Financial Planning for Doctors

There’s no way you are old enough to be my doctor.  Does your momma know you’re here?” I’d be lying if I told you that I didn’t get this line of questioning most weeks at work.  Seriously. Even the last question.  The reason is that 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.  I take no offense.  After all, I take a similar approach when people ask, “Can I trust Public Service Loan Forgiveness (PSLF)?” My answer?  Trust, but verify with a PSLF Side Fund.

Public Service Loan Forgiveness

If you are reading this, you are likely aware of the Public Service Loan Forgiveness program, which promises to forgive all of your remaining student loan debt after 10 years of monthly payments while you work for a 501(c)3 (non-profit) or governmental organization.  The forgiveness is tax-free, and it can be substantial.

If you are smart enough to start making qualifying payments in residency, those years count towards your ten years of payments, too!

Sweet deal, huh?

Yep!  That is unless you don’t believe that the government is going to own up on it’s promise. In that case, you better take advantage of student loan refinance ladders or get a student loan consult instead.

PSLF Background

The fact is that the forgiveness for PSLF became available for the first customers in October 2017. And when that happened, there were a lot of headlines discussing how 99% of people didn’t get forgiveness when they applied.

Has anyone actually had debt forgiven?  The answer is yes.  (There are some examples like this one from Big Law Investor).

Unfortunately, some people missed out on Public Service Loan Forgiveness, because they either didn’t understand the rules or didn’t file the right paperwork.  After all, to receive tax-free forgiveness through PSLF, there are specific qualifications to take part in the program.  For example, you should certify your employer 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?   Should you just give up and refinance your student loans?  Can I trust PSLF?

Can I Trust PSLF?

For those currently enrolled in the PSLF program, they will likely be grand-fathered into any changes that might happen.  And, remember, there is good reason to believe that PSLF will work out.

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.

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?

The PSLF Side Fund

If you are still asking, “Can I trust PSLF?”… then let me propose a solution that ought to work out regardless of the direction our government chooses to go.  Here is your back up plan.

First, the best plan is to live like Dr. Early Financial Independence who lived like a resident and save up money in case it doesn’t work out.

But you didn’t come here for vague advice.  So, here is the 3 step process for dealing with the PSLF problem by creating a PSLF Side Fund.

Regardless of what the government does, you’ll benefit from these steps.

PSLF Side Fund Step 1. Determine what your payment would be without PSLF 

You should plan to pay off your student loan debt in three to five years if you privately refinance your student loans.  If you are partaking in PSLF, it’s likely because you have a high debt burden.  So, the first step towards a PSLF side fund is to pretend that you are planning to pay off that debt in five years (12 payments per year = 60 payments).

Take your debt and divide it by 60 (this is roughly how much a monthly payment would be if you had to pay it off yourself over 5 years).  For example, say you have $400,000 in debt.  $400,000 / 60 = $6,667

This is approximately (without interest) what your monthly payment would be to pay off that debt in five years yourself.

PSLF Side Fund Step 2.  Subtract out your actual monthly payment in PSLF

The number above probably looks 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 what you should be paying on your loans.  For some who don’t learn to be content with what they have, they will never be able to pay off a number like that.

So, the next step is to take the number in step 1 above and subtract out your monthly PSLF payment.

Monthly Payment (from Step 1) – PSLF Payment

For example, let’s say your monthly PSLF payment is $1,500.  You would take the number from step 1 ($6,667) and subtract your $1,500 payment from that.  This would give you a grand total of $5,167 remaining.

Step 3.  Invest the money in a PSLF Side Fund

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, if you are asking if you can trust PSLF, the best way to deal with being concerned about PSLF is to verify it will work out in your favor regardless.  Take the money and invest it in a taxable account at a big mutual fund company (Vanguard, Schwab, Fidelity, etc).

This serves two purposes.

First, you can pay off the debt if the government defaults on their promise.  Second, 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 10 milestones of 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 hand, 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 play it smart.  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.  Then, if the governent fails to deliver on its PSLF promise, you can pay off the debt yourself.  If not (which is more likely in my opinion), you still have a tax-efficient investment in your taxable account that puts you closer to your financial independence number.

Can you trust PSLF?  Yes, but you should verify it, too, with a PSLF side fund.

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

8 thoughts on “Can I trust PSLF? The PSLF Side Fund”

  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’

  3. Jimmy-
    The PSLF Side Fund concept is really a great idea. I worry less about the PSLF being forgiven than I do about the shackles that come with the debt bondage for a long period of time. What if an opportunity of a lifetime comes along before the PSLF time is finished? Or, what if the work situation becomes toxic or harassing and you want to get out? If you are stuck waiting out the PSLF timeline, you have “golden handcuffs.” Keeping options open is key to financial freedom. The PSLF Side Fund is a MUST for anyone who is planning on doing the PSLF program.
    -Brent
    http://www.TheScopeOfPractice.com

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