PSLF vs Refinance Student Loans | White Coat Investor (2024)

By Dr. James M. Dahle, WCI Founder

If you are wondering if public service loan forgiveness is worth it, we’re here to help. The PSLF program allows any remaining direct federal loans to be forgiven once 120 qualifying on-time monthly payments have been made while directly employed by a qualifying employer. Direct federal loans include Stafford Loans, PLUS loans, and Direct Consolidation Loans. FFEL, Parent Plus, and Perkins loans do not qualify until they have been consolidated into a direct consolidation loan (though in October 2021 the federal government allowed for FFEL and Perkins loan payments to count toward those 120 PSFL payments IF you consolidate by Halloween 2022).

Qualifying payments must be made under one of five programs:

• Income Contingent Repayment (ICR)
• Income-Based Repayment (IBR)
• Pay As You Earn (PAYE)
• Revised Pay As You Earn (REPAYE)
• Standard 10-Year Repayment Plan

Let's take a physician with an income of $250K, who owed $300K in student loans at 7% upon medical school graduation. She just finished a three-year residency at a 501(c)(3) institution during which she made 36 payments in PAYE (an IDR) (IDR includes ICR, IBR, PAYE, and REPAYE) of $300 apiece. She started her first job at a 501(c)(3) institution, and if she makes her next 84 IDR payments, the remainder of her debt will be forgiven. She also has the option to refinance her student loans at 3% and she thinks that by living like a resident, she could pay them off in 3 years while still maxing out her retirement plan contributions. Should she go for the PSLF or refinance and pay off?

The Public Service Loan Forgiveness (PSLF) Program Option

Now, she only had to pay $300 a month ($3,600 per year) as a resident, and since this loan accrued $21K in interest per year, she now owes approximately $352K. Her IDR payments in PAYE are based on her income up to a payment cap which is not to exceed the standard 10 yr payment on her loan $3,483 (=PMT(7%/12,120,300000,0,0)). Her payments now as an attending have jumped to $2,119. If she makes 84 of those payments on this 7% $352K loan, after 84 months she will have paid a total of $178,038, but only $31,038 of that will have gone toward the principal, so she will still owe ~$321K, which will be forgiven if the program is still in place and remains non-means-tested.

Refinance Medical School Loans and Pay Off Option

The other alternative is to refinance the loans upon residency graduation at 3%. Since she will only have the loan for three years, and she has a high income, the risk of a variable rate loan is one she can take. In order to have a 3%, $352K loan paid off in 36 months, she will need to make payments of $10,237 per month. After 36 months, she will have paid a total of $369K.

PSLF vs Refinance: Which Is Better?

She will pay less money, especially when you consider the time value of money (money paid toward a loan 6 years from now is less valuable than money paid toward a loan this year), by going for the Public Service Loan Forgiveness program. Essentially, she'll save around $180K despite paying at double the interest rate for over twice as long. In the end, MORE than the value of her original loan will be forgiven.

She will have to run the risk that the PSLF program goes away, or that it is modified significantly such that it becomes means-tested, in which case she might not be eligible for forgiveness or might receive much less than planned. She will also be locked into a 501(c)(3) job for at least 7 years, potentially giving up income, freedom, and opportunity. If she leaves that job, or the program is significantly modified, she will come out way behind.

The cash-flow issue is also not insignificant. Payments of both $2,119 for 7 years and $10,237 for 3 years are not insignificant. It would be tough to max out retirement plans, live a reasonable life, AND pay $123K per year toward student loans for 3 years on a $250K income. It is doable, but you would have to live like a resident for 3 years. The other option isn't great either. Although your cash flow would be much better for the first 3 years, it would be much worse for post-residency years 4-7, when most docs really find it difficult to continue living like a resident. I'm not sure which is worse from a cash flow issue.

In the end, someone who is eligible for PSLF is almost surely better off paying the minimum IDR payments and getting the PSLF. Longer training periods and larger debt burdens make this option even more advantageous.

Will PSLF Be Grandfathered?

There is significant legislative risk to relying on this program, but it would be very unusual for a program change to occur that did not grandfather in those already enrolled in the program.

In addition, PSLF is mentioned in the promissory notes—legal contracts between the borrower and the lender. Even if Congress or the Department of Education changes the program and does not make provisions to grandfather in current participants, those borrowers should have an excellent legal case that should at a minimum result in a significant settlement.

What If PSLF Goes Away or If You Don't Receive Forgiveness?

I think the best way to deal with that risk if you are going for PSLF is to save up a side fund with the money you could have used to pay off the loans in 2-5 years after residency. If the program goes away, use the side fund to pay off the loans. If it doesn't and your loans are forgiven, add the side fund money to your retirement nest egg.

Public Service Loan Forgiveness has had some ugly PR with 99% of applicants being denied but success stories of doctors receiving forgiveness are emerging. These success stories come from those who meticulously follow program rules and from those that spend many frustrating hours every year following up with loan servicing companies that can't count to 120 correctly.

On a positive note, on May 5, 2021, over 50 senators sent a letter to the Department of Education urging Secretary Cordona to reform PSLF making it easier for public servants to obtain forgiveness—not harder. We'll continue to keep a pulse on any legislative proposals behind the program, but it seems to be improving each year. That 99% statistic above is also incredibly misleading—the denominator is completely wrong as they are counting EVERYONE in the program, most of whom have not made the required 120 monthly payments yet. So of course they're not going to get forgiveness…yet.

Should You Refinance Medical School Loans as a Resident?

This is an important, but complicated, question, and there are no easy answers. But here are some things to think about as you make your decision.

Principle #1 – You Can Always Refinance Private Loans

Private loans are not eligible for the protections of the Income-Driven Repayments programs, forgiveness through the IDR and PSLF programs, or the REPAYE subsidy. Plus, four lenders are offering $100 a month payments during your training. So there is no reason to avoid refinancing your private loans early and often every time you can get a lower interest rate. If you refinance through the links on this site, you will even get some cash back each time you refinance with a new company. The remainder of these principles apply ONLY to federal loans.

Principle #2 – If You're Sure You WILL Work at a 501(c)(3), DON'T Refinance

It would be a relatively rare situation for someone who is going to go work at a 501(c)(3) to be better off refinancing instead of getting PSLF. If you're going to work at a 501(c)(3) throughout residency, fellowship, and early attendinghood, enroll in an IDR program and get your PSLF. Remember, once you refinance, no more forgiveness. The rare exceptions to this rule would be someone whose residency IBR/PAYE/REPAYE payments are equal to their full payments (small loans or highly paid spouse) or someone who forgot to enroll in IBR/PAYE/REPAYE as a resident (don't do that). Another exception would be if the difference between your current rate and the refinanced rate were small (or even negative). No sense in giving up options unless you're adequately compensated for it with less accrual of interest.

Principle #3 – If You're Sure You WON'T Work at a 501(c)(3), Calculate Your Debt to Income Ratio

Add up your student loans and project your expected gross income as an attending physician in your specialty. Divide the student loans by the income to get your Debt to Income (DTI) ratio. If your DTI < 1.5, then you know you are going to refinance eventually. The only question is whether it is worth doing during residency. That is simply a question of effective interest rate. Adjust your interest rate for any REPAYE subsidy you may be receiving and for any student loan interest rate deduction you may be receiving and compare that to what the student loan refinancing companies are offering (again also adjusting for any student loan interest rate deduction you may qualify for). If you can get a better effective rate by refinancing, then do so. If not, stay in the IDR program. Once you're an attending, you are likely not getting any REPAYE subsidy, you are likely not getting any student loan interest rate deduction, and you can qualify for an even better rate, so go ahead and refinance.

If your DTI > 2.5, (for example student loans of $500K and an income of $200K) you will want to give serious consideration to IDR forgiveness. While this is dramatically worse than PSLF (takes 20-25 years of payments and the forgiveness is taxable in the year received), at that DTI ratio you are still likely to come out ahead. So don't refinance or you will lose that option.

If your ratio is between 1.5 and 2.5, you're in no man's land and should pony up a few hundred dollars and get high-quality advice to help you make a decision about what to do. We recommend StudentLoanAdvice.com. Again, if you are a resident or fellow and you're not sure, don't refinance. There's no going back to the IDR programs and PSLF.

Principle #4 – If You Are Not Sure If You Will Work at a 501(c)(3), Then Calculate the Cost of Your Option

The best way to calculate the cost of your option is to apply with one of our student loan refinancing partners that lend to residents. If your average loan rate is 7%, you have $300K in unsubsidized loans, and a lender offers you 4% fixed, then the cost of the option is (7%-4%)*$300K= $9K per year. That's $27K over a 3-year residency and twice that if you add on a 3-year fellowship. Now you have to weigh some other difficult to measure factors such as the likelihood of being able to get a job at a 501(c)(3), the attractiveness of available 501(c)(3) jobs and their location to you, and the difference in pay in your specialty between 501(c)(3) jobs and non-501(c)(3) jobs (if any). If the option is worth paying for you, then pay it, but if you get to the point in a year or two where you're sure you're not going to work at a 501(c)(3), then refinance. Sure, it cost you a little extra interest to keep that option open, but that's just business.

Principle #5 – Weigh the Risk of Not Getting PSLF

It is worthwhile running the numbers in your particular situation, just so you understand what you are looking at. First, let's consider a doc with $300K in 7% unsubsidized loans. Let's assume he just makes 10 years of equal payments (maybe his spouse has a real job while he's a resident or something). What do the payments look like?

Well, he pays $3,559 a month, or $42,713 per year for ten years and then the loans are gone.

Well, what if he decides to enroll in the PAYE program and go for PSLF? Let's assume that the spouse isn't working and he has two kids. Let's also assume a $50K income (AGI) as a resident and a $250K income (AGI) as an attending.

Now his payments as a resident are $113 per month, or $4,068 over the course of his residency. Upon finishing residency, he will owe $363,150. His payments at that point will be $1,780 per month, or $21,360 per year. After 7 years of paying $21,360 he still owes $398,295, which is then eligible for PSLF. He owes MORE than he took out in medical school and even more than he owed at the end of residency. How is this possible? Well, remember that 7% of $363K is $25,410 a year. Even his attending payments aren't covering the interest on this debt!

That brings us back to the risk issue. If you lose your 501(c)(3) job and can't get another, or the government limits the program, you will still owe a ton of student loans, more than you took out despite paying on them for 10 years. If you're not comfortable taking that risk, then either refinance your loans early in residency and plan to pay them off, even if you do end up in a 501(c)3, or save the difference between your PAYE payments and the payments that would actually make the loan go away in 10 years from med school graduation up in a side account. Then, if something happens, liquidate the side account and pay off the debt. If nothing happens, and forgiveness materializes, then you've got a pretty decent boost to your nest egg.

In Summary

• Refinance private loans early and often
• If you plan to work at a 501(c)(3) as an attending → Don't refinance federal loans
• If you have a DTI (or expected DTI) ratio > 2.5 → Don't refinance federal loans
• If you have a DTI (or expected DTI) ratio between 1.5 and 2.5 → Get advice from StudentLoanAdvice.com
• If you are an attending not working for a 501(c)(3) and have a DTI ratio < 1.5 → Refinance federal loans
• If you are a resident/fellow and do not expect to work for a 501(c)(3) and have an expected attending DTI ratio < 1.5, calculate your effective interest rate and compare to what you can refinance to. If you need help, contact StudentLoanAdvice.com.

If you do choose to refinance, please go through the links on this site. Here are the best deals on student loan refinancing I've managed to negotiate with the top student loan refinancing lenders if you are going to refinance.

Student Loan Refinancing Disclosures

What do you think? Are you PSLF eligible? Will you be going for that, or paying off your loans as soon as possible? Comment below!