As I get ready to graduate from medical school (finally!), I think about my crazy-big student loans more and more. Student loans are a very big deal for people who have attended some kind of college or university in the last decade. The tuition is sky-high. The interest rate is predatory. And the salary and employment prospects do not suffice.
As of the beginning of 2014, almost 12% of student loans are 90+ days delinquent or in default. With each year, the delinquency / default rate is growing.
Newly graduated doctors have it a little better than your average person. Sure, we still pay through the roof for our education. Our interest rate is the same. But the salary and chance of finding a job is pretty darn good.
But why pay more than what you must? No one likes paying more. A favorite pastime of the wealthy is finding ways to legally reduce taxes paid. (I will take up that hobby sometime later down the road.) So why not legally pay back as little as possible?
Lots of people may frown upon this — thinking I am taking advantage of the system and taking from taxpayers. Rather, I don’t see it like that. I’m sorry to tell you this, but think of taxpayers’ money as a sunk cost … money you will never see. If you wrote a check to Uncle Sam, kiss the money goodbye … for good.
Taxpayers’ money are used to bail out banks and other institutions that shifted their losses onto the government. It was used to fund the fat cats’ bonuses, even when they were the ones who tanked the economy.
Taxpayers’ money are used to enrich politicians and their friends. Even when the government shut down in 2013, the congress men and women still got paid. According to Huffington Post, in the 16 days of shutdown, Congress earned $4,054,997.95.
And for the past few decades, inflated amounts of taxpayers’ money are used to educate young adults. Those sitting on top of the educational hierarchy are making out like bandits. Even though schools are getting more money, they are not spending it on professors. Rather, they are bloating up their administration and beautifying their campuses.
Even though you are paying more, your education is not any better.
Look at two industries which cost you an arm and a leg to use: higher education and healthcare. Not surprisingly, lots of taxpayers’ money goes into the two industries. Federal loans for higher education. Medicare / Medicaid for healthcare. (And as a side note, only a small portion of Medicare / Medicaid money goes to doctors. Most of them go to hospitals, drug companies, and device manufacturers.)
As bad as healthcare is, higher education is even worse. Tuition has increased faster than even healthcare cost! Although unpaid medical bills are the primary cause of bankruptcies … I’m guessing the only reason school loans are not the main cause is because they are not dischargeable in bankruptcies (except under very, very rare circumstances).
So no, I do not feel bad trying to game the system. Don’t worry. I’ll more than make it up when I have to pay taxes. (And if this article is really that offensive to you, close the browser now and pay back more than you must. No one will stop you.)
Therefore, this will not be your average advice on paying back loans, telling you to live below your means and pay as much loan back as possible. If you want that advice, I’ve already written about it here.
Rather, my goal is to show you how to legally game the system and get away with not paying back everything on your federal loans. It could work for any profession, but works extra well for doctors.
You’ll see why in a moment.
There are 2 – 3 federal repayment programs you should be away of:
(I highly encourage you to take a moment to learn about them. Each link will open up in a new window. And if you want even more information, you can find it here. But if you are too lazy to do so, this is the very brief summary of each …)
Income-Based Repayment (IBR)
Under IBR, you pay 15% of your “discretionary income,” which is the amount over some threshold. The threshold is based upon the size of your family. So let’s say you make $50,000 as a resident. Your threshold is $20,000 (a number I made up to make the math easier). Therefore, for the year, you will only pay back only $4,500 — 15% of $50,000 minus $20,000.
However, any since you are paying back less than what is required, the loan will keep getting bigger and bigger. But the good news is that after 25 years of repaying under IBR, whatever amount left over is forgiven.
You will still have to pay taxes on the forgiven amount, which could be quite substantial. Don’t worry about it for now. Get through one day at the time. And right now, make sure you don’t default on your loan with a tiny salary.
As a side note, make sure you file your tax returns so you have proof of income.
Pay As You Earn (PAYE)
PAYE is just like IBR but even better. You pay 10% of your “discretionary income.” And after 20 years of repaying under PAYE, whatever amount left over is forgiven.
So why would anyone choose IBR over PAYE? Because it is harder to qualify for PAYE.
First, you must not have any outstanding federal loans as of October 1, 2007.
Second, you must receive federal loan on or after October 1, 2011.
When you have a policy make by a bloated bureaucracy, you get pile of confusion. And PAYE is exactly that. Don’t ask me why there are two different types of repayment programs. Don’t ask me why they chose the repayment periods they chose.
Don’t worry if you don’t qualify for PAYE. You will see later how it is very insignificant if you’re on IBR or PAYE.
Public Service Loan Forgiveness (PSLF)
The objective of PSLF is to encourage you work for full-time for the public’s benefit. Therefore, if you are working 30 hours or more per week for either:
- a federal government agency …
- a state government agency …
- a local government agency …
- a not-for-profit organization (as determined by section 501(c)(3)) …
you qualify for the program. This is really, really good for doctors because many hospitals are not-for-profit organization. (It is kinda ironic, considering how much money the hospitals make. But whatever. What really matters is how you can benefit.)
All you have to do is make 120 monthly payments (which will essentially take 10 years) towards your loan while working for the public’s benefit. After making the payments, any amount left over is forgiven.
Unlike IBR and PAYE, the forgiven amount is not taxable. Wow, the government really takes care of its own.
The good news is that the time you spend in residency and fellowship count! If your post-graduate training is 6 years, and you faithfully make monthly payments, you will only have 4 more years to go before you can get rid of all your loans.
IBR or PAYE + PSLF = Profit!
In all three programs, you can have $1 billion in student debt. But after 10 – 25 years, they will be forgiven. So attend those expensive schools. Just make sure taxpayers are footing the bill, because these programs do not apply for private student loans.
But it gets better than that!
The cool thing about these programs is that you can combine them and take the best of each. For me, I will combine IBR with PSLF. That means I will only have to pay 15% of my discretionary income for 10 years (assuming I work for a not-for-profit organization that long). Whatever left will be forgiven.
It gets slightly better if you can combine PAYE with PSLF. But the benefit is only 5% a year. So don’t cry if you don’t qualify for PAYE.
Who knows? Maybe the government will wise up and change it in the future. Try to get with the programs as soon as possible, so you’re locked in.
I could have charged very good money for this — $200 billed per hour. But I get as much satisfaction screwing over the whole broken, predatory system. So the more people who partake in this, the better.
If you follow my advice, I probably just saved you hundreds of thousands of dollars. If it really helped you out, leave a comment and let me know. (And if you wanna send me even a small portion of the tons of money I saved you, I won’t turn you away.)
This article is part of the Medical School Loans series. Click on the link if you want more tips and hints about borrowing money smartly.