The Big (Temporary) PSLF Expansion

You may have heard the news by now: PSLF has been (temporarily) expanded (again).

Back in 2018, TEPSLF created a new pot of money to help borrowers who had used the wrong payment plans in the past.

Now, in a final heave of their national emergency powers, the government will finally fulfill the spirit of the original law: more people getting forgiveness, fewer people missing out because of technicalities and bad servicing.

All “federal” loans are forgivable.

The inclusion of FFEL loans in the PSLF program is more noteworthy than you might think. You see, Direct Loans (the only current option and always part of PSLF) are provided and held by the federal government. The government forgiving its own loans is the whole point of the program. The now defunct FFEL program however was instead a public-private partnership: loans provided by private banks and secured by the federal government. In order to pay off FFEL loans, the government is going to encourage tens if not hundreds of thousands of borrowers to consolidate loans into the Direct system in order to forgive them, paying private companies real money in the process. This is why PSLF has specifically never included FFEL loans in the past (even though one could consolidate those FFEL loans and trade them in for a Direct Consolidation loan, making them eligible with minimal effort).

The fact is that for recent graduates the news is largely irrelevant. Very very few people graduating in recent years hold any FFEL loans or Perkins loans, and nearly everyone is using the correct payment plans. It’s just much easier for new graduates to set themselves up for the program than the older borrowers who were further along in the process (and who have been getting rejected or lost years of payments [often due to bad servicing]).

At baseline, people need to stop worrying about the PSLF rug being pulled out from underneath them, but hopefully, this second expansion will assuage lingering doubts. The program is still real, and it’s never going away retroactively.

Here is the Department of Education’s “Fact Sheet” about the overhaul.

And here is the very readable official description of what it all means and what to do next. This is the official party line, and it’s what you need to read.

The bottom line is that if you have any FFEL or Perkins loans, you need to consolidate those now and file a PSLF form (well at least by October 31, 2022). There are a lot of people working in public service and academics who are magically eligible for forgiveness this week that weren’t before (and there are going to be some very anxious people trying to track down employment verifications from back in 2008).

 

 

 

Don’t forbear your loans during residency (if you can help it)

The most fiscally responsible thing you can do as a resident with student loans is either enter an income-driven repayment (IDR) program like REPAYE, PAYE, or IBR or (rarely) refinance privately. Please see basically any chapter of the book.

Everyone is currently enjoying a 0% federal interest rate, but that’s set to expire this fall. No one gets a permanent pass on student loan management.

But not everyone is willing or able to do the most fiscally responsible thing. There are many reasons trainees forbear their student loans during residency and fellowship. Some live in high cost of living areas like San Francisco or New York and feel they can’t afford to live and spend a few hundred dollars a month on their loans. Others have families or other obligations that require the redirection of their salary. Still a third group could potentially make payments but is frankly unwilling to because they want to use that money to actually live their life, especially those that are tired of putting said life on hold during school and training while their non-medical colleagues continue to enjoy a higher cost-of-living lifestyle and share well-curated streams of filtered vacation photos (at least pre-COVID).

I’m not judging, but I can say this: very few residents should ever forbear their loans.

Not because it’s not financially responsible (though it’s not), but because if you’re not planning on making payments you should at least look into mitigating the growth of your loans. Government forbearance is the worst of all worlds: none of the perks of an income-driven repayment plan or possible loan forgiveness in a reasonable time frame while also stuck with the high-interest rates of federal loans.

These are the IDR perks you lose during forbearance:

  • Interest continues to accumulate on all loans (even subsidized loans, if you have any).
  • You get no IDR-derived interest subsidy and you get no 0.25% autopay rate reduction.
  • Then, at the end of the forbearance period, the accrued interest capitalizes and gets added to the principal (mean you don’t just owe more money then but your loan will also grow faster in the future).

In other words, the longer you forbear, the worse things get.

If you can stick it out in IDR instead:

  • All monthly payments during residency count towards the 120 monthly payments (10 years) needed for public service loan forgiveness. Even if calculated at $0/month.
  • Even if you switch to forbearance later, the qualifying payments you make still count for PSLF (they don’t have to be consecutive). Since your remaining loan balance after 120 payments will be forgiven, it is in your best interest to have these payments be as small as possible, so don’t waste your low-pay years as a resident unless you need to.
  • Any unpaid interest on any subsidized loans from college is forgiven for the first 3 years
  • 50% of any unpaid interest on all loans is forgiven if in REPAYE.
  • You get a 0.25% rate discount for enrolling in autopay
  • Interest will never capitalize again after entering repayment unless you change plans or you lose your partial financial hardship (for IBR and PAYE).

Those are good reasons to not forbear.

It’s also usually unnecessary. Being proactive means almost no one needs to forbear during their intern year: you’ll likely enjoy $0 payments during your PGY1 year (based on when you were a broke student) and very low payments (based on working only part of the year you graduated) during your PGY2.

So, plan for IDR first. If times get tough in the future, forbearance is only a phone call away.

Post-Match Personal Finance Checklist

Post-Match Fourth Year is a time of impending change, and there is no better time for a soon-to-be physician to learn the basics of personal finance and get their financial house in order before residency.

There are a lot of things you can do, but here are my top 5:

1. Learn the basics of personal finance and make a student loan action plan

There’s some core information that every functioning adult simply needs to know.

The are many resources for the former and very, very few that are comprehensive enough to make sure you’re doing the latter correctly. You can do both with my book, which includes chapters on the psychology of money, how interest works, taxes, and retirement at the level a new intern should understand. It’s available in print and ebook (Amazon, Apple Books), and the full text is available cost-free and advertisement-free (i.e. completely free) right here.

Early steps will almost always involve federal consolidation after graduation, and you will not forbear/defer your loans.

2. File your Taxes

The deadline was extended to May 17 if you haven’t already, but if you don’t owe taxes, you can file at any time without penalty. So do it! Your taxes are used to determine your student loan payments in income-driven repayment plans like PAYE, REPAYE, and IBR.

3. Consider what kind of insurance you need

If you are married and especially if you have kids, you simply need life insurance. The policies for life and disability insurance that you get from your employer are usually not large enough to provide for dependents and aren’t portable. Getting insured while young and healthy locks in future security. No one enjoys spending money on something they hope to never use, but that’s the nature of insurance.

If you own a home, you’ll need home owner’s insurance, and if you rent an apartment, you’ll need renter’s insurance.

You’ll definitely need auto insurance if you own a car, and need to make sure that the personal liability benefits are high (replacing the car is the cheap part; paying for healthcare and property damage, not so much).

At some point before the end of training, you’ll also want umbrella insurance, which is a cheap liability policy-of-last-resort in the rare event that you are on the hook for more than the limits on your home or auto policy (these cost around a few hundred a year for 1 mil policy but do require robust underlying home and auto policies).

Ignorance may be bliss, but insuring against catastrophe will help you sleep better.

4. Learn about and consider purchasing disability insurance

See my longer article about buying a DI policy during medical school. A post-match fourth-year student is eligible to buy a small doctor policy that is portable to all future jobs and can scale with future income increases. Any disability policy must be purchased through an agent, and it may be worth it to contact one now and see if a policy is affordable to you now. You may have access to different discounts at different points of training, and a good agent can walk you through all of your options, the benefits and costs of specific “riders,” and be available to you as your situation changes.

You want to purchase a policy as early as it’s affordable for you but not later than your final year of training. I partner with the fine folks at Pattern.

5. Get at least a vague handle on budgeting

It can be really helpful to use a service like YNAB or Mint to create a real bonafide budget to follow, especially if you’ve ever carried credit card debt, want to be more purposeful in your spending, or need to save up for some big purchases. But I know not everyone is going to do that. What’s easier for many people is to determine your reverse budget.

You figure your actual take-home pay (your paycheck after taxes and any retirement, FSA/HSA contributions, etc). Then, determine your fixed expenses, which are the things that happen no matter what like rent and student loan payments, and your mandatory variable expenses (e.g. utilities). The last category is the hardest because they may change month to month, so estimate high, not low. Note that you’ll want a 3-month emergency fund, and any retirement contributions that receive a match from your employer should also be considered mandatory. The difference between what you bring in and the costs you know you’ll need to account for is the maximum amount of money you can “spend” every month.

You should, of course, spend less, and you’ll need to if you want to afford things like travel, but you should never spend more unless you’ve already saved up for it. Figuring out how to plan for the big stuff as well as get deeper insights about your current spending habits are two of the big benefits of software like YNAB. You might consider setting up different folders in your savings account (or even different savings accounts) in order to hold money for special purchases like a wedding or vehicle. Then you can plan for those big-ticket items as an amortized monthly expense.

One key to making budgeting easier mentally and psychologically is a big gap between your income and your expenses. That’s why choosing wisely for the big fixed expenses like housing and transportation is so critical.

Leverage & Growth 2021

Last year, Peter Kim (Passive Income MD) put on a free virtual summit comprised of interviews with physicians doing interesting/entrepreneurial things outside of medicine. There were some pretty neat sessions.

I always enjoy talking shop, so Peter and I did an interview for this year’s conference about writing/blogging/self-publishing.

The Leverage and Growth Summit is free and runs from March 22-28 with videos available on Facebook. My interview will be released on Day 2, March 23.

You can register for free by dropping your email here.

There will be an option to upgrade to a “VIP All-Acess Pass” if you so choose in the future. That includes lifetime access to the recordings (normally each only available for 48 hours), invites to speaker Q&As, and additional networking. That VIP pass is $97 before the conference, $147 during the event, and $247 afterward. If you decide to upgrade, that link is an affiliate link and I will earn some money. (If you decide to just enjoy the free conference like I did last year, then no one earns anything except warm fuzzies).

 

A $310,284.24 PSLF Success Story

People often ask me if I know anybody who has successfully received public service loan forgiveness (PSLF). For the past couple of years, my answer has been that I’ve seen multiple verified examples of PSLF but didn’t know anyone personally (in real life). That’s mostly because I graduated in 2012, so my former classmates are still at least a year away.

That changed recently because last month a colleague of mine had his loans forgiven. He’s given me permission to share some illustrative parts of his story and provided me with a very detailed timeline. It’s a good case study, and I’ve added references to relevant background/discussion throughout.

Without further ado, here is his (annotated) story:

8/94 – First Stafford loan (FFEL) disbursed ($2,625). The local bank immediately sells the loan to Sallie Mae after collecting the origination fee.

  • You’ll notice that he is a nontraditional physician who went to school initially back in the 90s but then went back to pursue medicine in the 00s. The Federal Family Education Loan (FFEL) program was created in 1992 as a public/private partnership where “federal” loans were given by private banks in exchange for generous fees from the federal government and a guarantee against cases of default. FFEL supplied 80% of federal student loans until 2008.

8/95 – University converts to the Direct Loan system.

  • The Direct Loan program, which we all currently enjoy, coexisted with FFEL in the 90s. However, individual borrowers didn’t get to choose. The school picked either FFEL or Direct for its federal aid. At this time, due to a combination of purportedly better customer service (and marketing), most schools chose FFEL.

5/98 – Undergraduate graduation followed by consolidation under the Direct program ($11,118, subsidized loans only)

  • This was an optional step for convenience at this point but the beginning of a very helpful pattern. PSLF didn’t exist yet (announced in 2007) but astute borrowers will know that the federal government is only interested in forgiving loans that it actually holds (Direct loans). The only way to make FFEL loans qualify for modern income-driven repayment plans and PSLF is to consolidate them into a Direct Consolidation loan. The same consolidation necessity also applies to the now-defunct “low-interest” Perkins loan program that was shuttered in 2015.

5/05 – Consolidation of undergraduate and (non-medical) graduate school loans under the Direct program ($45,437 subsidized, $24,599 unsubsidized). Direct loans assigned to ACS/Xerox Education Services (“DL Servicer”) for servicing, the only Direct Loans servicer at the time.

  • So after finishing graduate school, he re-consolidates to add his grad school loans to his original undergrad consolidation loan.

9/07 – President George W. Bush signs the College Cost Reduction Act of 2007, establishing the Public Service Loan Forgiveness Program (PSLF)

  • In 2007, the Democrats held the House and Senate. The CCRA passed in the senate 78 – 18, and Bush signed the law. It’s hard to imagine any bill like this not being voted strictly along party lines these days. For further reading, see the first PSLF chapter of my book, available free online here.

7/10 – Consolidates new FFEL medical school loans under the Direct program ($69,707.25 subsidized, $171,973.74 unsubsidized). The consolidation waived the 6-month grace period and signing up for automatic payments lowered the interest rate by 0.25% to 6%.

  • While his older loans were Direct Loans, his medical school chose the FFEL program. You can see what so many people got this wrong. He informed me that back in May 2010, someone from the AAMC actually came to his school to talk about PSLF and what to do to qualify (including consolidation). This was rare golden advice back in the day, as most borrowers either kept the wrong loans (FFEL, Perkins) or used the wrong payment plan (graduated or extended). By consolidating after graduation, he was able to waive the otherwise mandatory 6-month grace period and enter repayment early. Read more about the importance of Direct consolidation here.
  • The interest rate of federal loans changes every year depending on the yield of a 10-year treasury note. During my era, for comparison, it was always 6.8%.

8/10 – Began repayment using the original Income-Based Repayment (IBR) Program.

  • The original IBR was the first modern-day plan within the income-driven repayment (IDR) umbrella, later joined by PAYE and REPAYE. Income-contingent repayment, the less generous original, dates back to 1993. IBR had payments of 15% of discretionary income, capped payments at the 10-year standard repayment amount if income rose sufficiently, and also allowed for loopholes like utilizing “married filing separately” to lower payments and maximize forgiveness.

9/11 – ACS/Xerox (“DL Servicer”) loses Direct servicing contract and loans were transferred to another servicer, which canceled automatic payments without notification and resulted in a “late” payment.

  • While there have been recent plans to consolidate all federal loan servicing with a single company (again), for most of the PSLF-era there have been multiple servicers (e.g. Navient, Nelnet, FedLoan, Great Lakes, etc). Of all the services, only FedLoan processes payments for those intending to utilize the PSLF program.
  • Submitting an employment certification form (ECF) for PSLF automatically switches borrowers to FedLoan, but back in the day, being bounced around wasn’t all that uncommon either. In fact, my loans were transferred to a new servicer a year after I graduated. Each time this happens, you’ll have to set up a new account and auto-pay must be re-established. It’s common to lose a month during the process, and sometimes the servicers themselves might place you on an administrative forbearance if they couldn’t get the job done in the interval between monthly payments.

1/12 – Submitted first employment certification form (ECF) for potential PSLF, triggering the automatic transfer of servicing to Pennsylvania Higher Education Assistance Agency (PHEAA, “MyFedLoan”). The transfer process takes greater than 1 month, resulting in a missed opportunity for a monthly payment.

  • When you file for your Direct consolidation, you are able to choose your servicer. If you are considering PSLF at all, you want to select FedLoan to prevent any delays from an unnecessary transfer down the road.
  • Additionally, while you would think that the transfer of your payment records would be easy-peasy, it isn’t. Apparently, at least in the recent past, actual paper was involved. Achieving PSLF on-time relies on a correct payment count, and the source of many folks’ incorrect payment counts is the payment information from old servicer accounts prior to the transfer. While FedLoan is objectively not a good company, they do better with their own counting.

1/14 – Employment verified but payment counts were inaccurate. Submitted complaint with bank statements to show the error. While there was no response, it seemed to be fixed in later iterations.

  • Incorrect payment counts are a common headache source for borrowers and are often off by years due to small errors in the data. And while it’s easy to request a manual recount, they’ll tell you upfront that the process might take two years. For obvious reasons, they also prioritize those who are closer to the 120 payment number.
  • When there are payment count or processing issues and FedLoan doesn’t fix them promptly, there are now a few ways to call in bigger guns. You can file a complaint with the Office of Federal Student Aid here and with the Consumer Finance Protection Bureau here. If neither one of those works, then contact the FSA Ombudsman.

6/15 – Residency complete; employment verified.

  • While it’s considered good practice to submit ECFs annually, at the minimum you want to do so as you leave a qualifying institution. You don’t want to be trying to track down someone at HR willing to sign your form years down the line.

6/16 – First fellowship complete, employment verified.

  • He’s doing a great job.

11/16 – Switched from IBR to the new Revised Pay as You Earn (REPAYE) payment plan created through an executive order by President Barack Obama in 2015. Annual income verification timing was moved to the end of the calendar year, and one qualifying monthly payment opportunity was lost; 2017 payments now based on 2015 (trainee) income.

  • Note that because he didn’t meet the eligibility criteria for PAYE, REPAYE was his only chance to lower his payments from 15% to 10% of discretionary income, resulting in significant savings.
  • During the switch, his annual recertification timepoint moved later in the year. Recall that payments are based on your most recent tax return, which is in turn based on the previous year’s income, so there is a considerable lag between when your income goes up and when you start paying for it with regards to student loans.
  • You should expect to always lose a month when switching between repayment plans. Your interest also capitalizes, though that is irrelevant with regard to loan forgiveness. With IBR, in particular, the lost month was specifically included in the process.

6/17 – Second fellowship complete; employment verified.

  • The more training you do, the better deal PSLF becomes. Because of the lag in payment increases, some physicians will almost certainly receive loan forgiveness after never making an attending-sized payment.

8/17 – Graduate school (MPH) enrollment triggers automatic deferment (without notification), another month lost while the deferment waiver was submitted and processed.

  • Most people who are full-time students cannot meaningfully make student loan payments on prior debt (and they’re usually taking on more!), so any time you become a full-time student, the system is set up so that you are automatically placed on an in-school deferment.
  • You can waive this and continue repayment on loans from prior schooling, which is very helpful for PSLF for those who go back to school but are still working full-time at a qualifying institution. (But no, in case you’re wondering, you can’t simply waive this on new/current loans and start making qualifying PSLF payments on those new loans while still in school even if you somehow were also working full-time.)

8/18 – Employment verified with 4 payments not appropriately counted; request submitted for a manual recount (which would take almost 2 years to complete).

  • Two years is what FedLoan considers par.

3/20 – President Donald Trump signs the Coronavirus Aid, Relief, and Economic Security (CARES) Act, essentially canceling the final 7 payments and neutralizing the effects of the prior errors.

  • The CARES act (which included 0% interest and $0 payments) has benefited a lot of people. In addition to helping keep less fortunate borrowers financially afloat, it’s also been a boon for those going for loan forgiveness, in particular those near the end of their journey currently enjoying larger salaries and consequent larger payments. Further discussion here.
  • An intern is often looking at $0 payments anyway. A resident may be saving a few hundred bucks per month. But many attendings are saving thousands of dollars per month through the CARES act forbearance, which counts these no-pay months as qualifying payments for PSLF.

10/20 – FedLoans sent notification that 120 payments had been reached (during the CARES forbearance); PSLF application/final ECF submitted, but an employer error on the application results in a 1-month delay.

  • The language of the CARES act was clear, but some folks were still petrified that somehow the CARES act forbearance wouldn’t count for PSLF. It does.
  • The HR department has a tendency to sign these forms incorrectly. Every signature should be legible and every date completely clear for an ECF to be accepted.

1/21 – PSLF application approved. $82,438.65 subsidized and $227,845.59 unsubsidized forgiven.

  • Congratulations!
  • (Note that subsidized loans are no longer given out for graduate school like medical school, but regardless the interest is only subsidized while still in school.)

Verdict

In the end, this story demonstrates most of the classic PSLF teaching points. It’s a real program. It can be administratively complex, especially for older borrowers, but it boils down to making sure you have Direct Loans and picking an IDR plan. Everything else is just optimization to maximize forgiveness by paying as little as possible over the course of the 120 qualifying payments, keeping records, and complaining if someone else messes something up.

It can provide a very large amount of tax-free loan forgiveness.

However, for some borrowers, this forgiveness does not result in significant cash savings given the relative compensation differences between academic positions and private practice.

People who borrow in the neighborhood of 1x their annual salary or less can feel more or less confident in picking whatever job they want and know that they will be able to service their debt. For these people, PSLF is a great benefit of pursuing your passion for public service but not a reason to take a job you don’t want. For those that borrow 2x or more, PSLF is a real reason to consider a qualifying job.