The official application for the Biden student loan forgiveness is now live. Impossible to say if any legal action will block it in the end, but for now the safest thing to do if you qualify is to apply as soon as possible. It’ll take about 2 minutes.

Apply here.

From Bloomberg, some crazy machinations involving the restructuring of Envision, the massive medical staffing company, in order to pay off debts.

This is because Envision had $7 billion debt from its 2018 leveraged buyout by KKR, and KKR needed to find ways to exploit the paper details in order to restructure the company without getting taken to court and blocked.

“Loose documents have become the norm rather than the exception,” says Damian Schaible, co-head of restructuring at Davis Polk & Wardwell. “If we go into a real recession, we are going to see more and more borrowers and sponsors seeking to exploit document loopholes to create leverage against and among their creditors.”

Here’s the quick summary, which invokes the playbook of spinning off the valuable assets in order to essentially dump the crappy ones:

Envision, which also explored a consensual debt exchange that would have raised less funding, ultimately opted for what is considered one of the most controversial and coercive out-of-court restructurings to date. The [initial] deal…would prove to be just the beginning of a series of maneuvers that eventually allowed the company to restructure the vast majority of its debt but forced creditors to turn against one another.

The strategy rested on two pillars. The first was a drop-down transaction, in which a company’s most valuable assets are moved away from existing creditors and used as collateral for new debt. The second was a series of debt repurchases and exchanges that gave certain creditors priority over others and pushed anyone who declined to participate to the end of the line for repayment.

We always talk about stocks being risky and bonds being relatively safe, but corporate debt is its own beast in this world where overleveraged companies can successfully exploit loopholes to screw over current creditors in order to obtain new financing.

Envision first designated [their profitable ambulatory surgery business] Amsurg as a so-called unrestricted subsidiary, effectively moving it out of reach of existing creditors without violating provisions in the credit agreement that prohibited moving or transferring the asset. The Amsurg assets would then be used as collateral to borrow $1.3 billion from Angelo Gordon and Centerbridge, who’d effectively be stepping ahead of everyone else in the repayment waterfall. Envision could then use the cash raised from the hedge funds to boost liquidity and to repurchase some of its existing debt at steep discounts.

Ultimately, only $153 million of the original loan was left outstanding, as owners of 96% of the debt had exchanged their holdings and waived their rights to litigate the transaction in the future.

Likely a harbinger of things to come. The “bad guys” largely win. And for creditors, better to get pennies on the dollar than nothing.

The years of low-interest easy money did a lot of emboldening and overleveraging, and everyone was eager to deploy capital on dubious deals:

There was a bitter irony in the way most of the company’s creditors ended up competing for crumbs. Four years earlier, when Credit Suisse Group AG sold the debt that financed KKR’s purchase of Envision, demand was so high that a salesperson teased investors with a picture of cake crumbs on a plate. The message then: Hurry up and grab it before it’s all gone.

Big long-hinted-at news in the world of student loans this week. Please peruse the Biden Student Loan Fact Sheet. The Official FAQ is short and very readable.

Here are some highlights:

Student Loan Pause

• Payment pause extended “one final time” through Dec 31, 2022. This is again a massive benefit to current borrowers and especially those going for PSLF. For example, each month of $0 payments that qualify is often a four-figure subsidy to an attending physician.

Debt Cancellation

• Up to $20,000 in debt cancellation to Pell Grant recipients and up to $10,000 in debt cancellation to non-Pell Grant recipients. Pell Grants are for undergraduate loans only, so most young physicians will be in the second camp.
• To be eligible for cancellation, your annual income must be below $125,000 (for individuals) or $250,000 (for married couples or heads of households). It is unclear how exactly they will define and what they will be using to verify income at this time (probably AGI from last tax return?), or for example, if people utilizing the married filing separately loophole to reduce IDR payments may finagle some free money (e.g. the resident married to an attending loophole; I suspect not).
• Current students are eligible for this relief. If you are a dependent for tax purposes, then it’s your parents income that will be used.
• The process should be automatic for many folks, but some may need to apply. If you’d like to be notified about news, sign up for the DOE’s “Federal Student Loan Borrower Updates” here.

This is obviously a one-sided easy-to-deploy benefit to borrowers that does nothing to address the underlying program of skyrocketing tuition. There has been an incredible amount of hand-wringing and teeth-gnashing about this on the internet. The irony of most of that discussion, particularly those against forgiveness, is that the government subsidizes and gives money to a variety of citizens for a variety of things (owning a home, having children, investing in long-held assets). There is no neutrality to any status quo either. People pick and choose where to aim their indignation on a daily basis but often do so in an isolated out-of-context fashion. Mostly, people respond to every event in the predictable ways of their camp.

So, this is the functional equivalent of a big tax cut for mostly young, mostly college-educated (or often college-attempted) Americans. Now, politically that camp pretty firmly supports democrats, so trying to appeal to that already strong base may not be a very savvy move in the current political climate, and it may not be very well-timed given the current inflation issues, but it’s not as though we haven’t injected money into the economy through similar (or even probably less effective) means before. It just so happens that this is targeted to have a clear disproportionate impact on a smaller subset of Americans than, say, the tax cuts of the Bush and Trump eras (which had a substantial disproportionate benefit for wealthy Americans but was perhaps less obvious to a casual observer).

Everything is political, and this is no exception.

PSLF

• The application for the temporary PSLF expansion expires on October 31, 2022. See the White House page here.
• Again, this was designed to temporarily remove some of the fine-detail barriers to achieving PSLF by allowing past payments using the wrong payment plan (e.g. extended, graduated) or ineligible loan type (e.g. Perkins, FFEL) to count.
• You don’t need to have fully earned forgiveness to benefit from this program, this is to codify credit for past payments.
• This is mostly a boon for older borrowers (i.e. mostly people who started school before 2009).

The New Payment Plan

• A light-on-details proposed (not final) plan to further reduce payments on undergraduate loans to 5% and fully cover unpaid monthly interest for everyone.
• For borrowers with original loan balances of $12,000 or less, IDR-based forgiveness after 10 years. Currently, for undergraduate borrowers in PAYE, that’s 10% and 20 years.
• Raise the discretionary income floor so that more people will have $0 payments.

If you’ll notice, the generous forgiveness terms in this setting are on very small loan amounts. The goal here is in large part to make local education, and specifically community college, affordable for all Americans such that low-income families will have small or no monthly payments and then forgiveness after 10 years. This will, again, not really do much to deal with students borrowing for more expensive schools (except potentially make long-term loan forgiveness more attractive thanks to low monthly payments and a smaller tax-bomb thanks to a better interest subsidy).

As in, this would have a relatively small impact for most doctors except for preventing negative amortization during residency (effectively lowering your interest rate and making private refinance during training less competitive). One clever possible benefit would be to waive the in-school deferment and enter repayment for undergraduate loans while in medical school to enjoy $0 payments and 0% interest via IDR, effectively granting you subsidized loans in a world where many loans have been unsubsidized.

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).

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).

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.