Some of my friends are going for loan forgiveness. They owe 300-400k at graduation, and will probably owe about 450-600k when they finish residency. They opt to let their debt grow with the 7% interest with hopes of have this debt erased after making 120 income driven repayments 503 nonprofit W2 employee.
I considered PSLF myself since I have 6 years of training in radiology. Residency and fellowship counts towards the 10 year payment for PSLF, which means all my federal student debt (principle + lots and lots of interest) can be forgiven as long as I make 4 more years of qualifying income-based-repayment as an employee for non-profit organizations.
At my friend’s encouragement, I even considered taking out max amount student loan during 4th year of medical school (reversing my diligent practice of taking out minimum student loan throughout the first 3.5 years of medical school) and use student loan as down payment for our first home. In my friend’s words “the money is literally free, you can get it forgiven by just working 4 more years in non profits!”
I almost joined the wagon of borrowing to my heart’s content, paying minimum for 6 years, and then 4 years paying as an attending, then poof, my remaining debt will disappear.
Why did I turn away from this sweet deal?
I looked closer…
4 reasons I find PSLF (public service loan forgiveness) unrealistic,
- The government keep talking about capping forgiveness, last year at 57k. A legislative change as such can pass anytime. if a 57k cap is executed, it would not even cover interest accrued during medical school alone, let alone interests accrued with negative amortization due to small payments in residency.
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The government has not (I wrote this post a few months ago, I hope they did by now) figured out the final forgiveness application for the first “forgiven” class in 2017, it’s only 1.5 years away from them being forgiven 100’s of 1000’s of dollars. Why aren’t there more guidelines on paperwork and protocol to receive final forgiveness?
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40% of my peers plan for forgiveness, and majority of these doctors have 300k of student debt now. Since the income based repayment or pay as you earn program allow you to make minimum payment that does not even cover monthly interest, 300k will easily become ~500k in 10 years. the general public is unlikely to support a program that erases 500k of student loan for a doc making 250+k annual salary .
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There are not as many non-profit employee position as doctors who hope for PSLF. Working for a nonprofit organization (most hospitals) as a contractor does not count. For instance, most radiologists, ER docs, and anesthesiologists work for hospitals as contractors and belong to a private group. It can be highly competitive and tricky to get a true W2/Employee position from a 503 organization. I would rather not chase a nonprofit employee position all over the country. I like having as many options as possible when it comes to getting a job.
Bottom line is, I don’t think our government can afford to absorb this much debt. Our national financial state is insolvent as it is. PSLF basically is a unsustainable and unpopular program. It can be stopped, capped, at any time, and leaves its debtors, heavily indentured servants for several decades.
On the other hand, if the interest rate is more reasonable, like at 2-4%, then student debt will grow much more slowly than it would under current student loan interest rate and negative amortization of income driven repayment.
The combination of high interest and low payment and time is disastrous.
These are just my concerns for PSLF, but I would be really happy for those who are able to get forgiveness for 100’s of 1000’s of dollars, too 🙂
You can take your financial destiny into your own hands, instead of hoping and waiting for forgiveness by managing your debt actively.
- Are you going for PSLF?
- Does your specialty offer lots of non profit employee jobs?
- Are you going to refinance as a resident and forgo PSLF since forgiveness is uncertain, and interest saving (2-4% instead of 7%) is certain?
Great analysis! A few points:
1. I completely agree that PSLF is an unsustainable program if indeed that most of the enrollees are physicians with large debt burden. But the fact is that we don’t know what we don’t know – at least until 2017. I wouldn’t be so quick to predict the doom and gloom. A parallel I would draw here is the often promised demise of social security.
2. Most fixed rate refinancing options lands around 4-5% APR. The 2-3% you quoted is for variable rate refinancing – which can go as high as 10%.
3. Legislation may change at any time, but it would be ethically and legally indefensible if the government did not grandfather in the folks who have been making their minimum payments deligently. Hence, if you enroll in the program before the rule change, I believe you’re likely to be safe. Of course there is no guarantee but neither is a successful career in medicine, yet most of us took the risk of heavy borrowing for medical school.
4. Even if you don’t believe that PSLF will stick around, if you have any subsidized federal loans, the government will pay your interest for 3 years if your IBR payment is less than the required minimum. That alone is worth leaving at least your federally subsidized student loans on PSLF.
5. Despite the financial considerations above, I don’t advocate “ripping off” the American tax payers for PSLF if you have no interest in public service. On the other hand, if you do have a passion for teaching, research or serving the underserved populations, then I don’t see any reason not to take advantage of a program that’s designed for you.
Thank you for the thorough comments!
1. The PSLF helps graduate students of other fields, not just medicine. While 57k may still help many other professionals, it is just too little for docs with 200-500k of debt. Also, since doctors need 503 doctors’ jobs for PSLF, there is still a very large need for non profit jobs (40%), quite disproportionate to the supply of said jobs.
2. yes, if i refinance my student loan, I would go for fixed 4% rather than variable 1.9% unless I know I can pay off the loan instantly if rate increases beyond reasonable range. 4% is still much better than 7%, especially compounded over 10 years.
3. grandfather in current participants is likely. i’m hoping this post will help those who are still in medical school and have not started IBR payments. they will be the ones who may not have this option from the get go.
4. what is required minimum? do you mean the interest accrued each month? are you saying that as long as you make income driven repayment monthly, gov will pay the rest of the interest so you don’t have a growing principle amount of debt? for those definitely going for PSLF, it does sound great!
5. Totally agreed. I have an interest in public service and love teaching. I still choose to pay off my own student loan because I don’t want to be crossing off good job opportunities because it is not a PSLF compatible position.
Yes to #4. See “What about interest” at this link. http://www.ibrinfo.org/what.vp.html