PSLF or Not to PSLF. That is the Question.

In an attempt to preserve confidence in the 1.46 trillion dollar student loan bubble, the government has created a system so convoluted that the mere thought of unraveling the intricate ramifications induces migraines. The PSLF (Public Service Loan Forgiveness) program will forgive the full balance of a loan balance for those who make 120 qualifying payments (10 years) while the subject of the loan works in the public sector or for a non-profit institution. This is potentially a huge boon for physicians as most hospitals with residency programs have non-profit status. There is a caveat though. The problem is that each of the 120 qualifying payments are based off of 10% of AGI so as an attending the payments you make will be close the the maximum payments on a standard repayment plan. This means physicians who have residencies on the order of 5-8 years especially benefit (cardiologists, gastroenterologists, oncologists, surgeons, radiologists, radiation oncologists) because their salaries are so low for so long and so their monthly payments are on the order of 200-400 dollars a month.

 Unlike the previous article where I discussed whether or not you should consolidate your loans, this question is much more difficult to answer. The reason is that there are just so many more variables to account for. There are several unknown factors that as an individual, you don't have full control over. However, it is exactly these subtle factors that essentially tip the balance of your decision. So in this discussion, I will try to post the simplest example, and it will be up to you to determine if PSLF is the right choice. What I will say, is that the results may surprise you a bit.

 So we meet Dr. Hero again who has a loan balance of $200,000. He is aspiring to be a gastroenterologist, and thus his residency training will be 6 years. Let's assume that he only has one interest rate of 6.8% with his student loans. He has the potential to refinance at 4.5% outside the government, which would erase the possibility of PSLF forgiveness. While in PSLF, he tries to get as much out of the program as possible, and only pays the minimum payment. After graduating residency, he will get an academic job which we will assume pays him $300,000. The following will be the 10 year course on his loan.

As you can see, at the end of 10 years Dr. Hero has made $1,530,000 in pre-tax income, has paid $125,200 against his loan, was subsidized $26,940 in interest, and was forgiven $163,860 on his loan balance. Not a bad a deal, right?

Now lets assume Dr. Hero decides PSLF isn't right for him and that he wants to go into private practice. We'll assume his salary to be a bit higher at $375,000 dollars. I don't think this is unreasonable, as the discrepancy between academic vs private practice pay can be even higher. We'll also assume that he decides to refinance his loan from the get go (although refinancing at the end of his residency would yield relatively the same result anyways due to the REPAYE loan subsidization).

   

Now we see our Dr. Hero at the end of 10 years has made $1,830,000 in pre-tax income, has paid $272,000 against his loans, saved $26,037 in interest from refinancing at a lower rate, was forgiven 0$ on his loan, and has a small $564 loan balance remaining.

So when the dust settles, which one wins?

• On pre-tax income PSLF loses by $300,000 
• On amount paid into loans, PSLF wins by $146,000 
• On interest saved PSLF wins by $902, but can swing the other way depending on how you calculate this. 
• On loan balance (including loans forgiven) PSLF wins by $183,296 

Tallying everything up, PSLF wins by a grand total of $30,198.

Now, $30,198 is a good sum of money, but well within the limits of error, based on the assumptions I've made. Who knows, maybe private practice pays $500,000, not $375,000. Maybe you may get married during residency, which would be equivalent to throwing a wrench at my calculations. Maybe you're not a gastroenterologist and you're a neurosurgeon with 9 years of training, or an internist with 3 years of residency. You'll also notice I counted the difference of income as pre-tax income, which, whether or not it should be counted as such is up for debate. If the physician is good at managing his assets, he could potentially deduct the difference. There is also a proposal from congress to limit the cap on the amount forgiven to $57,000, which would absolutely kill PSLF for physicians. These are all numerical factors that were not accounted for in my calculation which are individual specific.

There are also intangible factors as well. The difference is that although PSLF in this situation came out slightly ahead in numbers, you'll also notice that Dr. Hero in private practice is already in a position to make $75,000 more at year 11 than if he went down the academic route. On the otherhand, Dr. Hero in the PSLF scenario probably lived a comfortable life during his training making only on $4,490 in payments per year.

The point of this article is not to tease out exactly which one is right, but to show that given the variables, the two routes can be comparable.

The Anti-Consolidation

In the previous post I talked about federal loan consolidation and why you should avoid it. In this post I want to alert you on what to do with your student loans when you get out.

I have Nelnet for my loan servicing provider and when the loans were handed off to them, they formulated all my loans into 3 different groups.

This infuriated me. Within these three groups I had different loans with different interest rates. They, BY DEFAULT, consolidated my loans into 3 subgroups without even asking me. Why in the world would I ever want that? So I called my loan service provider and asked them specifically to break apart each of the loans, and voila!

I had anti-consolidated my loans! Now instead of a large 5.952% interest rate loan (group B) I broke them into smaller loans with 6.550% and 5.160% interest rates. In addition, instead of a 6.192% interest rate loan (group C) I had two loans with 6.550% and 5.960% interest rates. I did my own calculations and found that now that my loans are anti-consolidated (assuming I want to completely pay off my loans making 18k annual payments) I had shaved 5 years off my payment schedule. My advice in this situation is to look at the groupings of your loan, and before you accumulate any interest, specifically ask your service to break your loans apart if they have consolidated any of them for you.

Some of you may ask, does any of this even matter if you are planning for loan forgiveness? I will address this topic another time.

Should You Consolidate Your Student Loans?

I googled this exact question and was disappointed with the content on the first page of results. A third of the results were ads for refinancing, another had click bait titles on reasons for why you should consolidate, and the last few websites talked about why it might not be a good idea, but didn't delve into exactly why. In my frank opinion, the answer to this question is: probably not. To be clear, I'm talking about loan consolidation, not loan refinancing - which is a completely different subject. Loan consolidation, especially in today's student loans are nothing more than a weighted average of your interest rate. Take for example the following:

Dr. Hero has an outstanding balance of $100,000 in student loans. The break down of his loans are as follows:

• $60,000 at 4%
• $20,000 at 6 %
• $20,000 at 10%

The weighted average of his loan balance would be:

So by consolidating Dr. Hero would have one large loan at 5.6% instead of having 3 different loans at 3 different rates. This, however, isn't the final rate. On studentaid.ed.gov they specifically state that the interest rate on a consolidated loan is "rounded up to the nearest one-eighth of 1%". So instead of 5.6%, you are actually incurring interest at 5.625%. Ouch! However, that is not the main reason for why you should avoid consolidation.

Fundamentally there is a strong argument AGAINST consolidating your loans, and it isn't a new concept. In finance, there is a general principle that asserts any time you have loans, you want to pay down the highest interest loan first. So lets run through a simulation for student loans.

Dr. Hero puts $6,000 a year away into paying down his debt. He was smart and didn't consolidate his loans and put his payments against the highest interest loan first.

We see that Dr. Hero is able to pay off his balance in 31 years by targeting his high interest loans first. Now, let's say instead of being smart, he fell into the trap and consolidated his loans at 5.625% while paying $6,000 dollars a year against his loan.

OUCH! Dr. Hero is putting away the same amount of his annual income, but now he is stuck with a payment plan that lasts 52 years. The difference is 21 years! The primary reason for this difference is obvious. By paying down the principle of the higher interest loan first, you're reducing the interest that is compounded in the future. There is another, albeit smaller, reason to account for this difference in payment time that I didn't realize until actually doing the calculations. 

Student loan interest is simple interest (atleast in IBR programs). Capitalization (when the outstanding interest now becomes part of principle) doesn't occur unless the loan enters repayment, deferment ends, forbearance ends, the loan defaults, the payment plan changes, or consolidation occurs. Simple interest benefits the borrower particularly when the payments on the interest are not fully covered on a loan. That means the loan growth is linear, not exponential (as you can see in the first graph during the which the lower interest loans aren't even being touched). However, when the borrower starts to cover the interest payments on the loan, the curve is no longer linear, but rather an exponential function which means that the benefits of simple interest are not fully utilized during that time. In effect, you are taking advantage of the fact that the growth on your loan balance is linear and mitigating the exponential resistance on payment of your loans while reducing payments on your higher interest loans. 

So, then. You should never consolidate your loans, right? Again, probably.

An interesting question would be, at what consolidated interest rate would the government have to give you to match the non-consolidated payment schedule? The answer, after tweaking with the numbers in the scenario where you pay $6,000 a year is 4.24%. 

WOW! That's a difference of 1.01% of annual interest that the government is pocketing just because you made the mistake of consolidating. However, that also means that if the government gave you a consolidated loan less than the said interest rate, it is the borrower that benefits. Unfortunately, the government offers no such deal.

Chances are, unless you're given a significant discount for the consolidation rate, don't even bother! My question is then, why does the government even offer consolidation, knowing that it's a bad deal for the borrower? Why offer the trap to students who are supposedly the future of America? If the government were to act in an honest nature, it would offer a fair rate of consolidation, not one that adds more debt to the backs of the future generation which is already burdened with over 3 trillion dollars of student loan debt. On the the next section about Anti-Consolidation.

To Med-School or Not to Med-School.

If you're in college finishing up your degree and contemplating applying to or attending medical school, I'd like you to take a step back and try to evaluate your life from a more macro-top-down approach. Ask yourself, are you willing to sacrifice the next 12-15+ years (4 years of undergrad, 4 years of medical school, and 3-7 years of residency + any additional research years you took) to become a doctor? Don't get me wrong, I love medicine and the specific sub-specialty I am in. It has always been my dream to do what I currently do, but I also know that I could have been happy in a completely different field that required less training, less debt, and certainly less stress.

This is the most important financial decision you can make, because attrition is the biggest tragedy. It would be gut-wrenching to spend 12-15+ years of your life, only to figure out that in the end that you hate the job altogether. The irony is that you'll be making the most important decision at a time at which you are the least informed. 

So please listen to what I have to say:

1. Shadow, shadow, shadow. Get involved during your fall, winter, spring or summer break. I know it sucks, but it's worth it. Ask around for opportunities to spend time in the doctor's office. Try to get a broad range of experiences. I think following a primary care doctor will give you a good gestalt. It'll help pad your medical school application anyways. Don't focus on the amount of time spent, rather, focus on trying to see if medicine is right for you.

2. While shadowing, pay attention - not necessarily to the pathology, sciences, or the research, but rather to how happy the medical staff are. Where is the physician's focus? Is it on how fast he/she can finish their notes to make their afternoon yoga class? Is it on how things will be billed? Is it what kind of referrals he/she is provided? Or is it actually about how concerned he/she is for the patient? Get a feel for that, and don't ignore the sentiment. The negative vibe you get from clinicians when they complain about medicine is very real and very pervasive. When you enter medical school, you'll hear the "patients come first" mantra spouted throughout, but as you continue throughout your training you may start to question how much of that is truly held dear in your institution or among your colleagues.

3. Think about how you're going to pay for medical school. Are your parents dishing out the cash? Have you worked before entering med school and have some money saved up? Do you plan to take student loans, if so, how much and at what interest rate? Think also about what financial position you'll be in before entering med school (i.e. do you have undergrad student loans?).

4. Be proactive. If you're not proactive in medicine, you'll fall behind. If you make the decision to go into medicine, do it right the first time. That means getting the best GPA possible, studying diligently to ace the MCATs, pursuing research DURING undergrad, shadowing physicians in a meaningful way, and and being involved in meaningful volunteering activities that make YOU fulfilled. I've seen so many of my colleagues take a year off after college under the guise of taking a "research year". In my mind I ask, WHAT are you doing? I can guarantee that all of my colleagues who took a research year, didn't do it because they were so captivated by their research interest that it compelled them to give up a year of their life. They did it it to bolster their application prior to medical school because something else in their application was lacking. Time is money, and each year you take off, is another year of earning potential lost.

I'm writing this particular piece, not because I want to deter you from going into medicine, but to make you more informed before making the commitment. You have to be absolutely sure you want to go into medicine. If you do make that decision, there is no back tracking. Otherwise, it wouldn't make sense either practically or financially. It takes a lot out of you, physically, mentally, and financially. At the end of your training, you don't want to come to the conclusion that you wasted the past 12-15 years of your life.