The COVID-related PSLF boon continues

You probably know by now that the pandemic student loan payment pause was officially extended through Aug 31, 2022. Given midterm elections in November, I suspect there will be one more round of good news announced this summer and payments won’t actually start until–for example–January 1.

So that 0% rate continues to save people lots of money, and those $0 payments still count toward loan forgiveness including PSLF. There is probably no group this helps more than attending physicians.

But for anyone with rising incomes and especially more recent attendings, the additional pause extension news is likely even better than you’d think. From the recent announcement:

You won’t be required to recertify before payments restart, and the earliest you could be required to recertify is March 2023.

You may still see a recertification date that is earlier than March 2023 on your account Aid Summary. We are working to get those updated, and we thank you for your patience. If your recertification date falls between now and March 2023, it will be pushed out by one year. For example, if your account says your recertification date is Dec. 1, 2022, that date will be pushed out to Dec. 1, 2023.

For many borrowers, the next recertification deadline will be pushed even further into the future, potentially way past the point when student loan payments start again. Even if payments begin in August (or January), a lot of doctors will enjoy months if not almost a year of payments based on their last recertification from years ago, which means that a relatively recent graduate may enjoy trainee-sized payments for that much longer, and some residents may enjoy $0 payments for a while even after repayment restarts.

So a lot of folks–especially a lot of attending physicians–will get to benefit from significantly suppressed payments after the $0 period ends, likely resulting in thousands of dollars of additional eventual PSLF savings.

Marriage, Medicine, and Money (a free summit)

My internet friend Brent Lacey of The Scope of Practice podcast is putting on the free Marriage and Money, M.D. Summit 2021 next week November 15-17 (Monday-Wednesday).

It’s even eligible for a whopping 20 hours of CME.

This is one of those entirely free Facebook-based live online summits, and it includes hours and hours of content about marriage and finance from a bunch of physician and physician-spouse speakers. The private Facebook group is already live.

This is also one of those events where you can upgrade to a VIP pass for lifetime access, extra content, and a host of other perks. That cost before the summit starts is $99, $149 when the conference starts, and then $249 after it ends. Since it’s a CME event, you can use your CME funds to upgrade if you so desire.

(And that, dear reader–in case you missed it–would be the typical affiliate part where if you pay for an upgrade you also conveniently support this site.)

Functional Embezzlement

From Charlie Munger’s Herb Kay Memorial Lecture, “Academic Economics: Strengths and Weaknesses, after Considering Interdisciplinary Needs” (University of California at Santa Barbara, 2003):

…I asked the question “Is there a functional equivalent of embezzlement?” I came up with a lot of wonderful affirmative answers. Some were in investment management. After all, I’m near investment management. I considered the billions of dollars totally wasted in the course of investing common stock portfolios for American owners. As long as the market keeps going up, the guy who’s wasting all this money doesn’t feel it, because he’s looking at these steadily rising values. And to the guy who is getting the money for investment advice, the money looks like well-earned income, when he’s really selling detriment for money, surely the functional equivalent of undisclosed embezzlement. You can see why I don’t get invited to many lectures.

Fee-drag is insidious and nearly invisible to the human mind at a glance. As COVID-19 demonstrated, we are not wired to intuitively understand compound growth. When you see your accounts growing, you are happy. Even if you see your fees, they may seem reasonable on a snapshot basis.

What you don’t see, of course, is the effect of those fees year after year. Every loss is another piece that can’t undergo the magic of compounding in your favor. As the saying goes, “it’s time in the market, not timing the market.”

If you ever wonder how nice people can practice in an Assets Under Management model, the same problem works in both directions. Your money is still going up, so they feel they are providing a valuable service, especially in holding you to a plan and preventing you from otherwise hamstringing yourself (like, say, risking your nest egg on chasing meme stocks on Reddit or buying start-up cryptocurrencies).

Psychologically, we’re very good at cognitive dissonance: of not seeing what is inconvenient for us. Those professionals would rather see the “value” they create in terms of investment growth and the end-result financial security and not the excessive value removed from larger investors (and the even larger wealth those clients might otherwise enjoy).

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.