By Dr. James M. Dahle, WCI Founder
If you are wondering if public service loan forgiveness is worth it, we’re here to help. The PSLF program allows any remaining direct federal loans to be forgiven once 120 qualifying on-time monthly payments have been made while directly employed by a qualifying employer. Direct federal loans include Stafford Loans, PLUS loans, and Direct Consolidation Loans. FFEL, Parent Plus, and Perkins loans do not qualify until they have been consolidated into a direct consolidation loan (though in October 2021 the federal government allowed for FFEL and Perkins loan payments to count toward those 120 PSFL payments IF you consolidate by Halloween 2022).
Qualifying payments must be made under one of five programs:
- Income Contingent Repayment (ICR)
- Income-Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Standard 10-Year Repayment Plan
Let's take a physician with an income of $250K, who owed $300K in student loans at 7% upon medical school graduation. She just finished a three-year residency at a 501(c)(3) institution during which she made 36 payments in PAYE (an IDR) (IDR includes ICR, IBR, PAYE, and REPAYE) of $300 apiece. She started her first job at a 501(c)(3) institution, and if she makes her next 84 IDR payments, the remainder of her debt will be forgiven. She also has the option to refinance her student loans at 3% and she thinks that by living like a resident, she could pay them off in 3 years while still maxing out her retirement plan contributions. Should she go for the PSLF or refinance and pay off?
The Public Service Loan Forgiveness (PSLF) Program Option
Now, she only had to pay $300 a month ($3,600 per year) as a resident, and since this loan accrued $21K in interest per year, she now owes approximately $352K. Her IDR payments in PAYE are based on her income up to a payment cap which is not to exceed the standard 10 yr payment on her loan $3,483 (=PMT(7%/12,120,300000,0,0)). Her payments now as an attending have jumped to $2,119. If she makes 84 of those payments on this 7% $352K loan, after 84 months she will have paid a total of $178,038, but only $31,038 of that will have gone toward the principal, so she will still owe ~$321K, which will be forgiven if the program is still in place and remains non-means-tested.
Refinance Medical School Loans and Pay Off Option
The other alternative is to refinance the loans upon residency graduation at 3%. Since she will only have the loan for three years, and she has a high income, the risk of a variable rate loan is one she can take. In order to have a 3%, $352K loan paid off in 36 months, she will need to make payments of $10,237 per month. After 36 months, she will have paid a total of $369K.
PSLF vs Refinance: Which Is Better?
She will pay less money, especially when you consider the time value of money (money paid toward a loan 6 years from now is less valuable than money paid toward a loan this year), by going for the Public Service Loan Forgiveness program. Essentially, she'll save around $180K despite paying at double the interest rate for over twice as long. In the end, MORE than the value of her original loan will be forgiven.
She will have to run the risk that the PSLF program goes away, or that it is modified significantly such that it becomes means-tested, in which case she might not be eligible for forgiveness or might receive much less than planned. She will also be locked into a 501(c)(3) job for at least 7 years, potentially giving up income, freedom, and opportunity. If she leaves that job, or the program is significantly modified, she will come out way behind.
The cash-flow issue is also not insignificant. Payments of both $2,119 for 7 years and $10,237 for 3 years are not insignificant. It would be tough to max out retirement plans, live a reasonable life, AND pay $123K per year toward student loans for 3 years on a $250K income. It is doable, but you would have to live like a resident for 3 years. The other option isn't great either. Although your cash flow would be much better for the first 3 years, it would be much worse for post-residency years 4-7, when most docs really find it difficult to continue living like a resident. I'm not sure which is worse from a cash flow issue.
In the end, someone who is eligible for PSLF is almost surely better off paying the minimum IDR payments and getting the PSLF. Longer training periods and larger debt burdens make this option even more advantageous.
Will PSLF Be Grandfathered?
There is significant legislative risk to relying on this program, but it would be very unusual for a program change to occur that did not grandfather in those already enrolled in the program.
In addition, PSLF is mentioned in the promissory notes—legal contracts between the borrower and the lender. Even if Congress or the Department of Education changes the program and does not make provisions to grandfather in current participants, those borrowers should have an excellent legal case that should at a minimum result in a significant settlement.
What If PSLF Goes Away or If You Don't Receive Forgiveness?
I think the best way to deal with that risk if you are going for PSLF is to save up a side fund with the money you could have used to pay off the loans in 2-5 years after residency. If the program goes away, use the side fund to pay off the loans. If it doesn't and your loans are forgiven, add the side fund money to your retirement nest egg.
Public Service Loan Forgiveness has had some ugly PR with 99% of applicants being denied but success stories of doctors receiving forgiveness are emerging. These success stories come from those who meticulously follow program rules and from those that spend many frustrating hours every year following up with loan servicing companies that can't count to 120 correctly.
On a positive note, on May 5, 2021, over 50 senators sent a letter to the Department of Education urging Secretary Cordona to reform PSLF making it easier for public servants to obtain forgiveness—not harder. We'll continue to keep a pulse on any legislative proposals behind the program, but it seems to be improving each year. That 99% statistic above is also incredibly misleading—the denominator is completely wrong as they are counting EVERYONE in the program, most of whom have not made the required 120 monthly payments yet. So of course they're not going to get forgiveness…yet.
Should You Refinance Medical School Loans as a Resident?
This is an important, but complicated, question, and there are no easy answers. But here are some things to think about as you make your decision.
Principle #1 – You Can Always Refinance Private Loans
Private loans are not eligible for the protections of the Income-Driven Repayments programs, forgiveness through the IDR and PSLF programs, or the REPAYE subsidy. Plus, four lenders are offering $100 a month payments during your training. So there is no reason to avoid refinancing your private loans early and often every time you can get a lower interest rate. If you refinance through the links on this site, you will even get some cash back each time you refinance with a new company. The remainder of these principles apply ONLY to federal loans.
Principle #2 – If You're Sure You WILL Work at a 501(c)(3), DON'T Refinance
It would be a relatively rare situation for someone who is going to go work at a 501(c)(3) to be better off refinancing instead of getting PSLF. If you're going to work at a 501(c)(3) throughout residency, fellowship, and early attendinghood, enroll in an IDR program and get your PSLF. Remember, once you refinance, no more forgiveness. The rare exceptions to this rule would be someone whose residency IBR/PAYE/REPAYE payments are equal to their full payments (small loans or highly paid spouse) or someone who forgot to enroll in IBR/PAYE/REPAYE as a resident (don't do that). Another exception would be if the difference between your current rate and the refinanced rate were small (or even negative). No sense in giving up options unless you're adequately compensated for it with less accrual of interest.
Principle #3 – If You're Sure You WON'T Work at a 501(c)(3), Calculate Your Debt to Income Ratio
Add up your student loans and project your expected gross income as an attending physician in your specialty. Divide the student loans by the income to get your Debt to Income (DTI) ratio. If your DTI < 1.5, then you know you are going to refinance eventually. The only question is whether it is worth doing during residency. That is simply a question of effective interest rate. Adjust your interest rate for any REPAYE subsidy you may be receiving and for any student loan interest rate deduction you may be receiving and compare that to what the student loan refinancing companies are offering (again also adjusting for any student loan interest rate deduction you may qualify for). If you can get a better effective rate by refinancing, then do so. If not, stay in the IDR program. Once you're an attending, you are likely not getting any REPAYE subsidy, you are likely not getting any student loan interest rate deduction, and you can qualify for an even better rate, so go ahead and refinance.
If your DTI > 2.5, (for example student loans of $500K and an income of $200K) you will want to give serious consideration to IDR forgiveness. While this is dramatically worse than PSLF (takes 20-25 years of payments and the forgiveness is taxable in the year received), at that DTI ratio you are still likely to come out ahead. So don't refinance or you will lose that option.
If your ratio is between 1.5 and 2.5, you're in no man's land and should pony up a few hundred dollars and get high-quality advice to help you make a decision about what to do. We recommend StudentLoanAdvice.com. Again, if you are a resident or fellow and you're not sure, don't refinance. There's no going back to the IDR programs and PSLF.
Principle #4 – If You Are Not Sure If You Will Work at a 501(c)(3), Then Calculate the Cost of Your Option
The best way to calculate the cost of your option is to apply with one of our student loan refinancing partners that lend to residents. If your average loan rate is 7%, you have $300K in unsubsidized loans, and a lender offers you 4% fixed, then the cost of the option is (7%-4%)*$300K= $9K per year. That's $27K over a 3-year residency and twice that if you add on a 3-year fellowship. Now you have to weigh some other difficult to measure factors such as the likelihood of being able to get a job at a 501(c)(3), the attractiveness of available 501(c)(3) jobs and their location to you, and the difference in pay in your specialty between 501(c)(3) jobs and non-501(c)(3) jobs (if any). If the option is worth paying for you, then pay it, but if you get to the point in a year or two where you're sure you're not going to work at a 501(c)(3), then refinance. Sure, it cost you a little extra interest to keep that option open, but that's just business.
Principle #5 – Weigh the Risk of Not Getting PSLF
It is worthwhile running the numbers in your particular situation, just so you understand what you are looking at. First, let's consider a doc with $300K in 7% unsubsidized loans. Let's assume he just makes 10 years of equal payments (maybe his spouse has a real job while he's a resident or something). What do the payments look like?
Well, he pays $3,559 a month, or $42,713 per year for ten years and then the loans are gone.
Well, what if he decides to enroll in the PAYE program and go for PSLF? Let's assume that the spouse isn't working and he has two kids. Let's also assume a $50K income (AGI) as a resident and a $250K income (AGI) as an attending.
Now his payments as a resident are $113 per month, or $4,068 over the course of his residency. Upon finishing residency, he will owe $363,150. His payments at that point will be $1,780 per month, or $21,360 per year. After 7 years of paying $21,360 he still owes $398,295, which is then eligible for PSLF. He owes MORE than he took out in medical school and even more than he owed at the end of residency. How is this possible? Well, remember that 7% of $363K is $25,410 a year. Even his attending payments aren't covering the interest on this debt!
That brings us back to the risk issue. If you lose your 501(c)(3) job and can't get another, or the government limits the program, you will still owe a ton of student loans, more than you took out despite paying on them for 10 years. If you're not comfortable taking that risk, then either refinance your loans early in residency and plan to pay them off, even if you do end up in a 501(c)3, or 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.
In Summary
- Refinance private loans early and often
- If you plan to work at a 501(c)(3) as an attending → Don't refinance federal loans
- If you have a DTI (or expected DTI) ratio > 2.5 → Don't refinance federal loans
- If you have a DTI (or expected DTI) ratio between 1.5 and 2.5 → Get advice from StudentLoanAdvice.com
- If you are an attending not working for a 501(c)(3) and have a DTI ratio < 1.5 → Refinance federal loans
- If you are a resident/fellow and do not expect to work for a 501(c)(3) and have an expected attending DTI ratio < 1.5, calculate your effective interest rate and compare to what you can refinance to. If you need help, contact StudentLoanAdvice.com.
If you do choose to refinance, please go through the links on this site. Here are the best deals on student loan refinancing I've managed to negotiate with the top student loan refinancing lenders if you are going to refinance.
Variable 4.54% - 11.72% APR
Fixed 3.95% - 9.19% APR
† Bonus includes cash rebates and value of free course. Borrowers who refinance more than $60,000 in student loans using the WCI links will be enrolled in The White Coat Investor’s flagship course, Fire Your Financial Advisor for free ($799 value). Borrowers will still receive the amazing cash rebates that WCI has negotiated with each lender. Offer valid for loan applications submitted from May 1, 2021 through June 30, 2023. Free course must be claimed within 90 days of loan disbursement. To claim free course enrollment, visit https://www.whitecoatinvestor.com/RefiBonus.
Student Loan Refinancing Disclosures
What do you think? Are you PSLF eligible? Will you be going for that, or paying off your loans as soon as possible? Comment below!
One assumption you’re making is that physicians are making this decision on medical school graduation rather than residency graduation. It would be great if we all were that financially aware that early on, but I wasn’t. Waiting until later in residency to start IBR payments erodes this benefit. I might have done the PSLF program had I run the numbers at the end of med school since as you point out it is most often the way to come out ahead. Unfortunately many (I think most) people are in financial denial until getting towards the end of residency. Luckily my damage isn’t too bad (210k on finishing up a 4 year residency this June). I’m currently in the processing stage for refinancing with DRB for the 3% variable rate. They honor any deferment or forbearance in place prior to refinancing so I decided to get the process started early, and my first payment will be in August. Of course I’m also reassured that with refinancing and paying it off, I’m free to change to a for-profit job, and I can keep my payment plan in place even if congress changes its mind. I think there’s some good value with that kind of peace of mind.
Most residencies are at non profits, and as long as one isn’t in forbearance, the repayments can be counted toward pslf retrospectively. So yes, the decision can be made when searching for the real job, not on graduation.
When I started, a $0 ibr option was available based on 1040’s of nothing, but that has vanished recently according to our intern class. Now the minimum is 15% of monthly take home I think.
I am eligible for pslf based on my attending job being a w2 through a non profit, but that is a minority of EM jobs (similar to anesthesia). I went into residency-forbearance due to cash flow problems and having two kids in residency. Even if I had done ibr through residency, I would not consider pslf. One is that my loans are not as substantial as those with 300k; two is that the Obama turmoil is causing my pslf friends to have headaches about “what to do”. The final kicker is that as an EP, I am likely to change jobs fast, and could go to a for-profit group.
2017 is the first batch of pslf playoffs.
I would like to see a guest post / interview / q&a from sofi or drb. They have only been in existence since 2011 from what I can tell. How do they see their future, in either direction of what DC does.
My recommendation to EM residents would be to go into residency forbearance, pay off all accrued interest each month through residency. When DC figures out our future, consider the type of job based on debt burden (are all loans forgiven or just 57k?). They miss out on 3-4 years of payments toward ibr, but the odds of someone going to a non profit job are less than they are for other specialists. They can use any preserved money each month to pay off interest or contribute to a roth.
From my experience it is not always practical to get all your loans into IBR right at start of residency. Its more like in middle of PGY-I that everything is set.
I think a middle ground is better. Saving for retirement, paying off loans quickly.
There is a lot of uncertainty with PSLF, and being in the program and then on year 7 being rejected by the government for some odd technical problem would be bad.
I am in my second year of EM residency and currently work for a non-profit and have my loans in IBR/PSLF. I ran the numbers for my debt forgiveness, and it was a little over 200k after the 10 years. (With the current accrued interest I have about 350k in debt). If I continue to work for the non profit org where my residency is located, the income potential is about 50k less than what is out there in the community setting. It seems that given the uncertainty of the PSLF max, I would be better off consolidating, working in the community, and paying off ASAP. Further, my soon to be wife (3 weeks until the big day) is a family physician in her first year of practice with about 150k in student loans. It seems we can maintain a reasonable lifestyle, max out retirement accts, and use the rest to consolidate and pay down the loans ASAP… does this seem like the best idea?
I guess one may argue also that I could work for the non profit and get paid on a w2 and do moonlighting in the community on a 1099, which would (if my understanding is correct), allow me to put 18% of that moonlighting income into an additional 401k, giving me the ability to exceed the 51k limit and shelter more money from taxes?
I had typed up an earlier response but it didn’t go through:
I was able to make $0 IBR payments my first two years of residency, which apparently has now changed to something like 15% of monthly take-home, not based on a 1040 of $0. I am now in residency-forbearance due to being cash strapped with two infants. My first job out is a W2 at a non-profit, but I do not think I will pursue PSLF essentially due to time. I would rather pay the loans off and be done with it. I also do not have 300k in loans like others.
My friends who are doing PSLF are having headaches because of Obama’s proposal.
Piggybacking off Louis above, the first job is when the PSLF needs to really be determined. EM jobs are mostly in for-profit groups. In my opinion, it makes more sense for an EM resident to go into residency-forbearance (different from forbearance), pay off the accrued interest each month, and if there is any leftover cash at the end of the year, max out a Roth.
With the likelihood of fast job changes in EM, I would not suggest most EM residents aggressively pursue PSLF, since their first job may not even qualify. If it does, their second likely won’t.
PSLF’s first round of pay-offs occurs in 2017.
I would like to see a Q&A or a WCI vs Sofi/DRB interview. They have only been around since 2011, and I would like to know what their future is in the two scenarios:
1) DC forgiving 57K in PSLF
2) PSLF staying the way it is
Sorry, your previous comment got caught in the spam filter. I’ve had people who are subscribed to threads complaining about all the spam comments they’re getting by email so I tightened up the filters recently. I’m not sure what word caused your comment to be flagged as spam but here’s the ones that automatically send a comment to the spam box:
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There’s an entirely separate list that causes your comment to be held for moderation. Comments are also held for two or more links. I’m sorry but it’s tough to strike a balance between blocking legitimate comments and eliminating spam if I want to allow comments on the site. Just to give you an idea of the size of the spam comment problem, I’ve had 60 spam comments in the last 4 hours.
As far as your comment, I wanted to make sure you saw this post about refinancing: https://www.whitecoatinvestor.com/refinance-your-medical-school-loans-at-a-lower-rate/
For those wondering what he is talking about with “residency forebearance” here’s a good link: https://www.aamc.org/services/first/first_factsheets/112314/postponing_loan_repayment_during_residency.html
Oh, I used all of those words. That is probably why
Lol. I don’t know why yours was flagged. There’ll be a post about it tomorrow.
My wife is an intern in OBGYN with a little over $300k in med school debt. We are currently paying on IBR and have talked about PSLF. I’m becoming convinced to just consolidate out of 7% interest when she finishes residency and forget PSLF.
We already have to worry about reimbursement decreasing in the near future without taking the risk that the PSLF program will materially change and leave us on the hook for 10 years of a 7% charge. If we are able to earn enough to pay the loan off, then we likely will do it.
I know that’s a $192k decision, using the math in the example above. But in the end, isn’t it better to be in control of your situation?
I was eligible for IBR in residency but now that I’m practicing, I’m no longer eligible. I have $200,000 in loans and am a hospitalist with $200,000 salary, single, no kids. I need to refinance to a lower rate. Thank you for discussing the above options.
In med school I was always sure I’d do PSLF (another naive thought that increased my current debt load before I saw the financial light), but in many areas it can be hard to find a PSLF-qualified job. At the large, free-standing, largely public-insurance-serving peds hospital I’m finishing my training at, every single MD (except the residents) is contracted to work for the hospital, and all are paid by their own physician groups that are not PSLF-eligible. Because we weren’t willing to make a big relocation for family reasons, I took a somewhat higher paying job and am planning on consolidating and paying down debt ASAP. The decision to pursue PSLF for those still several years away from the 10 year mark is looking like a big gamble right now.
Thanks for the shout-out Dr. D. When I originally submitted the post on the Bogleheads forum, Obama’s gut-job of PSLF in the proposed 2015 budget hadn’t come to light, and in fact, I hadn’t heard about it until I came across your post this morning. It makes aiming for PSLF a much riskier proposition, and we may just try to refi the loan and pay it off in earnest instead.
Man, these are some crazy numbers/figures being thrown around. My fiancee is just finishing up MS1 but we will have around 160-200k of debt by the time she’s done. I can’t imagine what it would be like to have 300-400k in debt, I really feel badly for those people and hope PSLF stays around for them.
I don’t really know for sure but if I had to guess I would say it’s going away and you should not count on it. Most people aren’t doctors so they would probably support something like PSLF for undergrad and no PSLF for MD’s. Student loan debt in general is a bubble that will pop, I’ve written about it many times. It’s only a matter of time.
I’m still learning about everything but I think the best strategy for us will be for her to do a residency that qualifies for PSLF and try to find a job in a LCOL area/PSLF. I saw another poster mention that income difference was around 50k for a non-PSLF job but you also have to remember that’s coming in at your marginal tax bracket. So that 50k is really only 25k while on the other hand the PSLF is completely free from taxes for now 🙂
There’s a lot of risk but there’s also some huge upside with PSLF like your example shows. Tough choice, thanks for the post.
I am in the middle of a 5 year residency with a (what seems like required) 1 year fellowship afterward. We have been paying the IBR payments each month as opposed to forebearing because I figure that in 6 years we can make the decision to try 4 more years at somewhere for PSLF or if the program is gone or drastically different then the only negative is that I had a little less cash flow during my residency and my 200k of loans couldn’t capitalize as much (barely). Am I thinking about this wrong?
I think you’re doing it the right way, but you need to be an expert on PSLF and realize that if it doesn’t look good when you finish fellowship, you might want to refinance and start paying those down like mad.
I’m in the exact same situation oddly enough. I’ve been doing IRB since the 6-month post graduation $0/month grace period on my loans expired in Dec 2009. I was fortunate to have $0 payments the first year like others. Heading into my 6th year in July and I’ve accrued some extra interest, but not as bad as having made no payments.
Longer training programs definitely have an advantage assuming the program doesn’t change.
Also, someone made the point about the student loan bubble popping. My understanding (limited, I admit) is that a bubble will pop when borrowers default and liquidity dries up due to private business no longer being able to lend. Will the student loan bubble pop since it is the government that these borrowers will default on (and can’t use bankruptcy as a defense)? Or will the economy just continue to stagnate as people have no disposable income? Sorry for the long comment just curious what people expect with this bubble?
I really feel sorry for the “youngsters” with that much debt. Do all of them know that there is an active war against physicians? That would make me very nervous about a program that doesn’t pay off for ten years into the future.
Wow, just wow.
In a similar boat and have been crunching numbers over the past three years. One thing I didn’t see mentioned was the tax implications of the forgiven loan. If ~192,000 is forgiven after 10 years, do you owe taxes on the amount forgiven? Meaning a potentially hefty tax bill at the end of the 10 years, too.
My husband is about to start as an attending but will no longer be PSLF eligible. Our plan is to keep maxing out the retirement accounts (I think the habit of investing is worth more than the differene that money would make on the loan balance at our interest rate), max the loan repayments with the new income, and with extra shifts he picks up use 10% for fun money and the remainder for repayment. I estimate 3 yrs to pay off the loans. Will update how it goes!
No you will not owe taxes to the best of my knowledge.
How many years was his residency/fellowship and was he PSLF eligible during that time? If you’re close it might make sense to go for PSLF no?
The residency was 3 yrs with 36 qualifying payments under IBR. The new job is not at a 501(c)3 institution though. That bumps us out of the PSLF forgiveness and may even bump us out of IBR in a few years. It looks like taxes are not owed for PSLF on loans forgiven but they are for IBR loans forgiven? I’ll need to look into this more, I don’t quite understand that part yet.
Taxes are NOT owed for PSLF amounts forgiven. As far as I’ve been able to research, all other loans forgiven are treated as taxable income.
You don’t get bumped out of IBR. You might pay off your loans before the 20 year forgiveness mark, but you don’t get bumped out. It’s just your IBR payments become the equivalent of full payments (or what full payments would have been upon med school graduation.)
Thanks for all the comments/clarification on the tax situation. With IBR I was considering ‘bumped out’ to be ‘no longer having a partial financial hardship’. At which point I understood the interest would be capitalized again. I think we’ll pay off the accrued interest before that happens, but since the loans are gaining more in interest than we are paying each month during residency I’d rather not see that interest converted to principal if we no longer qualify for the partial financial hardship.
Sounds like a great plan.
There is a similar discussion going on in the veterinary community. I wouldn’t want to have to rely on a government promise that all my debt will be forgiven exchange for public service. Right now, the guidelines for what is considered public service, at least for veterinary graduates, are unclear at best. These are loan balances of 300k 400k or more we are talking about. Where exactly is the money going to come from when all these loans are forgiven? We’re not even talking about all the IBR debt that is supposedly going to be magically forgiven as well. Also, and this might rankle people- some public service jobs that currently qualify are not that bad. Why should I have to repay my loans because I work in the private sector AND have to eat the cost of your loans in the form of higher taxes? Clearly if pay disparity is an issue, the government would be significantly better off upping the annual salary of these public service positions rather than waiving off 400k in loan debt for someone who will probably jump ship once their period of servitude is up. I think it’s only a matter of time before the they figure that out and renege on these promises. Student loan debt is a very serious issue. These half baked solutions (IBR and PLSF) are not going to solve the problem.
In the legal community what have had similar discussions.
For many, it would be nice to not have to rely upon this government program, but many people did so because it seemed so set an stone just 6 months ago.
PSLF was created in 2007, and now that we are on the eve of the bill becoming due for the federal government, they are threatening to change it after many have put in years of work. It just seems wrong.
If you are interested here is a link to a letter to the president and a petition to keep the law unchanged: http://studentloansherpa.com/mr-president-deal/
According to page S-13 of the actual budget proposal (http://www2.ed.gov/about/overview/budget/budget15/justifications/s-loansoverview.pdf), it states that the proposed changes apply to the PAYE program, i.e. NOT the IBR program. That said, I was under the assumption that those of us who have been utilizing IBR in conjunction with PSLF would be grandfathered in and only those who took new loans out after July 1, would be affected. Am I incorrect?
I believe the Dept. of Ed. has been intentionally vague on whether current borrowers would be grandfathered into PSLF as it currently stands.
I have heard absolutely NO discussion of grandfathering. There is definitely risk here.
This blog got commentary / clarification from the department of education yesterday. The intention is that there is grandfathering.
http://educatedrisk.org/analysis/ed-further-clarifies-2015-budget-proposals-combined-incomes-pslf-caps-paye-terms
Awesome!
According to a Department of Education spokesperson, those who are currently using IBR in conjunction with PSLF WILL be grandfathered in if the proposals were to become law:
http://educatedrisk.org/analysis/ed-further-clarifies-2015-budget-proposals-combined-incomes-pslf-caps-paye-terms
It’s still a proposal, so you don’t really know what’s going to happen. PAYE is essentially just the new, updated version of IBR. I wouldn’t count on IBR payers being eligible for PSLF while PAYE payers are not.
As an FYI, there have been some bills tossed around threatening to tax PSLF payouts. Right now it’s tax-free.
I’m almost 5-years into IBR payments through my 5-year residency program, and I’m accepting a job working for a 501(c)(3). I have about 140k in student loans and a 10-year payoff rate of about $1,500 per month. My contract also includes 1k per month towards my student loans as long as I have them and renews in subsequent contracts, so I’m not in a huge hurry to pay them off. With all that in place, I’m planning on pretending like PSLF is going to happen, and I stand to have 80k forgiven. I’m not in a super-high paying specialty and will be happy to crack 250k.
That said, I got the advice to put what would otherwise be student loan payments into municipal bonds. If PSLF happens, I’ll have the bond portion of my portfolio taken care of. If it doesn’t, then I’ll just use that lump sum to pay off/down my student loans and will have sacrificed a few percentage points of return for a few years (i.e. my loans are at 5.25%, and munis will not return that).
Does that sound wise?
Yes.
I am just finishing my fourth year of med school and (luckily) decided to read around about loans and finances. I was excited about PSLF… But now I’m worried. It seems very high risk to make the minimum payments on IBR in the hopes of PSLF (although, grandfathering looks possible — but will I be too late to be grandfathered?).
One question I have is: Should I do IBR, making above minimum repayment in the hopes of decreasing my debt, and then consider any PSLF I get as a lucky gift from Uncle Sam? My parents might be able to help me out a little while I’m in residency.
I have about 320k in debt and am doing peds (and likely a two or three year fellowship)… All of which I know is bad news! I have no wife, no kids.
I just bought your book yesterday and have plowed through it in 24 hours. Very, very helpful. Should be required reading for every MS1!
Also, I’m trying to figure out when you would use PAYE v IBR. Is PAYE “better”? The minimum payment is less so I guess if you’re trying to maximize your PSLF it would be better? How about if you try to hedge your bets like I suggested in the parent comment? Is there a disadvantage to PAYE v IBR?
PAYE (ICR-A) is just the updated version of IBR.
$320K and Peds means you’ll need to live like a resident for quite a while after residency graduation, especially if PSLF doesn’t happen. That’s a real risk for you.
I am finishing up my MS1 year, and we had a financial consulting group come and present to us PSLF/IBR/PAYE this evening. I’m a non-traditional medical student, and I have just enough savings to pay off my 4 years of med school out-of-pocket (~$250k). I paid out-of-pocket for my MS1 year, but I have been wondering if I should consider taking out loans and betting on PAYE+PSLF for the remainder of my medical education.
Given the interest involved with taking out loans, I understand that it only becomes advantageous if the amount of my loan forgiven exceeds the amount of interest I pay. I am using the New America IBR Calculator, and if I borrow $180k ($120k @ 6.8%, $60k @ 7.9%), the total loan balance will be ~ $368k for 20 years. I stand to have roughly $173k forgiven if PSLF stays intact (assuming residency salary $45k/year and attending salary $250k/year).
Even with $173k forgiven, I still will have paid off $147k of the loan balance after 10 years under PAYE, which isn’t far off of the $180k I borrowed in the first place, so I truly only save $37k ($180k-$147k). Does that sound about right? $37k doesn’t seem like it would be worth it, considering the risk of PSLF going away and the requirement to work for a non-profit.
I would appreciate any comments (and confirmation of my calculations). Thanks.
**$33k ($180k-$147 = $33k, not $37k)
If I were in your position, I’d just pay cash. Under most scenarios, even with PSLF staying in place, you’ll still end up paying most, all, or even more than you borrowed in the first place.
Good advice. Not to mention, the constant risk and worry that PSLF would be changed to the point that you’d no longer qualify or receive the benefit you’re expecting would be eliminated. I know if we had the cash, my wife’s loans would be paid off this afternoon.
Hello,
This may be terribly obnoxious for me to ask so early on–I start medical school in the fall–but I am trying my best to increase my almost-zero financial literacy, and relieve my and my parents’ financial burden.
I was planning on going the route 99.9% of people seem to take–that is, the direct unsubsidized Stafford loan currently at 5.41%, with all of the repayment options attached (IBR, PSLF–maybe?). My parents, though, have offered to use their home equity line of credit, at a much lower (albeit variable) ~2.5%, and tax-deductible interest (up to a certain point?). Inability to make payments down the line should not be an issue, so they are comfortable with the intrinsic risk. The logistics of money changing hands, between me and my parents, will not be an issue either.
Now, I understand that at this stage I have no ability to foresee my future–what kind of medicine I will practice, where I will work, what my training will be like, what my costs will be…but I am wondering, with all of the complexities of IBR/PSLF at work here, would it be worth it for me to take the lower interest rate? I know that it is important to have flexibility, which the student loans provide, for the training years during which I cannot make very large payments, but if it will save money overall, my parents are willing to help with those payments (and I will pay them back later). Or is it mostly important to keep my repayment options open, and do what everybody else does?
Apologies if my thinking seems naive–24 year old talking here!
It’s a great option. Not sure I’d offer it if I were your parents, but it’s a great deal for you. Obviously significant forgiveness is better than paying debt back at any interest rate, but 2.5% tax deductible sure beats 5.4-8% non-deductible. Keep in mind the variable interest rate risk. While my crystal ball is cloudy, it seems hard to imagine interest rates won’t go higher at some point in the next 10-20 years. Of course, you also have to start making payments on that home equity loan right away, no in-school deferments or lower PAYE payments etc.
I’m about to start orientation for my first year of residency in PM&R and decided to un-holster my firmly planted head from the sand regarding my $310k debt load. Given the high amount and my likely following up with a 2 year fellowship, I’m strongly considering the PAYE-PSLF route. During one of our financial aide presentations pre-graduation this year we were told to participate in IBR/PAYE programs we would have to consolidate all of our direct federal loans, but from what I’ve read here it looks like consolidation is irrelevant on one’s approval for these programs. Obviously, not all of my loans are at the same interest rate, so I was wondering if one could consolidate the higher interest loans through http://www.studentloans.org and keep the rest as is when I apply or would I have to go all in on consolidation or no consolidation at all?
As a side note, my wife will be graduating from medical school next year with close to $400k in debt and will likely be following the same route I choose, so any advice you guys can offer would be splendid. Thanks for the awesome website, by the way! I’ve been pouring over it all day long!
$710K between the two of you, wow! Hope neither of you are planning on being stay-at-home parents or going part-time soon. Managing those loans well will be very important for you guys and PSLF is likely to be a very good option for you. I don’t think you have to consolidate to get forgiveness. But only loans on which you’ve made 120 payments can be forgiven. Remember also that consolidation doesn’t lower your interest rate like refinancing does. It just takes the weighted average of your interest rates and rounds up.
Hi,
I know that only Direct loans are qualified for PLSF program. I have Direct Loans , the avg interest rate is 6.6% with a balance of $250,000 and a federal Perkins loan, $4,200 with interest rate of 5%. Since I should pay as little as possible if I want to go for PLSF, should I consolidate Perkins loans into direct loans so that it will count toward forgiveness? or Should I not consolidate and just pay $4200 Perkins loan separately since it is not a large amount?
Yes, if you’re going to go for PSLF, it would make sense to convert your loans from loans that are not eligible for that into loans that are eligible for that, even if they are small. $4K is $4K.
Hi! I am so happy to have found this blog. I already bought the book and I am finding it very helpful. This month I graduate from medical school. I have $300k on federal and $50k private (from undergrad). I am considering either refinancing them all through DRB or doing IBR/PSLF just for the federal student loans and refinancing only the private. I am doing a 3 year residency and then 2-3 years of fellowship. I think that if I take advantage of the PSLF now, before it is gone, it could work since I am planning on doing 5-6 years of training and then I would just have to work 4 more years in 501(c).
But what do you all think? Would refinancing now be better since hopefully my new interest would be lower? Or IBR/PSLF?
Thank you
6 years of training? I’d try my hardest to get a 501(c)3 job to get PSLF.
One item I’ve yet to see addressed by anyone is what about when loan repayment programs are factored into the mix? For many folks, those who will end up as PCPs in particular, working that government or non-profit job that will ultimately qualify one for PSLF, will also qualify that doc for various loan repayment programs. Looking over my own debt, if I allow interest to accumulate by the astronomically high government-set interest rates I am currently receiving, those loan repayment programs even once maxed out will only be paying off accumulated interest and not really touching any of the principal balance provided I utilize IBR and make minimal payments during residency. On the flip side, if I can refinance now to significantly lower rates to slow the pile up of capitalized interest, my opportunities of getting rid of the loans in < 10 years with loan repayment programs and my own contributions seems much more do-able.
Would love to get your opinion on the matter as to whether or not I ought to retain my eligibility for PSLF by consolidating all of my Stafford loans with the government or go for the private consolidation, thereby forgoing PSLF but assuming other repayment incentives will actually be able to make a substantial dent in total amounts owed sooner rather than later. I am currently an MS-4 about to graduate and enter residency in Family Practice. Total borrowed was $174,000, total owed upon graduation with capitalized interest will be around $195,000. Of that, $8,500 is subsidized Stafford, $20,000 in HRSA Primary Care Loan for which interest is subsidized during residency, and remainder is unsubsidized Stafford.
I think you’re making this more complicated than it needs to be. If you’re going to work at a 501(c)3, go for PSLF. If not, refinance the loans. Most other programs don’t require your loans to be federal loans in order to get the benefits.
I think I have a similar situation as the above poster: new grad, just started residency in FP (3 year residency), loans of 250k after capitalization. I’m a good candidate for PSLF (married with 2 kids), but I want the flexibility of being able to join a for-profit practice, and I also don’t like the emotional burden of carrying those loans for 7 years after residency (I’d rather live like a resident and pay them off in 3). So, in short, I’m hanging on to PSLF just in case for now, but if I end up paying them off myself, I’m costing myself at least around 15k by waiting another 3 years to refinance (because of the higher interest rates), which seems like an expensive way to keep my options open. I know you can’t make the decision for me, but I was curious what your thoughts are. Am I approaching this in the right way?
There is a middle way. You can refinance just as soon as you know your job won’t be at a 501(c)3. Maybe you’ll decide that after your first year.