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.