How the CARES act should change your loan repayment strategy.
I’d be remiss to being any student loan discussion without addressing the payment pause. For over two years, roughly 40 million federal student loan borrowers haven’t had to make loan payments. While this probably came as a welcome relief, you may now be wondering: What are the implications?
The CARES act payment halt
The CARES act halted both accruing interest and payments on all federal student loans as of March 13, 2020. Loan statements suddenly showed 0 percent interest. Servicers quickly enacted payment suspensions, then extended this relief several times. Let’s examine the details.
First off, if you’ve made any loan payments since March 13, 2020, these payments are eligible for a refund. Contact your loan servicer to learn more.
As for future payments? If you’re an early career physician, you may have been using an income-driven repayment (IDR) plan. This requires annual renewal, but it’s likely you haven’t heard anything about renewing since the halt began.
Not to worry. IDR plans set to renew during the pause have been extended as far out as 2023. You don’t need to do anything right now. Your servicer will notify you when it’s time to recertify/renew.
That said, you can recertify proactively if you want to. We only recommend doing this if your income is lower now than it was in 2019. If so, this will lower your future payments. If your income has increased since 2019, it’s best to recertify only when you’re asked to. Just pay attention and make sure you don’t miss the notifications from your servicer.
You can also continue to make loan payments manually during the freeze. However, this isn’t required for Public Service Loan Forgiveness (PSLF). The payment freeze qualifies as long as you are meeting the other program requirements.
Of course, if you have private student loans or you’re one of the many borrowers who refinanced with a private lender to get lower rates, the CARES Act halt does not apply to you.
That was the case for Nikhil Verma, M.D. Verma took out private student loans. He had always planned to pay this higher-rate (9 percent) debt back as fast as possible. Like many private borrowers, he didn’t receive student loan payment relief through CARES.
“I was working in New York and had two roommates in Brooklyn so that I could keep more of my salary to pay down debt,” he explains. As soon as he could, he refinanced his loans to lower rates. He was able to do this twice since rates came down during the pandemic.
Verma understood that PSLF can be a debt savings option for those who work in large practices or hospitals. But he felt that trying to qualify for PSLF would limit his professional and economic opportunities. He preferred to choose his own repayment destiny. After fellowship, he moved fast to build a private practice. Now, he carries a lower interest rate and a comfortable monthly payment.
Income-driven repayment plans
For housestaff and PSLF candidates, income-driven repayment plans aren’t the exception. They’re the rule. According to data from the U.S. Department of Education, over 93 percent of PSLF participants are using an IDR plan. Many physicians in training are, too. These plans help keep payments affordable, reduce accruing interest and set physicians up for loan forgiveness.
IDR plans weren’t widely available until 2009. Today, they’re almost always the best path for reducing accrued interest during your lower income years. It often makes sense to switch plans over time. The goal is to minimize payments while maximizing savings. Five types of idr plans are available, but typically, one of three will be the best choice. Let’s explore these three.
Income-Based Repayment (IBR)
Launched in 2009, IBR is a federal repayment program. It limits monthly loan payments to 15 percent of your discretionary income. To be eligible, you must have a “partial financial hardship.” This means 15 percent of your monthly discretionary income must be less than what you’d pay on a 10-year standard repayment plan.
Most trainees with federal student loan debt qualify. For a single resident with a $55,000 annual salary, a payment equal to 15 percent of discretionary income would be$400 per month. By comparison, 10- year standard monthly payment on $220,000 of debt would be $2,500 per month. Clearly, a hardship exists.
IBR is also a qualifying repayment plan for PSLF. Taxable loan forgiveness is granted through IBR after 25 years of repayment. However, IBR payments are capped at the 10-year standard payment amount established when the borrower entered IBR. Because of this cap, many attending physicians pay off their loans through IBR before the25-year forgiveness period expires.
IBR is the least common choice for today’s graduates because of two plans introduced later. Let’s explore those next.
Pay As You Earn (PAYE)
Launched in 2012, PAYE is similar to IBR but only requires payments of 10 percent of a borrower’s discretionary income instead of 15 percent. Taxable loan forgiveness is granted after 20 years of repayment. The payment cap is the borrower’s 10-year standard repayment amount, and PAYE qualifies for PSLF. However, only borrowers who have no outstanding balance on a federal student loan issued prior to October 1, 2007 and who took out a federal student loan on or after October 1, 2011 are eligible.
Revised Pay As You Earn (REPAYE)
REPAYE became available in December 2015. It may make financial sense for continuing housestaff. Here’s a brief summary of its features:
• The government pays 50 percent of accruing interest, making unsubsidized loans partially subsidized.
• Just as with PAYE, the payments are only 10 percent of your discretionary income.
• These plans are eligible for PSLF. If you switch into REPAYE from IBR, the 10-year PSLF forgiveness clock won’t reset (unless you consolidate).
• Your household income will be used for calculations, regardless of how you file taxes. • Taxable loan forgiveness is granted after 25 years for graduate students.
• There is no payment cap, as opposed to the 10-year standard with IBR and PAYE.
How can filing my taxes strategically help reduce the cost of my debt
All IDRs use the previous year’s tax return to determine your payments for the next 12 months. That’s why it’s important to file your taxes strategically. For example, if you’re married and still in training, filing separately may increase your savings. At Doctors Without Quarters, we help each client analyze all their options. A tax advisor can then review this analysis to help them make a final decision.
If you’re an intern, you may want to file a tax return for the prior year, especially if you had little or no income in your last year of medical school. This strategy often yields a $0 payment in your first year of training. If you don’t have a prior tax return available when you apply for an IDR, you’ll be asked for a payroll stub. Your loan servicer will annualize this figure, which could result in a payment closer to $250 to $400 per month.
Should I refinance?
If you haven’t already refinanced, you’ve got no shortage of options. Lenders are probably bombarding you with emails, mailers and TV ads. But just because you can refinance doesn’t mean you should. Especially if you’re early in your career, the most important question to ask is: “Is this suitable for me?”
There’s a lot to consider. Rates are near historical lows, but the Federal Reserve recently raised interest rates and plans to do so again several times in 2022. This will likely raise private rates available on refinanced federal loans. Private lenders tend to be transaction-focused, and refinancing isn’t always the best option. Once yourefinance, you lose all available federal benefits, such as IDR plans and PSLF.
A 3 percent rate might seem attractive when you compare it to your current rate. But if you’re giving up loan forgiveness, it might cost you more in the long run. Be sure to understand the available federal benefits before you refinance.
Public Service Loan Forgiveness: Exponential growth and the doctor’s loophole
I’ve mentioned PSLF several times now. This program is uniquely valuable to physicians because they train in teaching hospitals. Let’s get into the details.
The PSLF program was created in 2007 to encourage student loan borrowers to work in public service roles. It offers tax-free loan forgiveness to borrowers who meet the three core program requirements for 10 cumulative years:
• You must have direct federal loans. Stafford, Grad PLUS and consolidation loans qualify.
• You must use a qualifying repayment plan. Income- driven repayment and 10-year standard repayment plans qualify.
• You must work full time for a qualifying organization. Direct employment by any federal, state or local government/agency or any 501(c)(3) organization qualifies.
Physicians see huge benefits from PSLF because most residency and fellowship programs are 501(c)(3) organizations. Because doctors tend to have a lot of debt and modest incomes during training, their debt increases substantially during this time. Ten years after graduation, many still have a significant amount of debt. If they remain employed in qualified environments after training, a lot of that can be forgiven.
One physician I worked with received loan forgiveness in 2021 after making 10 years (120 months) of payments. I asked the physician if she’d been deterred by the narrative spread widely in the media over the past few years before the overhaul about PSLF application denials. “Not really,” she replied. “I assumed I’d done my homework in terms of documentation, so my hope was that people who weren’t getting forgiveness was because their documentation was off or their understanding of how the program worked was off.”
Even so, until she actually saw her $0 balance, she was prepared to accept that she might need to find another way to pay off her loans. Fortunately, she was granted $130,000 of loan forgiveness — and I was surprised to hear it only took “eight or nine days” to receive confirmation of loan forgiveness after she submitted her final PSLF form.
The limited PSLF waiver
As you may have heard, the Department of Education recently announced an overhaul of PSLF. This is expected to improve the PSLF status of 1 million borrowers, including many of you.
The requirements listed above have been loosened. They now include payments made on any federal student loans while working full time in a qualified environment since the program’s inception in 2007.
Here are key takeaways for borrowers:
• Any past payments on FFEL and
Perkins loans qualify for PSLF as long as they are consolidated to direct loans by October 31, 2022.
• Any past payments not counted towards PSLF because they were late or in the wrong payment plan will now be considered qualifying payments.
• The first change is the most significant for most borrowers. If you’re pursuing PSLF, you consolidated all your loans to direct loans right after graduation and you’ve been using an income- driven repayment plan ever since, you don’t need to take any action.
However, if you have FFEL and/or Perkins loans—or if you’re unsure if you made qualifying payments in the past—you’ll want to follow these steps:
First, find out if you qualify to have additional payments counted toward PSLF by logging into studentaid. gov and viewing your aid summary. Expand all the options and see if you took out any loans that do not begin with the word “direct.” If so, you may qualify.
IF YOU HAD FEEL OR PERKINS LOANS BUT HAVE SINCE CONSOLIDATED THEM:
Did you work in a qualifying setting and make payments on these loans?
If so, have you ever submitted an employment certification form (ECF) for that time period? You may receive automatic credit. If not, complete the ECF using the PSLF Help Tool at studentaid.gov/pslf and send it to the applicable employer(s).
IF YOU STILL HAVE FFEL OR PERKINS LOANS:
Consolidate your FFEL and Perkins loans into a direct consolidation loan by October 31, 2022. This is important. You cannot receive credit for payments if you consolidate after that date, so we recommend doing this ASAP. The PSLF Help Tool can show you which loans need to be consolidated. After consolidation, use the Help Tool again to submit a PSLF form to complete your employment certification form.
IF YOU MADE PAYMENTS ON DIRECT LOANS THAT HAVEN’T BEEN COUNTED YET:
If you submitted an employment certification form and were told your payments didn’t qualify due to your payment plan or because they were late, you don’t need to do anything. You should be awarded credit in the coming months.
On the other hand, if you have not completed an ECF, it’s time to do so! Start with the PSLF Help Tool and be sure you have your employer’s EIN handy.
PSLF participation and forgiveness data
From September 2021 to February 2022, the number of borrowers granted PSLF forgiveness grew from roughly 15,000 to over 130,000 borrowers, and from $1.2 billion dollars of forgiveness to over $8.6 billion.
And that’s just the start. There’s nearly $132 billion in outstanding loan debt currently positioned for PSLF over the next 10 years for over 1.3 million borrowers. The shoe is just beginning to drop, and those pursuing or eligible for forgiveness should stay the course.
How should my loan repayments strategy change after training?
This is the most critical loan decision you’ll have to make. If you’ve been using IDRs during training, you’ll need to decide what to do next
This is especially important 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 with $250,000 in federal student loan debt was comparing a $150,000 salary from a non-profit hospital to a $205,000 salary from a for-profit program. After contemplating the after-tax impact of public service loan forgiveness and the reduced payments over the next six years, this resident realized the $150,000 salary was actually worth over $240,000 on average for that six-year period. Using an IDR during training is the only way to position yourself for this kind of opportunity.
Primary care vs. specializing: loan considerations
Brian Jian, M.D., is a neurosurgeon with Kaiser Permanente in Sacramento, California. He was able to get through medical school and training with limited federal debt. “I was bred to be a neurosurgeon,” he says. “My parents were a certain kind of way.” It’s a familiar story to many physicians.
Jian was always interested in specializing in neurosurgery and working on unique, complex cases. He enjoyed research and was able to earn a stipend and a PhD during his training. This gave him a competitive advantage when it came to achieving his career goals and limiting his federal borrowing.
Kaiser offers excellent pay and benefits, and residencies and fellowships at Kaiser qualify for PSLF. However, after training, Kaiser physicians become employed by The Permanente Medical Group, which is not a qualified PSLF employer.
Jian’s advice is simple: “Live like you’re a resident even once you transition until your debt is gone. If you’re conservative, you’ll be able pay down student debt rapidly as a specialist in tertiary care. Yes, always look for loan savings, but loan forgiveness shouldn’t be your primary factor for making career decisions.”
That said, Jian adds, “You should expect to pay $100,000 for living expenses.”
And of course, the right repayment strategy depends on a lot of factors, including your specialty. “If you’re in primary care, pediatrics or other lower-paying specialties, the loan forgiveness opportunity becomes more attractive and should not be ignored,” Jian says.
As for Jian, he’s found what works for him and his career. His passion for research is alive and well. He also serves as the chief medical officer of HitCheck, a cognitive assessment start-up focused on analyzing brain function.
Stay abreast of marketplace updates and take advantage of savings when available. The past year has created more opportunity for savings and forgiveness than we’ve seen in recent times. •
JASON DILORENZO (firstname.lastname@example.org) is the founder of DWOQ, a student loan advisory dedicated
to graduate health professionals, and BenElevate, a student loan employer benefit provider. Since 2010, he has served as a borrower advocate and advisor, speaking at medical schools, hospitals and conferences nationally on the topic of student loan legislation and its impact
on early-career physicians. Over his tenure, he and his team have consulted on over $5 billion in student loan debt. Learn more at dwoq.com/service/consultations.