[Editor’s Note: This is a guest post from Joshua Thompson, CFP, EA, a financial advisor and a frequent blog commenter who submitted a guest post last year on comparing disability insurance contracts. This post is designed to run in conjunction with yesterday’s post on whether to refinance as a resident or stay in the IBR/PAYE program so you can possibly go for PSLF. We have no financial relationship at this time, but he wants readers to know that he is currently offering residents a student loan strategy/tax preparation service for $100 a year, but notes that price is subject to change, and I’m sure it will after 400 WCI readers email him this week.]
Young doctors need to have a plan for their student loans. I have clients with student loan balances ranging from $100,000 to almost $500,000. These loan balances are the largest financial concern for many of my young doctor clients. Not only are these loan balances hugely intimidating but picking the right re-payment strategy is more confusing than ever. [And it has become even more confusing this year with companies offering to refinance your loans while you’re still in residency.-ed] Gone are the days of interest rates of under 3-4% (on federal loans) where your strategy was to just pay them off. Public Service Loan Forgiveness (PSLF) is an important strategy for many young doctors but understanding the program can seem complicated at first. My post here is intended to help young doctors see how to calculate their payments under IBR/PAYE. Most importantly however, this post should help young doctors decide whether to take a job at a non-profit and go for PSLF, or whether they would be better off with a for-profit practice and repaying the loans as fast as possible.
Joshua Thompson, CFP, EA
For-Profit and Non-Profit Forgiveness
There are 2 types of forgiveness under both IBR and PAYE; the least beneficial is the 25 year term for IBR and the 20 year term for PAYE. This forgiveness is for those who work in the private sector (for-profit) but make very little compared to their education debts-imagine being a resident for 20 years. The forgiveness under the “for-profit” program is taxable income when the debts are forgiven.
The other type of forgiveness under both IBR and PAYE is PSLF. This entails making 120 qualifying payments and having your loan balance forgiven after only 10 years. Qualifying payments are monthly payments based on your discretionary income while working for a “qualifying” institution. Qualifying institutions can be government agencies (military or VA) or IRS code section 501(C) employers (many teaching universities fall under this category). My focus will be to help young doctors evaluate how much PSLF they could actually qualify for.
The Two Big Questions
Before we get started there are two difficult items I address with my clients when discussing this topic. First, what are your post-training plans? Are they in a specialty or sub-specialty where there are actually jobs available at non-profits in a location they are willing to live in? Are they committed to working in an academic setting post residency? If the answers to any of these questions is no, then PSLF probably will not work for them. But if the answer is yes or maybe then now we need to see what is on the table.
A Case Study
My case study for this post will be a family physician that:
- expects to make $175,000 after training
- makes $50,000 in residency
- has a student loan debt of $250,000 when finishing medical school, $150,000 at 6.8% and 100,000 at 7.9%
- is single when entering residency and gets married in her last year of residency
- Has a child her second year as an attending physician
- Is willing to work at either a private group or a non-profit
I also assume a 2% inflation rate for the Federal Poverty level and a 5% a year increase in her salary over this time period.
| Federal Poverty Level 150% (2015) | |
| Family size 1 | 17,655.00 |
| 2 | 23,895.00 |
| 3 | 30,135.00 |
| 4 | 36,375.00 |
| 5 | 42,615.00 |
Qualifying for IBR or PAYE
Gold Level Scholarship Sponsor
The first step is to see if the young doctor qualifies for IBR or PAYE. IBR is 15% of discretionary income and PAYE is only 10%. In order to qualify for PAYE, you must not have had any federal loans before October 2007 and you must have taken out a federal student loan after October 2011.
Calculating your payments is fairly straight forward. You take your Adjusted Gross Income- the bottom number on the first page of your 1040, 1040A or line 4 on a 1040EZ. Then you subtract 150% of federal poverty level. This resulting number is your “discretionary” income (see below). If you are in IBR, you multiply your discretionary income by 15% or if you are PAYE eligible then you multiply it by 10%. Divide by 12 and this will be your monthly payment. I use annual numbers for my analysis since it is easier to see 10 years than it is to see 120 payments. When you are in residency your income is low so your payments are low. When you start working as an attending then your payments go up but there is a monthly cap on your payment. The monthly cap is what your standard payment would have been when you started IBR/PAYE. The monthly cap for this doctor would be $2,934 or $35,200 per year. So even if this doctor made $2,000,000 per year, her maximum annual payment would only be $35,200. This means that you may benefit from PSLF even if you have a relatively low balance of loans and expect to earn a high salary after say 6 or 7 years of training provided you start IBR/PAYE as soon as you start residency and wish to stay in the non-profit world.
Estimating Payments
We now have enough information to estimate this doctor’s IBR or PAYE payments:
| Calculate your annual payments | ||||
| Payment Year | AGI | 150% Poverty | IBR Annual | PAYE Annual |
| 1 | $ 50,000.00 | $ 17,655.00 | $ 4,851.75 | $ 3,234.50 |
| 2 | $ 50,750.00 | $ 18,008.10 | $ 4,911.29 | $ 3,274.19 |
| 3 | $ 51,511.25 | $ 24,860.00 | $ 3,997.69 | $ 2,665.13 |
| 4 | $ 114,000.00 | $ 25,357.20 | $ 13,296.42 | $ 8,864.28 |
| 5 | $ 177,625.00 | $ 32,619.00 | $ 21,750.90 | $ 14,500.60 |
| 6 | $ 180,289.38 | $ 33,271.38 | $ 22,052.70 | $ 14,701.80 |
| 7 | $ 182,993.72 | $ 33,936.81 | $ 22,358.54 | $ 14,905.69 |
| 8 | $ 185,738.62 | $ 34,615.54 | $ 22,668.46 | $ 15,112.31 |
| 9 | $ 188,524.70 | $ 35,307.85 | $ 22,982.53 | $ 15,321.68 |
| 10 | $ 191,352.57 | $ 36,014.01 | $ 23,300.78 | $ 15,533.86 |
| Total of payments | $ 162,171.05 | $ 108,114.03 | ||
You can already see where we are going here. This doctor took out $250,000 before residency started and we are showing an estimated total re-payment of only $162,171 under IBR and only $108,100 under PAYE, not including the beneficial effects of inflation or the time value of money. The next question is how much is expected to be forgiven? For that we need to know the weighted average interest rate for this doctor’s $250,000 loan debt and then see how her payments affect the loan balance over the next 10 years.
Calculating Forgiveness
To calculate the weighted average interest rate you take the interest rate of all loans and prorate them according to the total balance of loans. This doctor has $250,000 in loans, $150,000 at 6.8% and $100,000 at 7.9%.
$150,000/$250000 *.068 + $100,000/$250,000*.079 = .0724 or 7.24%
| Loan balances and weighted average rate calculator | ||||
| Calculating Weighted Ave | ||||
| Interest rates | 6.80% | 7.90% | 8.50% | |
| Loan Balances | $ 150,000.00 | $ 100,000.00 | $ – | |
| $ – | $ – | $ – | ||
| Total loans | $ 250,000.00 | $ 150,000.00 | $100,000.00 | $ – |
| 60.00% | 40.00% | 0.00% | ||
| Weighted Ave | 7.240% | 4.0800% | 3.160% | 0.000% |
Now we are ready to estimate this doctor’s total forgiveness under both IBR and PAYE:
| Calculating PSLF under IBR | IBR | |||||
| Loan Amount | Interest Rate | Interest per year | IBR Payment | Principal Accrued or paid | IBR/PSLF Forgiveness | |
| 1 | $ 250,000.00 | 7.240% | $ 18,100.00 | $ 4,851.75 | $ 13,248.25 | |
| 2 | $ 263,248.25 | 7.240% | $ 19,059.17 | $ 4,911.29 | $ 14,147.89 | |
| 3 | $ 277,396.14 | 7.240% | $ 20,083.48 | $ 3,997.69 | $ 16,085.79 | |
| 4 | $ 293,481.93 | 7.240% | $ 21,248.09 | $ 13,296.42 | $ 7,951.67 | |
| 5 | $ 301,433.60 | 7.240% | $ 21,823.79 | $ 21,750.90 | $ 72.89 | |
| 6 | $ 301,506.50 | 7.240% | $ 21,829.07 | $ 22,052.70 | $ (223.63) | |
| 7 | $ 301,282.87 | 7.240% | $ 21,812.88 | $ 22,358.54 | $ (545.66) | |
| 8 | $ 300,737.21 | 7.240% | $ 21,773.37 | $ 22,668.46 | $ (895.09) | |
| 9 | $ 299,842.12 | 7.240% | $ 21,708.57 | $ 22,982.53 | $ (1,273.96) | |
| 10 | $ 298,568.17 | 7.240% | $ 21,616.34 | $ 23,300.78 | $ (1,684.45) | |
| Total payments | $ 162,171.05 | $ 46,883.72 | $ 296,883.72 | |||
Under IBR + PSLF this doctor has $296,883 forgiven after year 10. This is non-taxable money.
| Calculating PSLF under PAYE | ||||||
| Loan Amount | Interest Rate Ave | Interest per year | PAYE Payment | Principal accrued or paid | PAYE/PSLF Forgiveness | |
| 1 | $ 250,000.00 | 7.240% | $ 18,100.00 | $ 3,234.50 | $ 14,865.50 | |
| 2 | $ 264,865.50 | 7.240% | $ 19,176.26 | $ 3,274.19 | $ 15,902.07 | |
| 3 | $ 280,767.57 | 7.240% | $ 20,327.57 | $ 2,665.13 | $ 17,662.45 | |
| 4 | $ 298,430.02 | 7.240% | $ 21,606.33 | $ 8,864.28 | $ 12,742.05 | |
| 5 | $ 311,172.07 | 7.240% | $ 22,528.86 | $ 14,500.60 | $ 8,028.26 | |
| 6 | $ 319,200.33 | 7.240% | $ 23,110.10 | $ 14,701.80 | $ 8,408.30 | |
| 7 | $ 327,608.64 | 7.240% | $ 23,718.87 | $ 14,905.69 | $ 8,813.17 | |
| 8 | $ 336,421.81 | 7.240% | $ 24,356.94 | $ 15,112.31 | $ 9,244.63 | |
| 9 | $ 345,666.44 | 7.240% | $ 25,026.25 | $ 15,321.68 | $ 9,704.57 | |
| 10 | $ 355,371.01 | 7.240% | $ 25,728.86 | $ 15,533.86 | $ 10,195.00 | |
| $ 108,114.03 | $ 115,566.01 | $ 365,566.01 | ||||
Under PAYE + PSLF, this doctor could have $365,566 in loans forgiven, again this is non-taxable. The loans actually grew by over $115,000 from the start of re-payment.
PSLF Works Great If You Qualify
So what does all this mean? If you are committed to PSLF this can be a great way to get out of your loan debt 10 years after graduating from medical school. I also look at this and see this forgiven amount as a way to evaluate whether or not a young doctor should follow their dreams or stay in a non-profit setting after residency/fellowship strictly for financial reasons. If you take the amount forgiven (PAYE) and divide it by .65 we get $562,400. This is the before tax equivalent of income earned by the loan forgiveness, divide this number by 7 (years as attending) and you get $80,344 of “phantom” income.
Paying Off Loans
Gold Level Scholarship Sponsor
Now, let’s assume this doctor could qualify to refinance her loans right out of medical school at 5% and not make any payments while in residency. Her loan balance grows to $290,000 by the time residency ends. Her payment per month at 5% is $3,075 or $36,910 per year or $369,100. Under PAYE this doctor repaid only $108,100. She saved $261,000 by staying in PAYE. If you divide $261,000 by .7 (assuming 30% tax bracket) you get a before tax, income equivalent of $372,800. This is the breakeven point for going into private practice for this doctor for 7 years, or $53,250 per year.
[Editor’s Note: Keep in mind this calculation depends highly on the inputs. For example, if you can refinance your loans at 2% and pay them off in 2-5 years instead of 10, the difference between required salary to work at a not for profit is significantly smaller.]
Finally, IBR and PAYE can be maximized or manipulated [i.e. by changing your tax filing status, contributing to retirement plans to lower required payments.-ed] Loan repayments under a refinance cannot be manipulated other than paying off more balance faster than the term you choose.
What do you think? Have you run the numbers to help you decide whether to work at a 501(c)3 or not? Is that even an option in your field? Are you going or PSLF? Why or why not? Comment below!
There are definitely more options than when I graduated, but I wish they still allowed the old rates. I like my 1.8% fixed over 30 years that I could refinance with when I graduated.
Yes, your situation is different and better. My wife has loans from medical school at 2.75% locked in for 30 years. Our mortgages are higher so we are paying those off first, not too complicated
Yes, many from my class (2003) are under 1% fixed.
question is how did medical education get so expensive?
for my class of 2014
first 8k per year was subsidized and becomes 5.8% on graduation+ 6 months grace period
8k-40k was unsubsidized and was 6.4% the moment it disburses
from 40k to cost of attendance (85-100k) was some where between 7-11%
does anyone know what law and which lobbyist groups pushed for (medical) education to become so un-affordable, educational loans so expensive?
this doesn’t really make much sense to me other than a national plan to trap doctors in perpetual debt (given doctors are the least likely to default on their debts and do have the high income to make high monthly payment)
while educational loan gets very expensive, government is bailing out big banks with “loans of what rate?” my bet is lower than 7%
this disparity between what banks and students receive in financial aid is a good reason for more doctors to get politically involved and to speak up for our profession as a whole.
I think this is a great article and very simple to understand – opposed to most literature on PSLF. I think the challenge and input that is often left out is tax implications during the 10 years of repayment. These calculations leave out the most common option of filing jointly once she marries and the income level of her husband. This would drive the monthly pay much closer or even to the ceiling monthly repayment depending on the husband/wife’s income.
In most cases with the numbers above, the PSLF advantage is still there but drastically different. Maybe the next article can touch on the tax implications of filing jointly/separate when your spouse has no income, has an average income, and has a high income and compare the same numbers above. I imagine the $ saved over time would range from ~$70k-$300k pending spouse income and filing strategy.
Thanks for all the great resources!
Chase,
Great point but believe it or not the tax difference between a 2 income household filing separately isn’t much different than jointly. The big difference is filing separately when one spouse is the sole income earner or makes significantly more than the other spouse and for whatever reason they can’t file jointly.
If this doctor was married to another doctor also making $175,000 then there is almost no difference in total taxes if filing separately, but there is a huge discount on the student loan payment. There is a huge loophole for MFS when both spouses have student loans, this is because each spouse gets to use the “married” 150% poverty level against each of their incomes when computing “discretionary” income. This loophole is being targeted for elimination and rightfully so. In effect, there is a 47,000 exclusion of income for a couple who files separately, while married filing joint only gets about 23,900 for its total exclusion.
The tax difference is negligible for a couple filing separately if they both work and make good incomes. Most will probably pay less than $20,000 more in taxes over a 10 year period by filing separately and probably less than that.
What if the one spouse is this same woman making doctor salary ($175,000) with $250,000 in student loans but her husband is a non-doctor making $175,000 WITHOUT loans? So same dual income but only one student loan, does it still benefit to file taxes as MFS?
Thanks!
Yes, if you are trying for PSLF. No if you are not looking at PSLF and plan to payoff the loans ASAP. The extra $175,000 income adds extra loan repayment of up to $26250 per year if in IBR and $17,500 per year if in PAYE. The tax results will be about the same whether you file jointly or separately. I just ran an MFS for a 2 doctor household client of mine, both made $300k last year, they saved a whopping $2 in taxes by filing jointly. Again, MFS is not that big of a deal if both spouses make about the same amount of money, especially if they both make over $100k because then most of the tax breaks you get for filing jointly are gone at that level of income.
Maybe this is a question for another post, and perhaps this is a very basic question but here goes…
If a resident graduates in June (salary $50,000) and starts an attending job in July (AGI of $168,000 or $12,000 per month), how would FedLoan calculate the AGI if you do not have a 1040 yet? Do you continue paying on the resident rate until you resubmit financial documents at the end of the year?
If you do submit new documentation in July, do they base payments on your new yearly income ($168,000) or your expected income for the fiscal year ($50,000/2 + $168,000/2 = $109,000)?
I think you’re good until the next year.
It’s based off the prior year’s tax returns so he’d (she’d) get a year off the resident salary return and a year off the half resident half attending mix.
I don’t exactly agree that the ‘loophole’ is all that inappropriate. If it’s a dual-physician household, both have significant loans – why should my income affect my wife’s loan payback and vice versa? Maybe the claiming each other is something that should be changed but that’s only affecting a few thousand dollars with respect to the discretionary income. While adding each the spouse’s AGI results in a significant difference without taking into context the amount of loans my wife has from what I understand? If that were the case, our loans should be combined into a single IBR account otherwise our discretionary income when filing jointly would result in a higher repayment without taking into account overall debt burden.
Is there any hard data on the percentage of jobs available that qualify for PSLF? Even better if it’s broken down by specialty.
Everyone I’ve talked to tells me that they don’t see many people in my specialty (radiology) going into qualifying jobs, but it’s all based on anecdotal evidence. I’m still waiting to hear back from DRB on my application to see if I even qualify for a refi, but it’s hard to take PSLF off the table when the swing is $250k. I’m just staring my internship now, but I think the risk of PSLF might be worth it even though the odds of qualifying after residency are pretty low.
I don’t know of any hard data. I do know that there are approximately 220 emergency docs in my metropolitan area and only ~20 of them (the university employees) have jobs that qualify. Every specialty and area is different. But I don’t think there is any specialty where more than 25% or so of the jobs are PSLF. If there really are 40% or more of med students counting on this, there is going to be a lot of disappointment for all of them. Not only those who don’t get a 501(c)3 job, but also those who do but end up getting paid less because the jobs have become so competitive. Right now 501(c)3 jobs in many specialties and areas pay about the same as private jobs, but maybe not when the unintended consequences strike.
The VA and teaching hospitals (university employees) seem to be the main employers for PSLF qualifying jobs. Who knows, maybe this program will change how some non-profit hospitals operate in the future to where more qualifying jobs are available. I think if this program is important to you and you are open to moving to another city for qualifying employment then one should be able to land one of these jobs, pseudo 3rd internship.
Here is the IRS searchable database for 501(c)3s I would imagine you could do a search for “hospital” and get a list. http://apps.irs.gov/app/eos/forwardToPub78SearchHelp.do
There are PSLF-compatible jobs in academics. You’d be hard pressed to find one in private practice. For me PSLF was icing on the cake. I like to write, I like to have academic time to myself during the week, and I like the job security of being with a big group. Extra money isn’t worth it if one works like a dog day in and day out, and doesn’t have security when one’s private hospital puts out a RFP when the group’s contract comes up.
<– academic radiologist at a state university who is shooting for PSLF, using PAYE now that he's apparently newly eligible for it instead of IBR as in past years
Thanks Joshua for this post!
For two income, two debt families this program can be a very significant boone. We are a two phsician family with each graduate having ~220,000.00 in debt with 3 kids. Our annual IBR payment is consistently ~2,000.00/mnth less than the 10 year minimum on debt with mixed interest rates – half of which is locked in at low rates and half at 6.8%. We are fortunate to each have PSLF qualifying jobs which pay reasonably – not market rate but definitely not resident wages.
One subtle and surprising issue is the full time requirement – one of us would likely work ~20 hrs/wk and be with the kids more if not for PSLF which requires a minimum of 30 hours to qualify. With each kid she could only take a prescribed maternity time or risk loosing months of eligible payments. Another consideration for anyone hoping to have flexibility around not earning for periods of time.
Chris, that is a great point and am sure there will be females who end up not realizing this requirement when deciding on extended maternity leave or working part time after having kids. The good news is that that’s not even an option for residents and fellows!
The bad news is it applies to more than just females, perhaps even entire specialties. I’m a full-time emergency doc. I work fifteen 8s a month. If you don’t add in any time after shifts, admin time, vacation weeks etc, that works out to 28 hours a week and I work more than most in my group. Hope no one is looking at that requirement too closely.
I believe the full time requirement is in place so someone couldn’t make their own 501(c)3 and “work” there for 1 hour a week to qualify. But let’s say you run an educational blog such as WCI which you run as a nonprofit and easily requires more than 30 hrs a week in medical, financial and life reading and research.(all of which is difficult to refute) You are golden.
Interesting idea…but might be tough to convince someone else it is a nonprofit JOB if you’re not getting paid, and might be tough to convince them it’s a NON-PROFIT job if you are.
You theoretically could make your blog a 501(c)3 because your mission is education (with a side effect of profit).
The categories include charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, or preventing cruelty to children or animals (http://www.irs.gov/pub/irs-pdf/p557.pdf page 4).
Its probably not worth your time to stick to the rules since you don’t have any student loans to be forgiven. But if you wanted to make the web site a larger corporation it could be an option to reduce taxes. You would still have to pay yourself and therefore personal income taxes but you could avoid business taxes. I am not an expert on this of course but it is something I have read about a little bit.
Good point. The PSLF employment certification form is how they will be checking the number of hours worked. This form should be filled out at least every time you change jobs, and you can do this annually. You need to have an “official” of your organization, i.e. HR Director, confirm the average hours per week on the form. I will call them tomorrow to get clarification on how to include (or not) include vacation time. If you get to exclude 4 weeks of vacation then your average is 30 per week. I bet you get 5 or 6 weeks.
I bet I get 12. But it really doesn’t matter for me. I’m the employer, and I’m not a 501(c)3, and I don’t have any loans anyway. But it would be good to find a link to the certification form so people can see what it asks for.
Here is a link to the PSLF employment certification:
https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf
I am checking on how FedLoan servicing calculates the average hours per week.
The point I wished would’ve been stressed more (and Jim hit on it a bit in the last post) was the risk of shooting for PSLF.
If you plan on doing PAYE and hoping/praying for PSLF at the end of ten years and it ends up being capped and/or scrapped… Well just go back and look at the numbers above to see how screwed you might be. Those numbers quantify the risk you are taking by counting on PSLF.
In today’s environment with Republicans scratching for every cent just imagine the headlines – “Doctors loans forgiven for $300K.” I honestly don’t think PSLF will survive in its current form and I certainly don’t see docs getting hundereds of thousands of dollars forgiven.
I think there will be changes too, but I don’t think it will be completely scrapped. I also believe, because of past proposals, that any caps on PSLF will not affect people in the system already. The language that I’ve seen from the proposals is that only new borrowers, defined as no loans prior to July 2015, would be affected.
You are right though, this sheet could be seen as a measure of risk if the program is scrapped, which I doubt will happen for those in the program already. For those who want to try for PSLF then they can invest the difference between what they should be paying and what they are paying in IBR/PAYE. It’s kind of like buying term and investing the difference.
The more I read and think about this, the more evident the inherent risk in the PSLF for the modern barrower (with rates at ~7%) becomes. In my opinion, there are so many things that have to go exactly right for PSLF to work (these are obviously generalizations, but I feel like it would take a very specific set of circumstances for it to be worth it to take on the risk of PSLF).
– you have to find a 503c job after training. This is a huge unknown for someone just out of medical school and starting training (which is ideally when you would commit to PSLF versus refinancing) and has little idea what their future will look like in 3-6 years. If you are geographically restricted, and I imagine the majority of people are, getting a 503c could be tough (anecdotal evidence). This seems partly specialty-dependent (i.e. it seems to be particularly hard to find in Emergency medicine, where 503c hospitals often hire non-503c physician organizations to staff their emergency departments).
– It makes sense that the compensation from a 503c organization would be less than a non-503c organization. So you would be sacrificing that income to join a 503c job. 503c jobs tend to be at academic institutions, or VA/government centers, which we know generally, pay less than private practice (non-503c organizations); this is certainly true in my specialty.
– No one has had their loans forgiven yet. There are zero success stories. There is no precedent. There is skepticism, for a variety of reasons that are detailed elsewhere, that the program will come to fruition for physicians in its current form.
– PSLF encourages accruing debt because the less you pay back, the more will be forgiven. If one commits to this path, but it does not work out for the above reasons, you are left holding a greater burden of debt than you would have had you pursued repayment. As mentioned elsewhere on WCI, the side account approach is a nice idea but it isn’t equivalent, keeping the PSLF option open with a side account has the real cost of dealing with a higher interest than if you refinanced. (side account approach for referecne: “save the difference between your PAYE payments and the payments that would actually make the loan go away in 10 years from med school graduation up in a side account. Then, if something happens, liquidate the side account and pay off the debt. If nothing happens, and forgiveness materializes, then you’ve got a pretty decent boost to your nest egg”)
– Refinancing your loans and going from say a 7% rate to a 3.5% rate appears to be the risk-adverse path. You pay back what you have borrowed and you decrease the interest. You have a concrete plan for repaying debt that you know with some certainty will work. An appeal to the PSLF/PAYE approach is decreased payments and no capitalization during residency, allowing one to maintain a better standard of living during residency. Refinancing however, with DRB for example, provides the same freedom. One could just live 2-3 years after residency with the same financial frugality (of a resident) and pay off all the loans.
– Pursing PSLF also seems to be more complex. Minimizing payments during residency through techniques like “married-filing separately” for those with spouses who have incomes must be balanced with the tax implications that follow. You have to work 30hrs/week to qualify, which as mentioned may limit maternity leave options, desire to move toward part-time, etc. You also have to track your PAYE payments (which is recommended to submit the form once a year or so) and re-apply annually. You have to deal with fedloan, which can be frustratingly slow at times. With complexity comes risk for error or failure. While these are minor points to consider in the big picture of dealing with hundreds of thousands of dollars of loans, they are not trivial for the busy physician.
I had committed to the PSLF approach when I started residency about 2 years ago. But now, with the appealing refinancing options available, I think I’m going that route. Just my thoughts.
Two points: 1) It’s 501(c)3.
2) The “side account” idea made a ton of sense BEFORE DRB started refinancing residents. It was equivalent then as long as your investments earned as much as your loans cost. Now it isn’t equivalent because you’re paying a higher interest rate to stay in IBR/PAYE.
Great comments.
Yes, this seems very complicated but where there is complexity there is opportunity if done correctly. I think the main mistake I see most often is that resident borrowers enter PAYE/IBR without PSLF eligible loans. I see this all the time where either none of the loans are eligible or 75% are and another $20-50k are not eligible. Unfortunately this is completely avoidable if done correctly right out of medical school.
I don’t think that the risk is as much as the sheet shows. If there are changes to the program for people who are already in it, then those changes will come within the next 2 years. Everything that I have seen so far indicates that people with loans prior to July 2015 should have the opportunity to have all of their “eligible” loans forgiven with no cap. Could that change? Yes, but as of now that is not the rule. If there are caps put in place within 2 years (for all borrowers) then those who are trying for PSLF will only have a missed opportunity cost of lower rates for a 2 year period. Rates may go up in that time period but if the whole program changes then the resident could stay in IBR or PAYE and just payoff their loans within 2-3 years, like the residents who refinance are planning to, and completely avoid loan interest capitalization while they pay off their loans.
If, today, a resident has $250,000 in PSLF eligible loans at 7% but has the opportunity to refinance down to 5%, then they would save a roughly $10,000 by taking the early refinance. This doesn’t even take loan interest capitalization into account when they refinance. If the program proceeds as indicated and this resident does get PSLF then they could save $100,000 to $200,000 in loan repayment in comparison to a 2% lower interest rate loan repayment.
Leaving PSLF today to take a lower interest rate for 2 years doesn’t seem prudent, especially if you want to work in an academic setting or VA type agency.
Great points. Thanks for your comments
Is it possible to open a 529 with myself as a beneficiary and if so do you think it’s worthwhile to insure against PSLF not working out? I could save my extra money for the next six years while I’m in residency and fellowship and have a nice sum to help pay down my loans if PSLF doesn’t work out; if it does then from I’ve been reading over on bogleheads (http://www.bogleheads.org/wiki/529_plan#Tax_considerations) it shouldn’t be subject to the extra 10% tax if I decide to use it as a down payment on a house because I received “Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.” Plus if I go with Utah’s 529 I can get backdoor access to DFA funds.
Interesting idea. I had not considered using a 529 as the side fund. I’m not 100% sure that paying off loans years after the actual educational expense would be considered a qualified educational expense, but you can certainly make a strong argument for it.
Thanks for this informative analysis. I have $225k in total student debt (int 6.55% on the bigger loan) and plan to wait on the PSLF vs refinance question until finishing fellowship in two years. In the meantime, is it better to max out Roth IRAs (spouse & me) while I earn a resident’s salary, or just pay down loans? Current household income is about $225k (wife is a physician).
If you think there’s a chance your loans will be forgiven, then yes, I’d invest instead of paying them down. However, on a $225K income maxing out both Roth IRAs seems like a given. Let’s say you’re paying $50K in taxes, living on $75K, and putting $11K into Roth IRAs. What are you doing with the other $89K? That’s what is going to determine how you guys do financially.
Thanks for the response, I didn’t want to mire the first post with details. After taxes ($57k) and living expenses ($75k), remaining income goes towards wife’s 401k/457 ($36k) and my student loan repayment (IBR payments + extra lump sum payments = $56k YTD). I applied to DRB, but I’m sitting on their offer (5.75% fixed or 4.16% variable as a 10-year loan) for now; SoFi declined application from outset. No other debt (credit cards, mortgage, etc.), credit score 748. Since I’m hoping to earn an attending’s salary in two years, would it be better to set aside $11k towards Roth IRAs rather than just hitting the loans? It sounds like the answer is yes….
What would you suggest between paying off loans vs. trying to get PSLF if you’re not sure it’ll be successful? I’m a first year resident and expect to marry my SO (currently a 4th year med student) within the next couple years. Right now, our finances are separate but we’ve talked about essentially combining all our resources and debts once married. We come from different financial backgrounds and basically, I graduated with no loans and have a good deal of savings and she’ll be graduating with a good amount of loans. I don’t know exactly how much she’ll have in loans, but I’m guessing on the spectrum of $150-200k.
With our combined income and my savings, I’m certain we could pay off her loans by the end of residency while I still contribute significantly to my retirement accounts (and to a Roth IRA for her). However, if she would be happy working at a 501c corporation (if she can find one as an EM attending) after an expected 4 year EM residency, do you think that would be better than just sucking it up during residency and paying it all off so that it’s not hanging over our heads for 10 years? I tend to despise loans and interest and prefer to pay them off as soon as possible, but I’m not certain that that makes financial sense if she could theoretically use PAYE and PSLF and not end up paying as much back…
Thank you for any input.
If she qualifies for PSLF, that’s better. A big “IF” of course.
Thanks! Definitely a big “if,” and I hate feeling like it’s hanging over our heads…but if it ends up paid off without our actually doing all the paying, I know it’s better.
Hello all,
I am looking for some general guidance. PSLF/IBR/PAYE is causing me a fair amount of stress lately haha. Some background on my spouse and me:
Wifey: PGY-3 Pediatrics resident. Doing a chief year next year. Will be doing a 3 year fellowship after that. So 7 years of training total.
Me: PGY-3 Emergency Medicine Resident (in a 4 year program). Will not be doing a fellowship. Will instead be seeking community practice employment upon graduation.
No kids as of yet.
Our institution has a 403(b) plan which matches 3% if we contribute 5%. We each are contributing the full 5%. We will each be 75% vested after our training.
We are trying to contribute 1K/month to a “high interest” (i.e. 1%) savings account which currently has ~30K in it right now. This is our emergency / down payment on house fund (we currently rent).
We do not have any ROTHs at present, but will be looking to change this soon I think.
We each picked up disability and life insurance this year.
My stress concerns our loans and how we are paying them back. We do not have other sources of debt besides student loans. We each have a relatively high amount of student loan debt (~200k / each) at 6.55%. We are both currently in the PSLF program. I am in PAYE and she is in IBR (she has a couple older, low interest loans from undergrad). I’ve applied for re-financing with DRB and are waiting to hear back. At the advice of a financial planner, we have been paying over the amount dictated by PAYE/IBR – we have been trying to make $1000 payments each month. In addition, we each paid off a moderately sized grad plus loan (17K each at 7.65%) earlier in training.
I’m stressed because I’m thinking maybe we should be using a different strategy. Maybe we should have been making the minimum payments and contributing the difference to ROTHs? Our advisor was of the opinion that paying down some debt was better than opening IRAs at this point. I think there’s a low likelihood that I will be able to find a PSLF qualifying job once I graduate (community EM practice), however, my wife would like to do PICU and I think most of these jobs are at academic centers. What’s worse (maybe) is that I filed our taxes as married filed jointly, so I’ve locked us into this strategy for another year. Mind you, we’ve been completely comfortable and able to make those loan payments so it’s not like we’ve been suffering. We sort of viewed them as a hedge against PSLF being scrapped and/or us not finding PSLF qualifying jobs. But now I’m second guessing everything. I’m thinking maybe we should open ROTHs at this point and take the 1K we were contributing to the savings account and depositing it there. Maybe moving forward – and especially when I hit attending stage and she’s still a fellow – we should file as MFS in order to keep her loan payments lower? Or should we just aggressively pay them down? I really don’t know and I’m very confused about what the right thing to do here is.
Any advice is greatly appreciated!
I think that your wife should pay the minimum on the IBR because she will likely get the PSLF. You both should try to do a Roth IRA if you can while your income is low (compared to future attending income).
You’re making payments above and beyond the required for someone who is an excellent candidate for PSLF? If you’re going to make extra payments and actually pay the loans off, refinance them with DRB or similar.
I certainly would fund Roth IRAs prior to additional loan payments.
Most advisors, even those who “specialize in doctor finances” have no clue about the different/complicated/essential loan repayment options available. In order to maximize PSLF this must be taken seriously as soon as you leave medical school. Unfortunately, many advisors just don’t spend the time on this and probably just figure making extra payments and saving in Roth is the right strategy for everyone even it is clearly not. If you are going to try to do PSLF then making extra payments is clearly the wrong strategy. The good news is (sort of good news at least) is that there is room for some mistakes for those who plan on PSLF and have debts higher than their expected salary as attending physicians as long as they get their plans straightened when they realize they may have made a mistake.
I am of the opinion now that $200k in loans is now on the lower end of the spectrum so your situation isn’t too bad compared to your peers.
$200K is technically average for leaving med school these days. But that includes lots of people with military commitments or Daddy Warbucks paying.
Although I didn’t express it well enough, Brian’s comment is exactly what I’m stressed about. I have already paid $50k into med school loans (now $200k left in eligible med school loan)….did I make a big mistake? If so, should I accept this and go for PSLF? One difference between Brian and me: I’ve only been making payments for 1 year, now only two years of training to go. Should I keep making extra payments into the loans? Or maybe I should open a side account, and put the extra money there until I know what job I will have?
If PSLF is a possibility for you, then don’t pay extra on your loans and make sure you’re enrolled in PAYE. When PSLF is no longer a possibility for you, then refinance.
Thanks for the comments, Joshua and White Coat Investor. I thought about what you both said, so I ran some repayment models on Excel. It turns out I pay almost the same whether I go for PSLF or pay off the loans ASAP, even before refinancing. These estimates include the monthly payment cap on IBR that Joshua mentioned.