Written By Dan Rooker, CFP®, CSLP®
Choosing whether to pay your loans down to zero or pursue an attractive loan forgiveness program, like Public Service Loan Forgiveness, can seem like a daunting task. It doesn’t have to be, though.
On paper, the option that results in the least amount of money paid from your pocket is the best result.
But like many personal finance decisions in your life, the decision around how to pay back your student loan debt is more “personal” than “financial.” In the end, for many borrowers, it’s okay if you don’t pick the least costly out-of-pocket loan payback strategy.
If you’ve got a student loan measuring stick out but not sure where to start, keep reading.
Helpful debt-to-income ratios
A debt-to-income ratio is a phrase that’s mentioned over and over again online, but rarely hits home if you’re not numbers-oriented. So I’ll reflect on it differently than you might find elsewhere online.
Take your expected annual compensation and multiply it by 0.75. If your loan balance is greater than this number, then you’re probably a good candidate for PSLF.
If you’re curious about whether you’d be a good candidate for longer term (20-year or 25-year) loan forgiveness, multiply your income by 1.25. If your loan balance is higher than 1.25x your income, it makes sense to run the loan forgiveness plan comparison in our calculator or hire a Student Loan Planner consultant if you’d like someone to guide you.
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PSLF requirements
Below is an overview of PSLF requirements that federal student loan borrowers must meet for loan forgiveness, along with helpful tips.
120 qualified payments
These payments don’t need to be made consecutively. If you decide to pause your payments for any reason, you can pick up where you left off.
You can make more than one payment per month, but only one payment can be counted as “qualified” toward PSLF.
Enrolled in an income-driven repayment (IDR) plan
Payments made on the Graduated, Extended, or Extended Graduated plans don’t count toward PSLF. Participation in the IDR plans requires annual recertification of your income to continue on the plan.
Although payments on the Standard 10-year plan can be counted, if you stay on it for the entirety of the 120 payment path toward PSLF, there would be no debt left to forgive.
Work full-time for a qualified employer
You should be working for — or planning to work for — a qualified employer full-time (their definition of full-time) or a weekly average of 32 hours per week measured over the course of the previous 12 months.
Payments made while not working for a qualified employer don’t count toward PSLF. A qualified employer is a nonprofit 501(c)(3) organization, or federal or state government entity.
You don’t have to work for the same qualified employer the whole time. You can switch to a different qualified employer as many times as needed in your career.
Borrower professionals that we talk to who often find qualified employer opportunities in their industry:
- Physicians
- Teachers
- Physician Associates
- Nurse Practitioners
- Physical Therapists
- Federal and state attorneys
- Pharmacists
- Etc.
Make monthly payments on-time
Technically, on-time means the payment was received within 30 days of the due date, but making a payment after the due date increases the chances that your payment won’t get counted afterward.
Set your total calculated required minimum payment to auto-pay. Your loan servicer should prorate the total monthly payments appropriately across all of your loans on your IDR plan.
Submit the Employment Certification Form (ECF)
Although the ECF is required just once along the entire 120-payment path, you have the option to submit the form multiple times to get an official count of qualified payments on record.
We recommend submitting the ECF at least once every 12 months. You already have to recertify your participation in an IDR plan every year, so you might as well combine that annual habit and generate the ECF through the PSLF Help Tool and get your employer to sign it before submitting it.
When PSLF makes sense
If you can check the boxes for all of the requirements above and your loan balance is greater than the 0.75x income threshold as well, then pursuing PSLF probably makes sense on paper.
So let’s apply PSLF to a borrower’s situation and see how the numbers shake out on paper:
Let’s call our borrower Dr. Matan. He owes $300,000 in federal Direct Loans with an average interest rate of 5%, from medical school. He’s about to start a five-year surgery residency program where he expects his income to start around $60,000, increasing by 3% each year. After the residency program, his income will jump to $400,000 as an attending physician in the nonprofit sector, increasing by 3% each year.
Dr. Matan is (at this point) unsure where he’s going to work after residency but the residency program is a qualified employer and his loan balance is definitely higher than 0.75x his residency income and pretty close to 0.75x his expected attending income a few years from now when $400,000 today is higher due to inflation.
See the table below for a comparison of the next 10 years of payments across various federal repayment plans if he worked for a qualified employer after residency:
| 10-year standard plan | PAYE or new IBR | REPAYE | |
|---|---|---|---|
| Monthly payment during residency | $3,182* | $339 | $339 |
| Monthly payment as an attending physician | $3,182 | $3,182** | $3,672 |
| Payments made over 10 years | $381,836 | $197,901 | $229,515 |
| Projected loan amount forgiven (tax-free) through PSLF | $0 | $250,782 | $186,923 |
| Total payments | $381,836 | $197,901 | $229,515 |
**on PAYE and IBR, the payment is capped at the 10yr standard repayment plan, while the income-driven payment on REPAYE is uncapped.
So there are definitely things to consider:
- Likelihood of continuing to work for any qualified employer.
- Income trajectory working for a qualified employer versus the other employers out there in the for-profit space.
- Work culture and work-life balance
These “other things” could be pros or cons, depending on how you view them.
When refinancing makes sense
Student loan refinancing is far less complex than the federal loans system. It makes sense you’ve decided you want to be on a pay-it-down-to-zero plan and you’re just looking to get a lower interest rate.
Let’s say that Dr. Matan above is for sure working for a for-profit employer because he expects to make $600,000 in a private practice setting and finds that income and work-style more fitting to his lifestyle wants and savings goals.
In Dr. Matan’s case above, refinancing only makes sense when he transitions out of residency. Until then, he should be on an IDR plan. He’d want to pick between the REPAYE plan and (probably) a 20-year refinanced loan. To illustrate that, see below for the loan balance after five years of residency with different loan options:
| 20-year refinance loan at 3% | PAYE or new IBR | REPAYE | |
|---|---|---|---|
| Monthly payment during residency | $1,664 | $339 | $339 |
| Projected loan balance at the end of residency | $254,124 | $343,537 | $321,769* |
| Total payments after 5 years | $99,840 | $20,845 | $20,845 |
Assuming Dr. Matan can afford $1,664 student loan payments in residency, he’ll need to decide whether putting that income toward his student loans or putting it toward some other purpose is best.
After residency, it’s a pretty clear-cut decision to refinance away from the federal system, assuming the interest rates at that time are lower in the private lender space.
How he refinances (i.e. 20-year loan, 15-year loan, 10-year loan, etc.) depends on his lifestyle wants and goals at that time. He would probably be well-served following a refinancing ladder strategy, especially if a practice loan is part of the deal with his future employer.
Key takeaways and Tips for borrowers who won’t do residency
Consider PSLF with your federal loans when working for a qualified employer and you owe a balance that’s more than 0.75x your expected income. Dr. Matan’s example is a somewhat complicated case for a single person because of residency.
It gets more complicated when borrowers are married and more so when married with federal loans. You can solve your student loan situation over the course of an hour with six months of email support by hiring a consultant.
If you’re not doing residency or you’re beyond residency, still use the “debt-to-income ratios” listed at the beginning of this article.
If you want to play it safe and plan for the unlikely “what if they cancel PSLF” situation, then calculate what you’d pay to pay-it-down-to-zero and save the difference between that payment and the payment you’re required to make on an IDR plan for PSLF.
Let’s say Dr. Matan’s payment on the 20-year plan was $1,664 and his payment on PAYE/IBR/REPAYE was $339 and he saved the difference of $1,325 every month for five years. Without investing it, that’s almost $80,000 sitting there just in case he decides to take the private practice offer. It’s also $80,000 he could pocket and invest if he decides to go the PSLF route for at least the subsequent five years.
If you’re not sure about pursuing PSLF, but you work for a qualified employer today, keep that option open and save the difference instead. If you do that and then decide to refinance down the road, you can use the accumulated savings to make a lump-sum payment and commit at that point in time.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
