Managing student loans can be challenging. Some physicians are leaving school hundreds of thousands in debt, in the form of federal (direct) and private loans. The majority of physicians will pay back their private loans so most will want to refinance as soon as possible, and refinance again if rates drop.
But what about your federal student loans?
This is a question we get asked a lot from physicians, and for good reason. Without a proper review of the facts, some physicians could be losing out on thousands of dollars by refinancing their federal loans. In fact, a recent analysis helped us potentially save one client over $100,000 dollars by not refinancing.
How is this possible?
Federal student loans can qualify for many forgiveness programs, but the one you should be looking at is Public Service Loan Forgiveness (PSLF). Under PSLF, you can have your loans forgiven, tax-free, after only 10 years of payments. You lose the ability to use PSLF when you refinance your federal loans with a private lender.
Do I qualify for PSLF?
In order to qualify for PSLF you must meet the below requirements:
- Work full-time for a qualifying employer (government agency or not for profit 501(c)(3)
- Have Direct Loans or consolidate other federal loans
- Utilize one of the Income-Driven Repayment (IDR) programs
- Make 120 qualifying payments
The IDR program chosen will most likely be PAYE or REPAYE, but you should work with someone well versed in the different IDR options. If your goal is to utilize PSLF then try and avoid forbearance and deferment at all costs and sign up for one of the IDR plans. Your payments in the IDR plans could be next to nothing and still qualify towards forgiveness.
Should I pursue PSLF?
If you work for a qualifying employer and have already made a substantial number of small loan payments in residency, then absolutely! You should contact Fedloan servicing to confirm your eligibility and qualifying payments. Your goal should be to make the smallest payment possible so more can be forgiven after 10 years. Going forward you will need to submit an annual Employment Certification form and keep track of your payments.
The PSLF program could always change, which is why we recommend you keep the difference between your standard 10-year payment and lower IDR payment in a side-fund. If the program were to get canceled you could apply the savings towards your loans.
If you don’t qualify for PSLF, or stand to benefit, then refinance your federal loans and develop a plan to pay them off before the 10-year term.