The Physician’s Guide to Student Loans, Public Service Loan Forgiveness and More
What You Need to Know About Student Loans
Student loans, federal student loan forgiveness, and Public Service Loan Forgiveness are all hot topics these days, especially if you have as many loans as the typical resident. The average med school graduate owes $250,990 in total student loan debt. Yikes! That amount of debt is daunting no matter how much you expect your eventual salary to be.
It hurts even more when you consider most docs will make around $65k during their years of residency. Understanding the different types of student loans you have and the payment/forgiveness programs you qualify for is crucial to managing your debt and building a solid plan to deal with it.
Types of Student Loans
There are two main types of student loans, Federal and private. Federal loans are made by the federal government and private loans are made by private banks or lenders. Federal loans can be consolidated into private loans. Private loans cannot be changed into federal loans so if you have federal loans and are considering consolidating them into a private loan you must be sure because there are no take-backs after you do.
Federal student loans are loans made by the federal government to both undergraduate and graduate borrowers. There a couple different types of student loans: subsidized, unsubsidized, Perkins loans, FFEL loans. The type of federal student loans that you have can depend on your financial need, if you will use the loans for undergraduate or graduate schooling, or if you are a parent getting a loan for your child.
The names of the types of loans don’t always make intuitive sense so be sure to do your homework on exactly what types of loans you have and which repayment plans those loans qualify for.
The two broad types of federal direct loans are direct subsidized student loans, and direct unsubsidized student loans.
Direct Subsidized Loans
Direct subsidized student loans are offered to undergraduate students on the basis of need based on the information that you entered into your FAFSA. Subsidized loans are exactly that, they are subsidized by the federal government on your behalf. How this works is that the government pays the interest on these loans while you are in school (attending at least half-time), for the first six months after leaving school, and during a period of deferment where payments are postponed due to financial hardship.
Direct Unsubsidized Loans
Direct unsubsidized student loans are the other main type of direct student loan offered by the federal government, and they are available to both undergraduate and grad students. As unsubsidized loans they accrue interest as soon as you receive them.
To determine whether or not you have direct loans you should visit the StudentAid.gov site and create an account using your Federal Student Aid ID. Using the site you will be able to see a summary of your federal loans and their type.
The term Stafford Loan may refer to a subsidized or unsubsidized Federal Stafford Loan that was made under the Federal Family Education Loan (FFEL) Program. This program has not operated since 2010, however some people and schools still use the term “Stafford Loans” when referring to direct subsidized or direct unsubsidized loans.
A Perkins loan is another type of subsidized federal loan that is made available to students that have demonstrated exceptional financial needs. The reason this isn’t considered a “Direct Loan” is that it is a loan made from the school and the borrower makes payments back to the school.
Parent PLUS or Grad PLUS Loans
PLUS loans are unsubsidized federal student loans made to parents of undergraduate dependent students which are known as Parent PLUS loans, or when made directly to graduate or professional students known as Grad PLUS loans.
Direct Consolidation Loan
With federal student loans you have the option to consolidate them into a Direct Consolidation Loan. There are pros and cons for making this decision. Certain federal loans don’t qualify for some of the federal repayment plans like REPAY or PSLF, while consolidated loans do.
You may also lose some benefits and protections for certain loans with consolidation. After consolidation you have one loan with one interest rate that is the weighted average of your individual loans. Because you only have one loan now you lose out on the opportunity to pay off your loans individually with methods like:
- Snowball method, where you focus on paying off your loan with the smallest balance first. Once that loan is gone you use the extra cashflow to pay off your next smallest loan, and repeat until they are all gone.
- Avalanche method, where you pay off your loan with the highest interest rate first since it is costing you the most. Then when that loan is paid off you move to the next highest interest rate debt and repeat until finished.
Private loans are made by private banks or lenders and the details can vary widely. They generally cost much more than a federal loan, and are used when a borrower can’t access federal loans. The payments, interest, and terms and conditions on these loans can vary widely based on the borrower and institution. Interest also accrues on private loans while the student is still in school.
*A note on refinancing*
It’s important to remember that while you can refinance your federal student loans into a new private loan, you can’t reverse the process and change private loans into federal loans. You need to be mindful of this as you approach any sort of loan refinancing decision. You may have a good reason to refinance – such as getting a lower interest rate, or a lower payment – but you also lose out on the protections and repayment options that are available with federal student loans.
With Federal Student Loans there are many different payment programs, like IBR or PAYE, that you can use to manage your payments and repay your loans. Most of these plans forgive the remaining balance on your loan after 20 or 25 years of making payments, but the amount that is forgiven is treated as taxable income and you need to prepare for it.
You can use one of these payment programs at the same time you are pursuing loan forgiveness under the Public Service Loan Forgiveness (PSLF) program, which exists in its own little category that we will explain more further down this article.
Standard Repayment Plan, Graduated Repayment Plan, Extended Repayment Plan
With these plans, monthly payments are calculated to pay off your entire loan balance over a period of 10 to 30 years. Payments are fixed under the standard plan, and can increase over time under the graduated and extended plans. These plans differ from the following plans we will discuss in that your income isn’t taken into account when calculating your monthly payment, and the plan is designed to pay off the entire loan balance by the end of the plan, i.e. there is no loan forgiveness as a part of these plans.
Income Driven Repayment Plans
There are several different Income Driven Repayment Plans. The plans vary on: eligibility depending on when you received and what types of loans you have, payback period length, payment amounts, and more. Your loan payment while in one of these plans is based on a percentage of your discretionary income, meaning it could change as your income and tax filing status changes.
Each of these plans has a set repayment period and your loan balance at the end of the repayment period is forgiven, but remember that forgiven amount is taxable as income so you need to be prepared for the tax bill that comes with it.
Income Contingent Repayment – ICR
Payments are the lessor of 20% of your discretionary income or your payment under a 12-year fixed payment plan. The repayment period is 25 years. The ICR payment plan is rarely used.
Income Driven Repayment – IBR
There is an “old” IBR and a “new” IBR. There are slight differences and you can’t qualify for the new IBR if you had any loans prior to July 1, 2014.
OLD: Payments are the lessor of 15% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 25 years. You must demonstrate a financial hardship to qualify.
NEW: Payments are the lessor of 10% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 20 years.
Pay As You Earn – PAYE
Payments are the lessor of 10% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 20 years. You must demonstrate a financial hardship to qualify.
Revised Pay As You Earn – REPAYE
REPAYE is similar to PAYE but you may have higher payments than with PAYE. Payments are 10% of your discretionary income, even if it’s higher than the 10-year standard repayment plan payment. The repayment period is 20 years for undergraduate loans and 25 years for graduate or professional loans.
An updated REPAYE plan was proposed as part of the federal student loan forgiveness announcement in 2022. This plan has not been finalized or approved yet, but we are including the highlights below and will update this post if things change.
- Borrowers will use 225% of the federal poverty limit when calculating discretionary income, up from 150% used for current REPAYE.
- Undergraduate student loan borrowers will calculate their payments as 5% of their discretionary income. Graduate loans will still use 10% of their discretionary income to calculate payments. Borrowers that have a mix of graduate and undergraduate loans will calculate payments based on a weighted average of their loans.
- Married borrowers will be able to exclude their spouse’s income from their loan payment calculation by filing taxes Married Filing Separately (MFS).
- A big change is that interest will no longer accrue in excess of a borrower’s calculated payment. This means that your loan balance will not continue to grow even if your calculated payment does not cover the entire monthly interest due on the loan. This means that borrowers seeking loan forgiveness will have a lower amount forgiven, and a lower tax bill due, at the end of the loan.
Public Service Loan Forgiveness
PSLF isn’t exactly a payment program. You can enroll in REPAYE or IBR or any of the other payment programs while you are pursuing PSLF. But it is a very important program that you need to know about because it could save you hundreds of thousands of dollars if you qualify. If you work in the public sector or for a qualifying nonprofit you can have your entire loan balance forgiven after 10 years (120 qualifying payments).
The requirement for PSLF include:
- Must work “full time” for a qualifying entity – these include public health, nonprofits, public school teachers, etc.
- Must have federal direct loans (if your loans aren’t direct you may be able to consolidate them into federal direct loans).
- Must make 120 qualifying payments – note the language isn’t 10 years of payments, but 120 qualifying payments.
If you are pursuing PSLF you should definitely enroll in an income-driven repayment plan to reduce your monthly payments as much as possible and increase the amount that will ultimately be forgiven.
There are many factors to take into account when considering student loans and your best strategy to deal with them. Refinancing, consolidation, seeking loan forgiveness, choosing a particular income-driven repayment. All of these decisions come with consequences that are helpful to understand so you can make the optimal decision for your situation.
Making a plan to deal with as much student loan debt as the typical med school grad has can feel daunting. Not creating a good plan to manage it can lead to serious problems with your finances in the future.
There is a lot of helpful information on the federal student aid website about repayment plans and consolidation faqs. If you feel overwhelmed talking to a financial advisor with experience dealing with student loans can be a big help.