IBR and Public Service Loan Forgivenes

[BobA]

I am an MS4 about to start psych residency and I'm thinking about signing up for IBR for the Public Service Loan Forgiveness Program (IBR-PSLF). This program promises to cancel federal debt if you've worked in the public sector for 10 years. Residency counts!

However, I have some concern that the loan forgiveness that's promised for 10 years of work in the public sector won't materialize.

I have 280K in debt (250K federal) and so my plan all along has been to try and pay about $1,000/month during residency. This doesn't quite cover my interest but it's better than nothing.

I'll be obligated to pay about $400/month towards my IBR - which won't cover my interest. In order to hedge my bets in the event that IBR isn't there when I'm done with residency, or in case I want to go into private practice, I'm going to invest that extra $600/month that I would've been paying towards interest on my federal loans (maybe invest it into the 30K private loan I have. I can't decide). If IBR-PSLF is there when I graduate, then that's great for me but if not at least I've paid off my private loan (or starting saving for retirement).

How does this sound?

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[GeraldMonroe]

Finance isn't hard.

Step 1 : When you have the money, you should pay off the private loans first. In general, it is better to pay down debt first, in order of interest rate, instead of investing money, because you get a guaranteed return for paying down debt. The exception is for extremely low interest rate debt (like student loans used to be) and for tax-deferred investments like 401k and Roth IRA.

As for $1000 a month during residency? I'd hold your horses on that, you might need that money to help you enjoy your life. You only live once and all that.

Step 2 : when it comes time for getting a job as an attending, keep in mind that any job that is eligible for the loan forgiveness in 10 years is probably going to pay less. Calculate your true net pay when considering offers, factoring in the loan forgiveness and assume there's a 25%-50% chance you would leave the job before sticking out the 10 years. A decade is a very long time to be working for a disfunctional medical organization.

 

[UserNameNeeded]

Sounds reasonable to me. If you're counting on Public Service Loan Forgiveness, then it makes sense to use IBR's minimum as the guide for monthly payment and funnel any excess funds to paying down higher interest debt.

The sad, unfortunate thing for those of who've lived through the surprising changes in student lending over the past few years is now we know the rules can change at anytime and usually for the worse. None of these future promises are ever truly secure.

When I first got my student loans starting in 2006, multiple financial aid counselors at 2 separate schools assured me borrower benefits (interest rate reductions, principal reductions, etc.) offered at the time of MPN signing were guaranteed. And, yet, only after T.H.E. took them away 2 years later does anybody with any authority (financial aid office, the lender itself and TG the guarantor) realize/admit that they can be taken away since they're not stipulated in the MPN. But the MPN is a generic form with the same wording for every student and every Stafford loan. And if anyone actually read it, they'd see what a horribly written, intentionally vague contract we're signing.

And, as we all know, they took away the 20/220 pathway-- and, again, students (AKA suckers) were told "oh, you'll have 3 years of deferment in residency on that $65,000 of subsidized Stafford--that's the law!" And then the law changed.

How are you certain your residency will qualify for public service loan forgiveness? Did you get that in writing somewhere?

I'd be sure I'm happy with my professional choices first and foremost, because if that decade of work is for naught and the Public Service Loan Forgiveness doesn't work like you anticipate, then it won't be a total loss if you loved where you worked.

 

[nontrdgsbuiucmd]

I've reviewed this plan pretty carefully -- the IBR plan that is, from the source data on what all is covered and the details. Couple other things of interest are that "public health" is covered -- this includes working for non-profit organizations, including religious organizations (Catholic Hospitals, Adventist Hospitals) provided you're acting as a physician/healthcare person and not prosteletizing (spelling?).

To me it sounds a lot more doable to work for a non-for profit hospital than to work for the Gov't. But as stated above, laws are always subject to change. I'd look VERY skeptically/carefully at the difference in salaries between the options, and keep in mind the IBR payment will be way high after training is complete -- it'd be horrible to have med loans pretty much paid back anyway at the end of 10 years working in a sub-optimal (gov't) environment.. and then have the loan forgiveness benefit not do much for you.

 

[Poitiers2]

I don't know if you're into the idea, but another option is working a more rural or less represented area. You can get some pretty nice loan repayment for working in less dense regions of the country and sometimes even make far more than you'd make in a city.

If you get a 25K per year loan repayment, that's probably close to 40k in income prior to taxes.

 

[nontrdgsbuiucmd]

I have 280K in debt (250K federal) and so my plan all along has been to try and pay about $1,000/month during residency. This doesn't quite cover my interest but it's better than nothing.

I'll be obligated to pay about $400/month towards my IBR - which won't cover my interest. In order to hedge my bets in the event that IBR isn't there when I'm done with residency, or in case I want to go into private practice, I'm going to invest that extra $600/month that I would've been paying towards interest on my federal loans (maybe invest it into the 30K private loan I have. I can't decide).

One other majorly bad thing about IBR, I believe this is the case for the
10 year public service option, it is definitely true for the 25 year repayment option -- any loan amounts forgiven at the end of the period are taxable income. So if you knock down the loan amount to 250K after 10 years (as the balance would grow by $600 per month during residency due to not paying enough to cover interest), you're 250K "income" (loan forgiven in year 10) would result in a tax bill of.. who knows by then, will fed + state tax rate be more than 45%? Right now the marginal rate on another 250K of interest would be around 40% fed tax + whatever the state tax rate is; 10% or so in NY and CA, average top marginal state income tax rate is around 5-6%.

My question is, in 10 years if you're making $120K per year in public service, how would anyone handle that $112K tax bill? If this were paid back to the IRS over the NEXT 10 years, the amount per month @ 9% IRS rate would be $1,425, which is 14% of the gross salary, assumed 120K, public sector physician salary. Hopefully this will be change by law?

As mentioned by OP, by setting aside money, you can help defray this. But even still, set aside $600 per month when the student loan balance is increasing by $600 per month does not work, in that the student loan balance incurs interest of 7% or so; there is no investment that will return 7% on average after tax; even the stock market (with massive short term swings) is lower than this; probably 2-3% is a more realistic return for your saved money. Compounded over 10 years, and there'll be a sizeable gap between $$ saved versus additionally grown principal on the student loan.

 

[elr1983]

Can you post the link to the detailed information you read about this? All I could find was a statement generally stating what qualified. Not really anything about whether residency would count, details on the tax on the balance, etc. One thing I found was: http://www.finaid.org/loans/forgivenesstaxability.phtml, which suggests that there WON'T be tax on the balance if you're doing public service loan forgiveness.

 

[nontrdgsbuiucmd]

Can you post the link to the detailed information you read about this? All I could find was a statement generally stating what qualified. Not really anything about whether residency would count, details on the tax on the balance, etc. One thing I found was: http://www.finaid.org/loans/forgivenesstaxability.phtml, which suggests that there WON'T be tax on the balance if you're doing public service loan forgiveness.

Depends how deeply you want to read this..

http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi

I dug around & found a link to an organization that supposedly developed and supported basic IBR-type plan that was later accepted legislatively; the relevant regulations/rules start on roughly page 63235 of the Federal Register, volume 73, No. 206, published October 23, 2008. The next 5+ pages of the federal register provide the details of the plan.

Hopefully there is something in there that I missed stating that tax is not due on the "forgiven" portion of the student loan after 10 yrs of public service; given how easy it is for laws to be changed and how frequently they have been changed recently, I would not put a lot of stock in this plan staying as is for 10 years personally. Way too many examples pop to mind to elaborate them here + I worked for the Federal Gov't for 5+ yrs in a professional role & have seen how this stuff works from the inside.

 

[deleted98681]

My husband has been following this pretty closely --- he read the legislation and went to a talk at his school by somebody who was involved in drafting it. Apparently, the loans forgiven after 10 years of public service are not taxed, but those forgiven after 25 years are taxed.

 

[sumstorm]

With the public service part, did they clear up the whole 'no gaps' issue? For a while, it had to be 10 continuous years without gaps (ie no major illness, pregnancy, unemployment for any reason, etc) which I know was a huge issue for teachers who were not considered employed over the summer.

 

[nontrdgsbuiucmd]

I recall reading that specifically one can have gaps and still qualify, in the sense of working for the public sector or qualified non-profit firms for, say, 6 years, than taking a break, then adding another 4 years later. The key point was that 120 payments had to be made, I believe each within 15 days of the due date.

The fine print that I read also stated that if you have 9 years of public or other qualified service, you do not qualify for any forgiveness at all; full 10 years/120 payments are required.

Did not read anything about teachers and how summer months would be treated, sorry.

BabyWren -- thanks for posting this. Would appreciate it if you could post sources or other info regarding the forgiven portion not being taxable after 10 years -- that would be really cool if it's finalized within the regulations.

 

[masterofmonkeys]

I called the public service loan forgiveness people. According to whoever I talked on the phone, after my direct consolidation loan app has been approved, there is some sort of enrollment process for PSLF. This makes me slightly less worried that the option won't disappear sometime in the next 10 years.

 

[masterofmonkeys]

Did not read anything about teachers and how summer months would be treated, sorry.

Dunno where I read it, but if it is a teaching job and you're employed full-time 8 months of the year, it counts as 12 months.

 

[blanche]

Would this also apply to doctors working for fed agencies like the CDC or NIH? (the latter, I'm thinking if you do one of their fellowships and stay on to work a bit..)

 

[montessori2md]

Yes, as long as you're a federal employee while there (couldn't be a contractor or say researching using an NIH grant at a university).

 

[GeraldMonroe]

I called the public service loan forgiveness people. According to whoever I talked on the phone, after my direct consolidation loan app has been approved, there is some sort of enrollment process for PSLF. This makes me slightly less worried that the option won't disappear sometime in the next 10 years.

That's really important, since among other things, it means the government will actually approve a specific institution for PSLF. Would be terrible to start working for a nonprofit hospital and later find it's somehow not "public service" enough. (since even the high end hospitals that pay their physicians $400k a year are sometimes technically a nonprofit).

Also, it makes it harder for the government to renege on the deal - Congress, for the most part, cannot renege on a written contract.

 

[abbaroodle]

Do you have to consolidate?

I have some loans from 5 yrs ago when interest rates were way low (which I consolidated) and a ton of loans at the current lousy 6.8% rate. If I dont do 10 yrs of qualifying IBR, I would like to have the option of paying off the 6.8%loan faster than the really low ones.

If you do IBR, does that option go out the door?

 

[GeraldMonroe]

Do you have to consolidate?

I have some loans from 5 yrs ago when interest rates were way low (which I consolidated) and a ton of loans at the current lousy 6.8% rate. If I dont do 10 yrs of qualifying IBR, I would like to have the option of paying off the 6.8%loan faster than the really low ones.

If you do IBR, does that option go out the door?

Yes and no. Evidently, to take advantage of the public service loan forgiveness option, you do have to consolidate. Regular IBR, you don't. This is per my school's financial aid counselors, who may be wrong.

 

[abbaroodle]

If you dont consolidate, who do you pay for IBR? It seems like maybe a percentage of each proportional to the size of the loan?

It kind of sucks that you need to "decide" now which you want to do. If I start out consolidating (as my hospital is like many a non-profit) and decide to go into private practice, then I am stuck with the lumped interest rates. :-(

 

[honeyb]

I've been doing a fair amount of research on this topic, and found that the following site has the most comprehensive information on IBR and public service loan forgiveness. It would have saved me an awful lot of time if I had known about this from the start!

http://www.ibrinfo.org/

 

[met19]

I called the public service loan forgiveness people. According to whoever I talked on the phone, after my direct consolidation loan app has been approved, there is some sort of enrollment process for PSLF. This makes me slightly less worried that the option won't disappear sometime in the next 10 years.

i called direct loans, the servicer who will be working on PSLF and they said the app goes out when you meet the requirements (e.g. 10 years). If you heard differently please post who you spoke to. thanks

 

[The JockDoc]

Can years spent in residency count towards part of the 10 year public service loan forgiveness?

 

[yadayadadude]

Can years spent in residency count towards part of the 10 year public service loan forgiveness?

Yep. Cool, huh?

 

[YouAreAwesome]

Yep. Cool, huh?

What about fellowship?

 

[Terpskins99]

What about fellowship?

Should also count.

What matters is that you are working for a hospital that is recognized as a 501(c)3 non-profit organization by the IRS. I believe all US teaching hospitals are included under this umbrella.

The official handout.

 

[nontrdgsbuiucmd]

With the public service part, did they clear up the whole 'no gaps' issue? For a while, it had to be 10 continuous years without gaps (ie no major illness, pregnancy, unemployment for any reason, etc) which I know was a huge issue for teachers who were not considered employed over the summer.

The version in the Federal Register stated that 120 payments needed to be made total; it made reference to these payments not having to be made all in one block of employment but that they could be made through separate employment periods; my read is that this issue you mentioned was the reason for the final wording.

My husband has been following this pretty closely --- he read the legislation and went to a talk at his school by somebody who was involved in drafting it. Apparently, the loans forgiven after 10 years of public service are not taxed, but those forgiven after 25 years are taxed.

Just read another article on this stating there is a bill under consideration now that would eliminate taxes on the "forgiven" portion under IBR; I could not find anything stating that after 10 yrs 501 c3 or government employment, the "forgiven" portion would not be taxed.

Often a bill is written, and changed a fair amount before the House passes it, and then the Senate passes a diffferent version, and there's a reconciliation process where the legislation that passes is finalized; the "forgiveness" clause may have been stripped out somewhere in the legislative process. Hopefully it'll be put back in at some point!

 

[Terpskins99]

Got off the phone with my school's financial aid department.

One major issue they had with Public Service Loan Forgiveness is that the program isn't funded yet (which sort of makes sense, since the program started in 2007 and thus 2017 is when the first batch of people can send in a formal application for loan forgiveness). So whether or not the program ever gets funded or sticks around 10 years from now... who knows.

Many residents will still be applying for IBR anyhow, so I guess it doesn't make a difference right now. Pay down as much of your accrued interest as possible before you consolidate, folks!

 

[UserNameNeeded]

10 years = 120 payments = forgiveness. Can you do 120 payments within less than ten years and qualify for forgiveness earlier?

 

[Terpskins99]

10 years = 120 payments = forgiveness. Can you do 120 payments within less than ten years and qualify for forgiveness earlier?

Almost certainly not. That would kind of defeat the purpose of trying to get people to work in public service for 10 years.

 

[met19]

Got off the phone with my school's financial aid department.

One major issue they had with Public Service Loan Forgiveness is that the program isn't funded yet (which sort of makes sense, since the program started in 2007 and thus 2017 is when the first batch of people can send in a formal application for loan forgiveness). So whether or not the program ever gets funded or sticks around 10 years from now... who knows.

Many residents will still be applying for IBR anyhow, so I guess it doesn't make a difference right now. Pay down as much of your accrued interest as possible before you consolidate, folks!

spoke to direct loans, if the program is changed and you can qualify now, you will be grandfathered in. (e.g. just like other deferments, programs etc). therefore its not up to you to figure out how the feds, will pay for it. after all Direct Loans is run by the Feds. YOU CAN'T GET FORGIVENESS your servicer is sallie mae or citibank. in other words, the fed gov't will just take out more debt.

 

[SteelCity]

spoke to direct loans, if the program is changed and you can qualify now, you will be grandfathered in. (e.g. just like other deferments, programs etc). therefore its not up to you to figure out how the feds, will pay for it. after all Direct Loans is run by the Feds. YOU CAN'T GET FORGIVENESS your servicer is sallie mae or citibank. in other words, the fed gov't will just take out more debt.

I dont know what you meant to say with this last sentence, but it's coming off as you wont get loan forgiveness if your loans are through sallie mae or citibank. Is this correct?

 

[elr1983]

Does anyone have a link to written information about being grandfathered in to PSLF? I'd like to see something in writing...or better yet, has anyone gone through the process and received some sort of written agreement from the government stating you'll be grandfathered in?

Also, and this is a really stupid question, but when calculating the amount you'll pay each month, you use your pre-tax salary, right?

Is anyone else finding that IBR may still be too expensive on a residents salary, especially for people in higher cost of living areas??

 

[nontrdgsbuiucmd]

Found a great link on IBR in Facebook, one of the moderators works for the IBRinfo.org group (I think that URL is accurate; it's the one listed toward the top of this post)

http://www.facebook.com/topic.php?uid=18274939375&topic=8052

One point to mention, and I've experienced this as well -- the people who answer the phone at the direct loan servicing center (federal program) are data entry level clerk types. Not that this is bad, but they often will not be familiar with the intricacies of a new program, and they may incorrectly explain how IBR works. I have gotten incorrect info on a number of instances, and been told that something was not possible although per the rules it should have been. There is an ombudsman's office for direct loans who may be able to help when you begin to get the beauracratic (sp?) runaround:

http://www.ombudsman.ed.gov/

Re: calculating how much you'd pay each month -- per IBRinfo.org, you'd pay 15% of whatever you earn over and above 150% of the poverty level for your household size; I believe the total income that is used is adjusted gross income (AGI) off your 1040; this would be income after deducting for a handful of expenses such as 401K deduction.

 

[Terpskins99]

Also, and this is a really stupid question, but when calculating the amount you'll pay each month, you use your pre-tax salary, right?

Is anyone else finding that IBR may still be too expensive on a residents salary, especially for people in higher cost of living areas??

The interest payments are still tax deductible, so you can recover whatever taxes you paid on that amount that year.

Frankly, anything is expensive on a residents salary. But its within reason on a tight budget. The loan calculator showed I would owe $400/month during 1st year of residency, $415/month in yr 2, $433/month in yr 3, $794/month in yr 4 before leaping up to $1646/month in yr 5 when I would be expected to be an attending physician. If I continued my training as a fellow, then obviously the spike would take place later.

 

[david594]

Should also count.

What matters is that you are working for a hospital that is recognized as a 501(c)3 non-profit organization by the IRS. I believe all US teaching hospitals are included under this umbrella.

The official handout.

And for all the pre-vets/vet students, the same should also apply for most of the US vet schools, a few of the larger animal hospitals, and most of the animal shelters in the country. So it could be possible for a veterinarian to qualify for a public service loan forgiveness.

A huge plus for us as our internship/residencies pay equally poorly, but with our much lower long term salary potential.

 

[met19]

I dont know what you meant to say with this last sentence, but it's coming off as you wont get loan forgiveness if your loans are through sallie mae or citibank. Is this correct?

from what i know yes

 

[WACAT]

No they will not be forgiven. You MUST be with Direct loans to get PSLF. That is how the government helps to offset the cost of the program. They are saving money when you consolidate with DL instead of paying subsidies to Sallie Mae or any other FFELP provider.

 

[WACAT]

I'm not sure what you are asking, but I just went through the process. I graduated. When I started residency in July I then consolidated all of my THE loans into one consolidation loan through DIRECT loans. I will now have to make my first payment on Oct 21st so I'm just hoping they process my IBR paperwork by then!

 

[UserNameNeeded]

If your "salliemae loans" are Stafford loans (or a few of the random other student loans that qualify) and they are consolidated with the Direct loan program, then yes, Aatif.