I’ve previously discussed in the detail the benefits and importance of consolidating federal student loans into a Direct consolidation loan as soon as possible after graduating.

One side perk of doing so is that most people will also max out their student loan interest deduction for that tax year regardless of whatever actual monthly payments you make on your loan.

That’s because several things are included as interest in addition to obvious actually paying interest on the loan with monthly payments. From IRS Pub 970:

Capitalized interest. This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capitalized interest is allowed in a year in which no loan payments were made.

Interest on refinanced and consolidated student loans. This includes interest on a loan used solely to refinance a qualified student loan of the same borrower. It also includes a single consolidation loan used solely to refinance two or more qualified student loans of the same borrower.

So, for most medical students, consolidating after graduation will automatically max out the deduction for that tax year, even if you end up with $0 IDR payments under IBR/PAYE/REPAYE and pay no actual interest yourself.

The reason for this is that interest accumulates on all unsubsidized loans while in school, which normally capitalizes at the end of grace period. Consolidating creates a new loan that “pays” off all the interest on your former loans. It would be an extremely lucky student who borrows so little as to accrue less than $2,500 (the max deduction) in interest over multiple years of school.

Make sure to download your 1098-E form from your loan servicer if they don’t send you one in the mail, as this document demonstrates the amount of interest paid. Your tax software like Turbotax or accountant will need this.

Remember, however, that there is a phase-out for this deduction with rising income starting at $65k/yr single and $130k/yr married with no deduction for incomes above $80k/$160k. Your tax software will do this for you automatically.

Big hat tip to Sotirios and Dalton from Doctored Money for bringing this up the other day.

This interesting article in New York Magazine about the proposed economic benefits of forgiving all of the outstanding $1.4 trillion in student loans has been making the rounds recently:

According to the Levy Institute paper, authored by economists Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum, canceling all student debt would increase GDP by between $86 billion and $108 billion per year, over the next decade. This would add between 1.2 and 1.5 million jobs to the economy, and reduce the unemployment rate by between 0.22 and 0.36 percent.

So, the macroeconomic upside of canceling all student debt would be substantial. The primary (supposed) downsides of such a policy would be a higher deficit, the potentially regressive distributional consequences of debt forgiveness, and (relatedly) the unfairness of rewarding certain well-off borrowers who don’t “deserve” it. Of course, all of these critiques would apply more powerfully to the recently passed tax cut bill. Few people would argue that increasing Harvey Weinstein’s after-tax income was a laudable public policy goal. But no one thinks that we should judge the merits of a tax cut on the basis of whether it rewards any unsavory individuals.

Forgiving $1.4 trillion in debt sounds nuts, but as a convenient near-perfect foil, we instead have a $1.5 trillion tax cut that probably won’t do a whole lot to help anyone who needs it.

The government theoretically profits from the Direct loan program, but the currently rising and soon to be endemic rates of default now predict that the government will start losing a lot of money in the near future.

What most people don’t realize when it comes to the alarmingly rapid rise of student loan default is that the most common culprits are not big borrowers attending expensive private schools (though that happens too, and certainly the need to repay large amounts of debt can be crippling and limits consumption). It’s actually people who borrow less than $10,000. It’s the people, many of whom who never completed a degree program or who received technical training at an unsavory for-profit “institution” like Trump University, who are unable to find the good steady work needed to pay off even a relatively small loan.

As with tax breaks, the biggest winners of the definitely-not-going-to-happen universal loan cancellation would, at least on paper, be high-debt high-income professionals like business school graduates and physicians. But unlike a tax break, not needing to use IDR would result in the same return of 10%+ from every borrower’s income, year after year—a much bigger and likely much more meaningful change, and it would also mean that those who default would finally be able to take steps to rebuild their credit.

There are a lot of headlines talking about what Trump is doing to PSLF.

But, to be clear, Trump isn’t doing anything to PSLF.

What Trump has done is release a budget proposal, as the sitting president does every year. This proposal is meant to signal policy goals for the administration, but nothing in it is binding. Presidents don’t make budgets; Congress does. President Trump made similar student loan requests for 2018 as he has for 2019, and they were roundly ignored last year. President Obama recommended capping PSLF during his last years in office, and that was ignored as well.

Don’t get me wrong, I don’t think PSLF is going to last forever. It’s going to be much more expensive than the government realized, and pulling out the rug from “rich” doctors may one day prove to be relatively good optics for budget savings.

But, there’s a big difference between PSLF being shuttered in the future (or even next year), and PSLF going away for those are already counting on it.

PSLF is still available, and there’s no reason to ignore it.

Make no mistake, Trump absolutely does want to kill PSLF. However, this is the actual language of the Trump FY2019 budget proposal, and it’s pretty clear that it does not affect old borrowers (emphasis mine):

Reforms Student Loan Programs. In recent years, income-driven repayment (IDR) plans, which offer student borrowers the option of making affordable monthly payments based on factors such as income and family size, have grown in popularity. However, the numerous IDR plans currently offered to borrowers overly complicate choosing and enrolling in the right plan. The Budget proposes to streamline student loan repayment by consolidating multiple IDR plans into a single plan. The single IDR plan would cap a borrower’s monthly payment at 12.5 percent of discretionary income. For undergraduate borrowers, any balance remaining after 15 years of repayment would be forgiven. For borrowers with any graduate debt, any balance remaining after 30 years of repayment would be forgiven.

To support this streamlined pathway to debt relief for undergraduate borrowers, and to generate savings that help put the Nation on a more sustainable fiscal path, the Budget eliminates the Public Service Loan Forgiveness program, establishes reforms to guarantee that all borrowers in IDR pay an equitable share of their income, and eliminates subsidized loans. To further improve the implementation and effectiveness of IDR, the Budget proposes auto-enrolling severely delinquent borrowers and instituting a process for borrowers to consent to share income data for multiple years. To facilitate these program improvements and to reduce improper payments, the Budget proposes to streamline the Department of Education’s ability to verify applicants’ income data held by the Internal Revenue Service. These student loan reforms would reduce inefficiencies and waste in the student loan program, and focus assistance on needy undergraduate student borrowers instead of high-income, high-balance graduate borrowers. All student loan proposals would apply to loans originating on or after July 1, 2019, except those provided to borrowers to finish their current course of study.

“…except those provided to borrowers to finish their current course of study” further supports that students in the middle of the course of study will get grandfathered into PSLF.

So, new borrowers starting in 2019 at the earliest would be part of the new program.

And by new, I mean the US government’s definition of “new,” which really means having no federal loans prior to this date.

So:

• Current students need not panic.
• Former students currently in repayment need not panic.
• Future borrowers who plan to only attend college need not panic (because the new proposal is actually pretty favorable to undergraduate loans).
• Future borrowers who plan to attend expensive graduate schools like medical school should cross their fingers.

And, none of this matters if Congress does this year what they did last year and ignores the problem. Student debt is a hot-button bipartisan issue. Whatever reform, if any, does get passed is unlikely to look like a carbon copy of the Trump plan.

[Since this was written, Splash shuttered their resident-specific program and LinkCapital shut down entirely]

In 2015, DRB (now Laurel Road) began offering private student loan refinancing to medical residents with a set monthly payment of $100. This was substantially lower than what the calculated payment for any resident would be under an income-driven repayment plan like PAYE or REPAYE but apparently too hard on the budget for a lot of residents who continued to forbear.

Not long after, LinkCapital joined the resident refinance ranks ($75 a month, eligible after intern year), followed by the very recent addition of SoFi ($100/month for up to four years of training). But for anyone who felt like every buck counted, private refinancing was still more costly to the monthly budget than forbearing.

Of course, forbearing is actually by far more costly in the long term because accruing interest grows unabated and then capitalizes while the borrower enjoys exactly none of the many wonderful benefits of participating in an income-driven repayment plan like IBR/PAYE/REPAYE.

To be absolutely clear, most residents should not be refinancing their federal loans. The vast majority of residents should be in REPAYE or—if spousal income makes REPAYE untenable—PAYE. But for those who feel forced to forbear in anticipation of a career in private practice, then refinancing is something really worth taking seriously.

Splash Financial has now made it possible for this subselected group of trainees to shave thousands off their loans painlessly: the required monthly payments during training are a token $1. They offer relatively narrow rate ranges for different term lengths from 5-20 years, so you may not even need to complete the really quick application to know if it’s even worth considering. Note that there’s no autopay discount during the training period.

When Splash first started offering their product last summer, they tacked on a hefty origination fee, which is unusual in the refinancing industry, where no cost-refinancing is essentially standard.  A few months later and they saw the light, nixing the fee. Now the product is a no-fee no-cost alternative that’s competitive with everyone else and the only one that allows for refinancing without the $75-100 monthly payment during training that even the other resident-friendly companies require. You can, of course, pay more per month like any other company (and the more you pay per month, the less you’ll owe later, so that’s highly recommended).

Student loans are a $1.5 trillion dollar industry, and every student loan company has referral programs. Splash’s program offers $500 for loans greater than $100k.

Unless you are in financial straits now and require loan forbearance but also plan on working at a 501(c)(3) non-profit after training, then forbearance is unlikely to be the right choice for you financially. IDR is the solid option for most people and REPAYE often offers the best rates around for many residents, but that doesn’t apply if you can’t or won’t make the payments. Those just forbearing to free up cash during training probably shouldn’t be forbearing in the first place.

Be aware that with any of the resident refinancing companies the interest accrued during training does capitalize at the end of training, so trying to pay down some of that interest prior to this step is always a good idea.

Last month Betsy DeVos’ (Trump’s) Department of Education ended their cooperation with the Consumer Finance Protection Bureau, because, you know, the CFPB was “overreaching” in trying to actually protect student loan borrowers.

Shocking that the same DOE that wanted to consolidate the entire servicing industrial complex into one giant government contract with a shortlist that included a company currently being sued by the CFPB for defrauding students would now be cutting ties with the agency charged with dealing with exactly this kind of detritus.

InsideHigherEd on the rapidly abandoned plan to consolidate all student loan servicing into a single monolithic “too-big-too-fail” mega contract:

DeVos has taken heat since May from members of Congress and representatives from the loan-servicing sector over the plan to pick a single servicer that would hire subcontractors to collect loan payments. Department officials at the time argued that the plan would make oversight of servicers by the government more efficient.

But the proposal found critics among both Republicans like Senator Roy Blunt of Missouri, who argued that the system would remove choice and competition, and Democrats like Massachusetts Senator Elizabeth Warren, who warned against creating a federal contractor “too big to fail.”

Blunt and Warren were part of a bipartisan group of senators who introduced legislation ahead of the department’s announcement Tuesday to block the single-servicer plan. Their bill would instead require the participation of multiple loan servicers.

Instead, 2019 will still see the consolidation of the different servicer websites to a single portal that interacts with the borrowers (which was the original Obama-era plan already in motion). Everything else will remain separate. How that will happen basically remains a mystery, but the site itself will be developed and managed by the Office of Federal Student Aid.

Hopefully, they don’t take any tips from Navient, because their website is singularly terrible.

From a reader:

Incoming PGY1. Your posts are tremendously helpful! My question is, why aren’t all residents (or at least the majority) doing REPAYE and then switching to PAYE at the end of their training? I feel like I am missing a key pitfall or something. Is it a pain in the ass to switch? Are new residents scared they will not be able to switch? Or is this just information not everyone has? I understand some people are not eligible, have a large spousal income, have private loans, etc etc…But just wondering why this isn’t a more ‘popular’ way to go about it?

Both REPAYE and PAYE calculate payments based on 10% of your discretionary income. But because PAYE monthly payments are capped at the amount that would be due for the standard 10-year repayment, PAYE payments can be lower than REPAYE payments for high earners. PAYE also allows for the married-filing-separately loophole that REPAYE closes.

The first thing we do as human beings when considering any big important action is to look around and see what everyone else is doing. (One imagines that, overall, this is a helpful survival mechanism.)

The downside to this approach is when the crowd is wrong. Or, when the crowd is right, but you’re different in some critical way.

So, the first/main reason people aren’t all switching from REPAYE to PAYE? They haven’t had a chance to yet.

Reason 1: Too Fresh

The switch probably will be popular over the next few years, but REPAYE is still pretty much brand new and a lot of current residents who should be aren’t on it. It was released at the end of 2015 (which is mid-cycle for almost everyone’s annual recertification), so really only students graduating in 2016 (i.e. new PGY2s) even had the option to pick it when they first selected a repayment plan.

Reason 2: Too Mislead

Another reason is that even for the more industrious residents who considered switching when it came time for their annual recertification, it seems that a lot of servicers have been misleading borrowers about the ability to switch out. For example: Yes, you can switch back from REPAYE to IBR or PAYE or even Navient is still lying to borrowers despite lawsuit.

Reason 3:  Too Ignorant or Lazy

Most borrowers choose and set-it and forget-it strategy to student loans, which means that they don’t critically re-evaluate their decisions or maximize their strategies. I’d like to think most people fall into the reason #1 camp, but the reason #3 group is one of the reasons why I wrote a book about it. A lot of folks are just lost.

Reason 4: They Actually Don’t Need To

A final big reason is that many borrowers won’t benefit from switching to PAYE: it depends on what happens after training. Switching only makes sense if you’re trying to minimize payments for PSLF. Otherwise, having smaller payments just means paying more over the life of the loan. Additionally, the accrued interest will capitalize, which is not relevant for PSLF but is for everyone else. For PSLF purposes:

And even for those PSLF-bound:
– A lot of people don’t need to. It isn’t that easy to break past the pay cap for a lot of docs. Thus, if you’re single, have a non-working spouse, or have a spouse with a similar debt to income ratio, PAYE isn’t going to make a big difference unless you are in a high paying specialty. There are definitely attendings who will continue to earn a REPAYE interest subsidy throughout their 10 years of qualifying payments, even with spousal income (particularly heavy borrowers).
– Similarly, depending on their spouse, many won’t gain enough in lower payments by filing separately to offset the tax penalty of switching to PAYE in order to file taxes separately worth it.

The real take home

As you approach the end of training, it’s time to sit down and make your real repayment plan. You may have been in REPAYE because it was the no-brainer choice while in training, but now—with a new job and a salary increase on the horizon—you’ll have the information you need to figure out if you should stay the course, switch to PAYE or IBR, or prepare to refinance privately.

Unsurprisingly, Navient is still lying to borrowers despite the ongoing lawsuit (for misleading borrowers) from the Consumer Finance Protection Bureau.

I was talking to a fellow resident last week. She has almost a half million dollars in student loans from medical school and has been repaying in IBR. She recently got married, and her husband, also a resident, thankfully doesn’t have any student loans himself. Unfortunately, this also means that next time she recertifies her income, her payments are going to basically double thanks to the addition of his additional income. Once he becomes an attending, they would go up even further.

Given the possibility (and desirability) of public service loan forgiveness for her given her long training and very high loan burden, which would result in more money forgiven than she borrowed in the first place (due to negative amortization during residency), her goal should thus be to minimize payments in advance of this goal. I recommended she switched to Pay As You Earn (PAYE) to reduce her payments now and file her taxes separately from her husband next year (they weren’t married for tax purposes this year).

And here comes the lie: she called Navient for guidance, and the customer service representative told her she was ineligible for PAYE because she held a loan from 2009.

Anyone who knows anything about federal repayment programs or has the capacity to do a simple Google search would know that the limitations for PAYE eligibility have nothing to do with the year 2009. They are the following:

To qualify for the PAYE Plan you must also be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You’re a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan when you received a Direct Loan or FFEL Program loan on or after Oct. 1, 2007.

So, nothing before 2007 and at least something after 2011. In other words, 2009 was a great vintage for PAYE. Full bodied and expensive with more than a hint of scut.

From the Consumerist:

The lawsuit alleges that for years Navient engaged in a series of illegal and deceptive practices, including providing borrowers with incorrect information, processing payments erroneously, and failing to address customers’ complaints.

Sounds familiar.

As always, it’s difficult to know if the servicer customer service reps are willfully ignorant or malicious, but they are routinely wrong (and seemingly proactively so).

My advice to anyone ever calling a servicer with a question is to already know the answer before you ask it. Find some official government verbiage to back up your interpretation. You should be looking for confirmation, not advice, and if the answer you receive isn’t the answer you’re expecting, find out exactly why. If the person you’re talking to doesn’t know, then get them to give you to somebody else.

After rolling back modest consumer protections last month, Education Secretary Betsy Devos’ tenure has released its biggest change yet.

In an example of doublespeak that would make Orwell proud, DeVos said this in the announcement:

From day one, my priority as Secretary of Education has been to put students’ needs first. This amended solicitation does just that. It maintains superior customer service and borrower protections while increasing oversight and protecting taxpayers.

…

With changes in the new amendment, we have simplified the process to ensure meaningful borrower protections while saving taxpayers more than $130 million over the next five years. Savings are expected to increase significantly over the life of the contract. Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times and an improved payment application method that will maximize the benefit of each payment the borrower makes. Our amendment makes no changes to repayment plan requirements.

But what the amendment actually does is consolidate the servicer program into one mega-contract in 2019 with no meaningful stipulations for accountability and no demand that the contractor work in the best interest of (or even be fair to) borrowers.1The last part was part of the previously dismissed late Obama-era policy.

Yes, the solution to a bad servicing situation is just to consolidate the program and give it to one private for-profit company, and the shortlist of three finalists includes Navient, universally considered the worst servicer, the one with the most complaints, the one with the most opaque and unusable website, the only one currently being sued by another government agency, and the one that despite that lawsuit continues to mislead borrowers.

Here is how Navient responded to being sued by the government for misleading borrowers:

There is no expectation that the servicer will “act in the interest of the consumer.” Courts therefore routinely hold that servicers and lenders “do not owe borrowers any specific fiduciary duties based upon their servicer/borrower relationship.”

From the Consumerist:

According to the CFPB’s April complaint snapshot, Navient was the most complained about student loan servicer, receiving an average of 1,400 complaints from Nov. 2016 to Jan. 2017, a 1,073% increase from the same three-month period the year before.

The Direct loan program tops $1 trillion. Navient already services over $300 billion in student loans and profited around $308 million from servicing those loans last year, down from $338 million in 2015 in part because of $17 million in extra legal expenses for basically being an awful company.

GreatNet, one of the other three finalists (the third is PHEAA aka FedLoan), is the combined venture of Great Lakes and Nelnet, two of the four largest servicers. Both companies have yet to be sued by the government and aren’t quite as hated, which for all I know may disqualify them from making a competitive bid in the current regime.

The budget savings of $130 million over five years is only a small fraction of total servicing expenses, but—more importantly—the increased cost of the Obama-era plan was to pay for genuine customer service to help reduce delinquency and default. Reduced default would likely generate more payments from borrowers, thus paying for some if not all the difference (Americans currently hold $137 billion in defaulted federal loans).

Lastly, the government profits from student loans. This is not a situation in which a budget shortfall affects uninvolved taxpayers; it’s a scenario in which a portion of the profits from student loans are reinvested into the same system to help American citizens who utilize it.