Public Service Loan Forgiveness (PSLF): What Doctors And Hospitals Need To Know

The Public Service Loan Forgiveness (PSLF) is a federal program that forgives student loans for people who work for government or non-profit organizations. There are several eligibility requirements but many physicians qualify and can have hundreds of thousands of dollars of educational debt eliminated. How can a physician maximize the amount of money forgiven? Should PSLF eligibility be a factor in job selection? Should hospitals and other healthcare organizations promote PSLF eligibility as an employment incentive? As usual, the answers are all in the details.

 

What is the PSLF program?

Public Service Loan Forgiveness is a program sponsored by the U.S. Department of Education. It was created by the College Cost Reduction and Access Act of 2007. This is a different program than the one-time student loan forgiveness program proposed by President Biden that would forgive up to $20,000 to anyone with student loan debt. In order to be eligible for the PSLF, an applicant must be employed by a qualifying employer for 10 years. Therefore, the first applicants became eligible in 2017, ten years after the law was passed. There were problems initially and 99% of the first 28,000 applicants were denied. Congress attempted to fix these problems with new legislation in 2018 but confusion and misinformation about eligibility requirements persisted. In, 2019, President Trump’s proposed budget included elimination of the PSLF program; however, the democrat-majority House of Representatives did not cut the program. By April 2020, only 2,215 borrowers had student loans forgiven under the PSLF, a denial rate of 98.5% since program inception. To address many of the problems with the PSLF, the federal government granted a temporary waiver for PSLF applications between October 6, 2021 and October 31, 2022. This waiver allowed application approval for people who were previously denied PSLF because of issues such as past late payments on loan installments. There are new, permanent changes to the PSLF program that will go into effect in July 2023 that will further address some of these issues. The current eligibility requirements are:

1. Have a William D. Ford Federal Direct Loan. Other federal student loans are not eligible but may be able to be consolidated into a Direct Loan to become eligible.
2. Be employed by a qualifying employer. These include federal, state, local, or tribal governments and not-for-profit organizations. This also includes the U.S. military and the Peace Corps.
3. Work full-time for that employer.
4. Repay loans under a qualifying income-based loan repayment plan. To qualify:
   1. Each payment must be for the full amount owed for that payment period
   2. Payments must be made no later than 15 days after the payment due date
   3. Payments must all have been made while employed by a qualifying employer
5. Previously make 120 loan installment payments (i.e., 10 years of repayments). All of these must have all been made after 2007 (inception date of the PSLF).
6. Have used a qualifying income-driven loan repayment plan. The type of repayment plan is critical and many common repayment plans are not eligible for PSLF including the Standard Repayment Plan for Direct Consolidation Loans, the Graduated Repayment Plan, the Extended Repayment Plan, and the Alternative Repayment Plan. Repayment plans that are eligible for PSLF include:
   1. Pay As You Earn Repayment Plan (PAYE Plan)
   2. Revised Pay As You Earn Repayment Plan (REPAYE Plan)
   3. Income-Based Repayment Plan (IBR Plan)
   4. Income-Contingent Repayment Plan (ICR Plan)
7. Submit a PSLF certification and application form every year to the Department of Education. This form requires entries by the borrower and also requires a signature from an authorized official of the employer who has the authority to certify the borrower’s employment. It is important that the borrower knows who to go to in the organization to get this signature:

Once the PSLF is approved, the federal government then forgives whatever amount remains on the Federal Direct Loan. Therefore, an important strategy is to make the lowest allowable amount in monthly payments so that there is the greatest amount left on the loan after 120 payments. The forgiven amount is not subject to federal income tax.

Many physicians are eligible

One of the results of the COVID pandemic was an acceleration of the trend for physicians to be employed by hospitals rather than private physician practices. A study reported in 2022 by the Physician Advocacy Group found that 75% of U.S. physicians are employed by a hospital or other corporate entity (such as a health insurer). Currently, 341,200 physicians (52% of U.S. physicians) are employed by a hospital.

The American Hospital Association reports that there are 6,093 hospitals in the United States. Of these, 1,228 are for-profit hospitals, 2,960 non-governmental not-for-profit hospitals, 951 state/local governmental hospitals, and 207 federal governmental hospitals. In addition, there are 635 non-federal psychiatric hospitals and 112 other hospitals (such as prison hospitals); many of these are also either not-for-profit or operated by a state or federal government. In other words, more than 70% of American hospitals are qualifying employers for PSLF purposes.

Medical school is expensive. Currently, 73% of medical school graduates have educational debt at the time of graduation. The average debt is $250,990 ($202,450 for medical school and $48,540 for undergraduate school). Many physicians funded their education at least in part through Federal Direct Loans. These loans are for $5,500 – $12,500 per year for undergraduates and up to $20,500 per year for graduate or professional students. The total maximum is $138,500. They are particularly attractive because they have lower interest rates than private educational loans and do not have as strict credit history requirements as private educational loans. Most students use a strategy of maximizing their Federal Direct Loan amounts before taking out more expensive and more restrictive private loans, for example, from a bank or credit union. There are other federal student loans that allow the student to borrow larger amounts of money. For example, a grad plus loan from the U.S. Department of Education can be for the entire amount of the cost of professional school. Other federal student loans (such as FFEL Program loans or Perkins Loan Program loans) are not themselves eligible for PSLF but can be consolidated into a Federal Direct Loan, thus increasing the amount of money that can be eventually forgiven using PSLF.

There are other loan forgiveness programs that physicians may be eligible for such as the National Health Service Corps Loan Repayment Program (underserved communities), the National Health Service Corps Students to Service Loan Repayment Program (primary care physicians in physician shortage areas), the National Health Service Corps Substance Use Disorder Workforce Loan Repayment Program (substance use disorder treatment facilities), the National Health Service Corps Rural Community Loan Repayment Program (substance use disorder treatment facilities in rural areas), the Indian Health Service Loan Repayment Program (Native American communities), the Armed Forces Loan Repayment Program (military physicians), and State Student Loan Forgiveness Programs (states with physician shortages). The PSLF program has the broadest inclusion criteria and is available to more physicians than the other loan forgiveness programs since the PSLF does not require moving to an underserved area, working in substance use disorder treatment, or joining the military.

I’m a medical student. How does the PSLF affect me?

The PSLF is designed to forgive student debt. Medical education is expensive and most of the educational debt generated by physicians is from medical school (rather than undergraduate college). It is important to be strategic when incurring educational debt. Here are some specific tactics that medical students can use:

• Maximize PSLF-eligible loans. This means starting with the William D. Ford Federal Direct Loans. Only use other student loans after you have taken as much as permitted from the Federal Direct Loans. Try to avoid private loans if at all possible.
• Consolidate other federal student loans into a Federal Direct Loan as soon as possible. Many loans can be consolidated into a Federal Direct Loan and this can greatly increase the amount of money that will eventually be eligible for PSLF. However, consolidation resets your PSLF eligible payments to zero so if you have already made payments on your Federal Direct Loan and then consolidate, you will lose credit for all of those payments you have previously made. Ideally, you should consolidate all loans immediately after graduation from medical school, before you make your first loan repayment installment in residency.
• Keep your total debt as low as possible. Private medical schools are more expensive than public medical schools and do not necessarily result in a better education. Do a careful analysis of the total cost of each medical school when selecting which schools you apply to. Keep your living expenses low by living with roommates, cooking your own meals, and making purchases judiciously.
• Don’t forget scholarships. Unlike loans, scholarships do not need to be repaid. A $50,000 scholarship beats a $50,000 loan every day. Check with your medical school’s office of financial aid and apply for any scholarships that you are eligible for.
• Know whether your residency employment will be eligible for PSLF qualification. Most residencies are at not-for-profit hospitals but if your residency is at a for-profit hospital and your employer during residency is that hospital, then your loan payments made during residency will not count toward the 120 necessary to be eligible for PSLF. Moreover, you lose the advantage of making your lower monthly loan payments when your income is lower during residency and as a result, when you do eventually apply for PSLF, you will not be able to have as much money forgiven. When applying to residencies, ask if the organization that you get your paycheck from either is a government employer or is a tax-exempt employer under Section 501(c)(3) of the Internal Revenue Code.

I’m a resident. How does the PSLF affect me?

As soon as you start residency, you are employed and thus must start making payments on your student loans. However, with income-driven repayment plans, the amount you pay each month depends on your annual income. Here are some tactics to pay the least over your 10-year repayment period in order to have the greatest amount forgiven under PSLF:

• Start making loan payments early. Do not opt for using grace periods or deferment to delay starting payments. The amount of monthly payments depends on how high your income is. Your strategy should be to make as many payments as possible when your income is low during residency and make as few as possible when your income is higher as an attending. By using this tactic, you will have a larger amount still owed on your loan when you become eligible for PSLF and therefore will have a larger amount that can be forgiven.
• Don’t pay Federal Direct Loans off early. It feels really, really good to be debt-free and it can be tempting to try to make extra, early payments on student loans during residency and as a new attending physician. However, if you work for an employer that qualifies you for PSLF, then every early loan payment that you make is less money that can be forgiven once you are 10 years out of medical school. With PSLF, it is far better to be debt-smart than to be debt-free.
• Keep your annual income low. As a resident, it can be tempting to do a few moonlighting shifts each month to buy a new car or to go on a Caribbean vacation. But the money earned from those moonlighting shifts increases your annual taxable income and therefore increases your monthly payments on an income-driven repayment plan. This will result in a lower amount of loan forgiveness after you have made 120 monthly payments and are eligible for PSLF. On the other hand, contributing to a 403b, 457, or traditional IRA can reduce your annual taxable income, resulting in a lower monthly repayment amount which then increases the total amount of your loan that can be forgiven by PSLF. Each physician weighs the benefits of extra disposable income against the cost of higher loan payments differently.
• If your spouse makes a lot of money, consider filing separately for federal income taxes. This keeps your own taxable income low and thus keeps the amount of your monthly payments as a resident low. The result is that a larger amount of your loan can be forgiven by PSLF. By filing separately rather than jointly, you may pay slightly more in income taxes as a resident but the amount of money eventually forgiven could be much greater.

I’m a physician. Should I base a career choice on the PSLF?

The PSLF program is attractive to doctors since it has the potential to wipe out hundreds of thousands of dollars of educational debt. But for a physician completing residency or fellowship, basing a job choice on whether or not that job will result in PSLF eligibility can be hazardous. There are several reasons why a new physician should not base a career decision mainly on PSLF eligibility.

• It might go away. A PSLF applicant must first work for a qualifying employer for 10 years. Ten years is an eternity when it comes to federal funding. It is 3 different presidential terms and 5 different congressional terms. Inevitably, there will be swings in which political party controls the presidency and the U.S. House of Representatives. The PSLF has been on the chopping block before and it may be again before new physicians entering the workforce this year become eligible.
• Don’t sell your dreams. Maybe you have always aspired to take over a solo practice in your home town. Maybe your ideal job is to work for a for-profit healthcare company such as HCA. Maybe you would like to work part-time for a few years when your children are young. In these situations, you won’t be eligible for the PSLF. But if PSLF eligibility means taking a job that you won’t be passionate about or compromises your desired work-life balance, then the cost of PSLF may be too high.
• You might change your mind. I am a unicorn – a doctor who stayed at the same health system as a medical student, resident, fellow, and attending physician for 41 years. Few physicians stay with the same employer for their entire career. Historically, between 40% and 70% of physicians change jobs in their first 5 years of practice. During the first 2 years of the COVID pandemic alone, 43% of physicians changed jobs. Maybe your spouse has to relocate to a different city. Maybe you don’t get along with your colleagues. Maybe your hospital closes. If you change jobs in the first 10 years of practice and your new employer is not a qualified employer for PSLF purposes, then you won’t be eligible for PSLF. On the other hand, once your loans are forgiven by PSLF, you are free to go work for whoever you want, wherever you want.
• You might be financially better off without PSLF. Government jobs usually pay less than private practice jobs for physicians. Not-for-profit hospitals often pay physicians less than for–profit hospitals. With PSLF, you will still need to make required repayments every month for 10 years and the amount that you will be forgiven is only the amount remaining on your Federal Direct Loans at the end of those 10 years. In the long run, you may come out ahead financially by taking a job that does not qualify for PSLF but pays a few thousand dollars a year more than a job that qualifies for PSLF. This is particularly true if the amount of money you take out for Federal Direct Loans is relatively modest, for example, less than $50,000. On the other hand, if you estimate that your student loan balance after your first 120 monthly payments will be $500,000, then taking a private practice job in order to earn an extra $20,000 per year compared to an academic job does not make financial sense.
• You aren’t compulsive with paying off bills. To be eligible for PSLF, you have to make your repayments in full, every month. If you miss monthly payments or run out of money at the end of the month and can’t make a full payment, then you lose eligibility.
• You’re prone to getting caught up in moral dilemmas. When the federal government forgives educational loans, it means that the American taxpayers are paying for your education. For some people, this is perceived as a handout and physicians earn enough that they may feel they don’t deserve a handout. Elected officials from 11 states declined to participate in Medicaid expansion because they were ideologically opposed to taking federal tax money to care for the poor in their state. If you are a person who won’t be able to sleep at night if the federal government helps pay for your medical school debt, then the PSLF may not be for you.
• Shorter rather than longer residency. The 120 payment clock starts ticking once you graduate from medical school. As a resident and fellow, you earn less than an attending physician but with an income-driven repayment plan (such as PAYE or REPAYE), you also have smaller monthly loan payments while still in training. If you enter a specialty that requires 3 years of residency, then you will have 7 years of high monthly payments as an attending physician before you are eligible for PSLF. However, if you enter a specialty that requires 7 years of residency and fellowship, then you will only have 3 years of high monthly payments as an attending physician before PSLF eligibility. Physicians with the longest residencies/fellowships have the most to gain financially from PSLF.

The bottom line is that hoping to qualify for PSLF should never be the main factor in career decision making. However, when it comes down to two equally attractive jobs, qualifying for PSLF can be a tie-breaker.

I employ physicians. How can I leverage PSLF?

If you are the medical director of a not-for-profit hospital, use your hospital’s PSLF qualification as a physician recruitment incentive. Here are some tactics you can use to your advantage:

• Tell physician recruits that the hospital meets PSLF employer qualification. Many residents and fellows do not fully understand the differences between for-profit and not-for-profit hospitals and often accept jobs without even knowing which type their new hospital is. There is also a difference between working for a not-for-profit hospital and working at a not-for-profit hospital. A physician employed by a private practice medical group that works at a not-for-profit hospital will not qualify for PSLF.
• Advertise that the hospital signs the employment certification each year. This is a required element of the PSLF application. By telling physician recruits up front that you are aware of the need for these annual certifications and are willing to sign them in a timely fashion, you indicate to the recruits that you are knowledgeable about the PSLF process and will be there to assist them without creating any barriers. Medical directors and hospital administrators have hundreds of forms that need to be signed every month and they often get behind in completing them in a timely fashion – make sure that physician recruits know that you place a priority on the PSLF certification signatures.
• Have a designated physician loan navigator. Hospitals often agonize over whether or not to pay a physician a one-time $20,000 signing bonus. But PSLF can amount to as much as a $650,000 savings to a physician with no cost to the hospital. Therefore, ensuring that physicians meet eligibility and apply correctly can translate to millions of dollars of financial benefit to the medical staff. Designating a staff member from the hospital’s finance department or medical staff office to devote a percentage of their FTE to helping physicians manage their loans can be a terrific hospital investment. Responsibilities could include helping physicians consolidate federal loans into Direct Loans, helping fill out PSLF applications, ensuring employer certification signatures get done, helping physicians develop strategies to ensure full and timely monthly payments, etc.
• Provide regular PSLF updates. There is no class on financial health in medical school. Most newly trained physicians do not fully understand investing, taxes, retirement planning, or personal budgeting. Because the first borrowers only became eligible for PSLF in 2017, many physicians are not even aware that the program exists, particularly if they graduated from medical school before 2017. By incorporating news about developments in the PSLF program into your medical staff meetings, you send a signal to the physicians that the hospital cares about them. Doctors talk to each other and when your medical staff tell their friends that the hospital cares about physician financial health, it helps you to attract top physicians. PSLF then becomes a line item for the medical director’s annual “Workplace of Choice” goals.

Never turn down free money

If you are a physician with Federal Direct Loans and have been employed by a government or not-for-profit healthcare organization for the past 10 years, then you may be eligible for free money with no strings attached. You have won the lottery without having to buy a lottery ticket. This kind of thing rarely happens in life so don’t let the opportunity pass by. If you are a medical director or administrator at a not-for-profit hospital then many of your doctors are eligible for free money. If you help them get it, it will foster their loyalty for years to come.

February 12, 2023