10 Student Loan Questions for Emergency Housestaff
By Jason DiLorenzo, Founder and Executive Director of Doctors Without Quarters (DWOQ)
What is the difference between the Income-driven loan repayment plans, and how do I select the one that makes the most sense for me?
Of the five income-driven repayment (IDR) plans available today, there are really three that are most suitable for today’s Housestaff with federal student loan debt: Income-Based Repayment (IBR), Paye As You Earn (PAYE), and the newest available program, Revised Pay As You Earn (REPAYE). Where the term IDR is used below, it is a reference to ALL of these programs.
Income-Based Repayment (IBR) was launched in 2009, and is a federal repayment program that limits monthly loan payments to 15% of your discretionary income. To be eligible, a Partial Financial Hardship must exist, which means that this 15% of your discretionary income, calculated on a monthly basis, is less than what you’d be required to pay on a 10-year standard repayment plan. This hardship exists for most trainees with federal student loan debt, as 15% of the discretionary income for a single resident with a $50,000 salary would result in roughly a $400/month payment. The 10 year standard monthly payment on $220,000 of debt, by comparison, would cost about $2500/month. Clearly, a hardship exists here…
IBR is also a qualifying repayment plan for the Public Service Loan Forgiveness (PSLF) program. Taxable loan forgiveness is granted through IBR after 25 years of repayment. However, payments in IBR are capped at the 10-year standard payment amount established when the borrower entered IBR. Because of this cap, many attending physicians would pay off their loans through IBR before the 25 year forgiveness period expires.
Note: IBR is least used by today's graduates with the introduction of these next two:
Pay As You Earn (PAYE) was launched in 2012, and similar to IBR newer federal repayment program. Similar to IBR, PAYE limits payments to 10% of a borrower’s discretionary income instead of 15%, and taxable loan forgiveness would be granted after 20 years of repayment. The payment cap is also the borrower’s 10-year standard repayment amount, and PAYE is a qualifying repayment plan for PSLF as well. Only borrowers who have NO OUTSTANDING BALANCE on a federal student loan issued prior to October 1st, 2007, and who took out a federal student loan ON OR AFTER October 1st, 2011, are eligible.
Revised Pay As You Earn (REPAYE) become available in December of 2015, and it may make sense for continuing Housestaff to consider entering it. Here’s a brief summary of its features:
- 50% of accruing interest paid by government (Unsubsidized loans become partially Subsidized!)
- 10% of discretionary income required (just like PAYE), and also PSLF eligible. If you switch into REPAYE from IBR, the 10-year forgiveness clock won’t reset (unless you consolidate)
- Household income will be used regardless of how you file taxes
- 25 year taxable forgiveness for graduate students
- No cap to payments (10-year standard in IBR & PAYE)
Once you enter one of these IDRs, you cannot be removed from them (although you can switch between them as appropriate), even if the hardship that qualified you does not exist after training (hopefully it does not because you are making enough income!). Therefore, a critical part of your repayment strategy is to perform an analysis and determine the best course of action based on your salary and sector of employment AFTER training.
Most of my federal student loans are between 5.4% and 8.5%. Are there opportunities to refinance to lower rates, and if so, does this make sense?
This is an important question, as many students and graduates are being approached or seeing advertising for lower rates available from private lenders, a marketplace that’s become increasingly crowded and competitive over the last year. The issue to consider is suitability, as lenders tend to be transaction-focused and refinancing isn’t always the best option for you. Once you refinance federal loans to a private lender, you lose all of the federal benefits discussed above. While a 3% rate might seem attractive, if it comes with a high origination fee and is a variable rate loan, you might find yourself in a more costly loan if rates go up from their current historic lows. Even more importantly, a refinanced loan will also not be eligible for an IDR or the substantial loan forgiveness available through these programs for those who work in non-profits or Public Service. That said, Emergency Medicine practices usually hire their physicians from a for-profit practice group, so even if these doctors are working in non-profit settings, they aren’t eligible for PSLF unless they are employed directly by a non-profit, or remaining in academics after training.
If I can afford to make larger payments than required in an IDR while I’m in residency, should I?
This is an extremely important question, and the answer is somewhat counterintuitive. I generally believe you should NOT pay more than required through an IDR during residency, because those overpayments likely compromise both your subsidy savings and potential loan forgiveness. In addition, unlike in forbearance, interest is not capitalized while you’re in training and have the hardship that qualifies you for these programs. So, if you’re an intern or a PGY2 and your required payment is less than $100/month (which it should be… please contact me if it’s not), you still might be able to afford $400/month. Instead of overpaying on your loans, I would suggest placing that $400/month in a money market or savings account. Even if you get 1% return on these funds, it’s actually outperforming the accruing interest on your loans because the interest isn’t capitalizing during your training. If your employment after training no longer positions you for significant loan forgiveness, you’ll be able to apply this savings towards the repayment of accrued interest BEFORE it capitalizes. If you remain employed by a non-profit or government entity AFTER training, this savings can be retained and allocated to other vehicles.
Are Public Service and federal loan forgiveness really viable options?
I’ll assume that most of you at this point are familiar with the PSLF program (if you aren’t, please contact me), and that your residency/fellowship can count towards this 10-year clock if you’re utilizing an IDR. Some people don’t believe that this program will exist as it does currently, and in fact recently proposed legislation suggests considerable changes.
Regarding future changes to PSLF, Housestaff at non-profit programs should be reassured by a few things. For one, the Master Promissory Notes you signed to borrow each loan for medical school included language about PSLF and your right to utilize the program. Thus, a legal contract between you and the federal government says you borrowed under the assumption you’d be able to utilize the PSLF program under the terms of the program at the time you took out the loan.
Secondly, if you’re actively working towards repaying your loans through the PSLF program and have made economic decisions based on the program’s details, you’ve demonstrated a detrimental reliance on the terms as they exist today. As such, the federal government may be obligated to grandfather you and others in the same situation through any changes to the laws, based on historical legal precedent. In summary, we hope this means you’re unlikely to be affected by the proposed changes.
Additionally, the unintended impact the proposed changes to the PSLF program would have on the supply of health care would harm the success of the Affordable Care Act. Many students and young health professionals see PSLF as a means to make their career serving others possible, especially in light of the lack of growth in primary care physician wages.
When and why would it make sense to consolidate my loans?
In July 2010, Direct Loans became the lender for all federal student loans. Stafford and Grad PLUS loans borrowed prior to this time may have been originated by a private lender (Sallie Mae, Wells Fargo, etc.) under the FFEL program. These loans need to first be consolidated to Direct Loans before making IDR payments on them will qualify for PSLF. Furthermore, Perkins and select need-based loans are not eligible for and IDR on a stand-alone basis, but they can be consolidated to Direct Loans for eligibility. Variable rate loans originated before July of 2006 can also be fixed at extremely low rates through consolidation.
If you’ve yet to enter an IDR, the first step in your action plan is to review all of your loans and determine if a consolidation is necessary to maximize your savings opportunity.
If you have already completed qualifying payments towards PSLF, consolidating to a new loan will actually create a new loan and erase your progress towards PSLF. DON’T DO THIS!
What is loan forbearance, and why might using it be a bad idea during my training? Isn’t that what residents used to do?
In forbearance, no loan payments are required but your interest continues to accrue. It’s true that in past years many residents did not pay on their loans during training, but the times have since changed dramatically and loan forbearance is typically the most costly option for today’s residents. Superior repayment alternatives have arisen in recent years and interest rates on federal student loans to medical graduates were fixed in 2006, with an average rate of 7%. While forbearance allows you more access to your modest training income, it is important to note that ALL of this interest accrues with no federal subsidy or forgiveness opportunity. Furthermore, interest can capitalize in each year that forbearance is renewed. A resident with $220,000 of federal student loan debt will accumulate almost $65,000 in additional interest over the course of a 4-year residency by using forbearance. Both Income-Based Repayment and Pay As You Earn are superior alternatives as they require affordable loan payments during training, provide an interest subsidy, and can position many residents and fellows for significant loan forgiveness.
I’ve accumulated a fair amount of private/credit card debt during my training. Are there any opportunities to refinance and reduce the high rates on these loans?
Yes. For several years, we’ve been encouraging the private lending marketplace to sharpen their pencils for our young physician clients, and as a result there are several programs now available.
For those of you with credit card debt, you’re not alone. It’s not uncommon to see our physician clients carrying over $10,000 of credit card debt by their last year of residency, and the average interest rate is over 15%.
How can filing my taxes strategically help reduce the cost of my debt?
All IDRs use your previous year’s tax return to establish your payment for the next twelve months. If you’re married, it may make sense to file your taxes married and separately during your training to maximize your savings opportunity. For our clients, we perform an analysis of the impact filing separately can have on your loan savings opportunity, which can be shared with your tax advisor to make a final decision.
Interns may wish to file a tax return for the prior year, particularly if you had little or no income in your last year of medical school. This strategy can often yield a $0 payment in your first year of training. If no prior tax return is available when you apply for an IDR, you’ll be asked for a payroll stub. Your loan servicer will then annualize this figure, which could will result in a payment closer to $250 - $400/month.
How should my loan repayment strategy change AFTER training?
This is the most critical loan decision you’ll make if you’ve been using available IDR's strategically during training, particularly if you’re deciding between offers from a PSLF-qualified employer and a private sector employer after training. In one of our case studies, a graduating resident after 4 years of training with $250,000 in federal student loan debt was comparing a $150,000 salary directly by a non-profit hospital, and a $205,000 salary from a for-profit program. After contemplating the after-tax impact of Public Service Loan Forgiveness and the corresponding reduction in payments required for the next six years, the $150,000 salary was actually worth over $240,000 on average for that six-year period. Only by utilizing an IDR during training can you position yourself for this opportunity.
I don’t have the time to manage my loans strategically with my training schedule. Is there a service that allows me to outsource this to a professional?
DWOQ exists to do exactly this. We offer one-time as well as annual federal loan consultations for a fee, and FREE refinancing suitability analysis (often relevant to those in the Emergency specialty). During each consultation, we are able to facilitate your loan consolidation if applicable, complete and file your IDR application and annual renewals, provide tax analysis if you’re married, conduct a training exit loan consultation, and keep you abreast of legislative changes and any appropriate refinancing opportunities. The goal of this service is to make certain you strategically reduce the cost of your debt by taking advantage of all of the opportunities discussed here.
Jason DiLorenzo is the Founder and Executive Director of DWOQ, and since 2010 he has served as a borrower advocate and advisor, speaking at medical schools, hospitals and conferences nationally on the topic of student loan legislation and its impact on early-career physicians.
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