What Should I Do With My Student Loans? A Proposed Strategy for Educational Debt Management

Public Service Loan Forgiveness is designed to provide employees of nonprofit institutions educational loan forgiveness.⁷  Participants are eligible for complete loan forgiveness after making 120 monthly payments in qualified plans while working full-time as employees of 501(c)(3) nonprofit organizations. Currently, 75% of hospitals in the United States qualify as 501(c)(3) organizations,⁸  and this number is rising. Given this growth, combined with the trend toward recent graduates becoming employees of these organizations,⁹  a large percentage of residents may benefit from PSLF.

Physicians receive the highest degree of forgiveness if they start making payments at the beginning of residency. For physicians who have completed training, monthly payments in PSLF-eligible plans are usually the same as those in 10-year standard repayment plans. As a result, if payments are not started until residency completion, the loans will be paid off prior to becoming eligible for forgiveness. However, since most PSLF-eligible plans are “income-driven,” payments made during residency are usually significantly lower, which can result in a substantial remaining balance forgiven after 120 monthly payments. While most residents stand to benefit from PSLF, those with large debt burdens, in long residency programs, or in lower-income specialties have the potential to benefit the most.

Only Federal Direct Loans or federal loans consolidated into a Direct Consolidation Loan qualify for PSLF. Private loans cannot be consolidated into a Direct Loan. An individual must enroll in a qualified repayment plan (table 1) and make 120 qualifying payments while working as an employee for a 501(c)(3) organization. Employees should submit employment certification forms to verify their employers' 501(c)(3) status.¹⁰  If a borrower becomes ineligible for PSLF through a change of employment, then loan forgiveness is simply not granted, but the payments made still apply toward reducing the balance. The 2017 presidential budget proposed limiting maximum forgiveness by capping PSLF at $57,500¹¹; however, it did not pass. Even if a cap is instituted in the future, it is unlikely that current plan participants will be affected since, historically, changes to plans generally only have been applied to new borrowers.¹¹ 

Qualifying PSLF plans are income-driven, with payment amounts calculated based on income and family size, not loan amount.¹²  Payments equal 10% or 15% of discretionary income. These plans include Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), and Income-Based Repayment (IBR). Key features of each plan are summarized in table 1.

Physicians who are certain they will not pursue PSLF (or who have private loans) should consider refinancing. Refinancing is only provided by private lenders, and involves taking out a new private loan at a lower interest rate to pay off existing student loans. Those who choose to refinance their federal student loans are no longer eligible for PSLF. In addition, most private lenders do not offer income-driven plans, the lowest rates are only available to attending physicians, and a government interest subsidy is not available for private loans. For these reasons, in most cases, residents should only refinance their federal loans upon completion of training. Physicians with a combination of loans can refinance their private loans while repaying their federal loans within a PSLF qualifying plan.

To simplify the decision-making process for educational debt, we provide an algorithm (figure) that incorporates the most important factors. The rationale for the algorithm is 3-fold: (1) borrowers pursuing PSLF should choose the plan with the lowest payments, since the remaining balance will be forgiven after 10 years; (2) all borrowers regardless of PSLF eligibility should prioritize the plan that maximizes the government interest subsidy; and (3) those not eligible for PSLF should select the plan that minimizes interest, and then pay off the loan as quickly as possible. Payment plans should be chosen based on an individual's situation and the key differences between the plans. A calculator is available on the US Department of Education's student loan website that enables the calculation of an individual's exact payment amount with each plan, and should be used in conjunction with this algorithm.¹³  As all variables are not incorporated into the algorithm, individuals should consider their specific situations in making these decisions. Examples are provided in table 2.

A few noteworthy examples of additional programs that might apply to a borrower include loan forgiveness or repayment for service in health shortage areas,¹⁴  the military,¹⁵  and National Institutes of Health mission-relevant research.¹⁶  In addition, an individual's risk tolerance should be assessed with the help of a financial advisor as this will impact his or her overarching financial plan, including the decision to pursue PSLF.

Public Service Loan Forgiveness is most advantageous if payments begin early in residency. While ideally borrowers would be provided this information during medical school, the underutilization of PSLF,⁶  combined with low financial literacy among residents,¹⁷  highlights the fact that current university-level education about student loans is not effective. This makes it important that program and institutional leaders provide trainees with appropriate financial education, such as arranging for education from reputable financial experts.^18,19  However, caution should be taken, for many financial advisors are not aware of the details of educational debt management for physicians.

At the beginning of residency all physicians should evaluate their financial situation with the help of a financial advisor well versed in PSLF, and utilize the algorithm in this perspective to develop a plan to eliminate their educational debt.