What to Consider when You’re Thinking of Student Loan Forgiveness
When new clients come to me, they almost always want to know more about student loan forgiveness. They’ve usually heard of Public Service Loan Forgiveness from a friend or colleague and they’re interested in finding out if they qualify. For some of them, PSLF is a great program that can potentially save them tens or even hundreds of thousands of dollars in student loan payments. For others, the majority actually, PSLF is zero help. PSLF is zero help because student loan forgiveness is only available, and beneficial, to a limited number of people in certain situations.
First, let’s talk a bit about what PSLF is and how it works. PSLF is a government program through which direct Federal student loans are forgiven. To qualify you must meet the following criteria:
· Work for a non-profit or governmental agency
· Demonstrate financial hardship
· Make 120 qualifying loan payments
· Have direct Federal student loans
Once you’ve made 120 payments, you’re able to apply for the remaining balance of your loans to be forgiven. As of today, no one has had their loans forgiven through this program. The first participants will be eligible to apply for forgiveness at the end of 2017.
If you meet the above criteria, then great! PSLF is worth exploring. The bad news is that there are some other circumstances that you need to consider before committing. I use the word committing for a reason; in order to maximize the amount of forgiveness which you’ll receive, you will have to take several actions such as setting up a payment plan under IBR, PAYE, or REPAYE. If you aren’t able to use PSLF after 10 years then you’ll end up spending more on interest than you would have under a normal repayment plan.
The first, and largest, consideration is whether or not you plan on spending ten years working for a nonprofit or the government. Our generation has a habit of switching jobs more frequently than previous generations. The average millennial job tenure is right at three years. That means that there is a good chance that you’ll be switching jobs at least once before you qualify for forgiveness. You’ll have to plan ahead when considering new positions to make sure that they will qualify for PSLF. One thing to note is that you have to actually be employed by a nonprofit. While many of the largest hospitals are nonprofits, a lot of those hospitals contract out the hiring of their doctors to staffing agencies. If you’re employed through a staffing agency instead of the hospital then you won’t qualify as working for a nonprofit.
Another consideration that you need to think about is whether PSLF will be around by the time that you’ve completed your ten years of payments. Cutting loan forgiveness for doctors is a fairly easy sell politically; most people don’t understand the work and determination that it takes to get through medical school and residency. All they see is that doctors making well into the six figures are having their debts forgiven. President Obama has already put forward a proposal which would limit PSLF actually. The good news is that it’s doubtful that PSLF will be completely done away with. The more likely option is that current enrollees would be grandfathered into the program, which would then be allowed to sunset once current enrollees have their debt forgiven.
For those interested in taking advantage of the program in the future there are several options which I see as viable. The first is that the forgiveness will be capped. This is a pretty likely option, although I can’t guess at the timeframe in which it will be implemented. The issue is that most people don’t understand the amount of debt that it takes to go through medical school. All most people see or hear is that doctors are having $500,000 in debt wiped out. I think that a much lower number might be implemented, something around $100,000 or $150,000. The second option which might happen is that debt forgiveness will become taxable. In truth, this is likelier to happen sooner. There is already precedence for this because amounts forgiven under IBR, PAYE, and REPAYE all count as taxable income. This could be a huge issue for those having six figures of debt retired. You can imagine the problem with having six figures of phantom income on which you would be required to pay taxes. If this comes to pass, the cost-benefit analysis will change and more planning will be required.
Let’s recap. Public Service Loan Forgiveness, and other types of student loan forgiveness, can be great options for some borrowers. PSLF allows borrowers to have the remainder of their loans forgiven after making qualifying payments for ten years. For borrowers who have a high debt to income level, particularly for those who have low initial salaries like during residency, this can be a great deal. Like with all good things, there are drawbacks to loan forgiveness. The biggest of which is that it requires you to work for a nonprofit employer or for the government. This isn’t a big deal for some but for others, it can be hard to find a job which qualifies. The other issue with loan forgiveness is that the rules might change between now and when you’ve actually made ten years’ worth of qualifying payments. Your forgiveness might be capped or it might be taxable. These issues need to be examined before making a decision!