For most young physicians, student loan strategy is the single most important item in their financial plan. Fortunately, the Public Service Loan Forgiveness (PSLF) program is a valuable option that is available to many doctors. Unfortunately, the program can be confusing and difficult to follow, as evidenced by the fact that less than 1% of the people who applied for the first round of PSLF had their loans forgiven. Therefore, we thought it would be helpful to provide a step-by-step guide for how to approach PSLF.
1. Make Sure Your Loans Qualify
The only student loans that qualify for PSLF are Federal Direct loans. If you have other government student loans, such as Federal Family Education Loans or Perkins loans, they will need to be consolidated into a Federal Direct Loan before they are eligible for forgiveness. Remember that private student loans are not eligible for forgiveness.
2. Make Sure Your Employment Qualifies
You must be employed full-time by a 501(c)(3) (a non-profit) or a government agency. Luckily, most residency and fellowship programs, as well as many academic positions, meet this requirement. Full-time employment is defined as at least 30 hours per week (or the employer’s definition) and you must be directly employed by the qualifying employer. For example, if you work at a non-profit hospital, but are employed by a private group that contracts with the hospital, that does not count as qualifying employment.
3. Enroll in an Income-Driven Repayment Plan
You must be enrolled in an income-driven repayment plan for your loan payments to count toward forgiveness. There are four different income-driven repayment plans: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income Contingent Repayment (ICR). The plans have different qualification requirements and different ways of calculating the required payments. Payments are either 10% or 15% of your discretionary income, which is defined as your adjusted gross income minus 150% of the poverty level for your family size.
When going for forgiveness, your goal should be to minimize the amount you pay toward your loans (thereby maximizing the value of forgiveness), so choose the plan that minimizes your payments. Keep in mind that you can switch plans, and the optimal plan for you may differ depending on your stage of life. Also, be sure to consider your tax filing status, since there can be a trade-off between taxes paid and loan payments, depending on the plan. Lastly, keep in mind that you can lower your adjusted gross income (and therefore, your loan payments) by taking advantage of tax deductions, like contributing to tax-deferred retirement accounts or a Health Savings Account (if eligible).
4. Meet Annual Requirements
The government requires you to verify certain information annually for your payments to count. This information includes your income, your family size, and your employment. Be sure to have your employer sign the employment certification form before submitting it, and complete the form annually, as well as any time you switch employers.
5. Make 120 Monthly Payments
You must make 120 qualifying monthly payments before you can apply for forgiveness. It’s best to start the process as early as possible, and you can enroll in an income-driven repayment program and start making payments late in your fourth year of med school. It’s a good practice to keep records of your payments and annual certification forms, since the government sometimes loses track of payments. You can check whether your payments are qualifying, and also track your progress to the 120 payments, by downloading your student loan record from studentaid.gov.
6. Remain in Qualifying Employment When Applying for, and Receiving, Forgiveness
The final thing to keep in mind is that, after making your 120 qualifying payments, you must remain in qualifying employment until loan forgiveness is granted. That means remaining with your qualifying employer both when applying for, and receiving, forgiveness.
How to Hedge Against the Risk that Public Service Loan Forgiveness Goes Away?
Some people worry that PSLF is “too good to be true” and will go away at some point. If you’re concerned that PSLF won’t exist when it’s time for your loans to be forgiven, there’s a simple strategy you can follow. Make payments as if you were planning to pay off your loans, except make these payments into an investment account. If it comes time to receive forgiveness, and (for whatever reason) it doesn’t happen, you have the money in your investment account to pay off your loans. On the other hand, if you receive forgiveness as expected, the money in that account can be used to give you a jump start in funding your retirement and other financial goals.
The Public Service Loan Forgiveness program can be a great tool for young physicians to manage their student loan burden, however, it must be handled correctly. There are numerous rules to follow and hoops to jump through, and if you don’t meet all the requirements, unfortunately you won’t receive forgiveness. By following the above six steps, you’ll ensure that you are taking the necessary steps to qualify for Public Service Loan Forgiveness.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.