If you’re planning on applying for Public Service Loan Forgiveness (PSLF) and spending the first ten years of your career in academic medicine or working for 501c(3) employers, this scheme could mean paying off your loans six months sooner, saving you an average of $30,000.
Consolidate your loans with your loan servicer and begin one of the income-driven repayment plans (IBR, RE-PAYE, ICR, or PAYE) immediately, foregoing any deferment or grace period. All loan consolidation applications take place on the StudentLoans.gov website (regardless of loan servicer) and include an income certification segment where you select one of the aforementioned plans.
Since most medical students don’t have any taxable income, the required payments over the 12 months following consolidation approval will be $0. This is critical for PSLF, since every payment you make while being employed at a 501c(3) organization (i.e., most residencies) counts as a qualifying payment, even if that payment is $0. In other words, from the time of consolidation approval, you will have started making qualifying payments.
However, there is a very narrow window of time to maximize your savings.
You technically can’t consolidate your loans before graduation. May or June are ideal for consolidation and beginning $0 payments. This is because you need to certify your income every 12 months after initiating IBR.
Yearly calculations occur one of two ways. If your income hasn’t changed significantly, the application imports your adjusted gross income (AGI) from IRS tax forms. If your income has changed significantly, the application will ask for your pay stubs and impute what you’d owe for the next 12 months (usually 10% or 15% of your discretionary income, defined as AGI minus 150% of the Federal Poverty Limit). The second method will always apply to residents and fellows since PGY-2 makes more than PGY-1, and PGY-3 makes more than PGY-2, etc. I’ve included some charts to make sense of this.
Let’s use Alice and Bill as examples, with the national average PGY pay scale and a $300,000/year attending salary awaiting them.
Alice consolidates her loans in June, had zero household income over the past year, and pays $0 per month during her PGY-1 between July 2019 and June 2020 (12 qualifying payments). When Alice re-certifies her IBR in June 2020 using PGY-1 pay stubs, her loan repayment for June 2020-June 2021 will be calculated using PGY-1 income, even though she’ll be earning a PGY-2 income during that time frame. Then she’ll recalculate her IBR payment again in June 2021, just before her next pay raise. Somewhere during PGY-2 or PGY3, she files the Employment Verification Form with the Department of Education, and FedLoans becomes her loan servicer for the remainder of her ten years. They’ll track her payments yearly and update her on her PSLF status.
Bill lets his loan servicer run the show. They’ll give him six months of grace period from graduation before they required him to make his first payment. He gladly accepts the six-month grace at graduation because he thinks (correctly) that standard repayment would be too expensive. But at the end of six months, they wanted to see his pay stubs to determine his income-driven repayment. He never consolidated his loans but applies for IBR through his loan servicer. He never filed the Employment Verification Form with the Department of Education, and they haven’t been tracking his qualifying payments either. By the time he gets around to it, he finds out not all of his payments have been qualifying payments.
Both have made 120 qualifying payments under the Public Service Loan Forgiveness scheme, but Alice had a six-month head start on qualifying payments coupled with 12 months worth of runway in the form of $0 payments. As an intern, she’ll make 12 qualifying payments of $0.
Bill used his six-month grace before beginning repayment, and his loan servicer used his intern-year pay stubs to calculate his IBR. In 2019, both Alice and Bill paid $0 towards their loans. But at the start of the next year, Bill was forced to start repayment while Alice had another six months with $0 payments.
By the end of 2020, Bill has paid about $3500 while Alice paid $1750. In 2028 and 2029 Alice pays about $15K each year while Bill pays $28K each year, and Alice is done with her 120 qualifying payments six months earlier than Bill.
Assuming an Attending Salary of $300K, Alice will save about $30K by consolidating her loans and beginning income-driven repayment while her income is still $0. Alice also switched loan servicers after her intern year by filing Employment Verification Forms with the Department of Education, which allows FedLoans to track her payments under PSLF and give her yearly confirmation that she’s on track with her repayment goals.
Steps to take:
1. Apply to consolidate your Direct Loans on StudentLoans.gov.
2. At the time of application, avoid selecting PSLF, explore the various income-driven plans that will work for your family size, marital status, spouses loans, ect., and forego any deferment period to start repayment immediately.
3. Wait for the application to be rejected — since your loans are likely in in-school deferment, you’ll need to wait until after graduation to obtain approval to consolidate your loans.
4. Call your loan servicer about your rejected application — have them explain why. Explain that you’re about to graduate. And let them explain that you can cancel now and reinstate the canceled application within six months.
5. Wait for your in-school deferment status to change and go on to complete your application.
6. File Employment Verification with the Department of Education after intern year — this will automatically cause FedLoans to be your new loan servicer, but you’ll obtain yearly confirmation that your PSLF payments are on track. Doing this prematurely may cause your income-driven repayment to change, according to some sources.
Anyone interested in Public Service Loan Forgiveness should use the PSLF Help Tool on the StudentLoans.gov website. But be wary. Once you file Employment Verification Forms with the Department of Education, your loan servicer will change, and there’s a concern that your IBR may be recalculated at the time of the switch, wiping some first-year savings.
If you’re certain your employer is a 501c(3) organization, then you can probably wait at least one year before filing the Employment Verification Forms with the Department of Education for PSLF and switching your loan servicer to Fed Loans. Till then, apply for loan consolidation with your current loan servicer immediately. It’ll give you runway and save you thousands.
Rishi Thaker is a medicine resident.
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