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STUDENT LOAN REPAYMENT STRATEGIES

I often work with physicians in my practice that are interested in finding ways to realize loan forgiveness, as the average physician I meet has around $180,000 of student loans when entering training and some with loans over $400K. Over the last decade and especially since the summer of 2009 the changes to the student loan environment have been staggering. With the new federal loan repayment programs of Income Based Repayment in the summer of 2009 and the Pay As You Earn Repayment in 2013 as well as the Public Service Loan Forgiveness many are on a trajectory to have significant and potentially all of their student loans forgiven (pending current legislation). To help illustrate these forgiveness strategies it is prudent to start with a definition of each of these programs.

Public Service Loan Forgiveness: This program was designed to create forgiveness of loans that were consolidated through the direct loan program if the borrower achieved 120 qualifying payments while working at public service jobs such as 501c3 organizations.  In order for ones payments to be “qualified” one must be enrolled in a qualifying repayment plan (IBR, Pay As You Earn, Income Contingent), working at a qualifying public service organization, and only payments after Oct. 1st, 2007 qualify.

Income Based Repayment Program: This program was designed with the intent to provide a lower monthly payment for people with high debt and low income. In order to qualify one must have a “partial financial hardship”. The main criteria used to determine an individual’s monthly payment includes whether one’s income is above 150% of the poverty level, the amount of dependents one claims, and the amount of loans one has. Most federal loans will qualify to be part of this program however PLUS loans made to parents, consolidation loans with underlying PLUS loans to parents, and private education loans will not qualify. The monthly amount that is paid will vary by year based upon the income documentation submitted however the max repayment amount would be the equivalent of a 10 year level consolidation repayment. One can achieve loan forgiveness through the PSLF program at 10 years if working at a qualifying public service organization or 25 year loan forgiveness if working at a for profit organization

Pay As You Earn: There are very few differences between PAYE and IBR however the main differences are as follows: 1) The loan forgiveness provided to for profit employees is reduced to 20 years, and 2) one must be a new borrower as of Oct 1, 2007 and must have received funds of a Direct Loan on or after Oct 1st, 2011

Many are not aware of these programs and further how to use these programs to their advantage to potentially receive forgiveness on their federal loans. There is a certain “profile” physician that these programs can be very impactful too: a physician that will have a long period of training, large federal loans, and confident they will be taking a job at a qualifying public service organization for a couple years out of training. It is my opinion that the key to maximizing these programs if you want forgiveness is paying as little to these loans as long as possiblesince they may get forgiven. This can work nicely for a training physician since the salary during training is very minimal in comparison to the incomes that may be realized when training is complete and the IBR/PAYE payment may be minimal and very likely not reducing principal. Therefore, as an example, if a physician has 8 years of training they are able to qualify 96 of the 120 qualifying payments before their income increases significantly. Once the income has increased the repayment schedule will increase as well however it will be “capped” at the equivalent of a 10 year level repayment note. Since there will still be significant amounts of interest still paid on this note this “profile” individual would be slated for over 80% of loans forgiven by the federal government. In addition since, the loan forgiveness is part of a Public Service Loan Forgiveness this is not a taxable loan forgiveness.

The student loan environment can be very cumbersome to navigate. If you do not feel comfortable or educated in this area I suggest seeking help from a qualified financial professional such as a financial advisor, federal consolidation specialist, and your federal loan providers.

Written by: Craig Molldrem, CLTC, CEPA, CLU®, ChFC®, CFP®
Senior Partner, Financial Advisor | North Star Resource Group


894534 / 04-2014