Time flies when you're having fun - it's been almost 9 months since White Coat Money launched with its very first post on Public Service Loan Forgiveness (PSLF). Since then, PSLF has been a recurring topic in my daily dealings with other residents and the general student-loan-owing public at large. As a forgiveness program that has benefited ZERO borrowers so far (that's scheduled to occur in 2017), the PSLF sure generate a lot of chatter - for good reasons. Let's revisit why PSLF may be a great option for many and address some of its potential shortcomings.
You can learn the details about the PSLF here. But the basic idea is that you work for a qualified public service employer, make 120 payments (10 years) on your qualified student loans, and any unpaid portions remaining after that gets forgiven by Uncle Sam. Some key benefits that make PSLF such an attractive choice include:
- No cap on forgivable amount - attractive to the average medical school graduate who carries a median student debt of $180,000.
- Unlike other forgiveness programs, the amount forgiven is NOT taxed as income.
- You can combine PSLF with many payment plans, including the very attractive income driven repayment plans - Income Based Repayment (IBR) and Pay As You Earn (PAYE).
Since the first qualifying payment for PSLF began in October of 2007, the first group of borrowers will qualify for loan forgiveness in 2017. However, as we get closer to that date, there are more and more concerns regarding the sustainability of the program.
- Limitless Forgiveness - as more and more people enroll in PSLF, the amount of potential loans to be forgiven is becoming a real concern for the government. As part of the 2015 budget, president Obama proposed a limit on PSLF - $57,500 per student. While this proposal did not become law, it is a sign of things to come. It's reasonable to expect that at some point in the future, PSLF will be capped.
- High debt, High income professionals - specifically doctors and lawyers. While we take out large amount of debt for our medical education, we also benefit from very high incomes. Most will have no problems paying back the six figure student debt while maintaining a comfortable lifestyle. As such, many feels that providing PSLF for these professionals goes against the spirit of helping those with low incomes relative to their total education debt.
- "The Doctor's Loophole" - the current PSLF is designed to have the borrower part ways with their student debt after 10-years of qualifying public service no matter what. When you combine PSLF with an income driven repayment plan such as the IBR or PAYE, your monthly payment can rise no more than the amount you would have paid under the 10-year standard repayment plan, NO MATTER how much your income rises.
- For example, if you are single, owe $200,000 in debt at 6.8% and are in residency and fellowship for a combined 6 years making an average of $55,000/year. Your original payment would have been $2,302/month under the 10-yr standard repayment plan. Now if you choose IBR or PAYE, your payment would be $467 or $311 respectively. Over the course of your training you would have paid back $33,624 (IBR) or $22,392 (PAYE). After training, you find a qualifying public service employer and start making an attending salary of $250,000, your required monthly payment will max out at $2,302/month! Over the next 4 years you would have paid a total of $110,496. Over the 10 years period of PSLF, you would have made total payments of $144,120 (IBR) or $132,888 (PAYE) leading to hundreds of thousands of dollars being forgiven (passed onto the taxpayers).
There is a good chance these concerns will be addressed by congress in the future, making PSLF less appealing to high debt, high income professionals like us. But before you freak out, realize that if you are already making payments on a qualified plan, you will almost certainly be grandfathered in and can simply laugh in the faces of those new borrowers who are less fortunate than you.