What physicians need to know
Let’s cut through politics and get to the root of the recent student loan changes announced by the White House and how they may affect student loan borrowers in the medical arena.
What follows are noteworthy updates, potential new opportunities and important action items that medical professionals need to know.
Forbearance period extended through the end of 2022
Yet again, the White House has delayed the restart of federal student loan payments and interest accrual. Although this was somewhat anticipated, it is still a huge relief for borrowers. This is especially helpful for those seeking forgiveness through the Public Service Loan Forgiveness (PSLF) Program or any of the Income-Driven Repayment plans because these months can still count toward that forgiveness.
• Recertification date extension
This forbearance-period extension prompts questions about when borrowers need to recertify their income because many have not needed to do so for more than two years now. Each previous extension has also come with extensions in the recertification-of-income dates, so it will be interesting to see if the recertification dates are pushed out again as well. If your recertification date falls between now and March 2023, it will be pushed out one year — but this is subject to change with the latest extension. This is going to be especially important for those new attending physicians because this could mean another year or more of artificially low payments based on their income from training.
• Income reporting
When pursuing an income-driven repayment plan, borrowers have two main ways of reporting income: their most recently completed tax return or their pay stub. Many new attending borrowers will feel proudly inclined to recertify their income, but this is not necessarily the best option because they can often report based on their previous year’s tax return, which is likely showing a much lower income. If you play the “game” right, you can typically get roughly two years of reporting artificially low payments after realizing a higher income. This is important for those trying to maximize savings and pursue PSLF.
For reporting based on one’s tax return, the Department of Education looks at the borrower’s adjusted gross income. In layman’s terms, this means your gross income subtracted by any pretax deductions like retirement savings or health savings account contributions. Given that, this may be a good time to max out those pretax deductions to proactively reduce your future reportable income. Because most repayment plans are based on 10% of discretionary income, this would mean that if a borrower were to max out their 401(k) at $20,500 in 2022, they would reduce their student loan payment by $170.83 per month.
• Deadline for refund extended
For borrowers who have made payments throughout the COVID-19 pandemic, they can request a reimbursement from their loan servicer. This is simply a reimbursement, so the borrower will need to add that reimbursed amount back to their outstanding balance. This is particularly helpful for those borrowers who have recently realized that they may qualify for substantial forgiveness through the new programs available. The deadline to request this reimbursement has now been extended through the end of 2022.
• Borrowers ‘born’ into COVID-19 forbearance
For those “born” (aka, graduated) into the COVID-19 forbearance period, it is critical to still enroll in an income-driven repayment plan because these months will not count toward any forgiveness plan unless the borrower is enrolled. Once a borrower enrolls in an income-driven repayment plan, the COVID-19 forbearance will keep their payment at zero dollars through the end of the year. Borrowers should keep in mind that reporting income from their last year’s tax return — or filing taxes showing zero income for those just graduating — could be quite advantageous.
1. Work with someone who has experience with student loans — possibly a financial advisor with a certified student loan professional designation — to identify your income-recertification date. This is only available on your official Department of Education record. (Makes total sense, right?!)
2. Sign up for an income-driven repayment program if you graduated during the forbearance period and have not signed up yet.
3. Consult a financial advisor familiar with student loan options and your tax professional to identify the best income reporting strategies and tax filing statuses.
4. Request a refund on any student loan payments made throughout the COVID-19 pandemic, if applicable. Consult a financial advisor (perhaps with that certified student loan professional designation) if you are unsure whether you qualify for any new forgiveness.
$10K of forgiveness on federal loans, $20K of forgiveness
on Pell Grants*
*Only if annual income is less than $125,000 (single) $250,000 (married).
This is the news that is getting the most publicity these days, yet it is mostly a drop in the bucket for most physician borrowers with six-figure student loan debt. Most attending physicians will not qualify for forgiveness; however, we do not know how the Department of Education will be asking for proof of income. Some new attendings may still qualify for forgiveness if the department allows borrowers to report their last year’s tax return, which is typically standard practice for the department. Once we get more clarification on how borrowers will be required to report their income, we will see how married couples filing taxes separately will be treated with regard to forgiveness as well.
1. Most will likely receive automatic forgiveness, but borrowers without income documentation in the department’s records will be required to complete a simple application. This application is expected to become available in October 2022, and you can enroll in federal student loan borrower updates at https://www.ed.gov/subscriptions to be notified about its availability.
No changes to PSLF, waiver still active
The White House made it seem as if it made changes to the PSLF Program, but it simply reannounced the PSLF waiver, which still expires October 31 of this year. The waiver allows any borrowers to get retroactive credit toward forgiveness for any time they have spent working full time for a federal, state, tribal or local government; military; or a qualifying nonprofit organization. This now even includes certain periods of time when the borrower was in deferment or forbearance on their loans, which is remarkable.
• Attendings with high income and close to the 10 years for PSLF
Borrowers who are attendings with outstanding loan balances should not discredit this program because there could still be solutions to identify a substantial amount of forgiveness, even with a high income. One of the less-common repayment plans that has proved fruitful for many attendings is the Income Contingent Repayment Plan. This plan allows the borrower to pay based on 20% of their discretionary income or a payment commensurate with a 12-year repayment of the loan balance multiplied by a factor based on their income. The nice thing is that the highest income “factor” is 200% — meaning it would only be double that of the 12-year payment. For example, if a physician has a $60,000 loan balance and $600,000 in income, their payment would be roughly $1,221 per month (assuming 6.8% interest). This is usually low enough to help the borrower realize a good amount of forgiveness if they are close to the end of the 120 months. Keep in mind that most online calculators do not factor this into their calculation, so be sure to consult a professional to assist.
1. Make sure all employer certification forms (https://studentaid.gov/sites/default/files/public-service-application-for-forgiveness.pdf) are up to date and submitted to the Higher Education Loan Authority of the State of Missouri (MOHELA) .
2. If you haven’t been moved to MOHELA yet, upload the employer certification forms to FedLoan Servicing.
3. If you still need to enroll in the PSLF Program and are with another servicer, reach out to your current loan servicer and let them know you want to enroll in the PSLF Program, and they will transfer your loans to MOHELA to service your loans.
4. Consider consolidating any outstanding loans that are not “direct” loans to get qualified payments. Be sure to consult someone with the knowledge to ensure those loans don’t qualify for other forgiveness programs like Perkins Loan cancellation or the like before consolidating.
5. Consider the Income Contingent Repayment Plan if you have a high income, moderate loan balance and just a few years left for forgiveness.
Proposals announced but not yet official
Several interesting proposals were announced, but none are law yet. Generally, everything being announced is positive news for those with federal student loans. What follows are a few noteworthy proposals.
Proposed: new repayment plan with a 5%-of-discretionary-income payment for those with undergrad loans
• For those with some grad school loans and some undergrad loans, the borrower’s payment percentage will likely be proportionate to how much of the borrower’s outstanding loans are undergrad loans. For example, if you have a 50/50 split between undergrad and grad school loans, your percentage of income would be 7.5%. Leave it to the government to make these things even more intricate!
Proposed: raising the discretionary income amount to 225% of the poverty line instead of the current 150%
• This would mean lower payments for everyone across the board if they make this the new standard rule for all repayment plans. It is likely that this could reduce income-driven payment amounts by about $125 per month, which could be helpful (though not earth shattering).
Proposed: no accrual of any “unpaid” interest
• This is the proposal to keep an eye on because it would be huge for our medical professionals with high loan balances. For example, if a borrower’s payment is $300 per month but their loans are accruing $2,000 per month, this new proposal is suggesting the government pick up the tab on the $1,700 per month. This could be a game changer for many seeking forgiveness or trying to simply repay their loans more efficiently because it could enable more repayment strategies.
Positive news for borrowers
Overall, the recent news around student loans — albeit controversial — has been positive for student loan borrowers. With all the changes, it is important for borrowers to reconsider their existing repayment or forgiveness game plan because new and more efficient strategies may have become available.
Just like you don’t want your patients reading WebMD and making medical decisions, be sure to seek counsel from an advisor who is trained in the intricacies of federal student loans and allow them to guide you through the chess game that is student loan repayment.
Michael Foley, CFP, CSLP, is a comprehensive financial advisor who runs his practice out of Scottsdale, Arizona, under North Star Resource Group. Foley was trained at Duke University and holds a certified financial planner designation along with a CSLP. Although he serves a diverse group of clients with financial and student loan needs, Foley has two physician parents and has found a specialty in working with those in the health care space.