This is the most critical loan decision you’ll make if you’ve been using IBR, PAYE or REPAYE during your training, particularly if you’re deciding between offers from a PSLF-qualified employer and a private sector employer after training. In one of our case studies, a graduating resident after 4 years of training with $250,000 in federal student loan debt was comparing a $150,000 salary directly by a non-profit hospital, and a $205,000 salary from a for-profit program. After contemplating the after-tax impact of Public Service Loan Forgiveness and the corresponding reduction in payments required for the next six years, the $150,000 salary was actually worth over $240,000 on average for that six-year period. Only by utilizing IBR, PAYE or REPAYE during training can you position yourself for this opportunity.
The federal IDR's use your previous year’s tax return to establish your payment for the next twelve months. If you’re married, it may make sense to file your taxes married and separately during your training to maximize your savings opportunity. For our clients, we perform an analysis of the impact filing separately can have on your loan savings opportunity, which can be shared with your tax advisor to make a final decision.
For M4’s, you may wish to file a tax return showing no income. This strategy has yielded a $0 payment in the intern year for many graduates. If no prior tax return is available when you apply for an IDR, you’ll likely be asked for a payroll stub. Your loan servicer will then annualize this figure, which will result in a payment of up to $400/month.
Some people do not believe that the Public Service Loan Forgiveness program will exist much longer, at least not in its current form. Indeed, the Trump administration's (and even Obama’s past) budget proposal suggests considerable changes.
Regarding future changes to PSLF, Housestaff should be reassured by a few things. For one, the master promissory notes you signed to borrow each loan for medical school included language about PSLF and your right to utilize the program. Thus, a contract between you and the federal government suggests that you borrowed under the assumption you’d be able to utilize the PSLF program as defined in your promissory note.
Secondly, if you’re actively working towards maximizing PSLF and have made economic decisions based on the program’s details, you’ve demonstrated a detrimental reliance on the terms as they exist today. The is a historical precedent of the federal government grandfathering such individuals through any changes to the laws. As unforgiving as many perceive Trump's FY2018 budget proposal to be with respect to PSLF (and, um, in general), grandfathering current borrowers is expressly mentioned, a very positive sign.
Additionally, the impact of the proposed changes to the PSLF program by the Trump administration could have a potentially negative impact on the future supply of health care professionals (this case could certainly be made, anyway). Many medical students and graduates today see PSLF as a means to making their career serving others possible, especially in light of the lack of growth in primary care physician wages.
While we hope that current Housestaff and final year students will not be impacted by these proposals, current and future graduate students may very well likely be. It is important to stay apprised of any changes and should they compromise your savings opportunity, adjust your repayment strategy accordingly. DWOQ is following these proposals very closely, and will provide updates as soon as they are available.
Income-Based Repayment (IBR) is a federal repayment program that limits monthly loan payments to 15% of your discretionary income. To be eligible, a partial financial hardship must exist, which means that this 15% of your discretionary income, calculated on a monthly basis, is less than what you’d be required to pay on a 10-year standard repayment plan. This hardship exists for most trainees with federal student loan debt, as 15% of the discretionary income for a single resident with a $50,000 salary would result in roughly a $400/month payment. The 10 year standard monthly payment on $220,000 of debt, by comparison, would cost about $2,500/month. Clearly, a hardship exists here…
IBR is also a qualifying repayment plan for the Public Service Loan Forgiveness (PSLF) program. Taxable loan forgiveness is granted through IBR after 25 years of repayment. However, payments in IBR are capped at the 10-year standard payment amount established when the borrower entered IBR.Because of this cap, many attending physicians would pay off their loans through IBR before the 25 year forgiveness period expires.
Pay As You Earn (PAYE) is a similar to IBR, but PAYE limits payments to 10% of a borrower’s discretionary income instead of 15%, and taxable loan forgiveness is granted after 20 years of repayment. The payment cap is also the borrower’s 10-year standard repayment amount, and PAYE is a qualifying repayment plan for PSLF as well. When the program was introduced in 2012, it carried a stipulation: only borrowers who have NO OUTSTANDING BALANCE on a federal student loan issued prior to October 1st, 2007, and who took out a federal student loan ON OR AFTER October 1st, 2011, are eligible.
Revised Pay As You Earn (REPAYE) was introduced in December 2015 by Executive Order from President Obama. Similar to PAYE, payments are also set at 10% of discretionary income and still qualify for PSLF. The greatest benefit of REPAYE, specifically for recent medical graduates entering training, is that 50% of accruing interest isn't charged during period of negative amortization. The biggest drawback is the requirement of reporting household income to calculate monthly payments, versus only an individual's income.
To learn more about REPAYE specifically, please visit our blog page and review the entry, "To RE or not to RE. That is the Question"
In forbearance, no loan payments are required but your interest continues to accrue. It’s true that in past years many residents did not pay on their loans during training, but the times have since changed dramatically and loan forbearance is typically the most costly option for today’s residents. Superior repayment alternatives have arisen in recent years and interest rates on federal student loans to medical graduates were fixed in 2006, with an average rate of 6-7% for today's medical graduates. While forbearance allows you more access to your modest training income, it is important to note that ALL of this interest accrues with no federal subsidy or forgiveness opportunity. Furthermore, interest can capitalize in each year that forbearance is renewed. A resident with $220,000 of federal student loan debt will accumulate almost $65,000 in additional interest over the course of a 4-year residency by using forbearance. The current Income-Driven Repayment plans available today are superior alternatives as they require affordable loan payments during training, reduce your interest costs, and can position many residents and fellows for significant loan forgiveness.
For those of you with credit card debt, you’re not alone. It is very common for physicians to carry over $10,000 of credit card debt by their last year of residency, with rates often over 18%. Private loans are also very common, and have a wide range of interest rates. There a few programs available to refinance this type of debt through the same lenders who are leading the charge for the Federal debt refinancing.
Recently, the refinancing marketplace for graduate federal student loans has become both crowded and competitive. That said, refinancing isn’t always suitable, and rates, terms and conditions vary greatly among lenders. As a medical graduate, you’ll also wish to consider if a reduction in interest rates justifies the risk of forgoing potential loan forgiveness and other Federal benefits? The REPAYE program now offers a significant accruing interest benefit for many residents that would reduce your effective interest rate during training. It may be best to utilize IBR/PAYE/REPAYE during training, and then consider the refinancing opportunity when you have accepted a job offer and have a better grasp of your liquidity and ability to pay down your debt strategically.
In July 2010, Direct Loans became the lender for all federal student loans. Stafford and Grad PLUS loans borrowed prior to this time may have been originated by a private lender (Sallie Mae, Wells Fargo, etc.) under the FFEL program. These loans need to first be consolidated to Direct Loans before making income-driven payments on them will qualify for PSLF. Furthermore, Perkins and select need-based loans are not eligible for any IDR's on a stand-alone basis, but they can be consolidated to Direct Loans for eligibility. Variable rate loans originated before July of 2006 can also be fixed at extremely low rates through consolidation.
If you’ve yet to enter an IDR, the first step in your action plan is to review all of your loans and determine if a consolidation is necessary to maximize your savings opportunity. We can help you make this determination. Should you choose to consolidate, you now have the option to select your new loan servicer.
This is an extremely important question, and the answer is somewhat counterintuitive. We generally recommend you do NOT pay more than required through any of the federal income-driven repayment plans (IDR's) during residency, because those overpayments likely compromise both your subsidy savings and potential loan forgiveness. In addition, unlike in forbearance, interest is not capitalized while you’re in training and have the hardship that qualifies you for these programs. So, if you’re an intern or a PGY2 and your required payment is less than $100/month (which it often should be… please contact us if it’s not), you still might be able to afford $400/month. Instead of overpaying on your loans, we suggest placing that $400/month in a money market or savings account. Even if you get 1% return on these funds, it’s actually outperforming the accruing interest on your loans because the interest isn’t capitalizing during your training. If your employment after training no longer positions you for significant loan forgiveness, you’ll be able to apply this savings towards the repayment of accrued interest BEFORE it capitalizes. If you remain employed by a non-profit or government entity AFTER training, this savings can be retained and allocated to other vehicles.