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[Updated Editor's Note: Welcome WSJ readers! I see that Josh Mitchell's recent article, US Student-Loan Forgiveness Program Proves Costly, links to this site claiming that some call the PSLF a “Doctor's Loophole.” Well, that some includes this guest poster, but not me. I'm getting lots of flack from readers about it, so much so that I may edit the entire article enough to remove the word “loophole” from it entirely.
To be certain, I don't view the PSLF program as a “doctor's loophole.” I think anyone who meets the requirements of the program ought to qualify for it, whether they are social workers or doctors. And if Congress feels a need to change the program, they ought to grandfather anyone who has taken out the loans already assuming this program would be in place. Most doctors make less in academic positions, which is the vast majority of those who will be getting forgiveness through the PSLF program. I suspect it will only be a matter of time before non-profit hospitals looking to hire doctors will drop starting salaries for new grads because they know about PSLF. By the way, it is far better for me financially for PSLF to go away. Not only will my taxes be lower, but more of my readers will refinance their loans, a significant source of revenue for this site. But I've got thousands of readers who have been counting on PSLF for as much as 8 years now, and I owe this to them as their advocate. Changing the deal now without grandfathering them in would be completely unfair.]
[Original Editor's Note: This is a guest post from Jan Miller, a student loan consultant and an advertiser on this website. I get at least 2 or 3 emails a week from readers asking me to look into my cloudy crystal ball and tell them whether or not PSLF will be a good idea for them and whether or not it will change before they can take advantage of it. This post helps answer that question. Enjoy!]
As a student loan consultant, I work with borrowers of various different career paths. Some are architects, some are baristas and some are even actors living in Hollywood. One of the biggest groups of borrowers I help are physicians. Because of their high debt amounts, and their participation in Internship and Residency, doctors have some particularly special concerns when it comes to managing their student debt.
One of the most recent concerns that doctors are facing is the effect that Obama’s legislation will have on the so-called “Doctors’ Loophole.” But what exactly is it, and how does it affect a physician?
What is “The Doctors’ Loophole?”
The Doctors’ Loophole refers to a special loophole that exists in the Income Driven Repayment plans, and Forgiveness plans, that the feds perhaps never realized would benefit physicians so significantly.
Back in 2007, when the income driven payment and forgiveness plans were created, they were primarily designed to help those who had low incomes in relation to their total federal student loan debt. Income Based Repayment (IBR) and Pay As You Earn (PAYE) payments will always max out at the standard 10 year payment, no matter how much money the borrower makes. So regardless of how much money a doctor ends up making, they will never have to pay more than what the standard 10-year amount would have required.
As a result, if a borrower’s income is low for a few years of residency (and it usually is), her or his required monthly payment will be nice and low to match it. But if they have a large surge in income once they establish their practice (and doctors usually do), then their required payment will never be higher than the standard required amount.
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Interesting loophole indeed. In addition to creating some very favorable conditions for monthly payments, this loophole can also result in large amounts of debt (i.e. hundreds of thousands of dollars) being forgiven for doctors – who may be making hundreds of thousands of dollars a year by the time the loan is forgiven! This unexpected benefit has been a happy boon for many physicians and other healthcare professionals– but there are many people who aren’t too thrilled about it.
[Editor's Note: I'd prefer the term “may be” to “has been” since no doctor has yet completed 120 qualified monthly payments since 120 months haven't passed since 2007.]
My Opinion + Recent Legislation
Personally, I have no problem with this beneficent loophole, since it is going to a group of professionals who a) already pay so much money for their education and b) are providing a tremendous public service. However, such a large forgiveness benefit for high income earners has received a lot of criticism as of late, to the degree that it’s likely to be closed when new legislation is passed in some way or another.
Recently, Obama signed an executive action that will allow borrowers in the 15% Income Based Repayment program to take advantage of the 10% Pay As You Earn program, come December 2015. His new budget proposal also directly addresses student loans, so we can expect lots of changes to happen.
Because of all these executive and potential legislative changes, I’ve been receiving questions from my clients, especially those who are healthcare professionals. They’re asking me questions like:
- Is the Public Service Forgiveness program too good to be true?
- Can I rely on it?
- Will it be taken away from me?
And so on.
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Interestingly, many doctors have made educational, career, and specific job choices based on their loan forgiveness potential. So, if new legislation breaks the promise of forgiveness, it is going to cause a substantial problem for a large number of people who were counting on this benefit. Might the feds back out on their promise of student loan forgiveness, once they realize that such a controversial loophole exists? Hopefully, they will honor their word and follow their own rules, as they usually do when it comes to federal student loans.
Realistically Optimistic Projections
Although I cannot predict what Congress will do, or what legislation will be passed, I am hopeful that any new changes that limit healthcare professionals to how much they can have forgiven will only apply to “new borrowers” (those who took out loans after the new legislation becomes active). After all, this would fall in line with the way they have always done it.
When the regulations were changed in 1987, those who took out loans before that time period were still subject to the same rules prior to the changes. The same thing happened when they made additional changes in 1993. Additionally, this type of grandfathering can also be seen with the Pay As You Earn (PAYE) program in its present state. For PAYE, newly instituted in 2014, if you have loans older than October 2007, you do not qualify for it. However, new borrowers with original debt after October 2011 do qualify for it.
Closing the Loophole
So, what will happen next? There are many ways to “close” this so called loophole.
- They can keep everything as is, but remove the payment cap at the standard repayment, so the payment amount continues to rise with the borrower’s income.
- Or, they can put a cap on the amount of total debt that can be forgiven.
- They could also specifically eliminate doctors from the program, or disqualify internships and residency from qualifying PSLF employment.
Even if the loophole is closed, I believe that current borrowers who are participating in the programs now are probably safe and will continue to benefit from the current lower payments and the future forgiveness benefits. However, it’s generally not recommended to base your career choices on forgiveness possibilities. [Easier said than done when you owe $550K and your dream is to be a pediatrician.-ed] Make sure you consider all factors, and speak with a trusted professional about your next best steps.
What do you think? Do you think PSLF will go away for doctors? If so, who do you think might be grandfathered in? How do you envision the loophole closing? How have these concerns affected your career choice and your loan refinancing decisions? Comment below!
A major theme during the last couple of election cycles is that being rich and successful means you are hurting others and therefore must be punished. That theme will likely continue. I find it difficult to believe that there will not be modifications to this program. I don’t think they will remove doctors or residency from the program. But they will cap the amount to be forgiven, tax the amount forgiven as regular income, and/or remove the cap.
Probably just being a critic, but the title is misleading. A well labeled benefit of the program should not be considered a loophole. That being said, I am aware of what I would consider a loop hole within the program, but have not read about it anywhere. Still waiting to take advantage of it before telling others.
Now I’m curious.
I agree with your thought that the most likely course of action is that only new borrowers will be affected by the changes.
I expect that the most likely difference will be that the amount of debt forgiven will count as income for tax purposes. This would move PSLF to be in line with PAYE and IBR since forgiven debt counts as taxable income under those programs. This would allow the government to raise revenue while still being fairly simple to implement.
It would be tough on borrowers though as they would be responsible for taxes on what could be hundreds of thousands of dollars in extra “income,” as well as most likely being bumped to the maximum income tax rate. This would most likely require planning ahead so that they would be ready to handle the extra tax burden that year.
Yes, that would be a lousy change, but it would still be worth it for most. Better than limiting forgiveness to $57K.
I’m so glad I don’t have to make these difficult decisions.
It looks like all references to a $57k cap on PSLF have been removed from the proposals on changing the program.
The “Doctor Loophole” is not having a cap on payments. In general, if the loophole is closed it will have a small effect on the PSLF and will not change the decision to do PSLF for most doctors.
Here is an example.
Doctor has $300,000 at 6.8% when entering IBR. The “cap” on this doctors payments is $3,452 per month or $41,400. This doctor would need to make $300,000 at a PSLF institution before his payments cross the cap. If this doctor made $400,000 per year then his payment would be about $56,000 per year or $15,000 more. How many doctors make this much at a PSLF institution? Furthermore, this doctor more than likely would have done 6-7 years of training at roughly $53,000 per year income. Sure the extra $15,000 would hurt but the PSLF would still be a substantial amount. This is how the REPAYE is forecast to work, in addition to getting rid of the MFS loophole.
It will be between 4-10 years before I know if it works. I am sure someone will post about it before then. You could always try to figure it out yourself considering it is relevant to your next book topic.
Following this up. ARKYDORE, email me. I am very curious about what you’re experimenting. I have an idea as well. Would be great to discuss . [email protected]
The commenter might be thinking of using the foreign income tax exclusion as a method of achieving a low effective AGI while still earning income by working abroad. If you made less than $100,000 plus your discretionary limit, then your IBR payment would be zero.
I’m not sure that you could do this PSLF, since you need to prove that you are employed by a non-profit and foreign organizations wouldn’t necessarily count. You could pull this off with IBR for new borrowers in 20 years.
Of course, this raises a host of other issues involving time spent away from home and the cost and hassle of obtaining work visas plus licensure.
I don’t think when this benefit was placed into the plan that the idea was for physicians to get $500K forgiven while making the same salary at a 501(c)3 as they could make elsewhere. I think the “loophole” idea is this one. While I don’t necessarily see it as a loophole either (since I’ve been pointing it out for years) I have no doubt that many Joe Q. Publics will view it that way when the NYT has a front page article: “Physicians Get $500K in Student Loans Forgiven!”
Exactly! this will come to a very public light and when it does, the amount of debt forgiven is going to be capped. In today’s fiscal environment, those on Capitol Hill Will hear holy hell from their constituents and this program will be severely modified.
On a slightly side note, my complaint with this program is that the differences in salary for physicians in 501(c)(3) and private practice are not enough to justify the enormous costs to taxpayers
Any idea if the loan forgiveness will come with a 1099 to count the forgiven loan balance as taxible income?
Debt cancelled under PSLF will not be considered taxable income and there will be no 1099. As an aside, loan balances forgiven because 240 qualifying payments (20 years) have been made without the public service requirement, are to be considered taxable income. The latter would not be relevant for any practicing physician but is the plan for some lower wage earnings.
I wouldn’t say “any.” It is possible that plan can still work out for some low income docs with very high debt burdens.
I am a recent IM graduate with +$350,000 debt (that doesn’t include all the IBR payments I made during residency or the $10,000 I threw at it near graduation time). I’m really afraid of those loans, but I’m fighting the urge to find a PSLF job. Would I rather sign up for a sort of prison that saved me, I don’t know, $100K or $200K (I haven’t run all the numbers), or would I rather keep my future and my work life open? Of course it’s a personal decision, but the opportunity cost is HUGE. 7 years stuck in a very narrow spectrum of work opportunities. 7 years where a doctor could open a practice, start a concierge service, start a medical device/app company, start a personal finance blog, start a health blog, start a consulting company, start a real estate business, etc. I might lose a few hundred K in PSLF (somewhat mitigated by refi), but I keep open the potential to be an entrepreneur. How much is that worth?
Remember you can be an entrepreneur on the side. You just have to work “full-time” as an employee of a 501(c)3. An internist with $350K in loans should be taking a very careful look at PSLF opportunities, and should do it BEFORE doing things like throwing an extra $10K at the loans because he fears them. If you don’t want to go PAYE/PSLF, then for heaven’s sake try to refinance them and get busy knocking them out.
Yes, I’m starting the refinance process. Conservatively, the 501(c)3 jobs in my area are a ~$50-70K per year pay cut compared to the mainstream private group counterpart. Yes, someone can be an entrepreneur on the side. Or, I can work for the highest bidder, refinance, work on knocking them out, and if a business opportunity comes up (or I create an opportunity), I can take it. And the risk I’m taking might be a motivator to make the best out of every opportunity. I guess what I’m talking about is advising doctors, motivated hard working intelligent caring people, to remember that they are worth so much more than the going rate, and they may be giving up more than they realize via the opportunity cost of being “stuck” at a 501(c)3. We all know how screwed up the health care system is. That failure might be one of the biggest entrepreneurial opportunities this country has. Leveraging that while working full time at a 501(c)3 will be very difficult. I don’t think I could have done med school “on the side” and I doubt I could be a hugely successful entrepreneur “on the side”. It’s a risk. I’m I totally crazy? Or just more risk tolerant than is usual for my age and debt burden? Some business personalities talk about the “abundance vs. scarcity” mentality, and I think there’s some truth in that.
For $70K a year, I’d probably pass on the 501(c)3 job. For $10K a year? I’d probably go for the forgiveness.
On average doctors as a group are very risk averse in the business side of life. I think that goes with the total lack of education and the taboo that schools place on the idea of making money (they dont seem to care about taking yours).
I believe that PAYE eligibility is being expanded. I know that my loans, previously eligible for only IBR, came up as PAYE eligible this year through my servicer, EdFinancial.
My reading of this is that it’s slightly early implementation of this presidential memorandum: https://www.whitehouse.gov/the-press-office/2014/06/09/presidential-memorandum-federal-student-loan-repayments . That memo specified an end of 2015 deadline for PAYE eligibility to be more widespread.
Yes, I see no reason for someone eligible to do so not to switch from IBR to PAYE.
I would just be careful to read the fine print before switching over from IBR to PAYE later this year. I could see a nuance limiting the 10 year repayment options for those who transfer to get them into a new system. Otherwise it seems like a no brainer change.
Have >$300K in loans currently under IBR. Have not yet switched to PAYE although my loans qualify because I’ve been told by the servicer that the interest that has accrued during my >3 years in residency will capitalize the moment I switch to PAYE. So basically, I can afford the higher payments for now so I will continue with IBR.
Interesting. Did you actually compare the extra interest from the capitalization to the additional amount that won’t be forgiven due to the higher IBR payments?
The switch is not from IBR to PAYE, it’s IBR to REPAYE. The Dept of Ed, in response to POTUS’ executive order, is implementing a new income driven repayment program – REPAYE. REPAYE is designed to mitigate some of the PAYE benefits. Briefly, here are some REPAYE(Revised Pay As You Earn)details:
1. Up to a 25-year repayment term for borrowers with graduate loans.
2. Inclusion of spouse’s income regardless of tax filing status.
3. 10% of discretionary income (same as PAYE, IBR is 15% of DI)
4. Only 50% of actual negative amortization will accrue
Generally speaking, REPAYE is better than IBR, not quite as good as PAYE.
Interesting. That is the first I’ve heard of REPAYE. Wonderful that things are now even more confusing. Do you have a good link?
Here are a couple of links:
https://www.insidehighered.com/news/2015/05/01/federal-rule-making-panel-oks-plan-expand-income-based-repayment-program
https://www.federalregister.gov/articles/2015/07/09/2015-16623/student-assistance-general-provisions-federal-family-education-loan-program-and-william-d-ford#h-25
Keep reading the federal register link and you will see that your 10% payment is not capped at your standard 10 year payment. Most high income doctors would be better off paying 15% as long as it is capped.
I’ve run the numbers on filing separately and filing jointly, and with a spouse who earns 50k+, you come out ahead filing separately during residency and the first few years as an attending. I was very surprised when I noticed this. Compound this with the incentive to switch from filing separately to jointly once you hit a standard 10 year payment, you will be a lot worse off with the new program.
I suspect that as long as PAYE sticks around for new borrowers, you should stick with it. If you only qualify for IBR, you probably are better off sticking with IBR since you are most likely out of residency by now and nearing the 10 year standard payment max.
That’s a big issue. That eliminates much of the benefit a doc would typically see. I probably need to do a post on REPAYE.
Better you than me 🙂
With REPAYE, the incentive to file separately is removed. If you’re speaking to a general tax strategy for MFS during the period you described, I would be surprised as well. I’ll look into further.
The 2nd item you mentioned about REPAYE removing the 10-year standard repayment cap is correct. But, to put it in some prospective, you reach that level, assuming 1 in family, when your AGI is approximately 1.5 times greater than your loan balance when you entered REPAYE or PAYE. IBR is approximately a 1:1 ratio.
“For PSLF, you are generally considered to work full-time if you meet your employer’s definition of full-time or work at least 30 hours per week, whichever is greater.”
Another “loophole,” (as a dr with ER no-doc call), sign with your private practice and then take 2 ER call shifts per week at the hospital. You get 48 hours of call at your 501c3 to continue qualifying for PSLF
That’s an interesting idea. You would have to be an employee of the 501(c)3 hospital not a contractor. I don’t know how frequent that situation would be just to take call.
Why do you have to be an employee and not a contractor? Doesn’t say anything in the requirements about it, just that you have to work 30 hours.
A contractor isn’t employed by a 501(c)3. He doesn’t work for it. He works for himself. Read the rules carefully and you’ll see they say nothing about working with another company that happens to be a 501(c)3. You actually have to work for the 501(c)3.
I agree that calling this a “loophole” is a misnomer. Plus, the “benefit” of lower payments with IBR or PAYE doesn’t mean you are not accruing interest on your principal. Granted the subsidized loan interest may freeze, the the unsub doesn’t, at least based on my understanding. The lower payments through IBR and PAYE were a new option introduced rather than applying for forbearance or going into standard repayment. My wife and I are both physicians with a substantial loan burden. She is still in training and once we learned about this program years ago, we took out small private loans to have extra cash to pay for her IBR so we could start the ticking clock on the 120 payments. It would be a travesty for the government not to honor those physicians who have enrolled in the program, even if changes are made moving forward. We live in the Bay Area while she finishes training, and by no means are physicians considered the wealthy elite.
I would consider the PAYE calculation for married persons who file their income tax separately to be a loophole. (Or you could just call it a mistake in the way the regulation was written.) The required payment is calculated using just the individual’s income alone but the family size allowed is 2 (assuming no kids). If both individuals are applying for PAYE, they both get to deduct the full amount of 150% of the FPL for 2 persons from each income. If kids are involved, you may be able to manipulate the payments further depending on the specifics of the situation.
My ibr was 0 Last year (resident,2 kids,unemployed wife, living in NY). Do my monthly payments of 0 count towards my 120 consecutive payments???
Yes. Beautiful eh?
I also agree with the opportunity cost. My job offer in academic psych was more than 100k less a year than what I am making now, with much heavier workload, committees to be on, vacation and extra unit coverage, etc. Thanks but no thanks! I am happy to live like a resident for a few years for my freedom!
Physicians taking advantage of this program have to work for a 501(c)3. It’s not a benefit every doctor can take advantage of. For almost all specialties, the salary at an academic teaching hospital (which are the 501(c)3s) is much less than those doctors who choice to work in private practice…we’re talking hundreds of thousands of dollars less. My husband has chosen to stay in academic medicine and I do not know how we will make it financially if this program is taken away. My husband has done 4 years of medical school, 3 years of residency, and 4 years of fellowship and has over 300k in student loan debt. My husband just started his first job out of training and we are by no means rolling in money. If they take this program away there will be a whole lot of really good doctors who will have no choice but to leave academic medicine and work in private practice just because they can’t afford to do otherwise.
This is all the more reason to scrap the unsustainable program. People are going into unfavorable financial situations with the hope of a bail out. Congress really needs to clarify this before it comes to a head. It is not a matter of if but when. Like WCI says, Front page NYTimes saying something like “Millionaire Pulmonologist gets $400k government subsidy.” Perhaps you don’t feel like your in this rich group but a physician salary getting several $100k in forgiveness from the government will be considered the same whether truly wealthy or not.
residents and med students really are looking at this as a bail out. they have taken on a ton of loans (and many many trips to europe and hawaii!) and are looking at someone else to pay for it.
No one is going to feel bad for you after umpteen years of training and schooling and living off debt. everyone here is/was in that boat.
as it currently stands this program will be unsustainable
I don’t think most medical students can get enough in loan money to really rack up “many, many trips to Europe and Hawaii.”
WCI – you’d be surprised. I’ve seen my own residents take at least one big trip per year of residency!
That’s a resident who has an income, not a med student living on loans.
Nope. It can be done. When I was in medical school in southern California, I lived exclusively off of loans with no other income. I was able to budget and pay for a $10,000 engagement and wedding ring for my wife. Not a wise financial decision, but I could have easily taken numerous international vacations and still lived entirely off of loans. Many of my classmates did. If you are able to live on less than your cost of attendance says you should, the government never asks for the extra money back and most medical school students (including me) are not financially smart enough to give it back.
I’m definitely doing it wrong then. We get 22.5k per year over attendance if you take the maximum federal loans. I guess I could swing 2 $10k trips to Hawaii if I lived/ate/drove a dumpster…
I didn’t get to read every comment made so please excuse any repetitiveness in my comments.
Full disclosure: My wife is a dentist who graduated with 200k in loans and works 2 days a week in a joint practice that she co-owns. We pay about 2k per month and she earns around 60k per year.
If the loan balances are forgiven, does that mean the money spent to provide said education is refunded by all involved? Book distributors, admin personnel, professors, lunch room workers, maintenance employees are just a few who provided a service and were paid by our tuition dollars. Does this loan forgiveness plan go back and request a refund from all those people to get those dollars back?
I don’t know about you WCI but this sounds a lot like stealing. If you disagree, look up one of those employees/companies who got paid while you were in college and ask them to write you a check. Better yet walk next door and explain your story to your neighbor about how you got a raw deal and ask them for the money to repay the loan. If you can collect the money needed God bless America, if not please don’t contribute to the destruction of our nation through this means.
I think the author eluding to this being ok since you are providing a public service is crazy. Who working isn’t providing a public service? This is why our country is heading toward bankruptcy at warp speed. Please read Economics in One Lesson or at least watch the modern version illustrated in 2 min chapters on Youtube by Amanda BillyRock to understand the absurdity of this idea.
Payments and bill’s aren’t something that someone forced upon us. We chose to do go to school and we knew the terms of the agreement. Forcing others to pay for your decisions is not a loophole it’s just wrong.
Maybe you should write your Senator and tell him you think PSLF is a huge boondoggle and should be scrapped.
But no, to answer your question, none of those service providers are stiffed. The taxpayers (all of us) as a whole are paying them. We paid for the loans used to pay the providers, and when the loans are forgiven, we all eat it.
To call PSLF stealing, is no different than calling any basic, legal tax deduction or loophole as “stealing”.
To those of us that have worked very hard to pay our loans back, a doctor making a few hundred thousand in salary and then magically having 400k in loans forgiven is very unpalatable and will certainly be even more unpalatable for the average American when he gets wind of it. Do you really think any politician will continue to back this plan when the notion that some doctors are going to have 500k plus in loans forgiven goes mainstream? Not a chance, political suicide. My wife and I borrowed for our education, got stuck with unfavorable 6.5% loans, and we worked hard to repay into the student loan till. We have made great strides the past few years repaying the debt and will be done paying all of them off soon. Why should others dip into the same till then not repay anything? The current student loan system/ higher education model is unsustainable, but PSLF was a bad idea. If you are counting on it, you may be in trouble. A better model for long term revamping of the professional student loan dilemma is to limit the amount of loans given to 20 something’s with no collateral (essentially all student loans) and make them at a fair interest rate.
I don’t disagree that it would be better to have lower tuition with more limited loans and to have lower interest rate loans than PSLF. That said, I can’t blame anyone for going for PSLF. That’s just learning the rules of the game and playing by them. I see no moral or ethical issue there. However, it’s probably smart to hedge your bets by keeping a side fund to use to pay the loans off if PSLF disappears.
I am thinking a lot about starting the side fund if I go the PSLF plan. That way I can also start Tax-loss harvesting sooner. Otherwise I might be in a all tax-deffered or Roth accounts for the near future.
I am somewhat concerned about the fact that compensation to physicians from drug companies or “big Medicine” are now reported in the Sunshine Act; would there be public release of loan forgiveness amounts with a physician’s name in a similar manner?
Another issue that may represent an unintended effect of the PSLF program, is that some hospitals that are not-for-profit actually pay a HIGHER salary (especially for the younger docs) than private groups. Without commenting on the morality or right/wrong of it (And yes, I’m in IBR for the possibility of doing PSLF), having high paid physicians’ loans forgiven was not an intention of the PSLF program.
I feel that what is truly unfair is the massive, relatively unchecked increase in medical school tuition. It is outpacing inflation by a wide margin. While medicine has had increase costs, there is no way my Pathology class should have cost double in 2008 compared to the class of 2003 when we were all reading the same slides and the same books. And of course if you complain, medical students, residents, and fellows look bad when they look like “rich doctors” to regular joes. Maybe medical students should collectively bargain like some residents are doing.
At least there are some good refinancing options out there now.
Johnathan, I think you are being disingenuous when you say that your rates were 6.5%. How many were subsidized? Subsidized graduate loans stopped soon after my wife started medical school. How many were below 6.5%? We have 1 or 2 at less than 6.5%, but I suspect a lot more of yours were beneath that.
You either graduated prior to 2007 with less loans due to cheaper education and lower interest rates or you graduated after 2007 with high interest rates, more student loan debts, and qualifying for ICR/IBR/PAYE.
Both groups benefited from government largesse. This style of argument reminds me of the “kids have it easy these days” arguments that older generations have been saying for generations that I find distasteful and dishonest.
Actually I graduated in 2008. That put my loans at one year of 2.2%, one at 4.8%, and two at 6.8%. Of course, you really can’t say no to the terms once you’re in school. My wife graduated in 2010. That means most of her loans were at 6.8%. I was able to consolidate my first two years into 3.6%. Not to bad. About half of mine were subsidized if I remember correctly. My wife consolidated all loans with DRB in 2014. We are fortunate that we have a good combined income and have cleared the better part of our 300k in student debt very rapidly. That’s in no small part to bogleheads and this website.
I am actually one of the few people that aggressively attacks online posters who criticize those of us who came out of school with significant student debt. It’s impossible as a professional to not come out of school in the past decade with a mountain of debt and the older generation just doesn’t understand that. I don’t fault anyone for trying to grab PSLF if they can qualify. The truth is, however, it’s a bad program and I can’t see it lasting for long. Why is it a bad program? I know a doctor that has almost 500k in debt. She’s sticking to an academic medicine but still making 200k a year. Residency and fellowship years apparently count towards PSLF. This is someone making 200k/ year about to torch 500k in taxpayer money. She’s not alone. That’s just not going to be received well by the public. Secondly, you want good people working in the public sector to stay there. Not bail after 10 years which this program basically encourages. IBR strikes me as a more reasonable, but still flawed, program. I say flawed because in 20 years there will certainly be many that cannot pay the tax they are expected to on the monstrous balances they are having forgiven. What then? In addition, just the thought of giving people 20 years of anxiety over snowballing loan balances until forgiveness? The difficulty one using IBR will face when trying to get a loan for a house or car or whatever for 20 years? Yikes.
Now despite how long winded this post has become I don’t want to sound like whiner without offering some solutions. Here are some ideas-
1) Federally mandated reasonable levels of state subsidies for higher eduction. The erosion of subsidies is part of this problem.
2) A four year degree comes at one set package price. No BS 10% increase every year
3) Student loans come at prime + a small percentage
4) The amount of loans you are allowed to take out is directly related to your degree path. It maxes out at 1.5X average starting salary for that degree. That forces academic institutions to lower costs when their customers can’t keep pulling from an infinite pool of borrowed money. This will also lead to less defaults on loans and stop students who don’t know any better from getting themselves under an insurmountable pile of debt.
5) I have other ideas, but I think I have rambled on long enough!
Jonathan, I like your thinking but I think the solution while not easy is simple. Get the government out of the college education lending business. Private lending companies have standards to avoid the problems you described from happening. When you get the artificial demand out of the market, the market will respond with lower prices. Trying to fix price or interest rates should not be a function we want the government to perform. Have we not seen how bad they are with money and trying to perform this function to date? There are plenty of private lending groups out there. I have several clients who are creating their own lending institutions for their kids colleges and some who are lending to individuals. It doesn’t take 100% of the people to stop taking their money for this to happen. Researchers have proved that 10% could be the “Tipping Point”. This would be in the benefit of everyone.
I don’t think this is going to be a problem for much longer anyway. The student loan bubble has become the next balloon set to pop and plenty of investors and economists have pointed to what I shared above. We recently wrote a blog about it if you care to read why and its implications. http://blog.fireyourbankertoday.com/student-loan-refinancing-could-raise-your-tax-rate
You are correct that the direction of taxes should be increased from this new government expenditure. The magnitude can be argued. I bet the effect of defaults is going to be far greater than the effect of refinancing or even forgiveness. At least with refinancing the taxpayer gets the principle back.
My concern with privatizing student loans is the higher rates and fees. Private student loans have traditionally charged interest rates several points higher than government loans. I am certainly open to considering any ideas that will reduce the essentially infinite amount of money available to student borrowers and force academic institution to come back down to earth in their pricing. Higher education is important and should be valued by society. Instead it has become an accepted means of burdening 22 year olds with unreasonable crushing debt.
What are your thoughts on doing ICBR over 20 years and getting the remainder forgiven versus paying off the debt? If I finish with ICBR payments in about 18 years, I should have about $30,000.00 forgiven, off of a loan that is worth about $170,000.00 today. However, I am a huge Dave Ramsey fan and have been ha.mwring out all debts. The student loan would be the last I would tackle, but I most likely could pay it off within the next five years. Basically the trade off is low monthly payments for 18 years and a forgiveness of 30K, or paying massive amounts in the short term to be totally debt free later. Any thoughts?
And that $30K is taxable, so make it $20K. I wouldn’t stay in debt for an extra 13 years for $20K.
You are better off refinancing to private loans then to have them forgiven after 20 years and only save 30k (which would be taxed). You can run the numbers, but I don’t see anyway of coming out on top with 20 year IBR over a refinance 15-20 year loan with DRB/SOFI.
agree. you’ll probably come out farther ahead with a refi, and its so much simpler to do. No messy paperwork or keeping up.
To me refinancing and paying it off in rapid order is by far the smarter approach. You really want to sit on 170k of debt for 18 years for a relatively small payoff at the end? iIf the entire balance was going to be completely waived it would be worth carrying, but 30k taxable? Not a chance.
Forgive me if this has already been addressed, but is there a salary at which a person no longer qualifies for IBR/PAYE or PSLF?
I think I have already answered my own question. It appears that the payment would max out at the 10yr Standard Repayment amount but the repayment plan would stay the same.
Correct.
No. But your IBR/PAYE payments may grow to equal the regular payments.
I think that relying on PSLF is too risky, if you can possibly afford to pay back the debt earlier. Compound interest at 6.5% on $200-300K over a decade is breathtaking, and basically precludes the possibility of retirement in the event of failure to realize one’s PSLF forgiveness plans.
I had low 200K debt from medical school. My spouse and I sold our home, much of our stuff, slashed our spending, and moved back in with my parents. I’m in my final year of residency and the debt will be gone next month. Once I realized that PSLF is probably a scam, we handled the situation as a true Debt Emergency (see Money Mustache).
Why do I say PSLF is a scam? Firstly, dealing with my servicers, Sallie Mae and Navient, has been like dealing with Comcast. Every word out their mouth is a lie or an equivocation. Every transaction is an opportunity for a misapplied payment, technical difficulty, misunderstanding, or some other ripoff. I have paid tens of thousands of dollars ahead of schedule and they changed their online payment system to frustrate my efforts. I believe this was because of me, personally. I paid a $20K lump sum online to start off my repayment in earnest. One week later their online system was modified to accept only payments of $10K or less. One can only call in now to make a payment larger than $10K. In the absence of a paper trail of printed PDFs every step of the way, I might as well use the money as toilet paper. Was the change to their online payment system a coincidence, or a specific, personal response to my large payment?
Despite paying enormous amounts of additional principal, I can produce a few dozen late/delinquent notices related to technicalities of the Navient automatic payment system. **A month with a late payment documented does not count towards PSLF.** Renewing IBR, and later PAYE, always took several months, during which time the account is placed into deferment. **Any month in deferment also does not qualify for PSLF.** All of this adds up to a few more years that must be spent in repayment to qualify for PSLF.
For all of these reasons, automatic forgiveness in 10 years time is a gross oversimplification and a pipe dream. Anyone betting on forgiveness had better plan on a minimum of 12-13 years factoring in all the bullsh-t, and have at least $10 grand saved to pay a lawyer to fight with these f-ers when the time comes. No private debt servicing corporation is going to let a huge sum of money like that slip away easily, whatever the federal guidelines might say. They want slaves for life, rules be damned.
For my part, I think it’s worth it to have these scumbags out of my life, even if others get huge debt forgiven 5-7 years later. Next month when I make the final payoff, Navient and friends will probably find some excuse to try and continue automatic withdrawals on a $0 balance account, encounter a technical difficulty in applying the final payment, etc. Nevertheless, even if I have to shove $100 bills down their throats, they will be paid off.
Wow! Thanks for sharing. I know how you feel about not even wanting that debt hanging around for more than a couple of years.
I am currently an MS2 who is attending school out of state and paying for it exclusively with federal loans. I took out my first loans in August 2014, before the proposed changes to PAYE/PSLF and will continue to have to take out loans to pay for tuition, living expenses, etc. Since I am still in school, I have not started paying back through the IBR or PAYE plan. When I get to residency and do start paying back, can I select IBR or PAYE as my payment plan and still be grandfathered into PSLF program?
From scouring comments and message boards, I get the impression that since I took out my initial loans before the changes, I will be able to do PAYE/PSLF on those loans and my loans for subsequent years– is that accurate?
You will almost surely be able to do PAYE. Whether or not you’ll be grandfathered into PSLF is anybody’s guess, but I bet you will.
This is not a loophole. I wish you wouldn’t call it that.
I voluntarily took a significant paycut to work on the teaching service for my medical school. I felt comfortable doing so because of PSLF.
If this isn’t public service as defined by the government, I don’t know what is.
Loophole doesn’t mean illegal. Loophole means that people are using it that perhaps the originators of the law did not intend to use it. So the only way to really know if it is a loophole or not is to ask those legislators if they really meant to include physicians making $200-500K a year in the program.
The recent changes to social security “loopholes” has prompted me to reconsider my PSLF strategy. Congress recently changed SS laws preventing the “double-dip” SS strategy used by many retirees and counselled for years by financial planners. Congress saw the spousal claiming as a “loophole” and shut it down only grandfathering those currently collecting SS. I previously assumed that any legislation changes would certainly grandfather current borrowers to the old terms. Now I am not sure. It is possible that congress could simply stop PSLF for those with income above $100,000, or some other figure, effective immediately. Proposals that shift costs to higher income people are popular in this current political climate.
You can hedge your bet by saving up on the side, or just give up on PSLF and refinance the loans. But realize this could be a decision worth tens of thousands of dollars depending on your loan burden and strategy.
What would you suggest as the best way to hedge your bet until PSLF comes to term using the extra money that is being saved on PAYE/REPAYE/IBR? I have maxed out my 401K already each year. I have two children and will be having at least one more.
I’d invest it aggressively in a side account. If you then get PSLF, you can add it to your nest egg. If it disappears, you can use it to pay off the loans.
Great blog and thanks for honest comments. I have a similar situation I’m a military resident but have undergrad and graduate loans that I let compound to about 107,000 on average 5.8%. I have been doing IBR and now REPAYE for 24 payments and signed up for the PSLF. I have about 39 months left on my military commitment and am likely to get out. I have been maxing TSP and IRA for 3 years and with the market am about 70,000 saved. I am debating what next to do. I would like to continue maxing the retirement accounts but also hate the loan debt and uncertainty of the PSLF program. I live very much like a penny pinching Resident and with all benefits my resident salary is about 100,000 of which about 60,000 is taxable. Do I keep maxing retirement and pay about 3000 a month to the loans additionally or lower retirement and put in about 50,000-60,000 a year to knock it out? Or just invest the money ride out the PSLF and have the invested money just incase PSLF does not pan out? I have had similar bad experiences with NELNET and the new FedLoan Services but am unsure what to do. Thanks for the comments.
What’s your plan for PSLF? 24 + 39 does not equal 120
My wife is a doctor. I’m a pharmacist. We’d both qualify. Student loans and tuition prices might be ridiculous but no one twisted our arms when we signed on. Between my wife and I we pay $4500 a month and are on a 10 year program to pay them off. She currently works and I work per diem and stay home with the kids. This all means of course that we don’t own a Lexus nor do we buy fancy clothes nor do we own an expensive house but we live very comfortably. I think it’s grade A bull crap that a doctor making $200,000 plus can qualify for loan forgiveness at all and furthermore that their payment cannot be greater than what it would be under the standard payment is nuts. Anyway, both my wife and I qualify. Just because something is technically legal doesn’t make it right, and doesn’t make it responsible.
I’d suggest writing your congressman. There have been proposals and programs with the features you like. For example, the Obama budget of 2013 proposed limiting forgiveness to $57K, which would basically shut it down for docs. And RePAYE doesn’t cap payments at the standard repayment plan amount. Get rid of IBR/PAYE and that would be the rule.
But I don’t fault docs for taking advantage of the program any more than I fault someone for using Food Stamps, Medicaid, Medicare, or Social Security benefits. Hate the game, not the players.
Interesting considering there is a large contingent of Americans that fault people for accepting public programs such as Medicaid. Hardly no one faults people for taking advantage of an obviously unintended consequence of a poorly constructed law. Those guys are just smart guys who know how to play the game. We aren’t talking chess here. I knew this existed and we could have taken advantage. But it’s obvious people are going to be extremely upset that physicians making high six figure incomes have their school debt forgiven while many people go without relief. It’s karma that will come back to bite people. It’s a game where the rules are created by the players that benefit the most. Writing my congressman you know is a canned, ridiculous response. Of course what’s legal and what’s ethical doesn’t seem to matter like it used to. All the meritocrats (of which I am) take what they can I suppose. Don’t get me wrong, tuition is sky high for doctors (like everyone else) and their training is pretty unforgiven. I’ve witnessed it first hand. But come on, does honestly anyone feel good about this? Play on playa.
What other way do you intend to change this other than having Congress change it?