Understanding PSLF (Public Service Loan Forgiveness)
Dr. Jake Groenendyk is a native of Sioux Center, Iowa. He attended Covenant College in Lookout Mountain, Georgia, and graduated with a B.A. in Biology, followed by an M.D. from Washington University in St. Louis. He is now an internal medicine resident at Northwestern University, and in his free time enjoys reading, running, and cycling.
What kind of debt can you expect from medical school?
Student loans are a big concern for many prospective medical students. In 2018, the American Association of Medical Colleges (AAMC) estimated that 75% of graduating students had educational debt, with a median loan burden of $200,000 for those that took out loans. While financial considerations shouldn’t be the primary driver of your decision to become a physician, anyone considering a career in medicine should understand the basics of financing a medical education. The bottom line is, before understanding loan forgiveness, you should first know the reality of medical school debt.
This post will focus on one of the most popular and well-known (but often poorly understood) programs for student loan management, Public Service Loan Forgiveness (PSLF). PSLF offers a tantalizing promise: tax-free forgiveness of student loans after ten years of qualifying payments. For some borrowers, this can entail forgiveness of hundreds of thousands of dollars of debt. However, only a few people have successfully received loan forgiveness through PSLF so far, and many observers think the program is unlikely to survive for very long. Here is what this article will cover:
What do you need to know about PSLF?
Is it likely that current medical students will ever see any forgiveness through PSLF?
Is PSLF a good fit for you?
What is PSLF?
In addition to the available options for avoiding heavy student loan debt during medical school, future physicians who are interested in working for nonprofits can consider using the Public Service Loan Forgiveness (PSLF) program to decrease their educational debt burden. PSLF was created in 2007 to encourage people with high levels of educational debt to consider the nonprofit track. The program is structured to forgive any remaining federal loan debt after a borrower has made 120 eligible payments. These are payments that were required to be made while the borrower was employed by the federal government or an eligible nonprofit. “Required” payments are the regular monthly payments on your loan; they cannot be made during a grace period. (Thus, it would not count to simply make a new payment every day for 120 days and consider those the 120 payments.)
Many academic hospitals, which train residents, are considered 501(c)3 nonprofits, and thus physicians can begin their careers with 3-7 years of eligible payments. It’s also important to note that this program will only repay qualifying federal loans; this category does not include federal Perkins loans (which have a separate repayment program, but can become eligible through loan consolidation) or loans from your university or a private corporation (which cannot become eligible through consolidation).
Loan forgiveness after 10 years might not seem like much, since the standard repayment plan splits a borrower’s loan burden into 120 equal payments spread over 10 years ($3000 monthly on a $200,000 loan that the borrower begins paying off after residency). However, many students opt for one of the federal government’s income-based repayment plans, such as Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE), which bases the monthly payments on the borrower’s expected discretionary income.
These payments are typically a more manageable $320-$360 for a single resident with no dependents. This could result in tax-free loan forgiveness of over $200,000 for some residents. For most borrowers, this is far more attractive than the income-based forgiveness program, which forgives any remaining federal loan balance after 20-25 years (depending on which payment plan you choose) of eligible payments. Income-based forgiveness, in addition to requiring 20-25 years of payments instead of the 10 years required for PSLF, is also taxable. This means that if you had $100,000 worth of loans forgiven, you could owe the IRS as much as $37,000 in taxes on that money.
It sounds too good to be true. Is it?
Yes and no. You may have seen some recent news stories about how the loans of only a few people have successfully been forgiven through PSLF. Borrowers who began the program in 2008, its first full year, would have been eligible for forgiveness in 2018. By some reports fewer than 1 percent of those applying for PSLF have been successful. Many borrowers had been told by their employers that their position was eligible for PSLF, only to learn years later that it was, in fact, ineligible. Others believed their payments met the required standard, but learned when their applications were rejected that these payments did not in fact meet the standard (even payments off by a few cents can disqualify a payment from counting, according to the Wall Street Journal).
It is also possible that some loan payments were miscounted by FedLoan, the student-loan servicer employed by the federal government for PSLF loans. Unfortunately, early on in the program, no one seemed to put much thought or effort into the administration of PSLF; thus, it was easy for these sort of mistakes to happen. However, this issue has hopefully been addressed by the creation of new systems that allow students to track their eligibility and payments for PSLF online through FedLoans. If your current position or payments are not qualified, you should be able to find out immediately.
How long will it last?
Beyond the administrative challenges of PSLF in its current form, some students worry that the PSLF program might be cancelled in the future by the federal government. It is not difficult to imagine that a loan forgiveness program benefitting well-educated professionals and costing the federal government millions of dollars could be one of the first programs to be cut by politicians looking to cut the budget (or pay for their own pet projects). In fact, there have already been several proposals to cut PSLF, including in President Trump’s most recent budget proposal. The bright side for current students (or those likely to become students in the near future) is that these proposals have all grandfathered in current borrowers—the lifespan of the program may be limited, but it appears that those who have already taken out federal loans should be safe.
“It is not difficult to imagine that a loan forgiveness program benefitting well-educated professionals and costing the federal government millions of dollars could be one of the first programs to be cut by politicians looking to cut the budget.”
If you’re having mixed feelings…
Personally, I believe it is important to remember that the money funding loan forgiveness through PSLF is not coming from a vacuum—these are the tax dollars of your fellow citizens, or perhaps of your children. Some future physicians might not feel comfortable with this, knowing that their own financial situation is so good compared to that of the average American. Of course, this is a personal decision. Living frugally and taking out only as many loans as are necessary will help many future physicians feel comfortable with accepting their fellow taxpayers’ generosity. Also, keep in mind that the policy makers who created PSLF could certainly have foreseen that the program would be a boon to many highly paid professionals. PSLF is not a shady legal loophole, but a government program that, by forgiving large loan burdens of highly-trained professionals working in public service fields, is doing exactly what it was intended to do.
“Personally, I believe it is important to remember that the money funding loan forgiveness through PSLF is not coming from a vacuum—these are the tax dollars of your fellow citizens, or perhaps of your children.”
In summary, PSLF could be a great option for students with high loan burdens who are interested in working for the federal government or a nonprofit in the future. So far, very few borrowers have successfully had their student loans forgiven through PSLF. Thankfully, the administrative oversight of the program has substantially improved in recent years; thus, many of the issues preventing current applicants from qualifying should be avoidable for those just starting to make eligible payments today or who have not yet begun making payments.