What physicians need to know about student loans

Pay as you earn (PAYE)

This plan is usually best for clients looking for some loan forgiveness as it is likely the lowest payment option if a spouse is involved. The reason for this is that this program allows you to file your taxes separately from the spouse and only isolate your income. Therefore, you only pay one payment based on your income and not grouped with that of your spouse. There is also an upper limit on the payment amount, which cannot exceed that of a standard 10 year repayment.

The monthly payment is 10% of your disposable income, but unfortunately not everyone qualifies for this program. To qualify, you must demonstrate “partial financial hardship” and not have borrowed before October 1, 2007. Even if you make payments on this program for 20 years, they will cancel your loans, but the canceled amount will be considered taxable income in the year it is canceled.

Income-based repayment (IBR)

This program is usually intended for those who want to take advantage of the Pay-as-you-earn program but do not qualify. This program allows you to file taxes separately from a spouse to isolate your income for your payment and to have the same cap on payments as PAYE. As with the PAYE program, this cap can be beneficial for those who seek PSLF forgiveness but have a high income job.

There is both a “new” IBR and an “old” IBR. If you borrowed before July 1, 2014, you will only qualify for the old IBR plan, and if you borrowed after July 1, 2014 you will only qualify for the new IBR. The old IBR has payments based on 15% of disposable income, while the new IBR program is only 10%. The long-term tax waiver is 20 years for the new IBR and 25 years for the old IBR.

The only major difference between the new IBR program and the PAYE is that there is no limit to how much interest can be capitalized when you leave or switch. However, if you qualify for the PAYE, it is likely a better option than IBR in most cases.

Revised Pay According to Earnings (REPAYE)

This program is the standard income-based repayment option. This program is usually best for those who are single and / or plan to refinance their loans in the future. This program will always include your spouse’s income in the payment calculation regardless of the status of the tax return. This program offers some great interest subsidies and can cancel some of your unpaid interest that normally accumulates while making payments that are lower than the interest accrued. They waive 50% of the unpaid interest on all direct loans and 100% of the unpaid interest on all subsidized loans for the first 3 years. This will help keep your total amount down.

This program is based on 10% of your disposable income but, unlike other options, has no upper limit on how much you can pay in the future. There is no need to demonstrate partial financial distress and therefore almost everyone should qualify for this program. If you have a college graduate loan, you will need to make payments for 25 years before the tax relief occurs.

Student Loan Consolidation

Many people are tempted to consolidate their loans under the pretext of “necessary” or “for the sake of simplicity”. In most cases it is not necessary and most of the time it is not recommended. Consolidating your loans has some significant consequences if you are not aware of them. So, do some research and / or speak to a financial professional who is knowledgeable about student loans before doing so.

The benefits of consolidation are that it may allow some of your loans that are not eligible for the PSLF program (e.g. FFEL loans, Perkins loans, etc.) to be merged into one direct, eligible consolidation loan for one qualified earnings-related repayment. Consolidation can also allow for extended repayments up to 30 years, which could be a good option for those who want to pay off their loans but cannot refinance their large sum at a lower interest rate with a private bank and / or want to keep government coverage their credits in the event of their death. If you have defaulted or defaulted on a loan, this may also be a sensible option for you to pay that amount without your records.

The biggest downside to consolidation is that it will reset the clock for possible forgiveness for that loan. This means that if you have 5 of the 10 years under your belt on PSLF forgiveness and then you decide to consolidate your credit, it clears your record and forces you to start your 10 years over. This also applies to the long-term taxable waiver options of the various income-related repayment options. In loan consolidation, all loans are combined with a weighted average of the various interest rates. This limits your ability to target certain high yielding loans if you are trying to repay them efficiently in the future while holding them with the federal government.

Public Sector Loans Program

The infamous Public Service Loan Forgiveness program is one that is highly sought after but is full of hurdles that you must go through in order to qualify. Done right, this is one of the most efficient ways to pay off your loans, but we need to approach PSLF forgiveness with caution and have a backup plan in case it doesn’t work.

There are three main steps to ensure that you are properly enrolled in the PSLF program. The first step is to make sure Fed Loans is your loan service provider. If this is not your servicer, you are not properly enrolled in the PSLF program. Second, you need to make sure that all of your loans are “direct” loans. Any of your loans that are not preceded by the word “directly” do not qualify for the program. If so, you can merge these to be separate from the program or just keep going knowing you will have to pay these off separately.

The third step is to ensure that you are properly enrolled in one of the income-oriented repayment programs (IBR, REPAYE, PAYE, ICR). We often see residents have a $ 0 payment in the first year, but if they’re properly enrolled in one of these repayment programs, those months count towards the PSLF. Make sure you never pay more than the required amount as this may put your account in prepaid status and exclude those months from the PSLF program.

Finally, you need to make sure that you are working full-time for a qualifying institution. Typically we would like our customers to submit the employer verification form every 10-12 months to make sure everything is in order. This form will cause Fed Loans to update your “Qualifying PSLF Months” on your Department of Education file. A proper financial professional can keep your official records every year to make sure you stay on track and to check the work of the credit servicer. The loan service providers are known to be wrong, so it is important to have a professional review their work for you.

After you’ve gone through all of the above and your official records show that you have 120 qualifying payments (don’t have to be consecutive), you are ready to apply for tax relief on your loans.

Notes and Conclusions

The space for federal student loan can be overwhelming, but it is important that you educate yourself and consider getting the help of professionals to hold your hand during the process. Watch out for private consolidation firms contacting you during the training or leaving you scary messages about your credit. There have been many lawsuits against these companies trying to defraud students. No matter which professional you work with, never share your FSA credentials with anyone. When deciding to work with a financial professional, you should consider their expertise, education, background and other relevant factors. You might want to look for someone who has specific education or training in the student loan world.

Michael Foley, CFP, CSLP, is a comprehensive financial advisor with North Star Resource Group. If you have any further questions about your personal situation, please feel free to contact him at Michael.foley@northstarfinancial.com and 480-993-9491.

North Star Consultants, Inc. – Insurance Products and Services. CRI Securities, LLC – Securities and Investments. Securian Financial Services, Inc. – Variable Products and Securities. Securities and investment advisory services offered by CRI Securities, LLC and Securian Financial Services, Inc. Members of FINRA / SIPC. CRI Securities, LLC is affiliated with Securian Financial Services, Inc. and the North Star Resource Group. North Star Consultants, Inc. is owned and operated as the North Star Resource Group. Michael is a registered agent and an investment advisor agent of CRI Securities, LLC and Securian Financial Services, Inc. 3594513 / DOFU 5-2021Ð_

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