For many doctors, the government’s public service loan forgiveness (PSLF) program is not only a potential financial windfall but the only linchpin on which their medical degree can make any kind of financial sense as an investment. The program is simple, but the details are critical. To summarize, a borrower can earn tax-free loan forgiveness on the entire remaining balance of their federal student loans if they meet three criteria for 120 monthly payments: the right loans, the right plan, and the right job. That means you need to have direct loans, be on an income-driven repayment plan (PAYE, REPAYE, IBR, ICR) or the standard 10-year plan, and work for a qualifying employer (most commonly the government or a qualifying 501(c)(3) nonprofit organization). Every person hoping to achieve PSLF will eventually be serviced by FedLoan Servicing. If you’re not already with them, you will be switched once you submit your first employment certification form (which you should do annually). If these acronyms all seem like alphabet soup to you, then I recommend you take a few hours and familiarize yourself with how federal student loans really work. The stakes are high, and there’s a good chance your ignorance could be costing you. So with that preamble, let’s get to the two pieces of bad advice borrowers have been receiving on an all-too-regular basis. Mistake 1 False: You must check the box saying you do not have access to your spouse’s financial information in order to utilize the married filed separately loophole. For married borrowers who file their taxes jointly, income-driven repayment (IDR) IDR plans calculate monthly payments based on household income. There is a “loophole” in IBR and PAYE (and subsequently closed in REPAYE) that allows the borrower to file taxes separately from their spouse and then calculate their monthly payments based only on the borrower’s income. This is totally kosher. For unknown reasons, some FedLoan representatives have directed borrowers to check a box on the annual recertification form stating that they are “married but cannot reasonably access [their] spouse’s information.” Long story short, this box was not designed for that purpose and should not be used in this situation. It was specifically placed to help estranged spouses or sufferers of domestic abuse. Checking it in a normal marriage scenario could be considered fraud, and fraud is bad. Mistake 2 False: Once you lose your partial financial hardship, you must switch out of payment plans that require it for initial eligibility, such as IBR and PAYE. This is completely wrong as well. Once in IBR, always in IBR. Once in PAYE, always in PAYE. If your income rises such that you no longer have a partial financial hardship (PFH), then your interest capitalizes and your monthly payment maxes out (is “capped”) at the standard 10-year repayment amount. FedLoan has directed many borrowers to switch to REPAYE in this situation. From a PSLF standpoint, this isn’t always bad advice for IBR, but it’s always incorrect for PAYE. For one, you’ll lose a month or two of qualifying payments as FedLoan processes your payment plan switch. But more importantly, REPAYE monthly payments scale with income and never cap. Depending on your earning trajectory and marriage status, a single doc or a physician with a non-working spouse could save money with REPAYE vs IBR, because REPAYE is based on 10% of your discretionary income (adjusted gross income minus the poverty line) and IBR is based on 15%. But, in general, FedLoan has been giving this advice to lots of people who will simply pay more per month in REPAYE and have no need and no business switching plans. And, because these folks no longer have a PFH, they can’t switch back. Source
