Quick question regarding PAYE/PSLF

[johndoe3344]

Hello,

I'm a new intern and I have around 25k undergraduate debt and 175k med school debt with around 15k of that interest (that will capitalize around november/december of this year). I was given a total of 25k cash gift by my parents to do whatever I wanted with it (ostensibly to pay off the 25k undergraduate debt).

Originally, I was simply going to spend it all paying off the 15k interest (prior to capitalization) and then sink the remaining 10k into paying off loans with the highest interest rates. However, given the PSLF/PAYE programs, which I just heard about today, this might not be the smartest thing to do since I would have a huge chunk of my loans forgiven after 10 years. In that case, would it be smartest to invest/put into high APR savings/etc. that 25k instead of paying my interest/loans?

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[RangerBob]

PAYE forgiveness is after 20 years. PSLF is after 10, but requires you to work at a non-profit for 10 years (most, but not all, residencies count). However, most non-profit hospitals aren't directly employing physicians and you're often working for a for-profit physicians group contracted by the hospital (often even at academic institutions--the attendings and residents usually get paid by different entities, which is why there's the discrepancy). So unless you are definitely planning on a career with the VA, Indian Health Services, county hospital, or prison system, there's a good chance your attending job wouldn't qualify for PSLF. Obviously there are exceptions (I know a non-profit Catholic hospital that directly employed its physicians), but don't think that most hospital-based jobs would qualify.

Also, keep in mind that Obama already proposed limiting PSLF, three years before anyone is projected to benefit from the program. Democratic presidents tend to be more kind towards students, so I think that hints at how congress will likely react when they start forgiving a few neurosurgeons (9 years residency + fellowship and maybe 1 year as an attending at a VA) and other high-paying specialties hundreds of thousands of dollars. It only takes one or two cases for the media to report on before the entire country will support limiting PSLF, which you do not actually apply for until you're ready for forgiveness (ie., no one is currently enrolled in the program, and thus the government can make whatever change it wants and no one would be protected/grandfathered in unless the bill that gets passed specifically protects those already making eligible payments, who took out loans prior to a certain date, etc.).

If I were in your shoes I'd pretend PSLF wasn't around. For all we know it'll stick around in it's current form, but that's putting a lot of eggs in one basket. Use the money wisely--pay off the highest interest debt. Pay off some of that interest before it capitalizes (particularly interest on any private loans, then grad plus loans, then unsubsidized stafford, then subsidized stafford), but if your undergrad loans are at a higher rate, pay those off first.

Also keep some money for savings. Personally I think it'd be pointless to invest that money--get rid of your debt ASAP. You likely won't qualify for PSLF, and the odds are you loans will be paid off or close to being paid off by the time the 20-year forgiveness rolls around for PAYE (you'd actually have to calculate it, based on your projected future income), and you would've saved far more money if you paid off your loans ASAP. (Plus forgiveness through PAYE/IBR is taxed--I really think you'd come out far behind relying on that forgiveness).

I think $200k in loans should be paid off within five years of graduating residency (assuming a $200,000 salary). It could be done much faster if you were determined (or married with a working spouse, or if your salary was higher). Why hold onto the debt?

 

[johndoe3344]

Thanks a lot for your answer. I had no idea about the distinction between employment of physicians vs employment of residents at non-profit hospitals.

It seems I'm stuck between a rock and a hard place. On one hand, if I take the approach that PSLF doesn't exist, and I put all my efforts towards paying off my loans, and it turns out 10 years down the line, PSLF hasn't changed a bit and that I qualify, then I'll be short 100-150k not to mention I'll have been living in a closet on ramen noodles during residency/fellowship. On the other hand, if I only pay through PAYE banking on the 10 year PSLF forgiveness plan, and it either caps or I become ineligible (I will not be willing to attend at any non-major university teaching hospital), then I'll be stuck with a ton of debt.

EDIT: I'm trying to figure out how this all works. So let's say I go ahead and sign myself up for IBR, paying something like ~500/month. I have subsidized and non-subsidized loans. Because I am in IBR/PFH, the government will take care of all my subsidized loan interest for 3 years, so I can just ignore it while I finish residency. So that 500/month that I'm paying will go entirely towards the interest of my unsubsidized loan. Is that true? Can I then pay additional money and specify it to go toward the principle of my unsubsidized loan without them revoking my IBR/PFH status?

 

[NICUfello]

I think $200k in loans should be paid off within five years of graduating residency (assuming a $200,000 salary). It could be done much faster if you were determined (or married with a working spouse, or if your salary was higher). Why hold onto the debt?

I have about 180K in debt. Just started first job, with salary you said above. Payment is $900 a month now. 5.25% interest.

I would have to pay about 3900$ a month to pay off in 5 years. With kids, trying to save, 401k, not sure that is possible (for me).

 

[RangerBob]

I have about 180K in debt. Just started first job, with salary you said above. Payment is $900 a month now. 5.25% interest.

I would have to pay about 3900$ a month to pay off in 5 years. With kids, trying to save, 401k, not sure that is possible (for me).

It's hard, but I think it'd be doable. With a salary of $200,000, take home (in a high-tax state like CA) would be ~$120,000 (single)-130,000 (married, no kids) after taxes, at the lower end. With kids and smart financial planning, it'd be less. $3900/month rounded to $4,000/month is $48,000/year. That'd still leaves at least $70,000 ($80,000 if married, a bit more if you have kids, even more if your spouse works) in after-tax dollars, which is still a very nice chunk of change.

Whether that's the smartest way to go is a personal mater--maybe it's better to pay off your loans in 10 years so you have more wiggle-room each month. And if you work somewhere where a matching 401k is offered, then you certainly want to max out on that since it basically doubles that portion of your salary (and then the interest compounds over time). But I think extending repayment out to 20-25 years, hoping for IBR/PAYE forgiveness (and being taxed on it if it does stay around) is a really risky maneuver. While I think the odds are against PSLF sticking around, I actually think loan forgiveness via IBR/PAYE will stick around primarily because the amount forgiven is taxeable, and because of that tax, I think the government will on average come out ahead and make more money than if people paid off those loans quicker. I know multiple congressmen/women have proposed eliminating the "tax bomb" but I don't see that actually happening.

The way I see it, I'd much rather be (relatively) poor while I'm still relatively young and with young kids than still making large payments on my loans into my 50's.

 

[RangerBob]

Thanks a lot for your answer. I had no idea about the distinction between employment of physicians vs employment of residents at non-profit hospitals.

It seems I'm stuck between a rock and a hard place. On one hand, if I take the approach that PSLF doesn't exist, and I put all my efforts towards paying off my loans, and it turns out 10 years down the line, PSLF hasn't changed a bit and that I qualify, then I'll be short 100-150k not to mention I'll have been living in a closet on ramen noodles during residency/fellowship. On the other hand, if I only pay through PAYE banking on the 10 year PSLF forgiveness plan, and it either caps or I become ineligible (I will not be willing to attend at any non-major university teaching hospital), then I'll be stuck with a ton of debt.

EDIT: I'm trying to figure out how this all works. So let's say I go ahead and sign myself up for IBR, paying something like ~500/month. I have subsidized and non-subsidized loans. Because I am in IBR/PFH, the government will take care of all my subsidized loan interest for 3 years, so I can just ignore it while I finish residency. So that 500/month that I'm paying will go entirely towards the interest of my unsubsidized loan. Is that true? Can I then pay additional money and specify it to go toward the principle of my unsubsidized loan without them revoking my IBR/PFH status?

Yes--you can make payments on top of the monthly IBR/PAYE payment. But the $500/month doesn't entirely go to unsubsidized interest--it's spread out proportionately among all your loans. The government then pays any unpaid subsidized interest for three years--so there's a little difference. But that's still a really great benefit (along with your interest not capitalizing while you're in the program).

I owe more than you do. My personal plan is to stay in IBR/PAYE, probably for quite a long time as I'll probably still be eligible on an attending's salary. I finish residency in 2017, which is when the first cohort will finally be eligible for PSLF. I figure that if the program hasn't been scrapped/limited by then, we should know within 1-2 years of 2017 what will happen to it as people start cashing out. If it's still around, and the job I want is PSLF-eligible, then I'll make the minimum payments on my loans, and focus on putting extra dollars towards my wife's loans. After those are paid off, I'll probably pay extra towards my loans to hedge my bets in case PSLF changes. If it does stay around, it'd be a windfall too great to pass up. But if it disappears I don't want to be screwed.

As far as the 20-25 year loan forgiveness, I don't really plan on using that. I'll have to see what my attending salary is, but if it's low enough to make things tough then maybe I'll make the equivalent of a 25-35 year payment each month, so that I'm paying down most of my loans and get a little bit forgiven in the end. Once again I'd be hedging my bets here, as well as trying to minimize the tax bomb. But it might be financially better to just set aside money in investments and make the minimum IBR payment instead--honestly I really want to pay off my (and my wife's) loans before those 20 years, so I haven't thought about going the 20-25 year loan forgiveness route as much.

Regardless, unless it becomes a sure-thing that PSLF will stick around, I plan to live like a resident for a few years and make whopper-size payments. The interest on my loans is killing me, and the only way to tackle that is pay down some principle fast.

 

[NICUfello]

Agree with your points.

70K take home is 5800 a month.

Mortgage+tax $2000
Day Care $2000
food $500
phone+elec+gas+water=$400

I didn't count any entertainment or emergency funds, savings, or 401k....


I would like to pay off it in 10 years or sooner. 5 years having a family, is difficult (for me), and I am not living LARGE by any means, trust me 🙂

It's hard, but I think it'd be doable. With a salary of $200,000, take home (in a high-tax state like CA) would be ~$120,000 (single)-130,000 (married, no kids) after taxes, at the lower end. With kids and smart financial planning, it'd be less. $3900/month rounded to $4,000/month is $48,000/year. That'd still leaves at least $70,000 ($80,000 if married, a bit more if you have kids, even more if your spouse works) in after-tax dollars, which is still a very nice chunk of change.

Whether that's the smartest way to go is a personal mater--maybe it's better to pay off your loans in 10 years so you have more wiggle-room each month. And if you work somewhere where a matching 401k is offered, then you certainly want to max out on that since it basically doubles that portion of your salary (and then the interest compounds over time). But I think extending repayment out to 20-25 years, hoping for IBR/PAYE forgiveness (and being taxed on it if it does stay around) is a really risky maneuver. While I think the odds are against PSLF sticking around, I actually think loan forgiveness via IBR/PAYE will stick around primarily because the amount forgiven is taxeable, and because of that tax, I think the government will on average come out ahead and make more money than if people paid off those loans quicker. I know multiple congressmen/women have proposed eliminating the "tax bomb" but I don't see that actually happening.

The way I see it, I'd much rather be (relatively) poor while I'm still relatively young and with young kids than still making large payments on my loans into my 50's.

 

[goodoldalky]

PSLF is hard to be eligible for. I personally would not count on it for several reasons.

1. Your paycheck has to be issued by a government agency or 501c3. Most physicians who work at nonprofit 501c3 hospitals are employed by physician groups that are not 501c3 that issue the paycheck. Therefore, even if you work at the university hospital, which itself is 501c3, you are ineligible.
2. Your minimum monthly payment will likely end up being the 10 year standard payment (depending on your income you are unlikely to qualify for IBR to begin with), and in most cases unless your residency/fellowship is >5 years you will have paid off the loan within 10 years anyway.
3. As an EM doc, I am ineligible for PSLF because I do not work the "minimum" 30 hours per week each week (my contract is for slightly less than 120 hours a month).
4. Program is unlikely to be around in its current state when you are eligible. Not impossible, but unlikely. If you PLAN for PSLF and make the smallest payments possible and then for whatever reason you are ineligible or it is gone, you have costed yourself tens of thousands of dollars.

My recommendations:
1. Make sure you have an emergency fund of 3 months of living expenses.
2. Pay down all high interest debt, i.e.: credit cards.
3. Write a check to your loans for the rest.

Presuming your interest rate is 6+%, investing into an account, even a Roth IRA at this point, will not get you a guaranteed 6+% return. Putting it in savings, CDs, money market, stocks, bonds, mutual funds is an even worse idea. You can't get a guaranteed 6+% return on anything, but paying your loans.