By Andrew Paulson, CSLP, Lead Student Loan Consultant and Co-Founder of our partner site StudentLoanAdvice.com
In October 2022, the Department of Education (DOE) issued a press release titled “Charting the Path Forward to Public Service Loan Forgiveness (PSLF).” In this release, there were a couple of regulations listed that could help borrowers who are pursuing PSLF. One of those regulations could be huge for doctors in California and Texas. Here’s what it says:
“Allow a qualifying employer to certify employment for a contractor if that individual is providing services that by State law cannot be filled or provided by an employee of that organization. The Department is aware of specific circumstances where existing state laws generally prevent doctors at nonprofit hospitals in California and Texas from working for the hospital directly. This change would cover those individuals as well as any other contractor whose employment is similarly barred by state law.”
This regulation would allow thousands of docs in California or Texas that are currently ineligible for PSLF to qualify, potentially saving physicians hundreds of thousands of dollars in forgiven student loans.
First, let's talk about how some doctors in California and Texas have a tough time qualifying for PSLF.
California and Texas have had unusual state laws for years that prohibit many nonprofit hospitals from directly employing doctors. As a result, many doctors in those states are employed by a contractor with a hospital. However, in this specific situation, a doctor can't get PSLF, because in order to qualify, they must receive their paycheck directly from a qualifying organization—such as a nonprofit, a 501(c)(3), or a government employer. A doctor who's working for a nonprofit but who is being paid by a contractor wouldn't qualify.
With PSLF out of the picture, these doctors then select an alternative method of repayment, such as student loan refinancing or IDR forgiveness. That's usually a more costly option than PSLF.
If a doctor in California or Texas wants to pursue PSLF, they are constrained to employment at an academic institution, in public health, or in a government setting like the VA. If they aren’t interested in those environments, they must settle for employment at hospital contractors such as Kaiser Permanente. These contractors do not currently qualify for PSLF. This can pose a difficult decision for new docs who often have large student loan balances. Many new docs plan to pursue PSLF after they graduate training and desire to live in California or Texas. They risk losing out on PSLF, as there are fewer job options in those states that qualify because of the unusual state law.
One of the largest employers of docs in the country, Kaiser Permanente, could be on the list of employers that could fit as PSLF eligible, thanks to this new DOE adjustment. Many doctors finishing training who want to work in California will work for Kaiser. The unfortunate reality is they usually finish training with 3-7 years of work experience that is PSLF eligible, but they have to forfeit the program because Kaiser is not a qualifying employer. Now, with an opportunity for those docs to qualify for PSLF, many more physicians could end up pursuing PSLF and have their loans forgiven just a few years out of training.
More information here:
Refinance Student Loans and Pay Off or Go for PSLF?
Is Public Service Loan Forgiveness Worth It for Doctors?
How Do I Know If I Qualify for PSLF?
If you want to qualify for PSLF, here are six things you need to remember:
- Have direct federal student loans. If your loans aren’t direct, consider a direct federal consolidation.
- Enroll in an income-driven repayment (IDR) program such as REPAYE, PAYE, IBR, or ICR.
- Work full-time or the equivalent of full-time across multiple agencies or organizations (minimum of 30 hours per week).
- Make on-time monthly payments.
- Complete an employer certification form.
- Work at a qualifying employer. Qualified employers tend to be nonprofits, 501(c)(3), government employers, etc.
Once you’ve hit 120 qualifying monthly payments, you would be eligible for your loans to be forgiven tax-free.
More information here:
The (Nearly) Perfect PSLF Situation for a Physician
How Do I Know If My Employer Qualifies for PSLF?
The easiest way to determine if your employer qualifies is by using the PSLF help tool on studentaid.gov. To verify your eligibility, you need to insert the employment identification number (EIN) from the organization(s) that is paying you. Your EIN is usually on a tax form like your W-2. If you don’t have this, reach out to human resources.
Below is an example of a qualifying employer indicating “Eligible.”
This means, as long as you are following the rest of the PSLF rules, then you are accumulating credit (or have in the past) for the PSLF program.
If you are working at a community hospital but are employed by a contractor, you are likely paid by the contractor. Today, if you tried to input Kaiser Permanente (likely a contractor with a nonprofit hospital), you would come back with this “Not Eligible” status.
How Do I Know If My Employer Qualifies for This PSLF Loophole?
As of this writing, Kaiser Permanente employment or any other situation in which you are paid by a contractor with a non-profit/501(c)(3) doesn’t qualify for PSLF. Based on the new DOE regulations to start July 1, 2023, Kaiser is likely an employer that would qualify. However, it is unclear if you will certify using your nonprofit/501(c)(3) where you have privileges or through your contractor (who’s paying you) on the PSLF certification form. Perhaps in the unique circumstance of California and Texas doctors, the government would allow the nonprofit/501(c)(3) to sign it on your behalf of your actual employer. This would require less database work on the government's end and reduce the minutiae of adding all the different contractor organizations that would qualify under this new regulation.
But what LIABILITY would this present since you’re not actually an employee of the nonprofit/501(c)(3) where you spend your work hours? Maybe both your employer and the nonprofit/501(c)(3) where you're contracted would be required to sign the form. It would be a bit of a pain to get a signature from two organizations, but it'd be worth the hassle if it can save you that much money in student loans. I will update this post when we have a definitive answer on employment verification.
Here are some other questions I've been thinking about.
PSLF Loophole Q&A
Can I Qualify If I Already Refinanced My Student Loans?
If you have already privately refinanced all your federal student loans, you would not be eligible for the PSLF program. There is no undoing a private refinance. If you’re considering refinancing, make sure you consider this loophole, among other factors, prior to making your final decision.
Is This Retroactive?
It is still uncertain if this PSLF adjustment would be retroactive for borrowers. In my opinion, the fact these state rules have made it particularly difficult for this small segment of borrowers for years, I think the DOE will make this retroactive. So, there is a chance you could have been denied for years and still become eligible or move closer to eligibility.
Do Only Doctors Qualify?
In the ruling, it only mentions doctors in California and Texas that can qualify. It's possible other providers—such as PAs, NPs, and nurses—could also be included. I will continue to update this post as more details are released and if there are additional professions that become eligible.
Do I Qualify If I Work Outside of California or Texas?
No. This regulation only applies to those who are working in California and Texas.
What Impact Could This Have If You Qualify?
Picture this. You’re a new pulmonary critical care doctor working in San Diego at your first attending job making $325,000. You trained for six years at academic institutions and have six years of PSLF credit. You fit the unique situation in this loophole in that you are employed at a hospital contractor that, in the past, wasn’t eligible for PSLF.
You owe $300,000 in student loans at a 7% interest rate. You are trying to decide the optimal paydown plan and whether you should privately refinance or do PSLF.
You privately refinance your loans to a 5% interest rate and a five-year term. You make a monthly payment of $5,661 and pay $39,682 in interest. You’re out of debt in five years, and your total loan cost is $339,682.
Public Service Loan Forgiveness
You decide to pursue PSLF for four more years. You are on the PAYE program and you just recertified your income from the year prior when you worked half the year as a fellow at $60,000 income and half the year as an attending making $325,000. Over the next three years, your pay increases a little.
Over four years, your monthly payments in PAYE are usually about $2,500 and your total loan cost is $111,550. Your remaining loan balance of $275,000 is forgiven tax-free.
This new attending could end up saving over $228,000 in student loan payments by pursuing PSLF with this newest regulation. For many, PSLF forgiveness might not be life-altering money. However, it could also mean earlier retirement, partial retirement, more money in rental properties, 529 plans for kids, or just more time to spend with your loved ones.
As more information on this loophole becomes available, I will update this post. If you have questions about whether you qualify for this loophole or need general advice on the best way to pay down your student loans, contact our experienced team at studentloanadvice.com today!
If you're a doctor in California or Texas, could this loophole apply to you? Did you even know about this potential PSLF adjustment? How could qualifying for PSLF change your life? Comment below!