Can I trust PSLF and What to Do if you Don’t

“There’s no way you are old enough to be my doctor.  Are you still in training? Does your momma know you’re here?” I’d be lying if I told you that I didn’t get these question most days at work.  Seriously, even the last question.  I have the unfortunate disposition of looking like a 14 year old to most of my patients who are still old enough to remember Doogie Howser, MD.  I don’t blame my patients, though.  After all, the entire specialty of anesthesia is built on the mantra of “Trust, but verify.”

A recent area in physician personal finance that has the same dilemma, which requires the Trust, But Verify method is PSLF (Public Service Loan Forgiveness).  People often ask, “Can I trust PSLF?”

My answer?  Trust, but verify.  Let’s dig in.

Public Service Loan Forgiveness (PSLF)

Doogie Howser MD
You remember this guy, right? Apparently I don’t look much older than him. At least that’s what my patients think.

If you are reading this, you are likely aware of the Public Service Loan Forgiveness program, which promises to forgive all of your remaining medical school debt after 10 years of monthly payments while you work for a 501(c)3 (non-profit) organization.  Whatever balance that remains after that is forgiven, and it is tax-free unlike other forgiveness programs.

If you are smart enough to do this in residency, those years count, too!

Sweet deal, huh?  Well, except if you don’t believe that the government is going to own up on it’s promise.  The fact is that this forgiveness for PSLF became available for the first customers in October 2017.  But has anyone actually had debt forgiven?  The answer is yes.  There are some examples (like this one from Big Law Investor).

Unfortunately, there are specific qualifications to take part in the program.  You must also certify each year to continue in the program.

But, what if, you have qualified and certified each year.  Can you trust that five or six years from now the government will own up to forgiving all of this money for all of these graduates who make lots of money being doctors?  What can you do if you don’t trust that it’ll exist?

A little trust is probably deserved

I agree with others that for those currently enrolled in the PSLF program, they will likely be grand-fathered into any changes that might happen.  For those currently in medical school counting on this program in the future, I am not sure if it’ll exist or not when your time comes.  Why not?  Well, there have been signs that things may change.

The PSLF page on the governmental student aid website currently (as of 4/7/18) has an Alert that reads:

Alert! The Consolidated Appropriations Act, 2018 provided limited, additional conditions under which a borrower may become eligible for loan forgiveness if some or all of the payments made by the borrower do not qualify under current requirements for Public Service Loan Forgiveness (PSLF). The U.S. Department of Education is assessing the newly enacted law and will explain the new forgiveness conditions to customers on this page as soon as more details are available. We encourage you to check back periodically.

Elephant
Be wise, like the elephant, and make a back-up plan. You may need it to pay off your debt, or it may accelerate your financial independence.

There are also examples currently in congress, such as the PROSPER Act that potentially propose getting rid of PSLF for new borrowers going forward.  (It says nothing about abandoning this for people who are currently in the PSLF process.)

That said, everything that I have seen has pointed to people who are currently in the program being able to continue in the program.

So, my first word is “Have a little trust.”

This is probably easier to swallow if you are 1 year out from forgiveness, but what if you are 5 years out? What are your options?

Trust, But Verify

If you are of the belief that PSLF will be going away and that you are going to get screwed, then you probably need to have a back-up plan.  The best plan is to live like a resident and save up money in case you get the shaft.

What does this look like?

Well, here are the steps involved in protecting yourself.  And regardless of what the government does, you’ll benefit from these steps.  The most important time to start these steps is in your first month as a new attending or practitioner.

Step 1. Determine what your payment would be without PSLF 

Total Debt divided by 60.  

Most people advocate for paying off your debt in three to five years.  If you are partaking in PSLF, it’s likely because you have a high debt burden.  So, let’s pretend PSLF didn’t exist and that you planned to pay off that debt in five years (12 payments per year = 60 payments).

Take your total debt and divide that by 60.  This is approximately (without interest) what your monthly payment would be to pay off that debt in five years yourself.

For example, say you have $300,000 in debt. That number divided by 60 is $5,000.

If that number is simply too large for your income, then divide it over 7 years.  ($300,000 / 84 monthly payments = $3517 per month).

Step 2.  Subtract out your actual monthly payment in PSLF

Step 1 monthly payment – PSLF monthly payment

That number above is probably rather large to you.  However, don’t forget that you are also making a PSLF payment.  If PSLF didn’t exist, that number in Step 1 would be potentially what you would be paying on your loans.

So, the next step is to take the number in step 1 above and subtract out your monthly PSLF payment.  For example, if your monthly PSLF payment was $1,500.  This would mean for the example above, you take $5,000 and subtract $1,500 from this number, which results in a number of $3,500.

Step 3.  Take the remaining number in Step 2 and invest it

Invest number from Step 2 in taxabale account

The number you came away with in step 2 is the potential difference between your PSLF payment and what you’d need to be paying if PSLF didn’t exist.  Therefore, if the whole system fell through or the government reneged on the promise they made to you… this is the number you should have been saving to pay off the debt.

Therefore, you need to take this money and invest it in a taxable account at a big mutual fund company (Vanguard, Schwab, Fidelity, etc).  This serves two purposes.

One, you can pay off the debt if the government defaults on their promise.  Two, if the government owns up (like I think they will if you are already in this program), then you have a sizeable taxable account which puts you that much closer to your financial independence.  A taxable account is also a great way to bridge an early retirement.

Either way, you make out ahead of where you’d be if you just spent the money depending on the government to forgive all of your debt.

Investment options

Remember, you don’t want to be crazy aggressive with your money here.  Don’t go buy bitcoin, google, or Apple stock.  You want this money to hopefully mirror the stock market and, at least, account for inflation.  Unfortunately, bonds in taxable accounts can be very tax INefficient. On the other side, investing in pure stocks for something that you may need in five to seven years is not a great idea, either.  That may be too much volatility for a short time frame.

Therefore, I recommend that you have some diversification and some amount of bonds.  The bonds you want in a taxable account (a post unto itself) are municipal bonds, because they are not taxed at the federal level.

So, some options that contain good stock to bond mixtures where the bonds are only municipal bonds include something like the Vanguard Tax Managed Balance Fund or the Vanguard Intermediate-Term Tax-Exempt Fund.  Both of these contain solid stocks and the only bonds they contain are municipal bonds.

Hold it for at least a year so that you pay long-term capital gains taxes and pay off the debt if the government fails to live up to expectations.  If not (which is more likely in my opinion), you still have a tax-efficient investment in your taxable account.

I’d love to hear other people’s thoughts on this topic.  Are you taking part in PSLF?  Are you putting money into a taxable account as a back up plan?  Or are you trusting with blind faith that the government will follow through? Leave a comment.

TPP

7 thoughts on “Can I trust PSLF and What to Do if you Don’t

    • Yeah it’s a pretty good deal if you have a decent amount of debt. Doesn’t make sense to wait ten years if you don’t have a long training period or a lot of debt… But for those that do, it’s really helpful.

  1. Great advice! This is something that I think about often being at the start of my third year of PSLF repayment. This strategy is actually really close to what I was planning to do once I start my attending job as well (except without subtracting my monthly IBR part). It is comforting to see that someone else thinks this is a viable back-up plan.

    You make a good point about making this investment fund tax efficient. This wasn’t something that I had thought about before with my current investments all being in Roth’s.

    Besides having a decent chunk in funds with municipal bonds in them, do you think investing a tad bit more aggressively into a total stock market index ETF such as VTI could also be a viable option for this taxable fund?

    • That’s a double edged sword, isn’t it? ETF’s may have lower expense ratio’s particularly at lower contributions than index funds. However, many ETF’s spit off dividends which complicate the tax picture (as opposed to index funds which can be reinvested tax-free). ETF’s are technically a little more tax efficient.

      Really I think its a bit of splitting hairs between the two for the purpose we are discussing above. For me, personally, I advocate for the most passive form of investing, which means index funds. I don’t need the flexibility provided by an ETF because I plan to hold it for years anyway. If I were in PSLF, I would count on it being there and the money in the taxable account going towards my FI number. In that case, index fund investing is the way to go for me.

      I think an ETF is a reasonable approach, though. Still, I’d favor index funds, personally.

  2. I had the same thought this year when I was trying to decide between refinancing vs. pursuing PSLF. I ultimately decided to pursue PSLF but the main concern I’ve had is if our current political climate results in a stock market crash (which many people are worried about right now), then this could end up being a big issue! I know that’s always a concern in general but any thoughts on that?

    • Yep. Three specific thoughts.
      1) People in programs tend to be grandfathered in. You have a promissory note that outlines your enrollment in the federal program. Will they shut it down for current medical school students before they finish? It’s possible, though I still think unlikely.
      2) If the market crumbles, then putting money towards loans may be the best way to guarantee a return.
      3) Don’t worry about the market, timing it, or what may happen. Make a plan, stick to it, and enjoy the success you’ll naturally receive twenty-thirty years from now.

      P.S. If the market crashes completely, your loans don’t matter. Neither did investing in the market. What you will need is guns, water, ammunition, and canned food. Just sayin’

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