Editor’s Note: On October 25, 2022, President Biden announced an extensive overhaul of the PSLF rules. We also expect a new IDR plan as well. While the below mistakes residents often make still apply, the new mistakes will be surrounding choosing IDR or deferment during training. Previously, forbearance and deferment could not count towards PSLF. After July 2023, that is changing. So borrowers with med school loans will soon have to choose between minimizing interest through IDR subsidies and paying the minimum possible payment through deferment. We will have more updates for you soon.
Doctors are perhaps the most prone of all occupations to making student loan blunders. One of the biggest reasons is that many don’t fully understand how to take advantage of the special benefits available for student loans in residency or fellowship.
If you have federal student loans and you’re planning to work for a not-for-profit hospital after training, you must understand student loans rules surrounding PSLF. Medical students and recent graduate could lose out on tens or hundreds of thousands of dollars by making the wrong decisions with their student loans in residency.
If you’re a medical resident with federal loans, here are the biggest student loan mistakes you’ll want to avoid once payments resume after the COVID-19 forbearance period.
Mistake #1: Failure to consolidate med school loans
The average student loan debt for a medical student is just north of $200,000 according to the most recent data from the Association of American Medical Colleges (AAMC). Many of those students wonder “Do you pay students loans during residency?” The answer is yes.
That might seem like a bummer at first. After all, your resident income will likely be much lower than your attending salary. However, that lower resident income could also qualify you for lower payments. And it could potentially help you maximize student loan forgiveness.
If maximizing forgiveness is your goal, it’s critical that you consolidate all your federal student loans in residency into one Direct Loan. You should aim to do this during your grace period before repayment begins. All Direct Loan borrowers can do this regardless of credit score or income.
By consolidating, all your student loan debt will be eligible for the Public Service Loan Forgiveness program. Moving forward, each year of medical residency or fellowship will count towards the 10 years of loan payments needed to reach tax-free loan forgiveness. If you fail to consolidate until the end of residency, you might have missed the boat on the most generous loophole in existence for doctors today.
Note that private student loans aren’t eligible for a Direct Consolidation loan and may not offer a grace period after you finish medical school. If you have private medical school loans, you may want to consider student loan refinancing. A few student loan refinancing lenders offer reduced payments for medical residents. Some even provide a grace period after residency ends before you’re required to make payments.
Get around the FFEL ineligibility problem by consolidating them into Direct Loans
There’s a way around this though. You can take all your disparate federal student loans and lump them together into one loan with the federal government. This is called Direct Consolidation. It’s basically what any financial aid officer will do when you express concern about your loans. It’s also what private loan advisory companies sometimes charge more than $1,500 to do when they don’t even give you advice about payoff options.
*Pro tip: Many Facebook ads promoting student loan help are scams. Don’t hire a company to help you with your student loans unless they’re capable of modeling your debt to analyze different payoff strategies. Profit-hungry firms just put you into a Direct Consolidation Loan because it’s easy (you don’t have to pass a credit score check) and doesn’t prevent you from using a different strategy later. It’s a one-size-fits-all approach to what should be an individualized answer.
Unfortunately, student loan scam companies take the huge payments they receive and apply them towards tricking new customers. If the “student debt relief” company can’t tell you the cost of choosing different repayment options, they’re likely running a student loan consolidation scam.
Mistake #2: Failure to work for PSLF residency programs
It’s important that note that not all residencies will qualify as PSLF residency programs and working for a hospital doesn’t automatically qualify you for student loan forgiveness. To qualify for PSLF, you must take a “qualifying public service position.” PSLF residency programs are typically 501(c)(3) nonprofit organizations or state hospitals. According to the Association of American Medical Colleges (AAMC), qualifying fields may include:
- Emergency management
- Military service (active duty)
- Public safety
- Public health
Medical professionals could discover that their residency doesn’t count toward loan forgiveness if they don’t work for a qualifying employer. If you plan to pursue PSLF after residency, it’s imperative that you narrow your search to PSLF residency programs or you won’t cover any ground toward PSLF during your residency. To verify an employer’s eligibility, contact FedLoan Servicing.
Mistake #3: Failure to submit the PSLF Employment Certification Form annually
If you’re in medical residency or fellowship, this PSLF form from the federal financial aid office should be your best friend. Very few residents ever submit the form though. A common misconception among residents is that the PSLF program automatically results in loan forgiveness once you’re eligible.
This idea is probably the most common of the PSLF mistakes. Nothing could be further from the truth. You have to apply after working for a public service (not-for-profit) institution for 10 years.
Unfortunately, a lot of doctors will make payments for 10 years and be in for a rude awakening when they submit this form. Some folks will have loans they failed to consolidate as I warned with Mistake #1. In that case, all your loans without “Direct” in the name aren’t even eligible for forgiveness. Others will have to deal with the horrible record-keeping of federal loan servicers.
Our Personal Example Should Drive Home How Important Submitting the PSLF Form Really Is
Let me give you a personal example. My wife submitted the PSLF certification form to the Department of Education. The financial aid office transferred her from Nelnet to FedLoan Servicing, which is supposed to handle all PSLF cases. They returned her form with the shocking answer that she had only made 2 of the 120 loan payments required for PSLF.
This answer is totally wrong and is an example of extreme incompetence. She consolidated everything into a Direct Consolidation Loan at the end of medical residency. And she had made at least three years’ worth of loan payments during fellowship. But she only submitted the PSLF certification form at the end of her fellowship instead of during her first or second year of residency. So their record-keeping was completely off.
The PSLF paper trail is a beautiful thing
So what do you get with submitting the PSLF certification form annually? You get a paper trail and proof that you’re progressing in the program. If you submit the form each year, you will have proof that you made each payment.
This is especially important with a loan servicer as bad as FedLoan Servicing. So begin as soon as you get your first couple paychecks in residency and begin to make payments on your loans. Submit the form to know exactly where you stand in regards to the PSLF program.
Mistake #4: Failure to choose the right med school loan repayment program
Here’s the honest truth: your financial aid officer is going to give you a one-size-fits-all answer regarding your student debt repayment options. Few financial aid counselors consider your career, marriage, or life plans. And even fewer input them into a spreadsheet to simulate the cost of each option.
But choosing a repayment program is complicated. The right choice for you will depend on your life plans, goals, future income, and more. We consider all of these factors during our student loan consultations. But, for now, here are a few general tips.
REPAYE is a good plan if you’re a medical resident going for PSLF, expect to become an attending physician in seven to eight years, and your spouse isn’t working. It includes both partners’ incomes in the calculation for monthly payments. With only one income, REPAYE might result in a lower monthly payment and total cost if your goal is PSLF tax-free loan forgiveness.
IBR or PAYE is good if you expect a surge in income, your training period lasts four to six years, or your spouse has a high income. If that’s the case, then you should consider filing taxes separately. That way, the monthly payment is based on only your income instead of your spouse’s income too. Both these plans also place a cap on total monthly payments. REPAYE has no such cap.
A horror story from committing all the student loan residency errors
I’d like you to meet Tim, a soon-to-be-attending physician finishing up his five-year medical residency program. He’s really excited about the new contract he signed with a major academic medical system that is a qualifying public service employer for PSLF.
Tim has $200,000 in student loans with an interest rate of 6.8%. His contract stipulates a starting salary and bonus of approximately $250,000 in the first year. He expects his salary will grow to about $300,000 over the next five years.
Unfortunately, Tim made nearly all the wrong moves with his federal student loans in residency. While he did work for one of the PSLF residency programs, he never submitted the PSLF form. He never consolidated his loans. And he never checked to see if there was a better repayment plan than IBR.
PSLF is pretty much off the table now
Tim discovers that because he did not consolidate his old loans, the five years of IBR monthly payments he made during residency do not count towards PSLF. His loan balance is higher than it would have been otherwise too because he never looked into other income-driven repayment options.
I will compare the cost of IBR and private refinancing with the PSLF program if Tim had not made the student loan mistakes doctors make in residency. I’ll model his loans using the Student Loan Planner® Calculator.
To reiterate, Tim’s only real options now are refinancing to a lower interest rate with a private lender or joining the IBR program. I’m only showing the cost of PSLF to expose how much money was left on the table.
Tim’s only real cost-saving option now is student loan refinancing. Comparing PSLF with the cost of refinancing to a lower interest rate, we see that Tim cost himself over $80,000 by not knowing student loan rules. If he had not made these mistakes, he would have been eligible for tax-free loan forgiveness in just five short years.
It’s easy to save money on student loans in residency
If you’re still in medical school or are just starting your residency or fellowship, you can avoid these student loan mistakes. All you have to do is consolidate your loans within a year of starting residency. Then, file the PSLF employment certification form annually. Additionally, make sure you choose an intelligent repayment plan that can provide low monthly payments today and (hopefully) forgiveness down the road.
Avoid the three common student loan mistakes I mentioned, and you’ll be ahead of 90% of other doctors. If you plan to go into private practice and have a good credit score, you may also want to consider refinancing your med school loans. Whether you’re a medical resident who wants to lock in today’s low interest rates, or you’re already working in private practice, refinancing could make a lot of sense.
Student Loan Planner® can help you save money on your medical school student loans. Our advisors perform holistic loan analysis to see what your best available repayment options are. We’ve helped more than 4,880 clients take on over $1.22 billion of student debt and we’d love to help you too.