Written By- Mike Gorman, CFP®, CSLP®
It’s no secret medical school is expensive, often requiring significant financial assistance. Federal student loans and income-driven repayment plans can be beneficial to physicians, particularly those that work in public service and qualify for the Public Service Loan Forgiveness (PSLF) program.
Below are a few of the reasons Federal student loans are beneficial for physicians.
1. Income-Driven Repayment Plans
Federal student loans offer various income-driven repayment (IDR) plans. These plans cap monthly payments at a percentage of the borrower’s discretionary income based upon their family size, making it easier for physicians to manage their loan payments. This is especially beneficial during residency when earnings are generally far less than in future years.
As earnings increase, the required monthly payment increases. Many are surprised to learn that the required payment under an income-driven repayment plan is still less than the standard repayment schedule, in part because the payment is based on discretionary income, which is defined as the difference between your annual income and 225% of the poverty guideline for your family size and state of residence. Discretionary income can be reduced with retirement plan or health savings plan contributions, thereby reducing the required monthly payment. Some married couples, where both spouses are high earners, also choose to file taxes separately to reduce the income base for the repayment calculation.
It’s worth noting the current loan balance and interest rates are not considered when calculating a repayment amount under an IDR plan.
2. Public Service Loan Forgiveness (PSLF) Program
PSLF has the potential to be hugely advantageous for physicians working in public service, whether at non-profit hospitals, clinics, or other qualifying healthcare facilities. Under PSLF, borrowers who make 120 qualifying monthly payments while working full-time for a qualifying employer can have their remaining loan balance forgiven.
PSLF can significantly reduce the financial burden of student loans. Since the ongoing payment is based on income, years spent in residency are incredibly low compared to the standard repayment schedule.
3. Tax-Free Forgiveness
Loan forgiveness under PSLF is not considered taxable income. This means that physicians who receive loan forgiveness through PSLF do not have to pay taxes on the forgiven amount, unlike some other loan forgiveness programs where the forgiven debt is considered taxable income.
4. Example under the Saving on a Valuable Education (SAVE) Plan
The SAVE plan is the newest income-driven repayment plan, with the required monthly payment based upon income, family size, and the percentage of loans that are for undergraduate vs. graduate/doctoral school.
A family of 3 would have the first $58,095 of income (225% of the federal poverty level for a family of 3) excluded from the repayment calculation as of 2024. If the family includes two working spouses and both contribute $15,000 to their employer-sponsored retirement plan on a pre-tax basis, an additional $30,000 of income is excluded from the calculation, taking the total income exclusion to $88,095. The absolute highest the annual repayment can be is 10% of income above $88,095.
Can the payment be less than 10% of income? Yes.
Let’s say 80% of a physician’s student loans are from their doctorate studies and 20% from undergraduate studies. Instead of paying 10% of “discretionary” income under the SAVE plan, they would pay 9%, as undergraduate loan payments are capped at 5% of discretionary income, while graduate loans are capped at 10% of discretionary income. If a student loan borrower only has undergraduate loans, their monthly payment will be capped at 5% of discretionary income.
In summary, Federal student loans provide manageable repayment options and protections that are crucial for physicians given the high cost of medical education and the financial challenges faced during residency. The PSLF program offers a significant incentive for physicians to work in public service, providing a pathway to loan forgiveness after ten years of qualifying payments, which can provide a substantial financial relief.
