I had a question asked recently which sparked me to examine one of my assumptions more carefully. After several hours with Excel, I concluded that I need to use the classic answers of “it depends” and “you need to run the numbers” more frequently than I have been when it comes to PSLF.
Q. You wrote that if you were in deferment during residency then you should not bother with PSLF. I’m a general pediatrician, working for a nonprofit and now 6 years into PSLF. I did defer through residency. I’m wondering if there is something I’m missing by your statement.
A. You are correct that a broad general statement I have made over the years is not necessarily correct for everybody. It depends and you have to run the numbers.
Public Service Loan Forgiveness (PSLF)
As a general rule, the real secret to having a ton of money forgiven via Public Service Loan Forgiveness (PSLF) is to make a ton of tiny little Income-Driven Repayment payments during a long residency/fellowship training period. At the median physician income ($275K) and the median physician debt load ($200K), it is probably still good advice to not go for PSLF if you made the mistake of deferring your student loans during residency.
However, if you actually run the numbers you will see that at the higher debt to income ratios, that advice does not hold at all. I went through the trouble of actually running the numbers recently and after a couple of hours with a spreadsheet, I think I am now in a position to provide some better direction for those of you who deferred in training.
The Basics of PSLF
Before we get into that, let's briefly review the basics of PSLF. This is a program where any remaining DIRECT federal student loans are forgiven tax-free after you make 120 ON-TIME monthly payments in a QUALIFYING program while working FULL-TIME for a QUALIFYING employer. Those words are all in bold capital letters for a reason. Each of them represents a reason why people who thought they should get PSLF did not qualify to receive it. Your loans must qualify, your repayment program must qualify, and your employer must qualify.
If your career goals entail working for a qualifying employer (military, VA, academia, CHC, direct employment by a non-profit hospital) and you made a significant number of IDR payments during your training, PSLF is pretty much a no-brainer for anyone with a significant number of student loans.
However, if you are only considering working for a qualifying employer due to the possibility of PSLF, then you need to compare the salaries. If the after-tax salary from the non-qualifying job is GREATER than the after-tax salary from the qualifying job PLUS the amount of potential forgiveness under PSLF divided by the number of years you must work at that job to get PSLF, THEN you should simply go work at the for-profit job, refinance your loans, and pay them off in 2-5 years by living like a resident. If that is not the case and you don't mind working for a qualifying employer too much, then you should take the qualifying job. Many times, the salary at a non-profit isn't even less than that at a for-profit job, but most of the time it is at least a little less.
PSLF for Docs Who Deferred in Residency
However, the subject in this post is what should docs who deferred their student loans in residency do? Should they go for PSLF, or should they refinance and get busy paying them off? Well, if they're working for a qualifying employer, have a high debt to income (DTI) ratio (1X+) and run the numbers carefully, they will likely find that they should still go for PSLF.
Before we get into the spreadsheet, let's talk about the assumptions that went into it.
- First, the X-axis is Direct Student Loan Amount upon entering into the program. If the loans aren't DIRECT federal student loans, they don't qualify for PSLF. You might as well refinance those and get busy paying them.
- Second, the Y-axis is your adjusted gross income. That's line 7 on the new 1040. It is NOT your gross salary or your total income. What deductions live between your gross income and your adjusted gross income? The main ones for docs are retirement account contributions, HSA contributions, and health insurance premiums. So maxing those things out can reduce your adjusted gross income, reduce your required IDR payments, and increase the amount forgiven via PSLF.
- Third, in my example, I used an average student loan interest rate of 7%. I also assumed the doctor's income remained steady over the ten year period. I used a married couple with two kids (i.e. a family of 4). If you don't like my assumptions, use your own.
- Fourth, I used REPAYE as my IDR. It is the most common program used because of the interest rate subsidy it provides. However, it has a big disadvantage compared to IBR and PAYE–the payments aren't capped at the 10-year standard repayment amount. So at a low DTI ratio, you may be able to pay less and get more forgiven if you enroll in PAYE instead. PAYE often results in a larger amount forgiven, but that is simply because there is no interest rate subsidy and really doesn't matter for those who actually get PSLF.
- Fifth, the usual caveats for PSLF apply. It exists at the whims of Congress, both political parties have made proposals to limit it enough that it would become useless for most docs, those currently in the program would likely be grandfathered in to any changes, you should keep careful records of your annual employer certifications and every single qualifying payment, and you should build a PSLF Side Fund, just in case.
- Seventh, remember how your monthly payments are calculated under REPAYE. You subtract 150% of the poverty line in your area from your adjusted gross income and divide by 12. If that payment does not cover all of the interest that accrued that month ($1K/month for a 6% $200K loan), then half of the remaining interest is forgiven each month.
PSLF Forgiveness Spreadsheet
Okay, let's take a look at the spreadsheet. I know the type if small. Click on it and it should get bigger on your screen. The chart shows the amount forgiven after ten years for a given income and loan burden.
Let's start at the extremes. Starting in the upper left corner, we see someone with an AGI of $25K and a student loan burden of $25K. After ten years of payments, that person would have $34K left on their loans. That means they weren't even covering the interest on their payments and despite the REPAYE subsidy, the loans still grew by $9K over those ten years.
Moving to the upper right corner, we see someone with an income of $25K and a loan burden of $600K. Did I mention we're talking about extremes here? This person will make tiny little payments for a decade (actually the payments will all be $0) and then have $810K forgiven, tax-free. Pretty nice benefit for working for a non-profit. It basically quadrupled your income.
In the lower left corner, we see someone with an income of $600K and a debt of $25K. This debt will be paid off long before ten years under REPAYE and in exactly ten years in PAYE and IBR, so there will be nothing left to forgive.
The final extreme, the lower right corner, is where things get interesting. This is a doctor with an income of $600K and a debt burden of $600K. If you run the numbers, this doctor will pay $4,693/month for 10 years, a total of $559K and THEN have the remaining $401K forgiven. Not too bad for a DTI that isn't even particularly high (1X).
As you move around the chart, you will see that I have color-coded it into four colors.
You will see that no forgiveness is possible. If you are in this area, you might as well refinance and get a better interest rate to help you pay off your loans faster.
In the yellow area, it is technically possible for you to receive forgiveness, but I don't think it's worth the hassle. You're still going to pay off most of your loans and the amount you're going to have forgiven is less than 1/4 of your annual salary. For example, consider someone with an AGI of $300K and a loan burden of $200K. You could technically get $65K forgiven. But that's really only $6,500 per year, about 2% of your income. And you still paid $258K toward your loans! You could probably pay less interest overall by just refinancing, lowering your interest rate by a couple of points, and paying that loan off quickly. I don't think that's enough money to be worth pain of dealing with Fedloans for 10 years, keeping track of all your payments and certifications and trying to get the government to do what they agreed to do.
The red area is where PSLF is a no-brainer. These folks are going to have MORE forgiven than they borrowed. It doesn't matter so much if they're in PAYE or REPAYE, file MFJ or MFS, or contribute to Roth or tax-deferred accounts. Getting this PSLF is a critical part of their financial plan. Consider a pediatrician making $150K with $600K in student loans. This doc makes payments of $943 a month for 10 years, a total of $109K, and then has $755K forgiven. Basically, PSLF wiped out 5/6ths of his or her $600K loan.
The orange zone is an area where people also probably want to go for PSLF, although their payments will cover more than their interest and they won't receive any REPAYE subsidy. Using all the tricks (PAYE + MFS and maxing out tax-deferred accounts) to get that AGI down can really make a difference here in how much is left to be forgiven.
What surprised me when I ran these numbers was that this orange zone lives in the 1X debt to income ratio. For some reason, I thought when I had run the numbers in the past that it lived at a much higher DTI ratio. Consider a doc who makes $300K and owes $300K. This doctor will make payments of $2,193 for a total of $259K and then have $229K forgiven. That's like getting a raise of $23k a year, about 10% after taxes.
I chopped the chart down a bit to demonstrate the range of typical physician incomes ($150-400K) and debt burdens ($100-400K). Again, you can click on it to make it bigger.
As you can see, the biggest swath is in the orange zone. There are lots of doctors who, despite making a terrible error by deferring their student loans during residency, should still go for PSLF if they want to work at a 501(c)3.
Bottom line? From now on I'm going to have to say “it depends” and “you have to run the numbers” a lot more often than I have been when it comes to attendings making their first PSLF-qualifying payment. However, if you're in the green or yellow zone, check out the rates and cashback you can get by refinancing through the links in this chart:
Fixed 2.58%-5.99% APR
Fixed 2.83%-6.74% APR
Fixed 2.54%-6.25% APR
Fixed 2.95%-8.90% APR
Fixed 2.55%-9.10% APR
Fixed 2.50%-6.00% APR
Fixed 2.98%-5.89% APR
Fixed 2.99%-6.98% APR
Fixed 2.95%-4.20% APR
Fixed 2.95%-7.63% APR
What do you think? Did you defer in residency? Are you going for PSLF? Where do you find yourself on the chart above? Comment below!