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Introduction

Formulate a Financial Plan

Know Your Net Worth

Manage & Minimize Debt

Accumulate Assets

Budget to Live Within Your Means

Understand Investing Basics

Plan for Retirement

Insure People & Property

Deal with Financial Advisors

Review Your Employment Contract

Make Plans for Your Estate

Make Good Decisions

Conclusion

The Public Service Loan Forgiveness (PSLF) program offers loan forgiveness for eligible borrowers who work full-time for qualified employers and make an appropriate number of qualifying payments. More specifically, according to studentaid.gov,[1] to qualify you must:

  • be employed by a U.S. federal, state, local, or tribal government or not-for-profit organization;
  • work full-time for that agency or organization;
  • have Direct Loans (or consolidate other federal student loans into a Direct Loan);
  • repay your loans under an income-driven repayment plan; and
  • make 120 qualifying payments.

There are some very useful FAQs on the government's Public Service Loan Forgiveness site, addressing employer qualification, loan eligibility, qualifying payments, and the process itself. I strongly recommend reading through all this information. While that may seem like a pain, keep in mind that doing this properly could mean having a massive amount of your loan debt forgiven, so all your learning is time well spent.

It is crucial that you abide by all program rules and make intelligent decisions along the way:

  • Don’t miss any payments
  • Make sure your loans qualify. If some of them don’t, look into consolidating into Direct Loans that do qualify
  • Give careful consideration to the repayment plan you choose. Your selection should be made within the context of your household circumstances, including how much debt you have and whether you are married
  • Note that loan repayments made while in a residency program may qualify as PSLF payments—but you must make these payments. Electing forbearance or deferment could be self-defeating, because those years would not qualify and you’d have to spend more time in the program to reach your 120 eligible payments

DoctoredMoney.org observes that many graduating medical students would be best positioned by selecting REPAYE or PAYE repayment plans if they are interested in PSLF. This does not mean these are automatically the best choices for all graduates, but these are likely to be solid choices for many. Rather than reinventing the wheel here I recommend you visit DoctoredMoney’s Student Debt resources, which explain which repayment plans are advantageous under certain circumstances.

On paper, PSLF is a great program and many bloggers tout it as the clever way forward—but reality has proven disappointing for many.

The first cohort of borrowers seeking to qualify for PSLF completed their ten years of service recently. Many were dismayed to discover their applications for loan forgiveness were rejected. The rejection rate was a stunning 99%!

The government responded by creating a Temporary Expanded Public Service Loan Forgiveness (TEPSLF) program. In late 2019 the revised plan still rejected 99% of applicants. According to a January 31, 2020 NPR report, it was discovered that “71% of denials were essentially due to a paperwork technicality. According to the GAO [Government Accountability Office], more than 38,000 applicants were denied relief under the [TEPSLF] expansion ... simply because they hadn’t first applied for and been denied PSLF.”

 There’s been an outcry over the unnecessary complexity of the program and its draconian rejection rates. It’s understandably devastating for doctors who believed they were abiding by program requirements to suddenly discover their sizable loan obligations are not being discharged.

While we all hope the government will make the process more seamless, fair, and transparent, there are no guarantees.

Some commentators argue that the PSLF is completely safe and after ironing out its issues will honor all requests for debt forgiveness. My risk management background forces me to be more cautious. Due to Coronavirus-related bailouts, governments at all levels have taken on massive amounts of debt. Even before these unprecedented obligations, we knew that Social Security and other government programs would likely be insolvent within ten to fifteen years. The bottom line is that the federal government may not be in position to forgive massive amounts of loans. There is precedent for the government cancelling allowances we've taken for granted. For example, the Stretch IRA strategy employed by many families was taken away to fund other government priorities. This is a reminder that no program is untouchable. This doesn’t mean you should not pursue PSLF. It does mean you should not blindly assume all will be well.

Accordingly, if you are on a PSLF path or would like to embark on one, I strongly recommend you prepare—mentally, emotionally, and financially—for PSLF rejection or for some unfavorable changes to the program in the future.

Financial preparation in this context means ear-marking some of your assets or pillars to pay off loans that might not be forgiven. You can set up a separate investment account to cover “unforgiven” loans, or simply recognize that funds in your existing accounts may be needed to cover such liabilities in future. Take this contingent liability into account when calculating your net worth. The most conservative version of this is to subtract your total debt balance from total asset value when determining net worth. I.e., when calculating new worth assume none of your debt will be forgiven.

Periodically look up the latest information from official government sources to ensure you abide by all PSLF requirements.

 


[1] https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service

 

Related Links:

Public Service Loan Forgiveness

Loan Simulator

FedLoan Servicing

What Happens to Student Loans When You Die?

AAMC on financial aid

 


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