Are your candidates over-reliant on federal loan forgiveness?
This has become an increasingly important question we’ve answered for many employers and physicians recently. Consider these examples.
I recently consulted with an attending physician who had $100,000 in debt and a more than $300,000 annual income.
She seemed discouraged that no federal forgiveness was available even though she had worked in a non-profit environment for the past several years.
Because she deferred her loans in training and her income is now high enough that 10 percent of her discretionary income would require a payment higher than her 10-year standard payment, no balance would be left outstanding after 10 years to forgive. She is better off refinancing to lower rates in the private marketplace, even though she is employed by a non-profit.
Some profiles, however, are not so cut-and-dry. Following are a few considerations:
• If a physician is currently married to an income-earning spouse or plans to be in the future, they must know that to continue to make payments based on their own income, they’ll have to file taxes Married Filing Separately to keep income-driven repayment (IDR) plan payments lower. Filing separately can add significant cost to six-figure income households, and may price physicians out of pursuing loan forgiveness.
• If a physician is pursuing taxable loan forgiveness at 20-25 years through an IDR, any forgiveness will be accompanied by a tax bill. Every pursuit of taxable forgiveness should contemplate not just the projected payments, but also an estimated tax liability. Physicians should save for this early in their careers while payments are low.
• Let’s say a physician works eight years for a nonprofit employer, and in year nine the employer is purchased by a for-profit entity. Suddenly, through no fault of their own, the physician isn’t eligible for PSLF anymore and would need to change employers to maintain eligibility. A contingency plan should be in place to prepare for this risk.
• I’d be remiss not to mention errors made by borrowers along the way. Even more egregiously, servicers have been under fire for providing misinformation to borrowers pursuing forgiveness.
New IRS ruling: Student loan employer benefits
If you haven’t already heard, a recent IRS private letter ruling requested by an unnamed firm (who was seeking to offer a student loan benefit to their employees, something fewer than one in 20 employers do today) is permitting the firm to contribute up to 5 percent of salary to their qualified retirement plan as a contribution match as long as the employee can document that they’ve paid at least 2 percent of their income to student loans in that year.
I’ll do some quick math for you…IBR, PAYE and REPAYE payments will amount to over 2 percent of a physician’s income in most cases. Basically, this ruling represents the government recognizing that graduates with student debt burdens that prevent them from making retirement plan contributions shouldn’t be excluded from participating in an employer match program.
Jason DiLorenzo (firstname.lastname@example.org) is founder and executive director of Doctors Without Quarters (DWOQ, dwoq.com). Since 2010, he has spoken at medical schools, hospitals and conferences nationally on the topic of student loan legislation and its impact on early-career physicians.