How to Hedge Against PSLF Repeal

Repeal of PSLF
The future is foggy for the Public Service Loan Forgiveness program. That doesn’t mean your student loan payback strategy has to be

Maybe you’re a really savvy doctor who learned about the PSLF program in year three of medical school. You’ve since made three years of payments in residency under the PAYE program, and you’ve dutifully submitted your PSLF employment certification form annually. In fact, you’ve done virtually every possible thing to maximize your PSLF benefit. You have $300,000 in student loan principal with $40,000 in accrued interest. PSLF repeal would royally screw you over, so what do you do when both parties have said they want to repeal it and Republicans will control all branches of government?

What are the Chances the PSLF Repeal Actually Happens?

I actually think it’s highly likely that the PSLF repeal will happen within the next four years. Before you start panicking, I want to qualify that statement. PSLF in its present form will be going away soon, but almost certainly for future borrowers not current ones. I could be wrong, but I’d say with 85% certainty that anyone tracking progress towards PSLF today will receive it.

Here’s why I feel this way. Congressional Republicans have already submitted a bill repealing PSLF, but they exempted past borrowers from its effect. President Obama and the Congressional Democrats put forward a plan keeping PSLF in place but making it means tested, so that the benefit would cap out at $57,500.

The Democratic Plan Poses More Risk to Current Borrowers Using PSLF

If I was tracking my progress towards PSLF today, I’d actually be a lot more worried with the Democratic proposal than the Republican proposal. The Republican plan leaves the unlimited forgiveness of the current PSLF plan in place for past borrowers. Democrats could place a cap on the program and technically still leave it in place. Putting such a low cap on PSLF would effectively repeal it for many clients of mine with over $200,000 in student loan debt.

The government wrote PSLF into the loan documents for current borrowers. While that doesn’t have the same level of protection as a federal contract, some lawyers might think that it should. Hence, any proposal that would affect the current PSLF benefit would be subjected to intense lawsuits to treat the promise as a contract. That’s one reason the Republican plan left past borrowers alone.

Republicans Will Probably Move for PSLF Repeal Quickly for Future Borrowers

PSLF is extraordinarily expensive though. Since Republicans will look to rein in what they see as the excessive government spending of the prior administration, I would not be shocked at all if they abolished the PSLF program in year one or two of the Trump administration.

student loan calculator

While the chances are good that current borrowers will benefit from PSLF, there’s always a chance that somehow a surprise happens and it goes away. What do you do then?

Handle Financial Uncertainty By Preparing For Any Scenario

Before I founded Student Loan Planner, I used to be a bond trader for one of the largest money managers in the world. Occasionally we would see opportunities in the market where we needed to hedge against something not working out the way we wanted it to. That means we would protect our portfolio against all possible scenarios so we wouldn’t lose a ton of money no matter what happened.

Clients frequently ask me during student loan consults about possible PSLF repeal. Many of my clients have oriented their finances around PSLF for years. They are understandably worried. The way I’m advising clients is to plan for PSLF, but protect yourself too.

Consider Using a Repayment Plan that Controls the Growth of Your Balance

Some clients using PSLF want to minimize the amount they pay each month at all costs. I get that, because eventually the entire balance should be forgiven tax free. However, using a plan like REPAYE allows you to get an interest subsidy while filing taxes jointly. If your spouse has no debt, it might result in a slightly higher monthly payment, but REPAYE will also control the growth of huge loan balances.

On the risky end of the spectrum, a borrower might be using PAYE and filing taxes separately from their spouse. This will result in a very high loan balance as the interest accumulates and the lower monthly payment does not cover very much of that interest.

What if you’re worried about PSLF repeal? Make decisions to keep your student debt under control. Don’t let it just spiral with no end in sight. Get on a good repayment plan and keep it at a manageable level.

Save Pre-Tax for Retirement

The first and most important way to protect against the PSLF repeal is by saving a lot of money. Most of my clients using PSLF could afford to make larger payments, but they are instead making much smaller payments thanks to PAYE, IBR, or REPAYE.

pslf repeal

Consider saving the difference between what you’d pay under the Standard 10 year plan and what you’re currently paying in your income based plan. The first step is to max out your 401k if you haven’t been doing that already. That means $1,500 a month pre-tax into a 401k, which will reduce your income by $18,000 per year.

Saving for retirement also has the awesome effect that you pay less for student loan payments. Having ample retirement savings secures your future and allows you to pay down loans more aggressively if the PSLF repeal happens. After all, if your retirement savings have a big lead, then you can afford to save less there and contribute more to your loans if Trump axes the program along with the Republican Congress.

Open an Investment Account

In addition to saving aggressively for retirement, you should prepare for possible PSLF repeal by saving other places. That means opening a taxable investment account and buying shares of index funds.

If you haven’t learned about different ways to invest, the easiest and best for the average person is buying an index fund with a super low cost. Vanguard is an excellent choice if you like to manage your own investments, as the fees on their funds are between 0.05% and 0.2% a year.

What if you’re not a do it yourself investor? If you want a company to invest for you, then consider hiring Betterment or Wealthfront to handle your portfolios. If you sign up through the links, then I get a small referral bonus. I think both companies are best in class because they’ll help you get long term returns that are much better than if you just left your money in the bank for decades.

A bank account best case scenario gets you between 1% to 3% long term. That’s basically inflation. After taxes and fees, you probably will end up losing money on a real purchasing power basis. In contrast, investing in the stock market and bond market through index funds has a strong chance at earning something between 4% to 7% over the next 20 years. Since paying back your student loans could be several years away, saving extra in a taxable investment account is a great way to protect against PSLF repeal.

Say PSLF repeal happens and I’m a high income professional. If I had an investment account, I’d take my $30,000 to $100,000 and use the entire sum to pay down a significant percentage of my loans. After that, I’d refinance and pay it off as fast as possible.

Control What You Can and Protect Your Family Against PSLF Repeal

Sometimes clients ask me to guarantee that they are going to be ok. They want to know that the government will forgive their student loans tax free. I can’t make that promise, and maybe that’s why you can trust me. The world is too uncertain to bank on any one outcome. Therefore, if you’re hoping for tax free loan forgiveness within the next 10 years, that’ great go for it.

PSLF repeal

At the same time, control your student debt balance. Select a smart income driven repayment plan between REPAYE, PAYE, and IBR. Additionally, save for retirement and reduce your taxable income. Max out all pre-tax retirement accounts such as 401k’s and 403b’s.

On top of that, buy a lot of shares in index funds in a taxable investment account. Pay as little as you can in fees, and don’t panic when the market goes up and down. Build wealth so that you can pay down a large chunk of your debt all at once if you have to. Setting up your student loan strategy as a bond trader would set up a risk managed trade is an excellent way to protect your personal balance sheet no matter who runs Washington DC.

My business model here at Student Loan Planner, LLC is helping people conquer huge student loans with flat fee consultations.  I perform a holistic loan analysis to see what your best available repayment options are and simulate what the future looks like, including how to plan for a potential massive tax penalty.

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