half of an attending income. And so, your payments are a little bit lower.

And it's not unusual for a year or two after you finish training, you're still making low payments like you were making as a resident. So in reality, lots of doctors are only making real payments, large multi-thousand dollar payments on their student loans for one to five years after finishing their training, after recertifying their income. In fact, some people even delay their tax return so they can get another year out of this. They file an extension on their taxes. Their taxes aren't filed until October. And then they're going back an extra year to look at their lower income in setting these payments.

The amount that can be forgiven can be substantial. It is not unusual to have six figure amounts forgiven. I don't know that I've yet run into somebody who had a seven figure amount forgiven, but it is theoretically possible. Especially if you ended up going to a really expensive dental school and you paid for all that with debt and you went to an orthodontics residency and paid for all that with debt and went to an expensive undergrad. Seven figures is not impossible to have the public service loan forgiveness. There is no upper limit on it, at least under current law.
Pay attention to legal changes. There's always things being talked about in Congress, things being talked about in the executive branch. And it's possible there will be future changes in public service loan forgiveness. But what typically happens is those that are currently in the program are grandfathered in.

Now it's a good idea to hedge a little bit against the possibility of changes. Not only changes that are brought about by Congress or by the executive branch, but changes in your career. Maybe you decide you don't want to work full-time. You want to go on the parent track. Or maybe you decide you don't want to work for a nonprofit anymore. You realize you can be making twice as much money working in a private practice or a for-profit position or something. And you decide, “No, I don't want to do public service loan forgiveness anymore. I'm going to refinance my student loans using links at the White Coat Ambassador and get some cash back. Then I'm going to pay off my loans quickly, maybe by living like a resident.”
It's okay to change. But the nice thing about having a public service loan forgiveness side fund is that you've still got the money to pay on those student loans. And so, what I recommend you do is instead of making these huge payments, like you would make if you're trying to pay off your loans quickly in just like a couple of years, instead of making them to the lender, make them to your brokerage account.

And that way, if you change your plans or something happens to PSLF, you've got some money in the brokerage account. You might have $50,000 or $100,000 or $200,000 in that brokerage account. You can turn around and send to your lender and not be behind as far as getting your student loans paid off yourself.

All right, that's public service loan forgiveness. Everybody should take a look at it. It doesn't necessarily mean you should take a job that qualifies for public service loan forgiveness, but it's something to consider, especially if you like that job just as much and that job pays just as much, why not take the one that's also going to qualify for you to have a substantial amount of money passed to you in the form of student loan forgiveness.