How the CARES Act Impacts Student Loan Planning for Physicians
The recently passed CARES Act was a key piece of legislation that included many important items. While stimulus checks for millions of American households dominated the headlines, also included in the bill were some significant changes to federal student loans. We recognize that finances are no doubt second priority for most physicians right now, however we wanted to share a quick summary of the new changes and highlight some student loan planning opportunities resulting from them.
Here is a quick summary of the student loan changes included in the CARES Act:
- All required federal direct loan payments have been suspended until 9/30/20.
- Required payments toward federal direct loans will be stopped automatically.
- The interest rate for federal student loans will be 0% during this time, so no interest will accrue on these loans.
- The six months of $0 payments will still count as qualifying payments for the Public Service Loan Forgiveness program.
- Borrowers can still make voluntary payments toward their student loans, with any payments going 100% toward paying down accrued interest or principal.
- Private loans were not included in the CARES Act, so nothing changes there.
Here are some planning opportunities as a result of the changes:
- For anyone pursuing Public Service Loan Forgiveness, this is the best-case result. There’s nothing you need to do – you’ll have $0 of payments for the next six months AND those six months will still count as qualifying payments for PSLF.
- For anyone NOT going for Public Service Loan Forgiveness, this creates a unique opportunity to make voluntary payments that will go entirely toward paying down accrued interest or principal. Alternatively, you could use the extra cash flow to make additional pre-tax 403b, 457b, or 401k contributions to save more for retirement while also lowering your tax bill.
- If you’re unsure about whether or not you’ll pursue Public Service Loan Forgiveness, it’s generally best not to make additional “voluntary” payments. When pursuing PSLF, you want to minimize the amount of payments you make, so if there’s still a chance that you’ll go for PSLF, it’s not worth paying more than required toward your loans. Since no interest will accrue over the next six months, there’s nothing lost on your end by not making payments. You would be better off putting more toward saving or investing for other goals, like retirement.
We understand that most physicians have enough to worry about right now, so even if you do “nothing” and choose to have a little more cash on hand over the coming months, know that this is okay. However, for the physicians who are in a position to take advantage of the incremental planning items outlined above, this is yet another opportunity to further optimize your finances.
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.