I'm running two posts this week about student loans, this one today and a guest post tomorrow. Today's post will be about whether or not to refinance as a resident, a very complicated topic. Tomorrow's post will deal with the slightly easier topic of whether or not to go work for a non-profit (assuming that's an option for you) after residency and will demonstrate how to run the numbers.
I am now getting almost daily emails or comments from residents trying to decide if they should refinance their loans as a resident, or stay in the PAYE program throughout residency and then try to get a job with a 501(c)3 and go for PSLF upon graduation. It 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 If you're sure you won't work at a 501(c)3, refinance.
If you absolutely know you won't be working for a 501(c)3, then refinance as soon as you can (assuming DRB or anyone else who gets in on the resident refinance act will refinance you.) Although you may wish to leave any subsidized loans (if you are lucky enough to have any) out of the mix until residency graduation, the lower your rate on the unsubsidized loans the less interest you will pay back. Besides, the $100 DRB payments may be lower than your IBR or PAYE payments. See Principle # 6 for an exception to this rule-i.e. if you have really high debt to income ratio.
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 forgiveness. If you're going to work at a 501(c)3 throughout residency, fellowship, and early attendinghood, enroll in PAYE (IBR if you don't qualify) and get your PSLF. Remember, once you refinance, no more forgiveness. The rare exceptions to this rule would be someone whose residency IBR/PAYE payments are equal to their full payments (small loans or highly paid spouse) or someone who forgot to enroll in IBR/PAYE 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 are not sure, then calculate the cost of your option.
The best way to calculate the cost of your option is to apply with DRB (or whoever else joins the club.) If your average loan rate is 7%, you have $300K in unsubsidized loans, and DRB 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 (actually a little more thanks to compound interest) 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 # 4 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 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 $1780 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 to just $57K (proposed by the Obama administration last year), or whatever, you will still owe a ton of student loans, more than you took out despite paying on them for ten 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.
Social Finance (SoFi)
Pay off your loans so you can buy a boat and spend your time canyoneering. Look closely to see the rappellers.
Principle # 5 Whenever possible, use PAYE instead of IBR.
IBR offers no advantages over PAYE. If you can get PAYE, don't use IBR. PAYE has lower required payments, and thus more tax-free forgiveness if you get PSLF (10 years), and even if you never get PSLF, you get your taxable forgiveness 5 years earlier with PAYE (20 years) than with IBR (25 years.) To be eligible for PAYE, you must have no loans from prior to October 1, 2007, and have at least one loan from later than October 1, 2011. Otherwise, you're stuck with IBR.
Principle # 6 If heavily indebted and unable to work at a 501(c)3, consider IBR/PAYE forgiveness instead of refinancing.
The only real calculation to be made is for a relatively rare situation- this is someone whose debt is large compared to their attending income, but for some reason cannot or will not work at a 501(c)3. Most docs will pay off their loans prior to getting any PAYE or IBR forgiveness at 20 and 25 years respectively, but not if the debt is large compared to the income. If you are in this situation, you have to run the numbers. Consider this internist with an income (AGI) of $180K, debt of $400K at 6.8% that could (theoretically of course, since he may be turned down) refinance at DRB for 4% on a 10 year (after residency) fixed. Should he refinance or go for PAYE or IBR forgiveness? Let's assume a resident income of $50K and a family of four with no other income. Let me show you how to do this.
- Calculate your PAYE or IBR payments as a resident.
- Calculate your PAYE or IBR payments as an attending.
- Will you get forgiveness or pay the loans off? If you will get forgiveness, how much? If you will pay the loans off, when and after paying how much in interest?
- Calculate your total payments paid and total time to pay off if you refinance. Also ensure the payments are doable.
Okay, so step 1 is done by using handy dandy calculator such as this one for PAYE and this one for IBR. (You don't have to do both, just the best one you qualify for.) The PAYE calculator says $113 a month, or $1,356 per year. The IBR calculator says $170 a month. (Keep in mind if you are married and your spouse has income that your financial situation may be better if you file Married Filing Separately, even if it costs you more in tax.)
Step 2 is done the same way, just change the income and the loan amount. The income is easy. For the loan amount, you use the original $400K if you're in PAYE, but must use a Future Value calculation in a spreadsheet like Excel if you're in IBR.
=FV(6.8%,3,170*12,-400000) = $481K.
Now, under PAYE, your payments are $1197, or $14,364 per year. Since the interest on your loans is more than that (almost twice that), you should qualify for forgiveness after 17 years of attendinghood. The total payments until that time can be easily calculated at $1197*12*17+113*36= $248K.
Under IBR, your payments are $1795 a month, or $21,540 per year. Again, that's less than the interest on the loans, so you will get forgiveness after 22 years of attending hood and will have paid $1795*12*22+170*36= $480K.
Now, if you had refinanced at the start with residency with DRB at 4%, and made $100 payments during residency, and then payments amortized over 10 years afterward, you would finish residency owing:
=FV(4%,3,100*12,-400000) = $446K
Payments on that are $55K year, or $4584 per month. After 10 years, you would have paid $554K, more than with PAYE or IBR.
When Refinancing Wins
But what if we change nothing except the loan amount? What if the doc owed $200K instead of $400K? Under refinancing, the doc would have only paid $277K total. Under IBR, he would have paid for 17.8 years:
=NPER(6.8%,1795*12,-(FV(4%,3,170*12,-200000)),0) = 17.8
17.8 * 1795 * 12 = $383,412, over $100K more than he would have paid if he had refinanced (plus he's in debt for 7.8 years longer)
PAYE seems to still comes out a winner. The lower payments don't quite cover the interest, so there is still gobs of money to be forgiven after 17 years of attending payments, which total the exact same $248K. While this is $29K less money than with refinancing, you are also in debt for 7 years longer. To make matters worse, all that forgiveness is taxable. So add on $50-80K in taxes, and refinancing becomes the right move.
The smaller the debt, the better refinancing will work when compared to PAYE/IBR. The truth of the matter, however, is this: If you qualify to refinance your loans, that will probably work out better for you than going for IBR/PAYE forgiveness. If DRB won't refinance you, you should take that as a sign that you're better off making payments for a long time and getting IBR/PAYE forgiveness, even taxable forgiveness. Better yet, bend over backwards to find a 501(c)3 job and get tax-free PSLF a decade sooner.
What do you think? Have you been weighing refinancing your student loans as a resident versus staying in the government programs? What have you decided and why? Comment below!
In regards to PSLF, my understanding is that although the hospital might be a 501c non profit, the physician group who ultimately provides us the paycheck is technically a For-profit entity (again this is post-residency). As such, most attendings are not eligible for the PSLF. Has anyone heard about this? If so, am I understanding this correctly?
This is true. You must actually be an employee of the 501(c)3, not just work inside the walls of a 501(c)3. In my specialty and location, the only docs who qualify are the university docs despite half the emergency docs in town working at a 501(c)3.
You are right, it depends on who the doctor actually works for. If they pull their paycheck from a private (for-profit) group then that would not qualify. I work with many docs who are working at a non-profit post residency/fellowship. The VA and other government agencies are also “qualified” employment for PSLF.
Thanks for pointing this out. Depending on the specialty and a particular locale, working directly for a 501(c)(3) may severely limit job opportunities or it might not even be a possibility.
For example the hospitals in my area are all 501(c)(3)s but they subcontract most/virtually all of their staff. Only eligible options if you wanted to stay in town would be to extend residency with multiple fellowships, apply for a teaching position or work for the VA.
I always felt the easiest thing to do for someone not sure about going into 501c3 work, concerned about PSLF, etc is just to live 2-3 after resident/fellowship with the same financial frugality as a resident and simply pay off all the loans.
Yes, but might as well save $10-30K in interest while doing it.
Exactly. Refi as a resident and you save a ton of interest and a much smaller amount of principal to pay when you finally start as an attending.
I was under the impression that the PAYE program was going to be expanded sometime this year to include those with loans prior to 2007. I have also heard that there will be some contingencies with the new program such as couples who file married separately will still have to report combined income and that there is a proposed cap on forgiveness of ~$50k. Does anyone have any definitive information as to how this program will be changing?
The proposed cap was part of the Obama budget proposal last year. It was not enacted by Congress. I don’t know about the other two provisions, but they seem much more reasonable than the $57K cap proposed.
I believe PAYE eligibility has indeed changed as of this year. Two sources:
https://www.insidehighered.com/news/2015/05/01/federal-rule-making-panel-oks-plan-expand-income-based-repayment-program
https://www.whitehouse.gov/the-press-office/2014/06/09/presidential-memorandum-federal-student-loan-repayments
My anecdotal datum is that studentloans.gov and my loan servicer let me pick PAYE this year whereas I only had (15%) IBR in past years.
In general, I favor mathematically advantageous financial plans over emotionally driven decisions. For example I would much rather carry a 2.5% mortgage and invest the rest over paying down the mortgage because you are almost certain to come out ahead, especially if the rate is fixed. 2.5% is a pretty low rate to beat!
However this business of IBR/PAYE where loans are supposedly going to be magically forgiven after so many years may be mathematically sound but I would never ever do it! There are several reasons why:
1. The continued existence of this program is dependent on the whims of Congress. What is more, if I was a congressperson trying to reduce the deficit, this is the first program I would end! There is no rationale reason to give such enormous subsidies to people with such high incomes [most importantly people with high incomes who are not contributing significantly to their campaigns :)]. If the government is going to given billions of dollars away to people, it is not money well spent.
2. You are accumulating more interest today. The difference between 6.8% and 3-4% over the life of a residency is enormous, especially since most government loans compound annually and DRB does not compound until you start payoff.
3. With refinance you are in control and you can pay it off as you see fit. In PAYE/IRB, you have to play by the rules of the program.
4. With refinance, there is certainty, especially with a fixed rate.
5. With refinance, you do not limit your job search and therefore you can maximize your salary as you see fit. Being locked-in to a job is not a pleasant emotional experience. Residency is long enough! Also, if your future employer is a aware of your need to work for a non-profit it is a bargaining chip not on your side.
I don’t work for DRB or anything like that but I do think that this program is awesome and that anybody you is eligible should do it. There are very few down sides that are certain. There are theoretical down sides but time will only tell how IBR/PAYE pan out in the future.
I totally agree
PSLF to me sounds like an unsustainable, easily capped, unrealistic program given 40% of our peers are hoping to get forgiveness.
The issue is that the percentage of eligible jobs is much less than 40%.
I agree that this program seems like it is heading for cuts in the future. But congress spends lots of money all over the place, so just because it would be expensive doesn’t mean it won’t stay in place! Time will tell. And by time, I mean 2017 when the first people start to come up for forgiveness.
For me the math is easy since my Federal loans are at 4.25% fixed. Much tougher for the later 6.8/7.9% classes.
Couldn’t a mathematically advantageous financial plan include keeping the PSLF option open until you know for sure that you will not pursue it? Everything I’ve seen so for regarding any caps is that old borrowers would be grandfathered in. Someone could make the lower PAYE/IBR payments and create a side account for what their “refinanced” payment would be. There are people who could be looking at over $300,000 in PSLF, not sure if locking in a loan at 4% is worth giving up that option if it is a true possibility.
Perhaps in theory but not in reality.
The lower payments do not lower the accrued interest or the interest rate itself. When you are making payments that are less than the interest, the balance on the loan actually increases every month, and very significantly at the federal 6.8% rate. I.e., you are at a further financial disadvantage each day that interest accrues under PSLF.
If you make it to forgiveness then it’s great, but if you end up not pursuing it, then you will have spent tens of thousands of dollars more than you needed to keeping the option open.
I get that there is some skepticism on this program but I would plan on what is in play today. Obviously if you are not in a specialty that is in high demand at government or non-profits then PSLF isn’t for you and refinancing is better. Interest will accrue while in residency or fellowship whether or not you do PSLF or refinance, it will just accrue more at the federal rate.
I think the refinancing options are great and will benefit most docs but to simply disregard the PSLF option is not prudent; especially if you have a desire to do a fellowship.
Joshua,
As I understand it, the concept of being “grandfathered in” is wishful thinking. There is no contract that says that the government has to follow through on any forgiveness for anyone. Admittedly, if you were in the first 1-2 years of this (I think 2007 being your first payment), you will probably be safe because congress moves somewhat slowly but I would put the chances of someone graduating from medical school in the last 1-2 years having a substantial portion of their loans forgiven is approximately ZERO. Some people may disagree but I don’t foresee this lasting another 10 years! Remember this a subsidy to people who make more money then 90% of Americans. No matter your political bent, this is about as unpopular use of public funds as anyone could imagine.
To your point, there is risk associated with waiting too. In the example of $300,000 loan, 6.8 versus 3.8% cost you $9000 per year compounded annually. There is also interest rate risk because rates right now are quite low by historical standards so if you wait 4 years it is possible your interest rate could be 1-2% higher and on a $300000 loan, that is a lot of money. Just my two cents though.
First off, there is no need to be grandfathered in today as this program is in existence. I don’t think being grandfathered in is wishful thinking at all. There are many tax items and laws that have people “grandfathered” in. Also, 6.8% to 8% interest is a high amount of interest (profit) on trillions in debt. This program may end up being paid for by the insanely high interest rates on student loans for those that actually follow the programs correctly.
I think it is fear-mongering to say that near 0% of recent grads will have a chance to have any loans forgiven, even if it is capped at some point. Not all people with high student loan balances are MDs who expect to earn $400k per year. There are many people who have phd’s and law degrees who work for non-profits and don’t expect to make a ton of money.
We must have different ideas on what gradfathering-in is. What I am saying is that there is no obligation for the government to forgive loans because someone has already started paying IBR/PAYE payments. Tomorrow they could say that the max forgiveness will be $1 to $100K (or whatever) and there is no reason that would not apply to everyone including people who have paid in for the last 8 years…
I agree with you that the 6.8-8.5% interest is very high and there is a reasonable gain on the government’s part but it takes a lot of money at 6.8% interest to make up for a $300k forgiveness taken off the books. If there are 10s of thousands of medical graduate every year taking $200-500k off the governments books, it is 100% unsustainable politically and from a budget perspective. That is why I give the chances of this being available (in its current form) a 0% chance for those starting IBR/PAYE now (forgiveness in 10 years). As I said, people will disagree with me, but I would bet a lot of money on my statements.
The selling point for this program was for social workers making small salaries and lawyers that take non-corporate, low-paying jobs, in which it is basically impossible to pay off student loans. It was an unintended consequence that some doctors are technically eligible because a lot of hospitals (not physician groups) are technically non-profits, despite the hospitals paying approximately market salaries to doctors.
I agree with everything there except the politically unsustainable bit. It’s not tens of thousands of graduates each year. Almost surely it’ll be less than 5K. There are only 30,000 medical school positions each year, and that’s a dramatic increase from recent years- residency slots haven’t caught up to that yet.
Among the tens or hundreds of thousands of people actually getting forgiveness, only a small number will be doctors.
I also imagine that once 501(c)3 jobs figure out why they have lots of applicants, a pay differential between 501(c)3 jobs and non-501(c)3 jobs will appear.
I think the chances are far higher than zero, even if not 100%.
I am curious how you can be so confident in the persistence of this program WCI…
Even if there is only 5000 docs who get loans forgiven at say a conservative $250k per loan that is still $1.25 billion per year in government subsidies to an unequivocally affluent population.
Even if a pay differential emerges over time, the government subsidizing non-profit hospitals is also not particularly compelling considering that most of these hospital have huge revenue surpluses and this is relatively well-reported in the popular press (not that most people pay attention).
I just don’t see how this program can last, especially considering that it has yet to even reach maturity (0 loans forgiven as of this writing) and is politically untested.
I can see it persisting with maximum forgiveness at a reasonable level (say $50-75K total) but if that becomes the case refinancing wins hands down. You have already written about the moral hazard of PSLF. Having a maximum forgiveness sounds like the antidote.
I would actually advocate for this because there are so many people that just think their loans are going to be magically whisked by the unseen hand of the government and have no alternate plan [lets face it, no one is funding a side account :)]. Ending/modifying it NOW would be the best possible move so that people can make educated decisions, not decisions based on fantasy land.
Your arguments make sense, and I think the program will go away or be limited eventually. But who knows when? And I agree with Joshua that those who I’m currently writing for will almost surely be grandfathered in.
I understand where you are coming from and sure, there may be a cap someday (maybe sooner rather than later) but I am not going plan based on something that may happen in the future for those who are in the program. I have told clients that the biggest risk to them is that they may not find PSLF employment and that the program may change in the future. However, there are no proposals as of now that are capping forgiveness for those who are in the payment plan. I don’t mean to be condescending here at all but fantasy land (as of today) is PSLF being scrapped or capped for those already in the program. I am paying attention to developments regarding proposed changes to the laws regarding student loan forgiveness.
I agree. The side account isn’t equivalent in that case. Keeping that option open has a real cost (additional interest), even with a side account.
PAYE will be expanded by Dec 2015 to include borrowers prior to 2007.
https://www.whitehouse.gov/the-press-office/2014/06/09/factsheet-making-student-loans-more-affordable
Good article/analysis. Only flaw IMO is that it assumes the spouse doesn’t work, and the 250k AGI may be a little low for an attending in many fields, particularly as a salary over 7 or 17 years. But, honestly, a male doctor with two kids and a nonworking spouse describes almost all of the other residents in my wife’s class.
PSLF, PAYE, IBR only seem to be useful if you are graduating with a true mountain of debt (400k, 500k) and you know you’re going to be a pediatrician or something where you 1) know you won’t make too much money and 2) know you will likely find work at some children’s hospital, etc. so the 501(c)(3) isn’t an issue.
If you have a small or reasonable amount of debt, making any amount of attending salary means your income-adjusted payments are not an advantage, even if you get to tap out at 10, 20, 25 years. And that’s even if you don’t mind a) locking yourself into a high interest rate b) limiting yourself to only working directly for a 501(c)(3) entity, c) filing married filing separate tax returns and paying more tax than you have to for years, d) taking the risk that you might possibly miss one or more criteria for eligibility over the years. And all of that assumes you are completely comfortable counting on the government not to pull the rug out from under you at any point along the timeline.
I think you’re failing to see that the difference between real payments and IBR/PAYE payments during training is what gets forgiven, even if you have a very high attending salary.
Craig,
Even those with high incomes and low debt would have forgiveness if they start paying in residency and want to be in the non-profit sector. The PAYE/IBR payments are capped at the standard 10 year re-payment when entering re-payment. So someone with only $100,000 in loans at 7% would have a maximum payment of roughly $1160 per month or $14,000 per year, even if they make $400,000 when training is finished. So if this person paid $3,000 per year for 6 years of residency and fellowship, and add 14k*4+3k*6 = $74,000 of total repayment.
Thanks Joshua. That makes sense then!
I still don’t understand how not refinancing subsidized loans help. If bulk of the loans are unsub and refinanced then IBR/PAYE payment will automatically go up to cover all of the interest from the subsidized loans, since refinanced loans will not be recognized as financial burden by the government’s calculation.
Anyone know whether employment at the VA qualifies for PSLF?
The VA is a government agency and government agencies are “qualified” employment for PSLF.
Yes.
There’s a big “gotcha” with the principle #6 math: The forgiveness for 20/25 PAYE/IBR is a taxable benefit. The difference between what you would have owed and what you paid is taxable income that year. Not sure exactly how that’s calculated, but that’s laid out.
Public service loan forgiveness, on the other hand, is explicitly not taxable by law.
Wife is entering 4th year of medical school considering MED/PEDS (possibly GI). She should end with around 175k of debt for her. I have 80k which I have refinanced with SOFI. I make 120k annually as a pharmacist. Even if we got the PAYE route for her, I would assume we will have more payment then the average if you would file taxes seperately. It’s never really complete forgiveness since she would always have a payment right? So if she went from 50k to 60k during residency/fellowship. Then the last 3 years (year 7 to 10) would be expensive if she would make 400k right as a GI? We have to make 10 years to complete the forgiveness.
we have one kid and hope to have a 2nd soon.
South Dakota,
I am in a similar situation to the one you will be in. I just finished my residency and will be starting my fellowship in July but my wife is a practicing dentist (similar income range to yours). This past year, I filed Married filing separately, and it lowered my yearly IBR student loan payments by over 8k for the year at a tax increase of about 2k. Easy choice. There is minimal info out there on Married filing separately, because so few people do it. I think about 4% of US citizens file MFS. Playing around with Turbo Tax will let you know the tax hit to filing MFS–just compare that cost to your wife’s estimated savings on IBR/PAYE payments under MFS, and you will know if it is a good idea or not.
My situation is a tough one. I have over 200K in debt, and will have about 5 years into IBR when I start practice next year. PSLF would be great, and I would easily get over 100k forgiven. However, I am looking mainly at private practice jobs. If I sign with a private practice, I will immediately switch gears into the Refinance route. I think with my wife’s income and mine together, we could knock out our loans pretty quickly.
Ben- Was it easy to make the decision to file seperately? To me it’s the tax deductions I am worried about from jointly vs seperately. It sounds like for you it was a 2k cost to file seperately which ameks sense. Have you chosen a specialty? I assume your wife is taking a big hit up the tax bracket but you dont’ have to pay as much now. I was wondering how it would work filing jointly but still doing PAYE?
Run the numbers. It wouldn’t be surprised me if the amount of money eligible for PSLF were close to her original $175K.
Be sure that if you are interested in a program like the NHSC Loan Repayment Program that you don’t consolidate any other debts (e.g., car loan or credit cards) into a student loan consolidation, or you are ineligible for the NHSC. It is possible to be eligible for several programs at once (e.g., work at a NHSC site that is also a 501c3.
Has anyone refinanced their students loans with CommonBond? If so, can you describe your experience with the process and whether or not it was a good choice for your. Thanks.
I have several readers refinance with Common Bond every month. Hopefully one will chime in.
What do you do if you were contributing to Roth IRA and then want to file married filling separate?
Backdoor Roth IRA?
Yes, backdoor Roth if you file separately.
Very timely post and very helpful for me. I’m in the process of refinancing right now with DRB and just got my conditional approval letter a couple of days ago. DRB is offering me a fixed 5-year rate of 4.5% (4.25% if I open checking count and do EFT each month – no brainer). I am dedicated to living like a resident for 2 years out of residency to get loans paid off, so for me this question comes down to what things will look like in June 2021 (graduating from 6 year program in June 2019) versus going for PSLF to be forgiven in June 2023.
-Current Balance: 232K
-Current interest rate – IBR plan: 6.25%
-DRB offered rate – 4.25%
-Make $400 monthly payment during residency (more than my current IBR payment and more than the required DRB $100 payment during residency, but something that I can afford)
-After graduation, will make required payment to have these paid off in full within two years; Also calculated 5 year payoff total for entire life of DRB loan
-Assume 500k AGI including wife’s income (she’s also MD who IS going to PSLF)
POTENTIAL TOTALS PAID:
1. PSLF (loans forgiven 4 years out from residency – 2023): Total repaid: $145,296 plus $74035 in taxes (assuming 35% marginal rate) on the forgiven amount = $219,331
2. Current 6.25% to be paid off 5 years after graduation (2024): $347, 352 (requires $5469 monthly payment as attending for 5 years)
3. DRB 4.25% to be paid off 5 years out (2024): $306,000 (requires $4780 monthly payment as attending for 5 years)
4. Current 6.25% to be paid off 2 years out (2021): $319, 791 (requires $12524 monthly payment as attending for 2 years)
5. DRB 4.25% to be paid off 2 years out (2021): $289,044 (requires $11243 monthly payment as attending for 2 years)
Take home message: 2% makes a big difference, even over only 6 years. Now, clearly PSLF is the best option by the numbers, but my plan at this point is to go into private practice. For me, the potential difference in salary (much higher in my specialty starting out compared to academics or VA job) is worth forgoing PSLF. Everyone’s situation is going to be different, but just wanted to share my thought process if it helps others.
You should negotiate with DRB. I just got a 5 year fixed term loan at 3.5% (includes 0.25% EFT discount). They quoted a somewhat higher rate initially but I negotiated down to their advertised rate (given that I have excellent credit, etc).
Actually just finished up an email to them doing just that! Your success gives me hope.
I was also just quoted and signed papers (though not finalized yet) for 4.5% with DRB for 5 year repayment once my residency ends. Were you able to negotiate while still in residency or are you making the regular payments now As an attending? I was honestly so thrilled with the drb deal that negotiating to get it lower hadn’t crossed my mind, though I was disappointed I didn’t get a lower rate. I’m a PGY 2 refinancing about $160,000 And my credit score is about 750.
Edit to the above: no tax paid on PSLF. That total paid would only be $145,296, nearly $150k savings versus the next best option (paying off loan with refinanced rate in 2 years).
DRB just makes so much more sense. A guaranteed cost of your borrowing of between $289-306K (maybe better if you negotiate the rate). Versus a maybe $219K for which your balance will grow to an enormous amount such that if the PSLF does not work out (you choose a different job or the terms of forgiveness change) you will pay at least $347K. So essentially you are gambling either way you choose with around $100-150K. In my opinion, the smart choice is to go with the option you will have the most control over (fixed lower rate with no forgiveness). You are guaranteed to come out ahead of the worst case scenario (PSLF is scrapped or reduced to limited amount of forgiveness) but will do slightly worse than is the loans are fully forgiven. There is also the added potential advantage of having the loans paid off earlier if you are aggressive. You also may be able to refinance your DRB to a lower rate when you get your contract.
Quick question, how did you factor in compounding in your calculations because I believe there is a significant difference between how federal loans and DRB compound you principle.
I wouldn’t call getting $200-300K of loans forgiven only “slightly” better. Many docs who get PSLF will have an amount similar to the original loan amount forgiven.
How does DRB compound their loans? Did you say earlier that the loans don’t grow while in residency? That would be phenomenal.
It’s not that quite good of a deal. Loans still accrue interest in residency with DRB, they simply don’t capitalize until 6 months post residency graduation. This just means you’re accruing interest on the original refinanced principal at the agreed upon rate.
That is what I thought. That is a very big deal in the total cost of the loan compared to federal loans that compound every July. So we are comparing 6.8% compounding yearly for 6 years (less payments) to 4.3% that will not compound for 6 years. Huge, huge, huge difference!
BCB,
Both federal loans and DRB accrue interest daily and neither capitalize interest until after training. FedLoans capitalize when finishing deferment, consolidation, refinancing, or changing payment plans. In essence, a refinance of Federal Loans with any company will trigger a loan capitalization. It is possible to avoid capitalization if you start in PAYE/IBR and stay in it until your loans are paid off. Remember, you can always pay more on your student loans than your PAYE/IBR payment. I would say that 5 of my last 6 strategies for paying off student loans included refinancing to a lower rate because the client wasn’t committed to PSLF.
Joshua,
Are you sure about that? My federal loans capitalized every year. If you are interested, I can send you a statement showing you that all of my loans are set to capitalize 07/01/2015. I am in the process of refinancing so it doesn’t so much matter for me. But the point is that all federal loans as far as I know capitalize every year, not at the end of training.
Yes when you refinance you are capitalizing once and then not until you finish training.
BCB, yes I am sure about this. Check page 4 of 25 on this link: https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment-q-and-a.pdf
If you are in PAYE or IBR then the loans don’t capitalize every year, only when you refinance, consolidate, or change your repayment plan. Were you actually enrolled and making payments in PAYE? Also, there is a difference between loan interest accrual and loan interest capitalization. I believe DRB and any other bank would surely have the same type of loan interest accrual during training. I would expect that the only benefit of refinancing out of federal loans would be to get a better interest rate, i.e. their other terms will either be equal or less than federal loans.
Very helpful, thanks for sharing.
Keep in mind that no one has actually gotten any loans forgiven using this program, as it is yet to take effect. Additionally, this program was not designed with high-income earners (physicians) in mind. I foresee significant changes to the program to eliminate the opportunity for doctors to have any debt forgiven. What do you think the public reaction will be when the headline reads “Taxpayers pay off Doctors’ loans” with a picture of WCI driving his new boat around? If any physician loans are forgiven with this program, the public backlash will be outrageous and changes will ensure.
Realize that the loan is not just “forgiven.” Taxpayer money (that could be allocated to people who actually need it) is being used to pay off this loan. There is no free lunch.
That’s the big risk, and I know that article will show up in the NYT within the next 3 years. How Congress reacts to it, however, is completely unknown.
I agree, there may be some public outcry just like every year Exxon and others pay almost 0 tax on billions of revenue, but the hits just keep on coming. Fox news just had a panel a couple of weeks ago about student loans, but unfortunately, it was a complete hit piece and almost no truth to what they were saying, it was like no research went into the “reporting” on this. I understand your viewpoint though.
The BIG, BIG difference between Exon and graduation docs is that Exon pays millions of dollars in campaign contributions and lobbying costs to keep their unjustified subsidies.
There is no such money in defending PSLF. It is as good as dead in the water…
UroloJay,
PSLF forgives balance tax free. So its $145k paid for that option.
Thanks for the clarification – was just going off of memory from a conversation I had way back when with my med school financial aid department. Must be mistaken on that point. I suppose that makes PSLF more attractive for some, but for me I would still move toward refinancing with DRB and repayment 2 years after residency. The difference in lifestyle and career isn’t worth it to me.
I don’t have an opinion on whether or not this will be available in the future, and haven’t paid close attention to the details on making this decision as it doesn’t apply to me as I have been an attending for 10 years.
However, I would echo the sentiment mentioned above- be careful that you don’t end up in a position that you don’t feel you can leave. “Golden Handcuffs” can be a burden. Flexibility may not be directly measurable in dollars, but it can be vitally important to quality of life.
I’d also echo that although medicine is moving to a more employed model, hopefully many of us will still be independent and not directly employed by the hospital we work with.
There is a lot to think about with these decisions
This post sure is timely! I just posted in Bogleheads about this:
If I refinance with DRB now as a resident, would I have the option of refinancing later with either DRB or another lender like SoFi/Commonbond?
I ask because I have a prelim offer from DRB right now, but the rate they offered (starting 4.05% variable) isn’t as good as I had hoped – I mean they advertise 1.9 – 3.98% for residents. If I refinance later (as an attending) with a higher income-to-debt ratio, might I get a better rate? Any penalties for doing this other than extra credit inquiries?
Yes. Doesn’t mean it will be better or those companies won’t go out of business etc. But there are no prepayment penalties preventing you from refinancing again.
Your rate may be better due to being an attending (thus a better DTI) and if rates fall.
The main penalty is rates go up.
Via email:
Thank you for your excellent resources. I love the site and the book
and have recommeneded to all of my fellow residents. I just wanted to
point out that I have not seen the interest capitalization cap for
PAYE pointed out. “the total amount of interest that capitalizes
while you are repaying your loans under the Pay As You Earn plan is
limited to 10% of your original principal balance when you begin
paying under Pay As You Earn.”
And my response:
That’s a nice benefit. I wasn’t aware of that and it will certainly come into play for many docs.
At 6% a year, most docs should hit that before they are halfway through their residency.
I was not aware of this, that’s great! So if one’s loans is 300k, the capitalization (on a yearly basis) is limited to $30,000?
No, I think what he’s saying (and I haven’t looked it up to confirm yet) is that the total capitalization is 10% for the entire time you’re in the program. I suspect you still have to pay the interest eventually (unless forgiven,) but that it isn’t capitalized. A relatively minor benefit as things go, but better than a kick in the teeth.
That is not part of non-PAYE repayment plans as far as I know because my capitalization has been way more than 10% since I graduated.
Right, I think it’s PAYE only, not IBR.
I have loans from two lenders. I did not combine them because I was an idiot. I’m done with residency and in my first year as an attending at a 501c3 job (I work for the University).
One of the loans is about 80k and qualifies for PSLF, and the other is about 100k and does not qualify for PSLF. Both loans are at 6.8% (a tiny but less if I autopay)
Can I just refinance the 100k with DRB type places? And then leave the 80k with current lender to maintain the PSLF eligibility?
The job I’m in is in a major city, I’m part of the residency and medical school teaching faculty and I hope to keep it at least for another 6 years (residency was 3, and this year as an attending was year 4 of my 10 years in a 501c3)
Finally, currently as they’re both considered student loans it’s pretty easy to get mortgage loans but if I refinance with DRB would this new refinanced version hurt me when trying to buy a house despite the fact that I lowered my rate?
I appreciate any help and reply.
Is there a way to combine the loan so they’re both eligible for PSLF? I’d check that first if you’re interested in PSLF. But no reason you can’t just refinance some of your loans with DRB.
Yes, loans will count against you when getting a mortgage. That doesn’t mean you won’t get one or will have a higher rate though. Limitations are usually pretty reasonable.
Hi, thank you for the reply.
Yes I could combine the two loans to make them both PSLF eligible, I hadn’t done it because I was wary of re-starting the clock and potentially falling into the newer proposed rules of only subsidizing the 53k (or whatever) as opposed to potentially the entire loan. But maybe I should just combine them? The thing is I would still be paying the higher interest rate and assuming PSLF will be there, I was thinking perhaps I should play both sides, leave one in PSLF and pay off the other using DRB
Thanks!
I would not combine the two loans; this would reset your eligible payments on the loan that is currently PSLF eligible. Are you positive that your $100k loan is not eligible for PSLF? If your $100k loan is not eligible for PSLF then you could do a separate consolidation into an eligible consolidation loan and start accruing credit towards forgiveness, but it sounds like it would not really help in the long run. If you refinance that $100k then you all of your IBR/PAYE payments will then be going towards your smaller loan balance and you would probably end up paying it off within a few years anyway. You really need to run the numbers though, let me know if you need help with that.
The only reason that I could see a refinance of your student loans as hurting you for a mortgage would be that your credit score may go down due to too many credit checks within a certain period of time. It doesn’t matter who your loan servicer is, the mortgage company will want to know how much your payment is.
I had it reversed, the 112k (it’s actually 112k) is PSLF eligible; I’m paying more than the IBR but not full 10-yr payment, I’m paying just enough so that the 112k doesn’t grow just in case the program falls through.
The 80k (actually 86k) is the one that isn’t PSLF eligible.
So I will definitely NOT combine the two, and that makes sense to me, I wasn’t planning to originally. It seems to me that I should hope the 112k is forgiven in another 6 years, I should aim to pay off the 86k loan instead, and possibly have that go through a different servicer that can give me a better rate than the 6.8% currently.
Thank you, I did not factor in the credit checks. I would be looking for a mortgage in about 3-5 months so either I should do this now or wait until after I secure a mortgage loan.
Again, if you take the 80k loan out of the IBR equation by refinancing with another lender, then all of your IBR payment will go towards the $112k loan. There probably would be a lot of forgiveness depending on how much your IBR payment is. Also, are you absolutely sure your 80k loan is not eligible?
There probably would not be a lot of forgiveness…
You definitely don’t want to combine if it restarts the clock. Unfortunate. Splitting the difference is reasonable.
Thank you for your replies Joshua —
Yes I’m sure about the 86k loan not qualifying, but I’ve emailed the lender to verify this once more.
Yes all my IBR would be going toward the 112K loan, so you’re right, there wouldn’t be much forgiveness then. Maybe I should keep both where they are and just pay off the 86k such that it is paid off in about 7-8 years so that I can get the most out of the loan as it relates to the 112k loan. (The 86k is with Navient, the 112k with Great Lakes).
Hard to get excited about being in debt for 8 years. I’d almost rather live a little cheaper and pay them both off just to be done with it sooner! But run the numbers both ways and see how you feel about it.
This may have been mentioned, but when is the first PSLF class, AKA the guinea pigs, due to receive their forgiveness?
2017
I hear you; I am using almost 1/4 of my cash flow for things like Roth IRA and College Savings for my little on. So I guess I’m trying to simultaneously pay off debt and save for the future.
This might be off topic, but I am an attending with about $300,000 debt including that of my wife. We are currently paying our monthly payments with most of if set to be paid off over 10 years. Looking at the interest rates I got from DRB, I could afford the payment on a 5 year variable loan if I refinance. My question is this: What if something happens to my salary and I can no longer afford the payment? With the federal loans, you could always default to economic hardship status and drop the payment amounts. But what happens with the loans from DRB?
While they’ll try to work with you, the protection is far less than with the government loans. One more good reason to pay them off ASAP after refinancing.