I'm a Resident Physician: Should I Go for Public Service Loan Forgiveness?
Public Service Loan Forgiveness (PSLF) is a hot topic for many of the residents I speak with. If you decide going for PSLF is right for you, it is important that you understand the qualifications of the program so that you take the correct steps to achieve forgiveness, while avoiding “landmines” that can “blow up” your plan.
What’s so great about Public Service Loan Forgiveness?
Public Service Loan Forgiveness offers tax-free federal student loan forgiveness for those who qualify.
How do I qualify for Public Service Loan Forgiveness?
According to studentaid.ed.gov “[t]he PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.”
There’s a lot there to unpack, so let’s review this statement item by item.
“The PSLF Program forgives the remaining balance on your Direct Loans . . .”
In order for your loans to be forgiven, you loans must be Direct Loans. Federal Family Education Loans (FFEL) and Federal Perkins Loans do not qualify. However, FFEL and Perkins loans may qualify if they are consolidated into a Federal Direct Consolidation loan. Please note that consolidation erases any repayment history previously made. Essentially your repayment clock starts over again.
Furthermore, private student loans do not qualify for Public Service Loan Forgiveness.
“. . . after you have made 120 qualifying monthly payments . . .”
I sometimes see finance bloggers for physicians refer to the timeframe for forgiveness as 10 years. Technically this is incorrect. Your payments may, in fact, be longer than 10 years if they don’t qualify for one reason or another. The key here is “120 qualifying monthly payments.”
For example, say that during your residency you make qualifying payments. However, after residency you take a job for one year with a nonqualifying employer. During this period your payments do not count towards PSLF. If you then change jobs to a qualifying employer, your payments will continue to accrue from where they left off in residency.
“. . . under a qualifying repayment plan . . .”
Income-driven repayment plans qualify. The repayment plans listed below are the most likely to apply to you, though there are others that may be relevant depending on your circumstances:
Income-Based Repayment (IBR)
Pay As You Earn (PAYE)
“. . . while working full-time for a qualifying employer.”
You must be employed full-time. Part-time employment does not count. What constitutes a qualifying employer?
501(c)(3) tax-exempt not-for-profit institutions
Other non-tax-exempt not-for-profit institutions under 501(c)(3) whose primary purpose is to perform certain qualifying public services
Full-time Americorps or Peace Corps service also counts as qualifying employment
There are a number of landmines that can “blow up” your plan to receive tax-free student loan forgiveness.
Having just discussed qualifying employment, it is important to note that qualifying employment only counts if you are actually employed by the qualifying employer. In other words, if you work for a for-profit medical group that is contracted to the qualifying employer, you are not an employee of the qualifying employer. You wouldn’t be eligible for PSLF in this situation.
Confused? Here’s an example from a recent posting from Ben White to help you understand what I mean:
To give you an example: the very famous healthcare organization Kaiser Permanente runs a lot of 501(c)(3) hospitals. Many people who work at these places would definitely qualify for PSLF. However, the physicians who work for Kaiser are not employed by Kaiser Permanente itself or any of its network nonprofit hospitals. They are employed by various for-profit Permanente Medical Groups. It doesn’t matter if they work at a nonprofit; it matters who pays the bills. Whoever appears at the top of your W2 is who counts.
What other landmines need to be avoided? Remember that only DIRECT loans count. If you’re making payments under the FFEL or Perkins programs, these payments DO NOT count towards your 120 qualifying payments. These loans would need to be consolidated into a Federal Direct Consolidation Loan before payments begin counting towards forgiveness.
However, you need to be careful about consolidating any loans already eligible for PSLF. Federal loan consolidation erases your repayment history. If you’ve been making income-driven repayments for a few years and then decide to consolidate your student loans, you’ll be starting from the beginning all over again.
On the topic of qualifying payments, remember that if you’re going for PSLF your strategy is to make minimal payments in order to achieve maximum forgiveness. It doesn’t do you any good to pay ahead or pay more than the amount due. In fact, that may complicate your situation. Here’s what studentaid.ed.gov has to say:
If you make a monthly payment for more than the amount you are required to pay, you should keep in mind that you can receive credit for only one payment per month, no matter how much you pay. You can’t qualify for PSLF faster by making larger payments. However, if you do want to pay more than your required monthly payment amount, you should contact your servicer and ask that the extra amount not be applied to cover future payments. Otherwise, you may end up being paid ahead, and you can’t receive credit for a qualifying PSLF payment during a month when no payment is due.
Here’s another doozy. After you’ve made 120 qualifying payments, you still need to be at a qualifying employer at the time you apply for forgiveness, AND the time when forgiveness is granted. In other words, don’t switch jobs to a nonqualifying employer right after you’ve made your 120 payments. Wait to leave qualifying employment until the balance on your federal student loans is forgiven.
Some final thoughts.
Late last year the PSLF program came under undesirable media attention when it was revealed that an absurdly low number of PSLF applicants were actually granted forgiveness. What was the cause of the low forgiveness rates? Apparently many applicants didn’t meet one of the eligibility requirements that we discussed above, or the application for forgiveness was incomplete.
This raised fears among those seeking forgiveness under the program. However, my opinion (which doesn’t count for anything more than an opinion) is that it’s unlikely that the government closes the program for individuals who have already been working towards forgiveness and meet the eligibility requirements. Some physician finance writers suggest that it’s worth building up a side fund to pay off your federal student loans in the event that PSLF goes by the wayside, or that you decide you don’t want to work for a qualifying employer anymore. I can’t argue with that.
As a best practice, it’s a good idea to fill out and annually submit the Public Service Loan Forgiveness (PSLF): Employment Certification Form. A link to the form may be found here.
The content you just read is for informational purposes only. Yes, I’m a financial advisor, but this article really isn’t intended as advice for you specifically. Your unique situation needs to be taken into account, and the ideas presented here may not apply.
So, please make sure you do your due diligence BEFORE implementing anything. Due diligence may include hiring a qualified professional who understands your situation completely and can offer you personalized advice.