Second in a three-part series on student loan forgiveness programs you shouldn’t overlook
Many graduates with medical degrees are overwhelmed with their federal student loan debt.
Luckily, there are several student loan forgiveness programs out there that can significantly lessen the financial strain.
Two strong options for healthcare professionals are Public Service Loan Forgiveness (PSLF) and the National Health Service Corps (NHSC).
PSLF is an impactful option for healthcare professionals if you have a substantial amount of student loan debt. For those with a more moderate amount of student loan debt, then the National Health Service Corps might work better for you.
Public Service Loan Forgiveness
One of the best forgiveness programs available to those in medical careers is PSLF because of the widespread availability of qualifying jobs in the medical field and potential to forgive balances into the six figures.
If you work for an eligible government agency or nonprofit, PSLF will forgive your remaining federal student loan balance after 10 years of making qualifying payments through an income-driven repayment plan (which lowers your monthly payments based on your income).
And, even better, the forgiven balance is not taxable to you.
Only federal Direct loans qualify for forgiveness with PSLF. This tool from the Federal Student Aid’s website can help you determine if your loans may qualify.
PSLF can work for people in a wide array of careers, but it often works well for medical professionals due to the amount of qualifying jobs available.
For example, 2017 data from the American Hospital Association shows roughly 75% of the hospitals in the U.S. would qualify under PSLF. State and local government owned hospitals make up about 20%, and private, not-for-profit hospitals total about 55%.
That leaves only roughly 25% of hospitals in the United States that are non-qualifying, private, for-profit hospitals.
PSLF also may work great for those going into residency programs, including dentists who work in public or not-for-profit hospitals. These positions are often geared toward dental emergencies and traumas or towards caring for special health needs that require dental care.
To see which jobs qualify, use this helpful tool.
To maximize your benefits from PSLF, you will want to make the lowest payment amounts possible, which will increase your forgiven balance. You can lower your payment amounts by focusing on several factors, including:
1. Lowering your adjusted gross income (AGI)
2. Choosing the income-driven repayment plan with the lowest payments
3. Not paying extra toward your qualifying federal student loans.
Since calculated IDR plan payments are based off a percentage of your AGI, if you lower your AGI, you will lower your required payments.
A few planning strategies to lower your AGI include making contributions to a health savings account (HSA) and pre-tax retirement accounts, such as 403(b) and traditional IRA. These are also viable long-term savings vehicles to take advantage of if possible.
Finally, do not pay anything above the minimum payment toward your qualifying student loans since anything above the required payment is on track to be forgiven.
Let’s look at a hypothetical example. A medical professional with a $300,000 federal student loan balance starts qualifying for PSLF in their first year of a three-year residency where their income is $50,000 a year. Income increases to $250,000 a year after residency for the next four years and then to $300,000 for the remaining three years of qualifying for PSLF. This professional pays nothing above the minimum payments toward their loans and ends up with total payments of about $157,000 during the 10 years and about $277,000 forgiven at the end of their 10 years. By qualifying for PSLF, they saved roughly $225,000 instead of paying off the loan on the standard 10-year repayment plan, which would have cost them total estimated payments of $382,000.
Note: This forgiveness example includes the assumptions of a single borrower with one Direct Unsubsidized loan with an interest rate of 5% who has no dependents. This borrower is using either PAYE or New IBR as their IDR plan.
National Health Service Corps
NHSC is a healthcare-specific forgiveness program that can provide up to $50,000 toward your student loans in exchange for two years working in a health professional shortage area (HPSA).
The Health Resources and Services Administration designates populations, geographic areas or specific facilities as HPSAs based upon availability of care.
The program is looking for primary care medical, dental, and mental and behavioral professionals to work in these shortage areas. You can find out if your designation qualifies on the NHSC program fact sheet.
NHSC determines student loan forgiveness amounts based on the HPSA score and whether you work part-time or full-time.
Each HPSA has its own score varying from 0 to 25 (for primary care and mental health professionals) and 0 to 26 (for dental health). These scores are based on a variety of factors, including population-to-provider ratio, percentage of the population at 100% federal poverty level, and travel time to the nearest source of care.
The higher the score, the higher the need is for healthcare professionals and the higher student loan funding awarded.
If your HPSA site has a score of 0-13, you may receive up to $30,000 working full-time and up to $15,000 working part-time. If the score is between 13-26, you may receive up to $50,000 working full-time and up to $25,000 working part-time.
Just like PSLF, a great benefit of this program is that your awarded student loan forgiveness is not taxable to you.
PSLF and NHSC can work well for people in a variety of medical careers. These are two of the top student loan forgiveness programs available to healthcare professionals and likely could be valuable options.
While PSLF and NHSC are great options, do not forget to also look into what other student loan forgiveness programs are available to your specific career in case those fit your situation better.
For example, if you are a registered nurse, nurse practitioner or nurse faculty member with qualifying nurse debt, the Nurse Corps Loan Repayment Program (Nurse Corps LRP) could work for you. This program forgives up to 85% of your nursing education debt in three years.
To be eligible, you must have received your education from an accredited school of nursing in the U.S. and work full-time in an eligible Critical Shortage Facility (CSF), which is a nonprofit healthcare facility affiliated with or serving an HPSA.
You can see what qualifies as a CSF on the application and program guidance sheet from the Health Resources and Services Administration, which oversees Nurse Corps LRP.
Unlike PSLF and NHSC, the forgiven balance is subject to federal taxes. The Nurse Corps LRP withholds the taxes from your forgiven balance so you do not have to pay them yourself. Unfortunately, this lowers your student loan payment amount rewarded.
This program is not currently taking applications as of May 2019, but you can sign up for email updates to notify you when the next application cycle opens.
If you are looking for help navigating your full financial picture and understand how to incorporate some of these strategies to maximize the benefits, contact our team at Wipfli Financial.