Student Loans: In Print and Online

I published the first edition of Medical Student Loans: A Comprehensive Guide in 2017. Waiting almost three years to put out a print version is what happens in the perfect storm of total DIY, extreme retentiveness, and being a generally lazy procrastinator. Oops!

But I’m happy to say I finally put the finishing touches on the print editions for both of my loan books this month, so those of you hankering for the perfect beach read need wait no further:

Hurray!

Even better?

But in what is surely a terrible business move, I’ve also put the entire text up online at benwhite.com/studentloans/.

So yes, you too can join the ranks of folks still exchanging money for that hard-fought knowledge (thanks!).

And yes, you definitely still download a nice ebook file in the format of your choice in temporary exchange for your email address so I’ll have a nice big audience for that infrequent newsletter I’ll probably never actually start. (PS I even put the unsubscribe link in the first sentence of the download email; did you know it actually costs a bunch of money to have an email list? Crazy.)

But if you just want to scroll through 45k words in a web browser, now you can do that too.

Student loans are crippling a generation of Americans and have a chilling effect on personal+financial wellbeing. I’m just trying to do whatever I can to help you get the information you need to make thoughtful decisions about managing your debt.

If You Have a REPAYE Subsidy: Maximize It, Don’t Pay Extra

A general rule of debt repayment is that it’s never a bad idea to put extra money towards paying down your debt faster. More money means getting out of debt faster and less money spent on interest. This is true for credit cards, most student loans, car loans, etc.

However, this is actually not necessarily the case in the context of income-driven repayment in the setting of negative amortization (i.e. when calculated monthly payments are unable to cover the amount of accruing interest).

If you can’t dent the principal, then there’s no point rushing to put extra money toward your federal loans. But why?

How Much Will It Take to Make Real Progress?

The average medical resident has big loans and relatively low income. While some intentional living can certainly free up some extra money for debt payoff, it’s much harder to have enough extra to completely mitigate negative amortization, let alone begin actually making progress on paying those loans down.

For example, $200k at 6% accrues $12,000 interest a year. A single resident earning $60k in PAYE/REPAYE has a monthly payment of around $344/month, or $3,864 for the year. In order to break even, you’d need to spend over $8,000 extra. Not chump change, especially on a resident salary.

Leverage Instead

Leverage the extra money you can earmark for loans to earn some interest elsewhere. A tax-advantaged retirement account (at least get the company match from work if available) or a Roth IRA are great options. When the question is between investing vs. paying down loans, the real answer is yes.

But if you specifically want to put money toward those loans, put it somewhere safe for now that earns some interest and then use it toward your loans. Don’t rush; it’s a waste.

To understand why you should wait, you need to have an understanding of how interest works with federal student loans and how payments get applied.

How Federal Student Loan Interest Works

1. Loans grow with simple interest, and capitalization is only triggered by very specific events. Capitalization is when accrued interest is added to the principal, thus resulting in a bigger loan accruing more interest at a faster rate. The main triggers are loan consolidation, the end of the grace period, changing repayment plans, and if/when you lose your partial financial hardship while in the IBR or PAYE plans.
2. You can’t pay down the principal by making extra payments until you’ve paid off all the accrued interest for a specific loan.

What this means is that once you begin repayment, you should never be surprised by a capitalization event. Your interest will continue to accrue every single day but it will not be added on to the principal unless one of the above factors takes place. Because the principal does not change, the amount of interest accruing remains constant. No matter how big the number gets, the rate of interest accrual remains the same until a capitalization event occurs. Paying down a little extra interest itself now as opposed to later does not change the natural history or your loans or alter the amount needed to pay them down.

In the REPAYE program, half of any accrued interest that is not covered by your monthly payment is forgiven. Therefore, the lower your monthly payment, the lower your effective rate. That doesn’t mean you shouldn’t still set aside more money every month toward debt repayment, just that there is a real financial benefit to paying as little as possible directly to the servicer in the short term until you are able to dent the principal.

That Money is Still Spoken For

To reiterate, I am not suggesting that you take this extra money that you could otherwise put your loans and spend it toward lifestyle inflation.

That money should be in some kind of loan payoff slush fund, such as a CD or interest-bearing online savings account like Ally Bank.

Earning 1 or 2% risk-free in a savings account will make that money go further when you finally use it on your loans. A lot different? No, of course not. But it does help just a little bit to mitigate what can be relatively high federal loan rates. Sure, it can function as an emergency fund too, but you should give that account a name like “loan money.” It’s not for vacations.

When to Deploy

If you’ve been saving money on the side for loan payoff, there are several situations in which it’s time to pull the trigger and make a large lump sum payment.

  • Right before a capitalization event, such as losing your partial financial hardship in IBR or PAYE.
  • Right before a private refinance.
  • When your income increases enough that you’re actually able to start making substantial progress on your loans, then you can jumpstart it with your slush fund.

Caveat: if you have not consolidated your loans and have some plus loans at a higher interest rate, one could conceivably put all extra funds into paying off that loan first. Given that an individual loan will be a smaller amount, it may be feasible to make progress on it. However, in general, I recommend most people consolidate for the reasons outlined in this post.

Maximizing the REPAYE Subsidy

One of the common REPAYE questions has been if I pay extra will it eat into my repaye subsidy and thus ultimately lose money? There has been some discussion, but the answer is supposed to be that you can. That said, I would almost never trust a servicer to ultimately apply these things correctly. As we’ve discussed above, there isn’t a great reason to do this on a routine basis. In most cases, you’d be better off leveraging that money elsewhere.

One thing to consider is that placing money into a traditional pre-tax retirement account like a pretax 401k/403b reduces your adjusted gross income (AGI), which reduces your payments by 10% of the contributed amount the following year, which in turn increases your amount of unpaid interest thus increasing your unpaid interest subsidy and ultimately lowering your effective rate. That’s a mouthful, but it means that the more you can lower your AGI, the less interest accrues on your loan.

That said, the income-lowering strategy is much more effective in reducing payments toward PSLF than in saving money on the accrued interest. For example, a $100 pre-tax contribution will lower payments the next year by $10 and would thus result in $5 of forgiven unpaid interest.

Lastly, if you are considering the possibility of PSLF

Never spend a dollar more than absolutely necessary directly on your loans until you are ready to permanently give up that plan. Any dollar extra you pay is a dollar wasted in the event of achieving loan forgiveness. Again, if you are nervous about the PSLF program, then you hedge your bets by being financially prudent in other ways, not by tilting at your loans.

Will I qualify for PSLF?

After some high profile new stories about the initial 99% rejection rate for PSLF application, I wrote back in 2018 about how using that number as a means of summarizing the PSLF program was essentially clickbait.

I still see the 99% figure used all the time by ill-informed people in arguments about how everyone should abandon all hope and rush to the arms of an immediate private refinance without any consideration of critically important details such as the size of an individual’s crippling debt or how that relates to their current or expected income. Dunning-Kruger in action.

That said, the high rejection rate does illustrate the need for due diligence and careful planning, because what it really signifies is a lot of people’s general lack of attention to detail when it comes to critically important financial matters (e.g. the impact of investment fees on retirement planning):

Wrong loans. Wrong repayment plan. Wrong/unconfirmed number of payments. And (more rarely) wrong job.

A small fraction of that 99% also probably included some people who actually did know better but we’re hoping for a windfall. No harm in asking right?

Current borrower, the program is safe

If you’ve already borrowed loans, you’ll note that the master promissory note you signed includes this:

A Public Service Loan Forgiveness (PSLF) program is also available. Under this program, we will forgive the remaining balance due on your eligible Direct Loan Program loans after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed full-time in certain public service jobs. The required 120 payments do not have to be consecutive. Qualifying repayment plans include the REPAYE Plan, the PAYE Plan, the IBR Plan, the ICR Plan, and the Standard Repayment Plan with a 10-year repayment period.

The MPN is a binding contract between you and the lender (the federal government). It cannot be legally changed. This is why all new proposals, from the Obama-era PSLF cap to the Trump’s hoped abolition, have always specifically excluded current borrowers. They have to. To change the rules of the game for an old borrower runs afoul of the common law doctrine of estoppel. In layman’s terms, you can’t go back on your word.

I know that sounds good in theory, but everyone who reads internet forums, social media, or the annual PSLF clickbait articles (even from major news outlets) is leery. Thankfully, there’s already some existing case law!

The Department of Education under Trump-appointee Betsy DeVos could at best be charitably described as the perfect example of how cabinet-level executive departments can be politically undermined while being used as political bait for horrible and/or clueless people. Under DeVos, the DOE did try to change the rules after the fact for a tiny number of people with non-501(c)(3) nonprofit jobs that did (and then “did not”) provide qualifying services. These jobs are approved on a case by case basis by FedLoan, and the DOE tried to retroactively undo FedLoan’s approvals.

So how did it turn out? The government basically lost. You can’t do that. I explained the details of the case here (I think they’re interesting).

The PSLF program is an entitlement. Entitlements are hard to change and hard to get rid of, and you can’t simply pull the rug out from under folks who made decisions based on you holding up your end of the bargain.

So, with that long preamble, I’d like to answer the question at the title of this post:

Will I qualify for PSLF?

I’ll answer with another question:

Well, are you doing the things that it says on literally every single document that you need to do?

Then yes!

After a 10+ year boondoggle of administrative suffering, you too can enjoy your free money.

You need:

  • Qualifying loans (Direct, not FFEL)
  • Qualifying repayment plan (REPAYE, PAYE, IBR, ICR, or 10-year Standard)
  • Qualifying full-time employment (Government or 501(c)(3) non-profit are the most straightforward)
  • 120 on-time monthly payments

That’s it.

You don’t need to wonder; you should know at every point during the process. Check out the Official PSLF Help Tool. If you have any doubts, keep submitting those employment certification forms to FedLoan. If there’s an unanticipated problem, you can find out within months. Unless you’re trying to get a non-501(c)(3) non-profit job approved (like in that lawsuit), there really shouldn’t be any question.

Yes, FedLoan can be terrible. And yes, sometimes you need to submit a CFPB complaint to get those manual payment recounts done when it seems that basic arithmetic is beyond their reach. No one said the process was pleasant.

But at this point, no one else needs to be surprised after a decade.

Talking Student Loans with SLP

I was on the Student Loan Planner podcast with Travis Hornsby this week dispelling myths and getting into the weeds on student loan loopholes. Good times, and we discuss some really good tips. Check it out.

In related news, I made my usual periodic updates to my definitive, comprehensive, and completely free student loan books as well, so now’s a great time to get a Hanukkah present from me and get up to speed on taking care of that brain mortgage.

I’m obviously a firm believer that people should self-educate about this stuff (and all personal finance), even if they plan to hire a professional. And I think anyone can do it themselves if they put some time in. I don’t do “recommended advisor” pages around here, but I do send folks who need or want professional help to Travis, because we’ve been internet friends for years and he’s one of the few people in the industry that consistently knows his stuff (and he gives my readers an extra 6 months of follow-up questions when they hire him).

If you’re getting free advice about loans over a steak dinner, that advice is almost certainly wrong.

Thought Experiment: Borrow a Direct Loan as soon as possible in order to secure the possibility of PSLF

Back when the Republicans held the Presidency, Senate, and the House, there was constant bellyaching about when the government would shutter the PSLF program. As we’ve discussed previously, despite various proposals, any practical discussion that suggested an imminent demise was either unfounded, misguided, and/or primarily promoted by news organizations who need advertising eyeballs or by those who profit from private student loan refinancing.

If you’ve been reading before, you’ll know that any upcoming changes won’t affect old/current borrowers, who will be grandfathered. PSLF is in your master promissory note.

That said, a program cancellation would change things for those who would be considered new borrowers after its implementation. For example, a high school student planning on one day being a doctor could find their future plans derailed, as might a college student whose parents have generously funded their education.

With Democrats controlling the House and most Democrat contenders for presidency supporting drastically expanded loan forgiveness, it would seem the odds of a program cancellation in the short term are lower than many would have anticipated even just a year ago.

But let’s do a thought experiment:

If someone wants to guarantee the ability to be eligible for the PSLF program, they should take out a student loan of some kind as early as possible.

Why? Because changes only affect new borrowers, and anyone with a current loan is automatically an old/current borrower. Someone who has already borrowed money with the expectation that it can be forgiven and holding onto a master promissory note stating the same should be safe from any future changes.

So a freshman in college who doesn’t really need a loan but qualifies for financial aid could take out even a token loan just to open that eligibility door. If you want to go to graduate school, perhaps one should fill out the FAFSA no matter what, even if your parents were planning on taking care of college for you.

Caveat 1: I’m not really recommending anyone do anything. It’s just an illustration of the world we live in and the system we work with.

Caveat 2: There’s no guarantee it would work that way fully. In the event of a PSLF-closure, a borrower’s outstanding/current loans would certainly qualify, and past proposals would also nearly guarantee that the loans required to finish their current course of study would also qualify. But the loans required for a future graduate degree? That wouldn’t necessarily have to make it in. The goal of taking an early token loan would be to give yourself the best chance of locking in forgiveness while not costing anything meaningful from accruing interest.

Caveat 3: Sometimes being an old borrower isn’t so great. PAYE was an improved income-driven repayment plan compared with IBR and was specifically not made available to old borrowers when it was released. Taking out a loan earlier than you need might keep the PSLF doors open, but it could close others, especially since the PSLF doors don’t seem to be closing yet. Given how long it takes Congress to do anything, one can easily see a scenario where imminent program changes are telegraphed way in advance.

Caveat 4: With regards to the Caveat 3, I personally think it is unlikely given the optics of recent PSLF denials and how loan politics have changed for any good new programs to be withheld from old borrowers in the future.