In general, you want to start by looking at your loans and determining which were not issued under the Direct Loan program. We usually recommend a consolidation BEFORE entering any repayment plan, which creates one large loan with a weighted average interest rate. You apply for a consolidation through studentloans.gov. This act should transfer all loans to one servicer. A consolidation will make FFEL (commercially held) loans into direct loans so they are eligible for Income Driven Payment plans discussed below. It also helps with simplicity and minimizes the risk of loans being left out of repayment.
After you have consolidated, you will generally choose from four options for repayment:
Each option carries a unique set of advantages and disadvantages. When determining the best option for you, you should consider your ability to make payments and future career plans. The earnings or earning potential of your spouse can also be important.
As mentioned above, commercially held FFEL loans are NOT eligible for Public Service Loan Forgiveness (PSLF). However, they can be consolidated into a new Direct Loan to become eligible. This can be very advantageous to those borrowers planning to use PSLF as it increases the amount of potential forgiveness. Keep in mind that this loan needs its own set of 120 payments to qualify so if you are already in the program and making payments, this can present some challenges.
Typically once you consolidate and submit documentation for PSLF, FedLoan will become your servicer. As of April 2018, FedLoan is responsible for tracking certified payments and processing all PSLF applications.
FedLoan now allows you to document as you go your full time employment at a 501c3 nonprofit by certifying each month’s payment. This addresses the need of doctors to provide proof they have 120 qualified payments under the IBR, PAYE or rePAYE program. We highly recommend submitting this form annually and whenever you have a job change to certify the previous 12 payments and ensure that FedLoan is accurately tracking your progress.
*Note that ONLY payments made under an income driven plan are eligible. If you are in a state of forbearance or standard repayment, your payments are not eligible for PSLF.
The certification form can be found here:
All programs require a “partial financial hardship” for the borrower to participate. The key differences are how payments are calculated, which loans are eligible and how a spouse’s income is treated. IBR calculates payments at 15% of discretionary income (defined as adjusted gross income minus 150% of the poverty line for your family size) and allows you to exclude a spouse’s income if you file taxes Married Filing Separately. PAYE calculates payments at 10% of discretionary income and allows you to exclude a spouse’s income if Married Filing Separately. Borrowers are only eligible for PAYE if they had no federal loan balance on October 1, 2007 and all loans were disbursed after the fact. rePAYE runs through the same payment calculation as PAYE but requires borrowers to consider all family income regardless of how you file taxes.
In general, borrowers planning on PSLF want to choose whichever option generates the smallest possible payment during the 10 years so to maximize the eventual forgiveness. All of the options base payments on Adjusted Gross Income (AGI). Financial planning items like contributing to a pretax 403(b) or using an itemized deduction will lower your AGI and in turn lower payments. Keep in mind that paying less increases forgiveness but does increase your legislative risk if there are changes to the program. However, currently forgiveness is not capped.
Several private banks have created a niche in student loan refinancing and are often able to offer a lower interest rate to the doctor than what is available through the Dept of Education consolidation. Most recent federal loans are issued with a rate of 6.8%. You should consider refinancing if you are not interested in nonprofit work or the cost of using PSLF is higher than refinancing and paying back your entire principal.
The advantage of refinancing is obvious: a lower interest cost throughout the life of the loan. Suppose a physician has $250k at 6.8%. They refinance into a 10 year note with a private servicer at 4.5%. The refinance saves over $35k in interest! Refinancing companies also reward the borrower for a shorter repayment term. So if you have the ability to pay back aggressively (say a 5 or 7 year repayment) you will be rewarded with a lower interest rate than a borrower taking out a 15 or 20 year note.
Private banks do not currently offer forbearance and do base interest rate offer on ability to repay. Income and budgeting is needed at the time of the refinance in order to service the loan. Several servicers have dipped their toe into programs with limited payments for residents but these have been very inconsistent with banks starting and stopping them frequently, so in general we recommend waiting until you have the ability to start paying to look at refinancing.
The disadvantage of refinancing is that your loan now irrevocably becomes a private loan. You need to be very certain you will not use PSLF BEFORE you refinance as there is no way to go back. There is also a bit less flexibility in making payments so be sure that the repayment term you choose very comfortably fits into your family budget. Be sure to have adequate life insurance in place as well to cover the new loan burden, especially if there is a cosigner.
2072347 / 4-2018