Will Student Loans Be Forgiven? – Podcast #214

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Student loans have been on the back burner for the last year or so, as borrowers have enjoyed 0% interest on their federal loans. There has been lots of talk in Congress about loan forgiveness and what that could look like.  With the break on interest scheduled to come to an end this Fall, student loans are about to come front and center. Being in this state of limbo leaves borrowers with hundreds of thousands of dollars in student loans unsure of how to manage their loans going forward. Refinance and risk losing 0% interest if President Biden extends the deal? Pay them off and risk missing out on any loan forgiveness Congress may pass? There is a lot to think about right now, so we brought on Andrew Paulson of StudentLoanAdvice.com in this week’s episode to discuss loan forgiveness, interest rates, refinancing, consolidating, and other questions about managing your student loan debt.

 

Student Loan Forgiveness

A lot of people have been talking about student loan forgiveness. It has been a hot topic in Washington. It has been a hot topic in any sort of physician group. People are really wondering if Biden will forgive student loans and about the possibility of additional forgiveness. We aren’t just talking about public service loan forgiveness or long-term income driven repayment forgiveness, but additional forgiveness coming up at some point in the future. People wonder how that should affect their student loan plans. We asked Andrew what are the odds of any sort of forgiveness happening, what might that look like, and what should be done about it?

“I would not anticipate you getting all of your student loans forgiven. So many of our listeners and readers have mortgage-size student loans. And $10,000 or $20,000 forgiven when you’ve got $500,000 of federal student loans is not going to make that large of a dent. There has been quite a bit of talk that there are going to be some loans discharged in the future but as recently as last week in Washington, they talked that they’re kicking the can further down the road and that this is not the prime focus for them now. I would not put my chips in on any of your loans getting discharged here in the near future.

If that ends up happening, that’s great, that’s gravy. But I think that still having a great student loan plan for how you’re going to tackle your student loans and get those paid off or go for public service loan forgiveness is a much better route.”

Even the most liberal people out there on this topic are still talking about capping it at $50,000, which just doesn’t move the needle when you owe $300,000. You shouldn’t craft your entire student loan plan around that. More realistically and particularly President Biden has definitely walked that back to a $10,000 figure. We suspect that, even if that took place, which we think is less than a 50% chance, those with a high income may be excluded from it.

You have to keep in mind, right now, the Democrats control the White House and both houses of Congress. Chances are, come the midterm election, the president’s party typically loses significant seats in Congress. It would not surprise me at all if the Republicans controlled one or both houses of Congress after the midterm.

So that’s only 18 months away. If this isn’t a priority for them now, it wouldn’t surprise me at all if nothing got done before they lock up the government with the Democrats controlling the White House and the Republicans controlling at least one house of Congress. I wouldn’t expect a huge student loan program rammed through at all, given the likely political realities of this.

Certainly, if your plan otherwise is to refinance your student loans, I don’t think I would keep them in the federal student loans in hopes of getting $10,000 or even $50,000 forgiven. The odds are too low. But it’s your money.

 

Should I Refinance My Student Loans?

Student loans are going back to their normal interest rates come October 1st, and you have to start making payments again. Lots of people have been holding off refinancing, even if that is their long-term plan, until October 1st.

CommonBond has tried to entice you into doing it early. They are offering six months of 0% student loan interest if you refinance at least one federal student loan. It is June so really CommonBond is offering a better deal than the government because the government is only giving you four more months of 0% in student loans.

But should those who are planning to refinance in October take CommonBond up on this deal now?

“That sounds like a great offer. Really what we’ve been seeing since March of 2020, while payments for federal student loans and interest have been put on hold, is that the loan servicers, private refinancers, have been trying to get creative with ways to get people to refinance their student loans.

But if you can end up locking in a 0% interest rate and locking in potentially a low rate thereafter, that seems like a great idea if you’re not going to go for loan forgiveness. But now the question that I always get is about the timing. I think that waiting until August or September to then be able to lock in that low rate, whether it’s CommonBond or you end up going with a number of the other private refinancing companies that are out there, bottom line, there’s great value in that. And that can end up saving you thousands of dollars over time.

We also don’t know what’s going to happen with federal student loan payments and interest. If it gets reinstated, and you’ve locked in a low rate, great, you can go from there. But say they end up extending the COVID forbearance period longer, you could continue to save money and go down that route as well.”

There is always a risk that the government extends the 0% interest. It seems, given what’s happening with COVID in the country right now, to be a pretty low risk, but still a risk.

The other thing to keep in mind is inflation is up a bit in the last couple of months; interest rates are up a bit. It may be that the rate you get come October 1st is not as good as what you can get right now. Plus, there is going to be a mad rush for the doors in September and October, so you may not get very good service. It may take longer than you think to get it done at that point.

 

Should I Consolidate My Student Loans?

For those going for public service loan forgiveness, it is usually a great idea to consolidate right when you graduate as this will allow you to skip that six-month grace period and be able to get Public Service Loan Forgiveness payments to count three to four months earlier. With the direct federal consolidation, you are issued a new federal student loan in place of your old ones. This is a particular benefit to those who have old loans because they’ll be eligible for more income driven repayment plans and loan forgiveness.

What is the difference between consolidation and refinancing?

“A federal direct consolidation is when you are issued a new loan from the federal government, which consolidates all your outstanding federal student loans, generally into two loans, a subsidized and unsubsidized portion. It rounds your interest rate one eighth of a percent up and takes an average interest rate for all your loans to calculate your interest rate. So, you can no longer pay down on those larger, direct plus grad loans versus your smaller direct Stafford unsubsidized ones. It just becomes effectively one loan. It generally allows you to have more repayment plan options and the ability to obtain loan forgiveness.

So, if you have some older FELS loans and you want to be in REPAYE or PAYE, you need to do a direct federal consolidation to do that. But if you have payment history and then you do direct federal consolidation, your payment history is going to go to zero. It’s going to start over again. So, make sure when you’re doing it, that you’re doing it at the right time. Most of the time that’s right when you graduate med school.”

Benefits of Consolidating Federal Student Loans:

  1. You only have to worry about one loan.
  2. You can get the ball rolling, counting your payments toward Public Service Loan Forgiveness
  3. You can get some loans that you wouldn’t otherwise qualify for and combine them into a direct loan.

For private refinance or private consolidation, you can take any number of your existing loans, federal or private, and consolidate them with a private refinance and get that down to one loan. A lot less headache and paperwork. Then your loan payment works just like a mortgage. You have some high required payments. You can make that or above that and you just pay that down as soon as possible and you are really likely to get a lower interest rate converting it to private.

 

Should Residents Refinance Their Student Loans?

Loan servicers may not give you that great of an interest rate in your intern year. You may be better off keeping your loans federal and going into an income driven repayment plan, usually Revised Pay As You Earn (REPAYE).

“The reason being is with your low income as a resident, it’s likely your payments aren’t enough to cover the interest that’s accruing on your loans each year. This is called negative amortization. And half of the unpaid interest for the year will be paid in an interest subsidy. For a dual physician couple with loans at 7%, they’re both in school, let’s assume a $0 income in 2020. They filed their Income Driven Repayment certification form at $0, so their payments for the first year would be $0 payments. They would be unable to chip away at that $35,000 of interest charged for the year.

But they would also receive $17,500 in an interest subsidy, which effectively cuts their interest rate in half. And they would probably be eligible for this for the first year or two, maybe three years of their residency and keep their interest rate probably, after the REPAYE subsidies apply, less than 4%.”

If you can’t get lower than perhaps a 4% interest rate through a private refinancing, it’s probably better to keep your loans federal, because you’re going to be guaranteed, with those low payments, the interest subsidy, and you keep the door open for loan forgiveness.

“The way we usually look at that is as soon as your effective interest rate, after the REPAYE subsidy is applied, once that is higher than the private refinance rates you can go with, and you are not going to do loan forgiveness, you might as well just go ahead and private refinance it, live like a resident and start paying your loans off.”

This only applies to your federal loans. Anytime you have private loans and can get a lower interest rate, it’s usually a no-brainer to refinance.

 

Is Student Loan Forbearance Right for You?

A resident sees the standard 10-year payment, which on a $500,000 loan is $5,800 a month, and they can’t see a way to make that payment so they decide to go into forbearance. Don’t go into forbearance. Rather, enroll in Income Driven Repayment, get the interest subsidy, the low payment, and keep the door open for PSLF.

“I can’t tell you how many times I’ve talked to attendings who went into forbearance during their residency, and they are kicking themselves now because they missed out on the perks of staying in repayment. Because if you go into forbearance during your residency, those years won’t count towards loan forgiveness, and you’ll miss out on that significant interest subsidy.”

Your cash flow is really not that bad on an IDR program. Even if you have private loans, you can refinance those and get a hundred dollars a month payments.

There is really no reason to go into forbearance just for cash flow purposes. Your cash flow would have to be so tight that you really truly couldn’t carve out even a couple of hundred bucks a month for student loan payments. Most residents are not truly that tight. If they are, they really need to get serious about their budgeting.

Forbearance is almost always the wrong move during residency, yet it is common. Before going into forbearance, meet with Andrew who can help you decide what the best payment option is, whether that is Revised Pay As You Earn, Pay As You Earn, or Income-Based Repayment, for older borrowers. He can give you an idea of which payment plan is best aligned to your goals.

 

How to Reduce Your Student Loan Payment

There are strategies to reduce your student loan payment. If you are thinking about going for PSLF, these are important to know. Usually, it is through increasing your pre-tax contributions, mainly through your retirement accounts and HSA. Any of those pre-tax retirement accounts are going to reduce your adjusted gross income, which would thereby reduce your monthly student loan payment in REPAYE or PAYE.

This is a tricky point for a lot of people because they hear Roth is best as a resident. You are in the lowest tax brackets in your life. Now is the time to fund those Roth accounts. Yet the best thing for student loans is actually pre-tax accounts.

It is hard for a lot of people to decide between those two. Almost surely, if you don’t end up going for forgiveness, you’re better off with a Roth account, even if you miss out on some subsidy from REPAYE. But if you go for Public Service Loan Forgiveness, you’re probably better off with pre-tax. Yet a lot of people at the beginning of the residency aren’t sure if they’re going for Public Service Loan Forgiveness.

Make sure you contribute enough to your retirement account to get the employer match. If you can do that pre-tax, that’s going to end up lowering your student loan payment. If you have to do it with Roth, that is fine as well, because you have the opportunity for that to end up growing in an account that you’ve already paid taxes on.

You are choosing between two good options. Especially given that most residents aren’t saving anything for retirement. So, you’re already ahead when you’re putting it in either account. You can certainly run the numbers on how to invest that.

 

Student Loan Interest Deduction

Some in their residency will be able to get the student loan interest deduction. But as most of you are higher earners, you’re going to get phased out of this pretty quickly. But we definitely want to take advantage of that when we can.

For 2020, this is last year’s numbers on your modified adjusted gross income, this deduction phases out between $70,000 and $85,000 if you’re single. So, most residents, if you’re not moonlighting, you’re going to qualify to get your student loan interest deduction.

Now it’s only $2,500. If you pay at least $2,500 in student loan interest, you get that deduction. In that tax bracket, it might only be worth $250 bucks or $300 off your taxes. But if you’re married, that number goes up to $140,000 to $170,000 a year. So, if you put enough money into a retirement account, many docs might even qualify for that as attendings.

But most attendings probably aren’t going to qualify for the student loan interest deduction. It is still probably only going to be a $500-$600 deduction. It’s not going to be a massive deduction for you, even if you qualify for it. But if you can get it, you might as well take it. Just assume, though, that most residents will qualify for it and most attendings won’t. That is the way it works out for most people.

 

Tax Filing Status with Student Loans

Andrew shared a consult he did with a more complex situation, a resident and a periodontist living in a community property state with $900K in loans. The physician is looking to work at a nonprofit and pursue public service loan forgiveness. The periodontist is looking for the right time to refinance their loans and pay them off.

So, most loan services are going to say, just enroll in Revised Pay As You Earn. That’s the best payment plan. And while REPAYE is great for some borrowers, it’s not for everyone.

It is probably not a great idea for this couple where we want to get the periodontist in a position where their interest rate is probably 7%, 6.5%, maybe higher with their federal student loans. We want to get that down to 3% or 2.5% percent as soon as possible so that they end up paying much less interest over time. So, we would look to private refinance their student loans.

But what we would encounter is that while their spouse is a resident, they might be strapped with cash flow. Whereas if they did a private refinance on this $600,000 student loan, the required monthly payment on a 10-year term, 3% interest rate would be about $5,600. Couple that with the federal student loan payment, which, if they’re in the Revised PAYE, it is going to be $2,500. That’s over $8,000 a month, which could be tough when one is still in their residency.

If we take it a step further and decide to look at filing their taxes separately and have the physician enroll in Pay As You Earn, we could reduce their payment from $2,500 a month down to $225, which is a huge reduction in student loan payments, for the physician payment. If we’re looking to go for loan forgiveness, you want to go down the route where you’re paying the least amount towards your student loans and trying to maximize that.

But this kind of goes even a step further for those in community property states. If the resident makes $60,000 and their spouse periodontist makes $300,000, so household income of $360,000, if you file taxes separately in a community property state, your income will be divided evenly between the two of you. Effectively, $180,000 of income will be reported on each of your individual tax returns.

This can be problematic for student loan payments. In particular when the physician is making much less in their residency. When you do your Income Driven Repayment certification form, it’ll ask for your tax return, which is going to report your income at $180,000 instead of $60,000, resulting in you, as a resident, having a larger student loan payment.

The way around this is using alternative documentation of income. So instead of using a tax return, you can actually use a pay stub on your income certification form. You can take advantage of the PAYE plus married filing separately strategy, despite living in one of the community properties states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

But if I filed my taxes separately, I’m definitely going to pay more in taxes. I think most people are going to find that either it’s about the same or they’re paying more when they’re doing married, filing separately. Married filing jointly is usually a lower tax bill than married filing separately. So Andrew said,

“Then the bigger question is, ‘Am I in a better financial position filing taxes jointly or separately?’ So, from the calculation we did earlier, they’d be paying about $2,500 a month in their residency in Revised Pay As You Earn by filing their taxes jointly because they have to incorporate their higher-earning spouse’s income.

But if we looked at Pay As You Earn and filed their taxes separately, we can separate their incomes and they could reduce the student loan payment down to about $225, basically saving $2,000 a month, which is $25,000 of savings annually. So, then we would need to calculate the tax liability increase from filing taxes separately versus jointly, and compare it to the increased student loan payment savings. And we rarely encounter situations where you will be better off filing your taxes jointly.

By enrolling in Pay As You Earn and filing your taxes separately, this will allow you to focus less money on the federal student loans and be able to have more cashflow and capital to pay down those private student loans from the periodontist, save for retirement, and maximize your loans for forgiveness.”

 

What to Do If Your Student Loan Is in Default

If you are in default on a loan, you need to address that first. Before talking about repayment plans, private refinancing, loan forgiveness, and other options, you need to get this resolved right from the get-go.

There are four ways to really address student loan default:

  1. Pay it off
  2. Discharge the debt
  3. Loan rehabilitation
  4. Do a consolidation

Number one, repaying the debt can be a good thing if it’s a small amount, but perhaps this is a large loan and you can’t just pay that off. So sometimes that’s too hard to do. Two, discharging the debt, could involve some litigation, which can get complex. Andrew said that is something that he usually shies away from advising clients on.

But number three, loan rehabilitation, is really the most common of these four. The reason why is because this default can get removed from your credit history, but it does take about 9 months to do that. So, you have to be patient.

And then, lastly, consolidation is also common, though not quite as common as loan rehabilitation. In consolidation you are just issued a new federal student loan for that loan that is in default, and it takes about 30 to 60 days to rehab it.”

Once you have addressed the default, you can get a student loan plan in place and figure out the best payment plan.

 

Public Service Loan Forgiveness

One caveat for those that are considering Public Service Loan Forgiveness is, if part-time work is in the future, Public Service Loan Forgiveness may not be best for you. If you’re working part-time, you don’t get payment counts in Public Service Loan Forgiveness.

Andrew also pointed out when you’re keeping your loans federal, don’t pay more than the required federal student loan payment. This can throw your payments into something that’s called pay ahead status and can cause the loan servicer to lose track of your payment count and can mess that up later down the road, if you’re going for loan forgiveness.

It is better to put that money into a Public Service Loan Forgiveness fund invested on the side. If you end up not going for PSLF, you can whip it out and throw it at your student loans at that point. If Public Service Loan Forgiveness works out, great, you’ve got an extra couple hundred thousand dollars socked away for whatever reason.

Keep great records of all the payments that you’ve made in Public Service Loan Forgiveness, and file your employment certification form, this is the PSLF certification form that you need to file every year.

 

Sponsor

Laurel Road is committed to serving the financial needs of doctors. You take care of us. It’s time someone took care of you. With the new Laurel Road High Yield Savings℠ account, you can earn 10x the national average. Specially designed for doctors, our high yield savings account costs nothing to open and has no monthly maintenance fees. Information as of June 10, 2021. For terms and conditions, please visit www.laurelroad.com/wci.

 

Quote of the Day

Our quote of the day is from Henry David Thoreau, who said

“The price of anything is the amount of life you exchange for it.”

There is a lot of truth to that. Everything you own owns a little piece of you.

 

Milestones to Millionaire Episode

#17: Nurse Practitioner and Pharmacist Millionaires

Sponsored by DLP Capital Partners

This couple had a $1.2 million change in net worth in 6 years with a salary typically less than $200K. They reached millionaire status without ever feeling deprived. Find what a rich life feels like to you. If that life doesn’t cost a lot of money, it will make the journey more enjoyable and less painful. Make sure you spend your money on what brings value to your life. Learn to be intentional with your spending.

 

Physician Life Coaching

For anyone who wants to practice medicine because they want to and not because they have to, Jimmy Turner over at The Physician Philosopher is holding a masterclass now called The 3 Pillars to Physician Freedom. There are still two sessions available on June 10th and 12th. To claim your spot go here.

 

WCI Conference 2022 Speakers

If you haven’t heard, we are going to have WCICon22 in February in Phoenix. We’re actually calling for speakers now. If you want to speak at WCICon, you can apply now through the end of June.

 

WCI Scholarship 2021

The WCI scholarship is now open. You can get details on it here. Like every year, we changed and tweaked it a little bit. You can apply at whitecoatinvestor.com/scholarshipapplication.

 

Full Transcription

Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.

Dr. Jim Dahle:

This is White Coat Investor podcast number 214 – Will student loans be forgiven?

Dr. Jim Dahle:
Welcome back to the podcast. I am super excited. I had an email this morning that totally made my day. I’m not going to lie. It was pretty awesome. Let me pull it up here on my computer and read it to you.

Dr. Jim Dahle:
It says, “I just finished listening to the latest Milestones to Millionaires episode number 16, and I wanted to send a small email to thank you for what you were doing. I was considered an audio, but this feels a bit more comfortable. I’m actually not a doctor nor is my spouse, but I’m a professional cyclist riding on Trek–Segafredo in America.

Dr. Jim Dahle:
Even though a lot of things you teach do not apply to me, they do give me ideas, understanding and inspiration on how to manage my future and the very overwhelming US tech system that as a non-American seems a little insane”. Yeah. I agree with you there. “There are quite a few similarities in professions that I’ve found and truly just wanted to say thank you for all the info you give out”.

Dr. Jim Dahle:
But the best part about this, this email is from Toms Skujiņš, who is a Latvian cyclist. He’s basically the best Latvian cyclist. He’s been the road race champion for Latvia. This is a guy who’s worn the polka dot jersey for the best climber in the Tour de France. He’s gotten second on a stage in the Tour de France last year. I think it was stage eight. Somebody I totally know, watch on TV, follow in the news. And he sends me an email that says, “Hey, thanks for great podcasts”.

Dr. Jim Dahle:
So, Toms, you are awesome. Thanks for what you do. You’re totally inspiring to me to watch you guys suffer on your bikes all day long and then do it again the next day, day after day after day. So, you’re very welcome for any usefulness you’ve found out of this podcast. You’re certainly right that medicine and athletics and art really too, have some things in common. That your high-income is not due to your business savvy. It’s due to a specialized skill or knowledge base you’ve developed. In the case of most doctors, because they spent 10 to 15 years learning their craft. In your case, because you’re so fast riding a bicycle uphill.

Dr. Jim Dahle:
But either way, the truth is you got your high-income not because you’re awesome at business or money. And so, like the rest of us, you got to turn that high income into a high net worth in order to really build wealth. But awesome to get that email from you, thanks for what you do.

Dr. Jim Dahle:
And that goes for everybody else out there doing something that’s not medicine. If you’re earning a lot of money, chances are, it’s not a very easy job. And I can tell you this. I follow pro cycling long enough to know that pro cycling is not an easy job.

Dr. Jim Dahle:
All right, this podcast is brought to you by the Laurel Road for doctors. Laurel Road is committed to serving the financial needs of doctors. You take care of us, it’s time someone took care of you.

Dr. Jim Dahle:
With the new Laurel Road high yield savings account, you can earn 10X the national average. It’s especially designed for doctors. Our account costs nothing to open and has no monthly maintenance fees. Information is as of June 10th, 2021.

Dr. Jim Dahle:
For terms and conditions, please visit www.laurelroad.com/wci. Laurel Road is a brand of KeyBank, N.A and a member at the FDIC, an equal housing lender. NMLS number 399797.

Dr. Jim Dahle:
Now we’re going to be talking about student loans today. Laurel Road is also actually my longest term partner for student loan refinancing. If you are interested in refinancing your student loans, Laurel Road is certainly somebody you ought to be looking at. And the best deals for that are found on the White Coat Investor website.

Dr. Jim Dahle:
Not only do you cash back and I think the Laurel Road deal on cash back right now is a $550 cash back. Plus, right now we’re giving you Fire Your Financial Advisor free. It’s another $799 value if you refinance your loans through our link. So, pretty awesome deal there. Thanks Laurel Road for sponsoring the podcast.

Dr. Jim Dahle:
All right, our quote of the day today is from Henry David Thoreau, who said “The price of anything is the amount of life you exchange for it”. And there’s a lot of truth to that. Everything you own owns a little piece of you.

Dr. Jim Dahle:
If you haven’t heard, we are going to have WCI con 22. It’s in February, it’s going to be in Phoenix. We’re actually calling for speakers now. If you want to speak at WCI con, you can apply now. That not only gets you into WCI con free, but I pay for you to come out and pay you something for speaking. That hasn’t all been finalized, but if you want to speak, you need to apply this month at whitecoatinvestor.com/speakerapp.

Dr. Jim Dahle:
Also, the scholarship is now open. You can get details on the blog. Like every year we change it and tweak it a little bit, but you can get all the details of whitecoatinvestor.com/scholarship. You can apply at whitecoatinvestor.com/scholarshipapplication.

Dr. Jim Dahle:
Jimmy Turner, over at The Physician Philosopher, he’s running a masterclass this week. The masterclass is totally free, to help you with money and mindset and entrepreneurship. There is a session on the 10th, which is the day this drops as well as the 12th. I suspect you may be able to see recordings of that afterward, but you can sign up at whitecoatinvestor.com/alphaclass. And his alpha coaching experience I think closes for this session on the 14th of this month. You can sign up for that at whitecoatinvestor.com/coaching.

Dr. Jim Dahle:
All right, we got a guest on today. We’ve got Andrew back from studentloanadvice.com. We’re going to be talking about all kinds of student loan topics here, which feels like it’s been on the back burner for the last year, but it’s about to come back to the front burner.

Dr. Jim Dahle:
And so, we’re going to talk about all things student loans today and get you some more information that you need in these critical moments, especially for those of you with hundreds of thousands of dollars in student loans. Hopefully that’s not Toms Skujiņš, but it is unfortunately a lot of our other listeners. So, let’s get Andrew on the line and get started.

Dr. Jim Dahle:
All right, we have Andrew Paulson with Student Loan Advice on the podcast. Welcome.

Andrew Paulson:
Hey, Jim. It’s great to be here.

Dr. Jim Dahle:
Hey, in honor of this podcast, I’m wearing one of our new WCI t-shirts. I’m wearing the student loan slayer t-shirt. I don’t think it’s getting bought very much in the WCI store, but maybe we’ll start giving it away on the Milestones podcast to people who pay off their student loans. I don’t know, we’ll figure out something to do with it. But how’s Student Loan Advice going?

Andrew Paulson:
It’s going great. It’s been awesome working with so many healthcare professionals thus far, and being able to help them solve their complex financial situations on student loans, but overall loved being able to run a business. And obviously you are busy and you run into roadblocks and hurdles, but it’s been a lot of fun thus far.

Dr. Jim Dahle:
Awesome. Well, let’s talk about some of the things people are talking about with student loans. It feels like nobody’s been talking much about student loans at all for the last year, but we’re about to have some events happen that I think are going to make student loans come back to the forefront, both in the blogosphere, as well as in people’s minds. Particularly with the federal student loan 0% deal going away, come October 1st. Basically no payments and no interest accruing since last March,14th or so 2020. So, people have really enjoyed a nice 18 months student loan holiday that is soon coming to an end.

Dr. Jim Dahle:
A lot of people have been talking about student loan forgiveness. It’s been a hot topic in Washington. It’s been a hot topic in any sort of physician group. And people are really wondering about the possibility of additional forgiveness. And I’m not just talking about public service loan forgiveness. I’m talking about additional forgiveness coming up at some point in the future, how that should affect their student loan plans really.

Dr. Jim Dahle:
So, let’s talk for a few minutes about student loan forgiveness. What you think the odds of any sort of forgiveness happening, what that might look like and what people should do about it. What are your thoughts on student loan forgiveness?

Andrew Paulson:
Yeah, if we’re separating out public service loan forgiveness, or long-term income driven repayment forgiveness, and just strictly talking about, are you going to get $10,000 OR $50,000 of loans forgiven? So, I would definitely preface this, that I would not anticipate you getting all of your student loans forgiven.

Andrew Paulson:
So many of our listeners and readers have mortgage size student loans. And $10,000 or $20,000 forgiven when you’ve got $500,000 of federal student loans is not going to make that large of a dent. But there has been quite a bit of talk that there is going to be some loans discharged in the future.

Andrew Paulson:
But as recent as last week in Washington, they talked about that they’re kicking the can further down the road and that this is not the prime focus for them now. But what I would say is that I would expect the unexpected on this, and I would not put my chips in on any of your loans getting discharged here in the near future.

Andrew Paulson:
And if that ends up happening, that’s great, that’s gravy. But I think that still having a great student loan plan for how you’re going to tackle your student loans and get those paid off or go for public service loan forgiveness is a much better route.

Dr. Jim Dahle:
Yeah, even the most liberal people out there on this topic are still talking about capping it at $50,000, which just doesn’t move the needle when you owe $300,000. You shouldn’t craft your entire student loan plan around that. More realistically and particularly President Biden has definitely walked that back to a $10,000 figure. And I suspect that even if that took place, which I think is less than a 50% chance. I think those with a high income may be excluded from it. I suspect it may be means tested. And so, sure if you make less than $50,000 a year, you’re going to get $10,000 forgiven. But if you make doctor money, you may not get anything. That wouldn’t surprise me at all.

Andrew Paulson:
Yeah. And I just say, follow it, continue to stay posted on that, but don’t expect huge complete loan forgiveness of the $1.6 trillion federal student loan industry now.

Dr. Jim Dahle:
I think you’re probably right there. You’ve got to keep in mind, right now, the Democrats control the White House and both houses of Congress. Chances are come the midterm election the president’s party typically loses significant seats in Congress. It would not surprise me at all if the Republicans controlled one or both houses of Congress after the midterm.

Dr. Jim Dahle:
So that’s only 18 months away. And if this isn’t a priority for them now, it wouldn’t surprise me at all if nothing got done before, really. They locked up the government with the Democrats control in the White House and the Republicans control and at least one house of Congress. So, I wouldn’t expect a huge student loan program rammed through at all, given the likely political realities of this.

Dr. Jim Dahle:
And certainly, if otherwise your plan is to refinance your student loans, I don’t think I would keep them in the federal student loans in hopes of getting $10,000 or even $50,000 forgiven. I think the odds are too low. But it’s your money. You got to do what you want, right?

Dr. Jim Dahle:
There’s a cool deal out there right now. Obviously, student loans are going back to their normal interest rates come October 1st and you have to start making payments again. So, lots of people have been holding off refinancing, even if that’s their long-term plan until October 1st.

Dr. Jim Dahle:
But Common Bond has tried to entice you into doing it early. They have offered now six months of 0% student loan interest. And at this point we’re now into June. So really Common Bond is offering a better deal than the government because the government’s only giving you four more months of 0% in student loans, Common Bond is giving you six more months.

Dr. Jim Dahle:
What do you think people ought to be doing at this point? Do you think those who are planning to refinance in October maybe ought to take Common Bond up on this deal?

Andrew Paulson:
That sounds like a great offer. And really what we’ve been seeing since March of 2020, when payments for federal student loans and interest have been put on hold is that the loan servicers, private refinancers have been trying to get creative with ways to get people to private refinance their student loans. And a lot of people have been holding off and putting off those payments and putting up private refinancing.

Andrew Paulson:
But if you can end up locking in a 0% interest rate and locking in potentially a low rate thereafter, that seems like a great idea if you’re not going to go for loan forgiveness. But now the question that I always get is “Andrew, what is the timing that we should think about?” And I think that waiting until August or September to then be able to lock in that low rate, whether it’s Common Bond or you end up going with a number of the other private refinancing companies that are out there, bottom line, there’s great value in that. And that can end up saving you thousands of dollars over time.

Andrew Paulson:
And we also don’t know what’s going to happen with federal student loan payments and interest. If it gets reinstated and you’ve locked in a low rate, great, you can go from there. But say they end up extending the COVID forbearance period longer, you could continue to save money and go down that route as well.

Dr. Jim Dahle:
Yeah, I guess that’s always a risk, a possibility, but it seems to me given what’s happening with COVID in the country right now, that seems to be pretty low risk that it gets extended again.

Dr. Jim Dahle:
The other thing I suppose to keep in mind here is inflation is up a bit in the last couple of months, interest rates are up a bit. It may be that the rate you get come October 1st is not as good as what you can get right now. Plus, there’s going to be a mad rush for the doors in September and October, you may not get very good service. It may take longer than you think to get it done at that point. Maybe to be in the early bird isn’t such a bad thing.

Dr. Jim Dahle:
If you’re interested in that Common Bond deal, you can get the WCI special deal, which is $550 cash back plus Fire Your Financial Advisor for free. That’s a $1,349 value that you don’t get if you go directly to Common Bond. That’s at whitecoatinvestor.com/commonbond.

Dr. Jim Dahle:
As I mentioned earlier, Laurel Road is a sponsor of this podcast. So, I would include them in your search as well – whitecoatinvestor.com/laurelroad. But they’re not yet given the 0% deal. Maybe they’ll feel a little pressure with Common Bond doing it and do that as well. But right now, they’re not offering that deal. But we’re still giving you Fire Your Financial Advisor if you refinance through any of our links with any company.

Dr. Jim Dahle:
All right. So, I thought today, we’d talk a little bit about some of the cases anonymously that you’ve given advice on in the last couple of months. So, I think your first one is a pair of doctors that are just graduating from medical school, both with loans. Let’s talk about that case and what maybe those people ought to be thinking about and considering, and when they should come in and meet with you or how they should manage their student loans at this point.

Andrew Paulson:
Yeah, absolutely. Jim, I just want to preface this also that the average student loan debt amount that my clients have, it’s kind of across the spectrum. It can be $50,000 or it can be up to a million dollars. And so, I’ve advised on a number of different sides, but I think kind of on average, they end up being in the $400,000 to $500,000 range, which is skewed a little bit high because of the families, the couples that I’ve met with that have $800,000 or $900,000 in student loans.

Andrew Paulson:
But kind of getting into this more common scenario that I see with a dual physician couple, let’s just go through a hypothetical scenario of a couple. One is an internal medicine, the other one’s in emergency medicine, both graduating medical school now.
And they’re going to begin three-year residency programs here shortly and not planning on doing a fellowship, but they would both like to keep the door open for public service loan forgiveness, and see what happens later down the road.

Andrew Paulson:
They both have $250,000 in federal student loans. That puts them at a total student loan debt amount of $500,000. And assuming a regular federal interest rate, let’s say 7% on all their loans to make it simple. So average annual interest charge loans are growing at about $35,000 a year.

Andrew Paulson:
And so, when I first have this, I also want to look at what they’re going to be making when their attendings. And let’s say the internal medicine physician is going to make $200,000 starting and EM will be $300,000. So that puts them at about $500,000 of income as attendings, which would put their debt-to-income ratio at about one time.

Andrew Paulson:
And usually when we see this $500,000 by $500,000 of one-time debt to income ratio, they’re an excellent candidate for private refinance, living like a resident, and then paying them off in two to five years as an attending.

Andrew Paulson:
And after that, we usually get into, “Should I consolidate my student loans?” And those that are going to go for loan forgiveness, it’s usually a great idea to consolidate right when you graduate as this will allow you to skip that six-month grace period and be able to get public service loan forgiveness payment count three to four months earlier. So, instead of this couple going into a grace period until December of this year, they could start making payments perhaps in the end of the summer or early fall.

Andrew Paulson:
But bottom line with the direct federal consolidation issues you a new federal student loan in place of your old ones. And this is a particular benefit to those who have old loans because they’ll be eligible for more income driven repayment plans and loan forgiveness.

Andrew Paulson:
But I would mention that when you go from school into repayment, whether you do the six-month grace period, or you do a direct federal consolidation, your loan, your interest is going to capitalize. So, you don’t get to take out $500,000 in student loans and then payback $500,000. Unfortunately, you have to pay on the interest. So, that’s something else to be mindful of.

Andrew Paulson:
But going back to this particular borrower situation, it’s usually a good idea for them to look to private refinance their federal student loans. Particularly if they’re able to cut their interest rate from 7% down to 3.5% or 3%, because it’s likely going to save them thousands over the long run.

Andrew Paulson:
However, loan servicers may not give you that great interest rate right when you finish school. Particularly in your intern year. And you may be better off keeping your loans federal and going into an income driven repayment plan, usually revise pay as you earn.

Andrew Paulson:
And the reason being is with your low income as a resident, it’s likely your payments aren’t enough to cover the interest that’s accruing on your loans each year. This is called negative amortization. And half of the unpaid interest for the year will be paid in an interest subsidy. And in this couple situation, if they both make, they’re both in school, let’s assume a $0 income in 2020, and they end up reporting that on their tax return. And then they filed their income driven repayment certification form at $0, their payments for the first year would be $0 payments. And they would be unable to chip away at that $35,000 of interest charge for the year.

Andrew Paulson:
But they would also receive $17,500 in an interest subsidy, which effectively cuts their interest rate in half. And they would probably be eligible for this for the first year or two, maybe three years of their residency and keep their interest rate probably after the repay subsidies apply less than 4%.

Andrew Paulson:
So, then it gets back to, “Should I private refinance right from the get-go?” And if you can’t get lower than perhaps a 4% interest rate in this couple scenario, it’s probably better to keep your loans federal, because you’re going to be guaranteed with those low payments, the interest subsidy, and you keep the door open for loan forgiveness.

Andrew Paulson:
But I think I’d like to clarify one point. If they also had private student loans and a number of you do from grad or undergrad, you should look into it, if you can get a lower interest rate. Anytime you have loans that are private and you can go to a lower interest rate, it’s usually a no-brainer to refinance. And a lot of you have 7%, 8%, 9% private student loans that that’s all you could take out when you were in school and you can get a much lower rate.

Andrew Paulson:
So, then kind of moving forward with this family. Let’s assume they’ve got a child and their income in their residency, they’re both making $60,000. So, household income of $120,000. At a household size of three, they should anticipate monthly payments in their residency. In revised pay as you earn, from the $200 to $800 range.

Andrew Paulson:
And a common thing that I see from residents is they see the standard 10-year payment, which on a $500,000 loan is $5,800 a month. And that’s really hard to stomach and they can’t make that payment. So, they decided to go into forbearance. Don’t go into forbearance. Rather enroll in income driven repayment, get the interest subsidy, the low payment and keep the door open for PSLF.

Andrew Paulson:
I can’t tell you how many times I’ve talked to attendings who went into forbearance during their residency, and they are kicking themselves now because they missed out on the perks of keeping their staying in repayment. Because if you go into forbearance during your residency, those years won’t count towards loan forgiveness, and you’ll miss out on that. That’s a significant interest subsidy.

Dr. Jim Dahle:
Yeah. So, you miss out on those extra payments being made in case you go for forgiveness, you also miss out on the repay subsidy, if you’re otherwise eligible for that. And your cash flow is really not that bad on an IDR program. And even if you have private loans, you can refinance those and get a hundred dollars a month payments.

Dr. Jim Dahle:
So, there’s really no reason to go into forbearance just for cash flow purposes. Your cash flow would have to be so tight that you really truly couldn’t carve out even a couple of hundred bucks a month for student loan payments. And I just don’t think most residents are truly that tight. If they are, they really need to get serious about their budgeting.

Dr. Jim Dahle:
But forbearance is almost always the wrong move during residency. And yet it’s common. I wouldn’t be surprised if 25% of docs go into forbearance in a residency. And I don’t know who’s telling them to do that. Maybe they’re getting into medical school. Maybe it just seems like the right thing. They don’t get any advice. But it’s almost always wrong.

Andrew Paulson:
Yeah, absolutely. And then after we’ve really kind of talk through that, then we get into the step of nailing down. We’ve nailed down their payment on a monthly basis. Then we’re going to talk through what are their best payment options of whether they should go into revise pay as you earn, pay as you earn or income-based repayment for older borrowers, and really give you an idea of which payment plan is best aligned to your goals.

Andrew Paulson:
Then we’ll look at ways and strategies that we can reduce your payment. And usually that’s through increasing your pre-tax contributions mainly through your 403(b), your residency, or if they offer some other type of retirement plan, or if you want to do your own IRA, contribute to an HSA. Any of those pre tax retirement accounts are going to reduce your adjusted gross income, which would thereby reduce your monthly student loan payment.

Dr. Jim Dahle:
So, this is a tricky point for a lot of people, right? Because they hear Roth is best as a resident, right? Because I’m in the lowest tax brackets in my life. Now’s the time to be step in those Roth accounts full. And yet the best thing for student loans is actually pre-tax accounts.

Dr. Jim Dahle:
And so, I think it’s hard for a lot of people to decide between those two. Almost surely, if you don’t end up going for forgiveness, you’re still probably better off with a Roth account, even if you miss out on some subsidy from repay. But if you go for public service loan forgiveness, you’re probably better off at the pre-tax. And yet a lot of people at the beginning of the residency aren’t sure if they’re going for public service loan forgiveness.

Dr. Jim Dahle:
What do you tell those people that are trying to decide between Roth and traditional accounts? That is not really quite sure if they’re going for loan forgiveness or not. Do you just tell them which one do you think is most likely and do that or what do you tell them?

Andrew Paulson:
If their employer is going to match up to a certain percent, I really like them to take that. And let’s say they need to contribute 3% to get 3% from their employer, however they can do that. If they can do that pre-tax rate, that’s going to end up lowering their student loan payment. If they have to do it with Roth, that’s fine as well, because it just kicks the can a little bit further down the road with your federal student loans. But then they have the opportunity for that to end up growing in an account that’s already been paid taxes on.

Andrew Paulson:
There’s a lot of talk of going one way or the other, but I think bottom line contributing to a retirement account and making your student loan payments is a great way to go.

Dr. Jim Dahle:
They’re choosing between two good options there, for sure. Especially given that most residents aren’t saving anything for retirement. So, you’re already ahead and you’re putting it in either account.

Andrew Paulson:
Yeah, exactly. If they can just rip the band aid off and start saving and start learning how to do that, that’s definitely the best route. And they can certainly run the numbers on which way or the other and how to invest that.

Dr. Jim Dahle:
What else would you talk to them about?

Andrew Paulson:
The next part we talk about is taxes, sometimes come into play here and if they can get the student loan interest deduction, and we talk about tax filing status. Some in their residency will be able to get the interest deduction. But as most of you are higher earners, you’re going to get phased out of this pretty quickly. But we definitely want to take advantage of that when we can.

Andrew Paulson:
Bottom line for this scenario and this couple that have a debt load of $500,000 and an income anticipated at $500,000, they’re an excellent candidate to do revise pay as you earn, and then to private refinance. And the way we usually look at that is as soon as their effective interest rate, after the repay subsidy is applied, once that is higher than the private refinance rates they can go with, and they’re not going to do loan forgiveness, you might as well just go ahead and private refinance it, live like a resident and start paying your loans off.

Dr. Jim Dahle:
Yeah. So, let’s get into specifics on that student loan interest deduction. For 2020, this is last year’s numbers, your modified adjusted gross income, this deduction phases out between $70,000 and $85,000 if you’re single. So, most residents, if you’re not moonlighting, you’re going to qualify to get your student loan interest deduction.

Dr. Jim Dahle:
Now it’s only $2,500. If you pay at least $2,500 in student loan interest, you get that deduction. In that tax bracket, it might only be worth $250 bucks or $300 off your taxes. Something like that, $350 off your taxes, maybe. But if you’re married, that number goes up to $140,000 to $170,000 a year. So, if you put enough money into a retirement account, and many docs might even qualify for that as attendings.

Dr. Jim Dahle:
But I would guess that most attendings probably aren’t going to qualify for the student loan interest deduction. And again, it’s still probably only going to be $500, $600 deduction. It’s not going to be a massive deduction for you, even if you qualify for it. But if you can get it, you might as well take it. Just assume though that most residents will qualify for it and most attendings won’t. I think that’s the way it works out for most people.

Andrew Paulson:
So then if we can kind of take a step a little bit into more and more complex situations that I encounter a lot. Let’s take another couple, another physician and a periodontist. They live in Arizona, community property state, and they have $900,000 of federal student loans. The physician has $300,000 from school and the periodontist has $600,000. The physician still has three more years of residency and the periodontist is a partner in their own practice.

Andrew Paulson:
And this is very, very common where sometimes people, they’re going through their training programs together. But other times one’s still in school or one’s still in residency and the other is a couple of years into their career, which can end up making things a little bit more complex and need a little more review.

Andrew Paulson:
And let’s assume that the resident is making $60,000 in their residency and they’re going to make $200,000 as an attending. And the periodontist makes $300,000. So bottom line income right now is $360,000 for the couple. This physician is looking to work at a nonprofit and pursue public service loan forgiveness. And the periodontist is looking for the right time to private refinance their loans and pay off their student loans as they’ve moved into private practice and are not eligible for loan forgiveness.

Andrew Paulson:
But the periodontist is defaulted on one of their student loans because they didn’t make the monthly student loan payments for almost one year. And when I see a scenario where somebody has defaulted on a federal student loan, we want to make sure that we address that first and foremost. Because before we start talking about repayment plans, private refinancing, loan forgiveness, and their options, we need to get this resolved right from the get-go.

Andrew Paulson:
So, there’s four ways to really address default. One is to pay it off. Two is to discharge the debt. Three is loan rehabilitation, and four is to do a consolidation. Number one, repaying the debt can be a good thing if it’s a small amount, but perhaps this is a large loan and you can’t just pay that off. So sometimes that’s too hard to do.

Andrew Paulson:
Two, discharging the debt, which could involve some litigation, could ensue legal, which can get complex. And so, that’s something that I’d say we usually shy away from advising our clients on.

Andrew Paulson:
But number three, loan rehabilitation is really the most common of these four. And the reason why is because this default can get removed from your credit history, but it does take about 9 months to do that. So, you got to be patient.

Andrew Paulson:
And then lastly, the consolidation is also common, not quite as common as loan rehabilitation, which you were just issued a new federal student loan for that loan that is in default and it takes about 30 to 60 days to rehab it.

Andrew Paulson:
So, once we’ve addressed the default, we get back into your student loan plan and what we can do to get you the best payment. So, most loan services are going to say, just enroll in a revise pay as you earn. That’s the best payment plan. And while repay is great for some borrowers, it’s not for everyone.

Andrew Paulson:
And it’s probably not a great idea for this couple where we want to get the periodontist in a position where their interest rate is probably 7%, 6.5%, maybe higher with their federal student loans. And we want to get that down to 3% or 2.5% percent as soon as possible so that they end up paying much less interest over time. So, we would look to private refinance their student loans.

Andrew Paulson:
But what we would encounter is that while their spouse is a resident, they might be strapped with cash flow. Whereas if they did a private refinance on this $600,000 student loan, the required monthly payment on a 10-year term, 3% interest rate would be about $5,600. Couple that with the federal student loan payment, which if they’re in the revised page, it is going to be $2,500. That’s over $8,000 a month, which could be tough when one still is in their residency.

Andrew Paulson:
But now if we take it a step further and we decide to look at filing their taxes separately and have the physician enroll in pay as you earn, we could reduce their payment from $2,500 a month down to $225, which is a huge reduction in student loan payments.

Dr. Jim Dahle:
That’s the physician’s payment.

Andrew Paulson:
Yeah. We’re just looking at the physician’s payment, which ends up dropping their payment by about $2,000. And if we’re looking to go for loan forgiveness, you want to go down the route where you’re paying the least amount towards your student loans and trying to maximize that.

Andrew Paulson:
But this kind of goes even a step further for those in community property states is if the resident makes $60,000 and their spouse periodontist makes $300,000 so household income of $360,000. If you file taxes separately in a community property state, your income will be divided evenly between the two of you. Effectively, $180,000 of income will be reported on each of your individual tax returns.

Andrew Paulson:
And this can be problematic for student loan payments. In particular, when the physician is making much less in their residency. And because when you do your income driven repayment certification form, it’ll ask for your tax return, which is going to report your income at $180,000 instead of $60,000 resulting in you as a resident, having a larger student loan payment.

Andrew Paulson:
But the way that we get around this is using alternative documentation of income. So instead of using a tax return, you can actually use a pay stub on your income certification form.

Dr. Jim Dahle:
And get around that and still be able to take advantage of the pay plus married filing separately strategy, despite living in one of the community properties states. And for those who aren’t aware of what community property states are, they are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, mostly in the west.

Dr. Jim Dahle:
The history behind these is pretty interesting. Actually, most of them were governed by Spain or France at some point, rather than England. And so, it’s more a reflection of the continental legal structure than it is anything else. And it just kind of grandfathered into some of these states, but it has real implications when it comes to asset protection and estate planning and student loan management and all that stuff. But I like that strategy of simply using your pay stubs to document your income.

Dr. Jim Dahle:
It’s really interesting. A lot of people don’t realize that the department of revenue and the department of education are two totally separate departments. They do not talk to each other. There are a lot of strategies and people can argue whether they’re or not, that involve telling the department of education, one thing and telling the department of revenue, the IRS, essentially, something different.

Dr. Jim Dahle:
For example, you can file taxes as married filing separately, and then refile them a couple years later as married filing jointly. And that gives you the best of both worlds, low student loan payments, and eventually the lower tax bill as well. That one seems on certainly the gray area of ethics, but it’s interesting how these departments do not talk to each other. The right hand doesn’t talk to the left.

Andrew Paulson:
Yeah, that’s exactly right. Where you can be filing your taxes separately for student loan purposes and get low student loan payments. And then fast forward three years, you could go back to that tax return that you filed separately and amended to filing jointly and be able to recoup some of that additional tax liability that you pay. Let’s say you paid $5,000 more in taxes filing separately, and you did it because of student loans. You could end up amending that return later on and get that $5,000 back towards you.

Andrew Paulson:
But if you’re going to end up doing this every year for the 10 years that you’re going for loan forgiveness, there’s probably going to be a red flag that goes up. Just another thing you can have in your quiver to reduce your student loan payments to save money.

Andrew Paulson:
So, one other thing when you’re in a community property state, not only you have to be aware of when you’re the lower earner, but when you’re a higher earner, in this situation, if the periodontist ended up going for loan forgiveness, instead of them having an income of $360,000 that’s reported on their tax return, they would get their income reported at $180,000 which would then end up benefiting the higher earner.

Andrew Paulson:
Where we could look at the higher earner, getting the benefit. And then if we wanted to keep the lower earner at that lower amount, that resident salary, then they would use their pay stub. And this is something that’s pretty common that I’ve seen across consults of helping people out, get their loan payments down.

Dr. Jim Dahle:
Yeah, certainly it could work well on the other end as well, where the person with the larger debt is going for forgiveness to help keep their required income down.

Andrew Paulson:
After we kind of talked through that piece, the next question is if I filed my taxes separately, I’m definitely going to pay more in taxes. And I don’t know exactly what the tax liability increase is going to be. I’m not a CPA or a tax advisor, but I’d recommend that you do ask a CPA and tax advisor or use tax software and run the numbers filing jointly versus filing separately.

Dr. Jim Dahle:
Yeah. It’s usually just click one button and it’ll give you the number.

Andrew Paulson:
Exactly.

Dr. Jim Dahle:
With TurboTax or whatever. It’ll spit that out. And I think most people are going to find that either it’s about the same or they’re paying more when they’re doing married, filing separately. Married filing jointly is usually a lower tax bill than married filing separately.

Andrew Paulson:
Yes. And then the bigger question is, “Am I in a better financial position filing taxes jointly or separately?” So, from the calculation we did earlier, they’d be paying about $2,500 a month in their residency in revised pay as you earn by filing their taxes jointly because they have to incorporate their higher earning spouse’s income.

Andrew Paulson:
But if we looked at pay as you earn, filed their taxes separately, we can separate their incomes and you could reduce your student loan payment down to about $225, basically saving you $2,000 a month, which is $25,000 of savings annually. So, then we would need to calculate the tax liability increase from filing your taxes separately versus jointly, and compare it to the increased student loan payments savings. And we rarely encounter situations where you will be better off filing your taxes jointly.

Andrew Paulson:
So, where we’re getting to is by enrolling in pay as you earn and filing your taxes separately, this will allow you to focus less money on the federal student loans and be able to have more cashflow and capital to pay down those private student loans from the periodontist, save for retirement and maximize their loans for forgiveness.

Andrew Paulson:
But one small caveat for those that are considering public service loan forgiveness is if part-time work is in the future, public service loan forgiveness may not be best for you if you’re going to work part time. And that’s because if you’re working part-time, you don’t get payment counts in public service loan forgiveness. And in that situation, you’re probably better off private refinancing or perhaps looking towards long-term loan forgiveness. I don’t love extending out my loans for 20 years, but that’s certainly something that you could consider.

Dr. Jim Dahle:
I guess you can’t be a procrastinator either because those payments also have to be on time. Not only do you have to work full-time, but you have to make on-time payments. One day late, they don’t count. So, you may end up if you’re a procrastinator making an extra 6 or 10 payments, just because you miss deadlines on them.

Andrew Paulson:
Yeah. And one other thing, when you’re keeping your loans federal, don’t pay more than the required federal student loan payment. This can throw your payments into something that’s called pay ahead status and can cause the loan servicer to lose track of your payment count and can kind of mess that up later down the road, if you’re going for loan forgiveness. So, keep great records.

Dr. Jim Dahle:
It’s better to put that money into a public service loan forgiveness side fund invested on the side. And if you end up not going for PSLF, you can whip it out and throw it at your student loans at that point.

Andrew Paulson:
Exactly. And then you have a down payment on your federal student loans, which you can apply that directly to that. And if public service loan forgiveness works out great, you’ve got an extra couple hundred thousand dollars stocked away for whatever reason.

Dr. Jim Dahle:
What if somebody is running into this problem where their student loan servicer can’t count? Is that something your service offers? Do you help them communicate with and negotiate with the student loan servicer to try to get their payment count, to be accurate?

Andrew Paulson:
Yeah. So, I’m not going to hop on the phone with the loan servicer and talk through that, but I can certainly give you best practices of doing that, of good record keeping. The way I do that is you need to keep track of the student loan payments that you make in an income driven repayment plan at a qualifying employer with qualifying loans. So, if you can keep great records of all the payments that you’ve made in public service loan forgiveness, and file your employment certification form, this is really the PSLF certification form that you need to file.

Andrew Paulson:
They say annually, I would do it every six months just to make sure that they’re keeping track of your loan payments. And because I don’t want you to get to the end of your 10 years and not get your loans forgiven because there’s three years that they can’t validate your payments.

Andrew Paulson:
So, we make a plan for that. And I keep supporting documentation for each student loan payment you made. It’s just a bank statement for each payment, which is really easy to keep. And then just keep track of your correspondence with the loan servicer, because they may tell you different things each time you talk to them.

Dr. Jim Dahle:
Yeah. Everything in writing and maybe even record your conversations. Huh? I mean, I’ve run into a few people that have had a lot of problems and you almost have to be paranoid every time you talk to them, taking notes of who you talked to, what their number was, what the date was, what they told you, et cetera.

Dr. Jim Dahle:
But then I run into a few other people where it’s just like a snot and they’re like, “No, no problems. I sent in my form and everything was checked off”. So, I feel like they’re getting better as time goes on.

Andrew Paulson:
And that is one of the number one questions I get right from the get-go. “Andrew, is this public service loan forgiveness thing going to work out? And why is the success rate so low with all these smart healthcare professional program people that have been in school a long time? Why isn’t it working out?” It’s a new program, enacted back in 2007/2008, and we’re starting to see a lot more people that are getting loan forgiveness because they have a plan up front of what to do, and they’re meeting all the requirements, which in that decade or so, this was a lot harder to figure out.

Dr. Jim Dahle:
Yeah, for sure. But now I’ve regularly got people on the Milestones to Millionaire podcasts that have received public service loan forgiveness. It’s not one person, docs are getting it all the time. And I think particularly into 2022 and 2023, we’re going to see lots of doctors receiving public service loan forgiveness.

Dr. Jim Dahle:
All right. So, what are other common questions you get? Do you get the, “What’s the difference between consolidation and refinancing all the time?”

Andrew Paulson:
Yeah. Because this is a really easy one to get mixed up. You hear this consolidation and you don’t know whether that’s federal or private. So, a federal direct consolidation is when you are issued a new loan from the federal government, which consolidates all your outstanding federal student loans, generally into two loans, a subsidized and unsubsidized portion.

Andrew Paulson:
And for most of you, the unsubsidized portion is going to be larger for graduate school.
And then it rounds your interest rate one eighth of a percent up and takes away at average interest rate for all your loans to calculate your interest rate. So, you can no longer pay down on those larger, direct plus grad loans versus your smaller direct Stafford unsubsidized ones. And it’s just going to become effectively one loan. And it generally allows you to have more repayment plan options, and the ability to obtain loan forgiveness.

Andrew Paulson:
So, if you have some older FFEL loans and you want to be in repay or pay, you need to do a direct federal consolidation to do that. But I would bear in mind that if you have payment history and then you do direct federal consolidation, your payment history is going to go to zero. It’s going to start over again.

Andrew Paulson:
And I’ve seen a number of clients of mine that have done multiple consolidations, federal consolidations down the road because they just thought that was the thing to do. So, make sure when you’re doing it, that you’re doing it at the right time. And most of the time that’s right when you graduate med school.

Dr. Jim Dahle:
Yeah. So, the benefits of consolidation, obviously you get one loan, so you only have to worry about one loan. You can get the ball rolling, counting your payments toward public service loan forgiveness, but that’s about it. Those are the only real benefits to consolidation. Am I missing anything else? I guess maybe you can get some loans that you wouldn’t otherwise qualify for and basically combine them into a direct loan. Is that the one you’re thinking of?

Andrew Paulson:
Yeah. So, that’s one part taking some older loans and then doing a direct federal consolidation and then getting them eligible for repay and paye and loan forgiveness. But I’d also say we’re in a weird time right now where federal loan and interest rates are at 0%. But normally if this couple is graduating in May or June of this year, they’re going to go into a six-month grace period before they need to making payments.

Andrew Paulson:
And normally your loans are going to be continuing to accrue interest over those six years, which example number one, it’s $35,000 of interest for the entire year. That’s going to be another $17,500 of interest that is accrued over six months.

Andrew Paulson:
And what you could do is you can do a direct federal consolidation and opt out of that six-month grace period and get into repay or paye as you earn four months earlier and start getting payment count towards public service loan forgiveness four months earlier. Which if you look at four months more as a resident versus a high paid attending, I’m going to take that deal every time having more payments as a resident versus an attending, because that’s going to save you thousands of dollars over time.

Dr. Jim Dahle:
Yeah. That could be $10,000 or maybe even $20,000 in lower payments. So pretty good deal there for sure.

Andrew Paulson:
So, that’s the federal. And then for private refinance or private consolidation, you can take any number of your existing loans, federal or private and consolidate them with a private refinance and get that down to one loan. A lot less headache and paperwork. And then your loan payment works just like a mortgage, right? You have some high required payment. You can make that or above that and you just pay that down as soon as possible and you are really likely to get a lower interest rate converting it to private.

Dr. Jim Dahle:
Okay. So, let’s put you on the spot. Let’s say you’re one of these people that has been sitting around for the last year on their federal student loans. They’re not going for public service loan forgiveness. They’re planning to refinance eventually trying to decide whether to do it now or wait for October. Do you start looking at this Common Bond 0% deal? Or are you going to wait a few more months and see what happens?

Andrew Paulson:
Yeah. With interest rates very, very low right now and if I am absolutely certain that I’m not going to do loan forgiveness and with the influx of tens of thousands of people that are going to try to private refinance, right when the announcement is made of payments being reinstated, it’s probably a great idea to look at an option like Common Bond or any of the other private refinancers out there and at least lock in a lower interest rate. Because then you have a 30-to-60-day period generally that you can decide to move forward on that rate. So, I would certainly consider that and have the mentality of getting these paid as soon as possible.

Dr. Jim Dahle:
All right. If people want to hire you for some student loan advice and coaching, what’s the best way for them to get in touch with you?

Andrew Paulson:
Yeah. The best way to get in touch with me is to go to studentloanadvice.com and read about us studentloanadvice.com/book and book a meeting there.

Dr. Jim Dahle:
And you’ll take doctors, dentists, other high-income professionals, even people that aren’t high-income professionals. Correct?

Andrew Paulson:
Yeah. A lot of people think that I’m exclusive just to physicians. I love working with healthcare professionals and do every day, but I’ve also met with business executives, people at law school, so I’ll meet with anybody that needs help with their student loans.

Dr. Jim Dahle:
What if the Tour de France cyclist came to you for help with their student loans, would you take them?

Andrew Paulson:
I probably have to do a bike ride with them first and have them tell me about all the riding over there. I love following cycling but I would love to help them out.

Dr. Jim Dahle:
Awesome. My problem is, I don’t think I can keep up with anybody who rides over there. But hey, you know what? Toms Skujiņš if you need student loan advice, we’ll give it to you free. So, sign up right now and come on over, we’ll get you taken care of. We’re glad to have you as a listener.

Dr. Jim Dahle:
Andrew, you probably didn’t hear this part, but I opened the podcast talking about some feedback we got from a Tour de France cyclist about the podcast.

Andrew Paulson:
Oh, awesome.

Dr. Jim Dahle:
Anyway, thanks for what you do. If people want to get in touch with you studentloanadvice.com. This is a few hundred dollars that may save you tens of thousands of dollars from mismanaging your student loans. If you need it, if you got any sort of a complex situation at all, give Andrew a call, spend an hour with him. It’ll be well worth your time. Andrew, thanks for being on the podcast again.

Andrew Paulson:
Thanks for having me. I appreciate it.

Dr. Jim Dahle:
All right. That was great to have Andrew back on the podcast. Thanks to those of you who have been leaving us five-star reviews on Apple podcasts. It really does help spread the word. Our most recent one came in from Alexander. He said, “Extremely helpful and concise. I’m a fourth-year medical student in California. I found Dr. Dahle’s podcast and website a few months back and I’m listening to this every day. Each podcast has its own learning objectives. And if you don’t remember a topic discussed in that podcast, another one will address it. And so, you’ll really solidify the info one way or the other. One of the best finds of this year”.

Dr. Jim Dahle:
Awesome. That’s probably more typical of us to hear from medical students and residents and doctors that it is from Tour de France cyclists, but we’ll take you in no matter who you are if you’re interested in learning, and becoming financially literate and financially disciplined. It’s amazing if you have those two things, it’s like having a super power in our world these days, because they’re so rare. That combination is so rare.

Dr. Jim Dahle:
This podcast is brought to you by the Laurel Road for doctors. Laurel Road is committed to serving the financial needs of doctors. You take care of us, it’s time someone took care of you.

Dr. Jim Dahle:
With the new Laurel Road high yield savings account, you can earn 10X the national average. It’s especially designed for doctors. Our account costs nothing to open and has no monthly maintenance fees. Information is as of June 10th, 2021.

Dr. Jim Dahle:
For terms and conditions, please visit www.laurelroad.com/wci. Laurel Road is a brand of KeyBank, N.A and a member at the FDIC, an equal housing lender. NMLS number 399797.

Dr. Jim Dahle:
Keep your head up, shoulders back. You’ve got this and we can help. We’ll see you next time on the White Coat Investor podcast.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.

 

 

The post Will Student Loans Be Forgiven? – Podcast #214 appeared first on The White Coat Investor – Investing & Personal Finance for Doctors.

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