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Student Loan Planning: Repayment, Refinancing and More

Physicians carry far more student loan debt than most professionals. Many finish training with more debt than when they started as interest capitalizes. And because physicians can spend so many years in training, they’re often left making payments on student loans much further into their careers than others.

There are a variety of student loan repayment options, many of which are very similar to others, and it isn’t easy to switch from one to another. Understanding your options as early in your career as possible could save you significant amounts of money over the years to come. Talk with a financial advisor about your repayment options.

Types of student loan repayment plans

Standard 10-Year: The typical repayment plan for federal loans is a series of 120 fixed payments over 10 years. Most federal borrowers are enrolled in standard 10-year repayment plans automatically, unless they choose a different plan. 

Graduated: A graduated plan also lays out a series of 120 payments over 10 years. But these payments start out lower and increase, typically every two years, until the end of the 10-year period.

Extended: An extended repayment plan lasts 25 years, and loan payments can either be fixed or graduated. Not everyone qualifies, although many physicians are likely to — borrowers must have more than $30,000 in either direct federal loans or Federal Family Education Loans (FFEL). 

Income-Based Repayment (IBR): Income-based repayment is just that: A student loan repayment plan based on how much the borrower is earning. For borrowers who took out direct federal loans in July 2014 or later, repayments are set at 10 percent of the borrower’s discretionary income, with a payment plan lasting up to 20 years. 

Borrowers on IBR must provide income verification to set their payments. This can be advantageous to savvy borrowers. Whenever you experience a drop in income, you can call your loan servicer and ask to recalculate your payment based on proof of your new income level — a pay stub or a statement signed under penalty of perjury, for instance. But borrowers are only required to undergo income verification once a year. If your income increases, you can wait until that year is up to recertify your income. 

Pay As You Earn (PAYE): PAYE is a student loan repayment plan available to borrowers who took their loans beginning in October 2011. Like an income-based repayment plan, PAYE requires borrowers to make payments of 10 percent of their discretionary income, capped at the amount the borrower would pay using a standard 10-year repayment plan.

To enroll in PAYE, a borrower must qualify for “partial financial hardship.” Many physicians are likely to qualify for this. If the annual amount a borrower would owe on a 10-year repayment plan — 12 payments at that rate — exceeds 15 percent of her discretionary income, she qualifies for PAYE. 

In most states, borrowers who are married might consider filing separate income tax returns to keep student loan payments low. This is especially true if one partner has significantly more debt than the other and they earn around the same amount of income. That said, consult with a CPA to see what the “marriage penalty” may be for filing taxes separately.

California and Texas are community property states, which means spouses must divide assets equally if they file separate tax returns. If one partner earns $500,000 and the other earns $100,000, each is recorded as having $300,000 in income. If you live in one of these states, you may be able to use pay stubs rather than tax returns to qualify for an income-based repayment plan. 

Revised Pay As You Earn (REPAYE): REPAYE was created in 2015 for borrowers who didn’t qualify for PAYE. Like PAYE, REPAYE requires borrowers to pay 10 percent of their discretionary income, with no cap on payment amounts. Repayment terms last 25 years for graduate or professional degrees and 20 years for bachelor’s degrees. 

The primary difference is in how interest is treated. If your monthly payment of 10 percent of your discretionary income doesn’t cover the full amount of interest due, the government lender will pay the difference. After three years, that payment falls to half the difference. 

Additionally, with REPAYE, married couples cannot file taxes separately in the hopes of excluding spousal income. 

How Public Service Loan Forgiveness works

Prior to 2010, Public Service Loan Forgiveness was very difficult to access. Borrowers had to consolidate their loans perfectly in a way that was almost impossible to do without expert help. Further, FFEL — the default issuer of federal loans — was not eligible for PSLF.

In 2010, direct loans became the federal Department of Education’s default issuance. Direct loans are eligible for PSLF. To qualify for loan forgiveness, borrowers need to have made payments for 10 years. That means the first big wave of physicians who will be qualifying for public service loan forgiveness will be eligible to seek forgiveness in 2024. With PSLF, any forgiveness is tax exempt. 

Travis Hornsby, founder of Student Loan Planner, joined me on Money Checkup this summer to talk about student loan forgiveness. He pointed out that while the Department of Education is not as sophisticated as the IRS, there are likely to be some audits around 2024. Borrowers who have pursued aggressive strategies to reduce their student loan payments — by using pay stubs to represent their income while earning significant investment returns, for instance — may face scrutiny.

For physicians pursuing PSLF, Travis recommends REPAYE plans with married partners filing separately — especially if both have debt. While there are likely to be some tax penalties, they are not likely as large as the savings. However, if you are focused on working in an academic setting or a 501(c)3 hospital, PAYE may make more sense. 

Before you consolidate your loans, remember: The only way to qualify for capped payments is if you are on an income-based repayment plan, specifically PAYE. Once you consolidate, you cannot go back onto the standard 10-year repayment plan unless you have a partial financial hardship. 

When should you refinance your student loans?

Before you privately refinance your student loans, make sure you have three to six months of expenses in an emergency fund. Next, make sure you plan to spend your career in a job that does not qualify for Public Service Loan Forgiveness. If both of those things are the case, consider pursuing a lower interest rate through refinancing. 

If you refinance and still have a debt-to-income ratio of more than two to one, you may want to pursue income-driven repayment (IDR). With an IDR plan, the borrower makes consistent payments based on their income, family size and other factors. After 20 to 25 years, the borrower is eligible for loan forgiveness, but she must pay income tax on the forgiven balance. 

IDR plans can be good fits for physicians working in primary care or pediatrics, who struggle to earn incomes that are high enough to easily pay back their loans. Because not all physicians are eligible for Public Service Loan Forgiveness, IDR is another good option. 

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