Trump’s first student loan action

In this “Dear Colleague” letter, Trump’s administration takes its first action on student loan policy. Unsurprisingly, it was to rollback an Obama administration Dear Colleague Letter that prevented some collection agencies from charging extremely high fees when collecting on old defaulted FFELP loans if the borrower tried to respond quickly and enter into a loan rehabilitation agreement (i.e. actually pay them off).

This won’t affect any recent borrowers from this decade, in which federal DIRECT loans replaced the older system of private companies lending and the federal government serving as a guarantor.

What it does demonstrate is that no one should be surprised if nothing consumer-friendly comes out of this administration, and student loans are unlikely to be an exception. Trump’s campaign student loan plan was so financially unsound and costly that it is highly unlikely to ever make it anything more than soundbyte.1

  1. It made the coming wave of PSLF forgiveness that everyone is so worried about look cheap.

Medical training return on investment

Some fun (but not new) light reading for those debating whether pursuing medicine was a mistake: UC Berkeley’s Nicholas Roth’s The Costs and Returns to Medical Education.

Overall, of the specialties included, rad onc and radiology topped the scale and endocrinologists bottomed it. The data is from 2009, so some of the assumptions are out of date (as well as pre-dating the imaging reimbursement crunch and subsequent fall in radiology reimbursement, for one). In particular, how student loans are handled makes the data presented significantly less terrible than the reality for some specialties. But it’s still worth reading for several reasons, including:

After Congress passed the 1997 Balanced Budget Act, which capped government payments to hospitals for residents, hospitals added over 4,000 more residents than the government would support. This suggests that market forces are at work as hospitals try to hire residents until the marginal value of an additional resident is zero. It also suggests that hospitals profit from additional residents long after the point when our government stops funding resident education.

I didn’t know that, but it jives perfectly with the narrative all residents believe that hospitals benefit from our cheap labor despite the ludicrous claims that it “costs more” to educate a trainee.

Back to the numbers though, and ultimately, the provided calculated rates of return for the investment in medical school and training is fraught with misleading specificity. Career duration can change the entire calculus (he uses a retirement age of 65). From chron:

Although the overall physician population has grown 188 percent between 1970 and 2008, according to the AMA, the physician population over age 65 has grown by 408 percent in the same period. Economic factors may be keeping many physicians on the job longer, according to data from The Doctors Company, a medical malpractice insurance firm. The company found that the portion of physicians reporting satisfaction with retirement plans has dropped 18 percent since 2006, and the average age at which an internist retired had increased from 62 in 2002 to 70 in 2009.

When considering the costs of becoming a doctor, one must add up the real costs of attending school, lost wages during school, decreased wages during residency, and interest on student loans. Roth uses $36,369.68 as the annual tuition and fees (now it’s probably closer to $47,500 according to the AAMC). He does not count for living expenses, which is fair since everyone’s got to live, but students usually borrow this cost and his treatment of loans is suboptimal. He uses the wages of an intern to approximate lost wages during school (which is probably low for what most doctors could earn in other fields). He uses the average wage of a same-aged person with a college degree to calculate the opportunity cost of not working during school (again, probably low, given that physicians are typically better than average students and likely destined for better than average nonmedical careers overall as well). He also gives us free money:

In 2011, approximately 88.8% of professional degree students received some sort of aid. Of those students, the average aid awarded amounted to $27,500. xxix When weighted, the total aid for all students on average amounts to $24,420 annually.

I know almost no medical students who receive aid anything like that unless we’re grouping student loan “aid” in here. While there are the occasional folks with full rides, most scholarships are small, and most aid given for professional students is actually in non-medicine fields. This probably shouldn’t have made it into the analysis.

I also consider interest payments on student loans. Creditors offer many different types of loans to students, and this makes it very difficult to infer a general loan payment structure. For my purposes, I assume that a typical student accrues $100,000 in interest payments from loans for medical school. I assume that this student pays $5,000 in interest payments annually during the first three years out of medical school and $12,140 annually for an additional seven years.

These sums do not include payments on the original principle; they only include interest payments. These assumptions are similar to a sample repayment schedule presented by AAMC. This repayment schedule assumes an initial Federal Stafford loan of $160,000 dollars with public service loan forgiveness with an assumed $100,000 starting salary after residency

Essentially all loans are DIRECT loans now, but it’s still impossible to handle all loan possibilities with one plan. But this assumes basically a three-year residency followed by PSLF. Given that 44% of graduating students are considering PSLF, assuming that the average doctor isn’t really on the hook for their student loans is misleading. The total loan amount is also now too low, as are the likely annual payments as an attending.

So that’s the dealbreaker. Student loans have changed a lot since interest rates have risen. He assumes no interest payments followed by 100% PSLF adoption, which severely underestimates the cost of attendance to basically 100k even. That’s not realistic for the 60% of doctors who don’t plan to attempt PSLF and would even less useful if PSLF is eventually capped as has been proposed.

It would have been nice to see the payback method used as well (the measure of time to break-even point on an initial investment (it’s intuitive and easier to understand for most folks). But using Net Present Value (NPV) is a great way to present the value of an investment in medical training. Unfortunately, the assumptions are everything: the initial investment cost and the discount rate change the game:

It would seem that the interest payments weigh heavily on the net present values of medical education investments, although these values remain substantively positive.

Specifically, these correlations suggest that physicians receive increases in earnings that overcompensate for the opportunity costs of additional training. This assumes, of course, that additional years of residency and fellowship training result in higher earnings than lesser-trained physicians. The correlation between median earnings and the years of training necessary for the specialties I analyzed, however, is only .4588. While this correlation is significant, it reveals some inconsistencies between further training and earnings. If further training does not result in increased earnings to justify that training, then some physicians may find it profitable to avoid specialization.

Case in point: Infectious disease and endocrinology. You lose three years of attending income only to make less than if you hadn’t specialized in the first place. You are effectively taxed against your academic and clinical interests.

As Roth notes, the assumptions used and the relative costs etc change the number. But in the past several years, the only trend has been more cost to training at overall higher interest rates than were available in the 2000s. This change only exacerbates the cost of choosing a specialty with a bigger duration-to-income ratio.

It’s nice to see a mathematical illustration of what everyone implicitly knows. While Roth’s investment outlook is sunnier than reality, the comparison between different specialties is still relatively meaningful.

The average doctor with average debt is still doing okay. But a doctor choosing a less than average remunerative field with greater than average levels of debt is a different story. That private college + private medical school graduate passionate about rheumatology better be planning on starting their career in academia and hoping PSLF stays just the way it is. The orthopod? They’re just fine.

And if medical schools continue to get more expensive and options for forgiveness are capped, we’re not that far off from the point when some fields will no longer make financial sense at all.

CFPB sues Navient (even the feds aren’t happy with their own student loan servicers)

The Consumer Finance Protection Bureau is a nonpartisan government agency that was created after the 2008 financial crisis to help protect us from evil banks, credit card companies, predatory lending practices, etc.

They announced this week that they’re suing Navient, the biggest federal (and private) student loan servicer for defrauding borrowers and being generally terrible.

You may or may not really know or care about loan servicers, but they’re the middlemen who send you emails about making payments and take your money. Even when you take federal loan money, most people end up shuttled to one of the several private servicing companies who manage the payments. It should come as no surprise that handling that money is profitable and that unsavory companies stand to profit more if people send more money their way.

In short:

The Bureau alleges that Navient has failed to provide the most basic functions of adequate student loan servicing at every stage of repayment for both private and federal loans. Navient provided bad information in writing and over the phone, processed payments incorrectly, and failed to act when borrowers complained about problems. Critically, it systematically made it harder for borrowers to obtain the important right to pay according to what they can afford. These illegal practices made paying back student loans more difficult and costly for certain borrowers.

When people talk about trying to do clever (or even sometimes simple) things with payment timing or distributing loan payments, this is exactly why I would be hesitant to encourage them. It makes great sense to try to have extra payments go toward loans with the highest interest rate (and it’s still worth it). It makes sense to try to “time” extra payments to occur after the application of a REPAYE interest subsidy to get the best of both worlds by getting free government money while also paying down your debt as aggressively as possible (and probably not worth trying, I’d argue). It makes sense to talk with your servicer to get information about your options and make sure everyone is on the same page.

The problem is that the servicers aren’t good at servicing your debt.

I’m concerned enough about the servicers doing the basics of applying IDR-based interest subsidies for borrowers in general, and they purposely make it difficult to confirm what’s happening on their end by poorly if ever demonstrating this information on loan statements, even while they promise “they’re there” when you call. I’m deeply suspicious of any plan that involves the servicers working in borrowers’ best interests.

I’ve spoken with multiple residents steered away from the REPAYE plan through misinformation into IBR or PAYE. I don’t know how much is malfeasance or just incompetence—the people on the phone are customer service reps, not experts—but it’s nonetheless one of the downsides of having a complex convoluted federal system that even the people charged with handling it are unclear as to how to implement its policies.

How to submit PSLF employment verification

The general approach for PSLF is succinctly summarized here. In order to qualify, you’ll need to prove you were gainfully employed at a qualifying institution for 120 payments. That means you’ll need to account for 10 years of working life. The Feds recommend you certify your employment every year, which sounds like a pretty good idea if you ask me (there’s a lot of money at stake here, after all). At the least, you should get a form filled out at the end of your tenure at any institution (preliminary/transitional intern year, residency, other jobs, etc.). You don’t want to be asking random people to look back at employment records buried in some offsite file cabinet from your intern year 9 years ago when it comes time to file for forgiveness. It’s asking for trouble.

The steps are simple:

  1. Download the Public Service Loan Forgiveness Employment Certification Form.
  2. Fill it out. It’s extremely straightforward. Mail, email, or fax it to your former or current employer.
  3. Wait to get it back.
  4. Get it back.
  5. Send it to FedLoans, the official servicer of the federal government (address is on the form).
  6. Fedloan processes the form. If you are not currently serviced by Fedloan, your loans will be transferred from your current servicer. If you already consolidated, you’re probably with Fedloan already. Whether a new development or not, Fedloan will process your forms and update the “qualifying monthly payment” count based on the months of qualifying payments matched to months of verified employment.
  7. Rinse and repeat. Again, it may be beneficial to resubmit annually, but at the least, it’s a good idea to submit an employment verification form after moving on from each qualifying job. A) Paperwork only gets harder over time and B) You want to make sure everything is on track and Kosher before making any more financial decisions that might be based a misunderstanding of where you stand currently on the PSLF track.
  8. After you make that 120th payment, send in the final form. Unless the government has swindled you in a truly magnificent way, get ready to see something magical.

Employer verification: the lynchpin of PSLF

The week of Christmas, the NYTimes published a story about people who anticipated their loans being forgiven this year with PSLF and are now in the midst of a legal battle instead.

The suit, filed in United States District Court for the District of Columbia, says some borrowers received approval on their certification forms, then, years later, the entity servicing their loans reversed course, effectively ousting them from the program.

It did so retroactively, meaning that none of the previous loan payments counted toward the 120 payments needed to qualify for forgiveness. So if the borrowers took a job that qualified, they would have to start again with accumulating the payments.

The silver lining is that—though not 100% clear from the article—it appears these denials were all for jobs that were not 501(c)(3) non-profits. They were for other non-501(c)(3) non-profit jobs, which only count toward PSLF when they provide certain types of qualifying public services and are approved on a case by case basis. I have no doubt there are doctors who are planning on PSLF that will find themselves shocked and disappointed by technicalities, but so far there’s no evidence that the usual employment catchalls (government or 501(c)(3) organizations) for PSLF will be spontaneously denied.

These are eligibility criteria for PSLF-eligible employers:

  • Government organizations at any level (federal, state, local, or tribal)
  • Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
  • Other types of not-for-profit organizations that provide certain types of qualifying public services and must not be a business organized for profit, a labor union, a partisan political organization, or an organization engaged in religious activities.

Qualifying public services include:

  • Emergency management
  • Military service
  • Public safety
  • Law enforcement
  • Public interest law services
  • Early childhood education (including licensed or regulated health care, Head Start, and State-funded pre-kindergarten)
  • Public service for individuals with disabilities and the elderly
  • Public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations, as such terms are defined by the Bureau of Labor Statistics)
  • Public education
  • Public library services
  • School library or other school-based services

So, it is the private nonprofits offering “qualifying” services that are the category at greatest risk for being denied. If your job isn’t a 501(c)(3) but “should” qualify, submit your employment verification forms annually to prevent wasting your time and money planning for forgiveness that may forever remain out of reach.