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Education Debt

Part 1: Public Service Loan Forgiveness

What is Public Service Loan Forgiveness?

Public Service Loan Forgiveness is a program allowing the forgiveness of qualifying federal loans after the borrower makes 120 qualifying payments while working for a qualified employer.

Should I Pursue Public Service Loan Forgiveness?

The first decision to make when developing a loan repayment strategy is whether to pursue Public Service Loan Forgiveness. All remaining steps will be affected by this initial decision. There is no “correct” answer to this question in most cases, but there are some general considerations that can help you decide.

Factors supporting the pursuit of PSLF:

  • Qualifying loans

  • High debt burden

  • Low anticipated income (including lengthy training)

  • Likelihood of working at a qualifying employer

  • Vigilance

  • Risk tolerance

Qualifying Loans

Only Direct federal loans qualify for PSLF.  If your loans are from July 1, 2010 or later, your loans should qualify—though you should always check to confirm. If you have federal loans that are not Direct loans (including those before July 1, 2010), you may consolidate them into a Direct loan so that you can begin making qualifying payments on them.

Note that for the purposes of PSLF, consolidated loans will be treated as a new loan. This means that any qualifying payments made to qualifying loans that you then consolidate will not count toward the required 120 PSLF payments, since the count resets to zero for the “new” consolidation loan. For this reason, if you have already made qualifying payments to qualifying loans and you want to keep getting credit for them, it is important to only consolidate your non-qualifying loans.

If you haven’t made any payments yet, there is still another reason you may want to avoid consolidating all of your loans together, which is related to how the interest rate for the new consolidation loan is calculated. The interest rate for newly consolidated loans will be calculated as the weighted average of the component loans rounded up to the nearest 1/8th of a percent. If you have both non-qualifying and qualifying loans and you want to pursue PSLF for all of your loans, you can minimize the effect of this rounding by only consolidating your non-qualifying loans.

Loan Consolidation Example

Loan A: $100,000 at 5%
Loan B: $100,000 at 6.8%

Weighted average of interest (Loans A and B): 5.9%
Weighted average rounded to nearest 1/8th: 6%

Consolidation loan (Loan A + Loan B): $200,000 at 6%

In summary, you are not required to consolidate all of your loans together. By consolidating only your non-qualifying loans, you can both (1) retain any credit you have earned from qualifying payments to your qualifying loans, and (2) prevent the interest rate on your qualifying loans from being rounded up when averaged with the non-qualifying loans. While there are multiple reasons not to consolidate all of your loans together, there is one reason you might want to do this anyway: to enable yourself to begin making qualifying payments earlier in training.

Direct loans have a mandatory six-month grace period during which no qualifying payments can be made. If you consolidate your loans, you can begin making qualifying payments on the consolidation loan right away. Why would you want to start making qualifying payments earlier in training? Your income will likely be lower at the beginning of residency than it will be 10 years later. Since the value you get from PSLF increases as the size of your 120 qualifying payments decreases, making smaller qualifying payments early on will increase your potential benefit from the PSLF program. In addition, your loans will be forgiven six months earlier if you avoid the grace period and begin payments as soon as you enter residency.

High Debt, Low Income

The value of PSLF comes from forgiveness of the remaining balance of your qualifying loans after making 120 qualifying payments. The benefit you receive from this program is greatest for those who have a large amount of debt and can make small qualifying payments, since in this case there will be a lot of unpaid debt left to be forgiven after the 120 qualifying payments. This is why pursuing PSLF may be more appealing for those with a large amount of education debt as compared to those with a small amount.

Since you have to make 120 qualifying payments to be eligible for PSLF, you can’t just decide to pay a tiny amount each month for 10 years and obtain a large benefit.  You have to be enrolled in one of the government’s qualifying repayment plans, which will dictate your monthly payment based on the amount of debt you have and your income.

If you make enough money, you will be placed on the standard repayment plan and your required payments will put you on pace to pay off your loans in 10 years. If this is the case from the beginning of your loan repayment, there will be no loans left to forgive at the end of the 10 years (120 payments). Therefore, if you want to benefit from the PSLF program, you need to qualify for and complete income-based payments for at least part of your repayment period—and the longer you’re on an income-based plan, the more you will benefit from the program. Luckily, the vast majority of residents and fellows will have income levels low enough to qualify for an income-based repayment plan. Just like with higher debt levels, longer periods of lower pay will increase the amount forgiven after 120 qualifying payments.

The table below outlines four example cases to compare the amount of loan forgiveness that could be expected in several different debt and income level scenarios. Several assumptions and simplifications were made in these cases; they are meant to be illustrative only and do not represent real scenarios. Case A is designed to represent the type of resident who stands to benefit the most from PSLF: one with a large amount of education debt, a long training period, and a lower attending salary. Case B has the same level of debt but a shorter training period and higher attending income. Cases C and D mirror the training length and attending income levels of Cases A and B, but with a lower starting level of debt.

Loan Forgiveness Example Cases*
Public Service Loan Forgiveness case examples
* These examples are rough estimates only. They include several assumptions and simplifications in addition to rounding to make comparisons easier. These examples do not represent real scenarios.

In summary, those with larger amounts of debt and lower incomes—including longer periods of training—have the greatest potential to benefit from the PSLF program. However, there is typically still some potential benefit to other types of residents. Whether or not the risk of pursuing PSLF is worth the potential benefit, however large or small that may be, is a personal decision.

Qualified Employer

If considering pursuing PSLF, you should also consider the likelihood that you will work for a qualifying employer* for the full 10 years of required PSLF payments. If you don’t make 120 payments under a qualifying employer, the program will be of no benefit to you.

Switching to a non-qualifying employer after beginning to pursue PSLF will decrease if not eliminate your potential benefit from the program. This is because you will still be required to make payments on your loans during that time, but those payments won’t count towards the forgiveness program, so the amount of qualifying debt that can be forgiven will be reduced. If you don’t return to a qualifying employer, or if you do so without enough qualifying loans remaining, you will lose all potential value from the PSLF program.  This can come with the additional rub of the missed opportunity to more aggressively pay down debt earlier.

Many hospitals are qualifying organizations; many physician groups are not. Both of these generalities have exceptions. If you are thinking of pursuing PSLF, you should be obtaining this information when applying for jobs after residency.

* In short, qualifying employers include the government and non-profit 501(c)3 organizations. More information on qualifying employers can be found on the Federal Student Aid website.

Vigilance and Risk Tolerance

Finally, pursuing Public Service Loan Forgiveness requires both vigilance and a degree of risk tolerance.

Vigilance is important to maintain certainty that loans, payments, and employers all qualify for the program and are recorded correctly in the loan servicer database. One particularly important pitfall to note is that payments will not qualify for PSLF if you are paid ahead on your loans. 

Additionally, the database where payments are recorded is not accessible without contacting the loan servicer to request an audit of your qualifying payments. You should, however, get yearly statements that show the balance of your qualifying payments that are recorded in the database. If you believe there is an error in this automated count, you must request a manual review of your payments. At the time of writing, this process can take close to a full year to complete.

One should not simply trust that the PSLF process is simple and will take care of itself; this is still a relatively new program and is experiencing growing pains. Several horror stories have been reported, including misinterpreted payment plans and invalid approval letters.  In fact, since the first wave of borrowers became eligible for forgiveness in the fall of 2017, more than 70% of applications were rejected due to ineligibility and over 25% did not complete the required forms correctly.

In addition to vigilance regarding repayment status, a degree of risk tolerance is required for two reasons: (1) It is possible that you will want (or need) to switch to a non-qualifying employer before completing 120 payments—thus forfeiting all potential benefit from the program and suffering the missed opportunity to make more aggressive payments early on, and (2) the longevity of the PSLF program itself remains uncertain.  The risk that the program may not continue to exist in its current form (or worse, that it could be discontinued) must be taken into account when considering this option.


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