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Why I am saying goodbye to public service loan forgiveness FOREVER.

Dr. J1 Comment

Hello my friends,

Have you ever taken out a car loan, drove your new car off the lot, made a few monthly payments on the loan, then had such a clean and responsible driving record that the bank came back and told you that you don’t have the pay back the rest of the loan balance? Or how about if you have ever used your credit card to buy, lets just say, some food, clothes, and toiletries for the local homeless shelter as a good deed for the holidays and then the credit card company turns around tells you that you don’t have to pay back the balance and they will write the slate clean for your good service? The answer to these completely hypothetical situations is a definite “no” for pretty much 100% of everyone reading this right now.

My point is that public service loan forgiveness (PSLF) is similar to those situations mentioned above.  You are working in service to the public for ten years in order for the government to completely write your balance clean.  In today’s modern day banking system, where interest rates and profit margins are similar to the modern day gold rush, in my opinion there is no such thing as a free lunch.

As I have mentioned before, the bulk of my student loans have been with Fed Loan Servicing at an enormous rate of 7.375%. I have deferred making any moves toward refinancing privately because of the great appeal of doing loan forgiveness. For those new to the game, let me remind you that there is no turning back once you refinance out of a government loan.  Thus, you need to be absolutely certain that you do not want to pursue loan forgiveness once you turn down this one way street.

As you can probably guess, I remain cynical about the PSLF program.  There are a multitude of sources that are unclear as to the future of the program. Some sources say that they are going to cap the forgiveness amount to $57,000, others say that they will do away with it completely.  Potentially by retiring the program the federal government can save 24 Billion dollars.  Secondarily, there’s no reason why the federal government can’t tax you on every penny that is forgiven.  This taxable income can amount to a huge IRS bill.

Currently we are 4 months into 2018, and 2017 was the first year that any student loan would have been eligible for forgiveness.  I have yet to hear of any person who has had any amount of their debt forgiven.  I have done an internet search to see who were lucky enough.  Instead, I have only come across articles on people’s disappointment when they find major problems with qualifying for the program for one reason or another.  Common reasons being that they were not enrolled in the correct repayment plan or their original loan was not a Direct Loan.  Imagine ten years of tailoring your career choice to this program and ten years of planning for this debt to be forgiven only to find out that you have to start all over again at year one.

Lets review this chart again on my person loan situation from Studentloanhero.com loan forgiveness calculator:

(These numbers are based on $490,000 of debt, $210k a year salary, 7.375% interest rate, family of 2, married)
Screen Shot 2018-03-22 at 8.06.00 PM.png
Total amount of potential forgiveness under PSLF under the various repayment plans.

The interesting thing to note is that three out of four of these forgiveness amounts are actually higher than my current student loan balance!  Meaning, that for ten years I could be making payments on my student loans and the loan balance could actually go up, not down!  That also means that at ten years if there is a problem with PSLF and I happen to not qualify for forgiveness I would have just wasted ten years of hard earned payments and may actually be in a worse situation than when I started. If anyone remembers the sub-prime mortgage market in 2005, banks were lending mortgages that were too good to be true.  Unfortunately we know what happened with the housing bubble that burst and suddenly many people actually owed more than what their house was worth.  We are not connected to a tangible asset here, but we are connected to our earning potential.  This ratio is important when considering the size of your student loan debt and the potential to repay. With a loan balance that is increasing in size, this may tip a person underwater completely.

The last personal reason I would like to share as to why I am opting out of PSLF is that I will not be working in public service.  I have attempted to find a job in public service and have looked into employers that carry the coveted 501-3b non-profit status.  As a hospitalist, there are very few opportunities that exist for me which may seem as a shock being a physician.  If I were a outpatient physician, this would be a more realistic opportunity for me.  However, I just can’t see sacrificing more years into a job area that I don’t have 100% interest into. I would rather not sacrifice my years of training to putting in my time card just for loan forgiveness that may or may not even qualify in the end.  I made a commitment when I signed that master promissory note, and now I have to take responsibility for that obligation.  The financial commitment I made, while sometimes sleep disturbing, still has given me a career without any regrets for the lives I touch, and the incredible job I get to do.

I beg you all reading this to please note that these are my own personal views and tactics in battling my own student debts.  Please do your own research, make your own informed personal decisions based on your own unique situation, and most of all, keep the student loan hustle going!

Dr. J

Yes, Home ownership is still possible with debt.

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Yes, I have my student loans. Yes, I might be paying on them for a long time. But that doesn’t mean I am subject to living out of rentals. If it makes sense, I encourage ownership over renting a house. While it is scary taking out yet more loans and adding more debt to the collection, a house is a tangible asset that can easily become not only your sweet haven but also the largest investment of your life. Your hard earned dollars will go toward something which you may very well see a return on rather than in rental la la land. Secondly, you may see your house value increase after purchasing giving you what is called capital gains and equity. Even if you do not eventually pay off the mortgage, the increased value can mean some extra cash in your pocket when you go to sell.

Depending on what market you live in, ownership will make more sense. First of all, if you are lucky enough to live in an area where the housing prices are reasonable enough you could be looking at a monthly mortgage amount competitive with the monthly rental amount. Thus, this situation is a no brainer. Ownership also makes sense if you are planning on staying put for a long time. There are no new leases and no landlords to deal with. Furthermore, you can create that dream space, man cave, perfect zombie apocalypse hideout that you’ve always wanted.

While most would agree with all the great things about home ownership, qualifying for a mortgage is another story. Is this feasible with student loans? Absolutely. I just closed escrow on a house and I’m moving in with my half a million dollars of student loans strapped to my back. Here are some of my tips to qualify for a mortgage:

1. Its all about late payments. Late payments are displayed on your credit as 30, 60, or 90 days late. Do not be late on anything! I repeat, do not be late on anything! Not only do late payments negatively affect your credit score, mortgage companies see late payments as a struggle to pay bills.

2. Credit score. I once heard someone say that to live very well in America you don’t need a lot of money. You need good credit. Nothing holds more true than taking out a home loan. Protect your credit like its your golden ticket. I will eventually post another blog on this issue.

3. Debt to income ratio. This is simple to calculate. Take all your monthly payments and add them up. Divide this by your monthly income. Banks generally want to see a 40% or less DTI ratio to qualify for a mortgage. This is also how you can determine how much house you can afford. How much you can afford as a monthly payment is processed backwards to determine the overall purchase price of a house you can afford. The caveat is that certain things that are monthly payments are not counted in your DTI ratio such as utilities, cell phone, any type of insurance, health care bills, and all others that do not get reported to the credit bureaus. There are certain banks that may actually exclude student loan payments in calculating your DTI as well. The mortgage I am receiving included. This is how I was able to qualify for a house using just my income alone without my husband, as the bank I am using has completely ignored my monthly student loan payment. For specific questions on this feel free to contact me.

4. Down payments. Gone are the days of 2005 when you could buy a house with zero money down. These days, a down payment of 5-10% plus closing costs seems to be industry standard. So expect some up front money to get into the house. Remember this is a long term investment.

5. Time on current job. Mortgage banks are interested in one thing. Job stability. Don’t expect to be approved for a loan if you have changed jobs multiple times in the last few years. There could be some leeway if you are changing employers in the same line of work, but if you are working as a limo driver for 3 months, then a chef for 6 months, then a teacher for 4 months this is a huge red flag. As a physician I won’t run into much trouble changing employers as I would likely remain in the same line of work. They want to see 2 years of stable employment in the same line of work.

There are a few highly valuable tips I can give you if you are considering owning a house. Don’t be discouraged by the consideration of taking on more debt while still burdened with high student loans.  You can pay $1000 a month in rent or $12,000 a year to someone else, or you can have that money go to a tangible asset.  If you have determined that you are not able to qualify for a mortgage at this time, there’s no room to panic.  Now’s the time to speak with a mortgage banker and determine what it is that is disqualifying you.  You may not qualify now, but with a couple of changes you may be able to qualify in a few months or a year from now.  Most importantly, don’t let your student loan burden weigh you down from continuing to invest in your financial future.  Develop a plan for your student loans and stick with it.  Have that plan in place prior to pursing a mortgage.  And as always, keep the student loan hustle going!

Dr. J

 

Struggles of FedLoan Servicing and delayed payment processing.

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And my saga continues…

The problem with being so obsessed and analytical with my student loans is that every last detail is analyzed. My current struggle is that with FedLoanServing payment processing.

My giant loan of $490k has an interest rate of 7.375%. What this boils down to is that I’m literally paying $98 a day in interest. This is daily and compounding. So paying your payments early can save you a few dollars here and there. Unfortunately FedLoan Servicing does not process payments on the weekends. They also can take 3 or 4 full business days to process payments, and then even longer for the payment to post to your account. Its been 6 days since I made a payment and as I sit here and write this blog post I’m still waiting for it to post.

In my situation, if I made the payment when I had lets say $1200 in accrued interest since last payment I can calculate the interest being charged per day on this amount. Its about .42 cents. Then multiply by 5 days, thats about $2.10. Not even enough to buy a cup of Starbucks, I know. But over say 120 payments amounts to $242. But in the larger scale, imagine that FedLoan Servicing is managing repayment for thousands of thousands of students. They are collecting a few extra cents from every borrower for this huge delay in payment processing. Just another way the crooks will manage to squeeze out a few extra cents. As if charging 7.375% interest rate wasn’t enough. How about having a loan servicer who isn’t operating in the 1980’s and update their payment processing to allow for immediate online payments like the rest of modern day?

I did place a call to FedLoan Servicing and ask them about this glitch in the delayed payment processing and their response was that the computer “goes back in time” and gives you back that accrued interest. I’m not sure if I want to take the time out to really confirm this on my loans. In any case, our government hires these people to do one thing, service loans. The largest part of that is to accept payments. And your telling me they can’t accept weekend online payments and they take a week to process one payment? Just more evidence on how our student loan system is broken.

– Dr. J

The simple change to biweekly payments can save you thousands

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Lets say you get a paycheck every two weeks, as a majority of people do. Now, if you want to save even more on your student loans I was doing some research on the amount of money you can save by making biweekly payments. This would mean you would not pay your loan bill once a month but you could pay every paycheck. For those that this is a feasible option for them, I would highly suggest reading below to see the details.

Most likely your student loan interest is calculated on a daily basis. Take your interest rate and divide it by 365 days. My rate at 7.375% is 0.020%. This is your daily interest rate. On approximately 490k (remember to move the decimal point two places to the left) brings my daily interest rate to about $98 a day. Basically, I’m spending $98 a day before the sunrise rises everyday. When I log into Fedloan servicing I can see the current accumulated interest since the last payment:

My unpaid interest is $1,284.72. this amount increases by $98 daily and the new balance is used for the new daily interest dollar amount calculation. This is the principal of daily compounding interest. Your calculated interest every day is based on the previous days increased balance.

Now lets say you pay half of your student loan payment 15 days before the due date. You are dropping the balance just that small amount so you will save that extra money of compounding interest. Over time this could save you hundreds, thousands, or tens of thousands. You will also finish paying off your loan sooner, sometimes by years. There is a calculator you can use to calculate your savings. In my half a mill student loan situation this is huge. Not to mention this money is all out of pocket money and is all savings on interest. Check out what my projected savings is:

If you want to calculate your savings, this is the calculator I used: Biweekly payment calculator

– Dr. J

Down and dirty with public service loan forgiveness.

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PSLF or public service loan forgiveness inauguration in 2007 was created under President Obama’s leadership as a way to ease the student loan crisis for millions of borrowers.  Basically how it works is this: A borrower will need to enter re-payment under a qualifying re-payment plan.  The borrow must also work for a non-profit organization in full time status.  They must then make 120 on-time payments (over ten years) under one of these plans.  After all 120 payments are made, they can then have the remaining balance of their student loans forgiven or wiped out completely. The qualifying plans include:

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

The first recipients of loan forgiveness was in the fall of 2017.  I am still searching for anyone who has had a balance forgiven.  There are several considerations to be concerned about here.  First of all, there has been government talks about cancellation of the program altogether.  Obviously they did not anticipate this plan for high student loan borrowers such as myself who can potentially have hundreds of thousands of dollars forgiven. Secondly, there is also the potential that any amount forgiven will be handled by the IRS as taxable income.  Lastly, there is also the potential that they will cap the forgiveness balance to $57,500.

Here’s my opinion on PSLF.  It depends.  The higher amount of debt you have, the more appealing the program but also the more risky.  I will use my own loans to break down my points:

At $500,000 in student loans using this calculator:

Screen Shot 2018-01-28 at 6.38.29 PM
These are my monthly payment estimates for 120 (10 years) under each of the qualifying re-payment plans.
Screen Shot 2018-01-28 at 6.38.00 PM
This is the potential loan amount forgiven after the 120 qualifying payments under each re-payment plan. Seen in green. Under PAYE a whopping $670,002 could potentially be erased.

If I were to have have a crazy $670k completely erased, this will be subject to 25-30% in taxes.  The total taxes owed at 30% will be approx. $201,000 to uncle sam. Now, if you look at how much you would have paid out of pocket to the loans over the ten years using the same calculator as above you can see that the amount you are paying might not be saving you as much as you think.

Screen Shot 2018-01-28 at 6.47.00 PM
If I were under IBR plan, I would be paying $288,922 + $201,000 in taxes totaling $489,922 in total out of pocket to get out of debt.

The big factor that I should also mention here is that you can clearly see that while $670,000 will be forgiven, the loan balance has gone up by $170,000.  You see, at my income level and at my loan balance/interest rate entering into PAYE will actually add interest to the balance of my loan over the ten years.  In other words, the monthly payments are not even covering the accrued interest!  This is a scary thought if you consider the concerning considerations mentioned at the beginning of this article. For example, if I make it to year 8 and suddenly with a quick vote by congress the whole program becomes obsolete, I will not only be at square one, but I will actually be in a worse position than when I started.  Total nightmare.  The less risky choice would be the ICR plan which you could do the math on that.

Now which plan did I ultimately choose?  I am in an Income-Based Repayment plan.  The caveat is that I pay much more than what the payment book says to pay to avoid the balance of my loan going up.  I am actually not working in public service so some may wonder why I am in this plan at all. This plan also will allow for forgiveness of the student loan balance after 20 years of payments even if you are not working in public service.  I will hope that my loan will be paid by then but just in case…  More on re-payment plans for future posts.

– Dr. J

Update 2.12.18- I did place a call to FedLoan servicing because of another question I had on my account. While I had the agent on the phone I inquired about taxation of the debt forgiven. They deny this as a taxable income at this time. Keep in mind that at the forgiveness of any student loan debt you receive a 1099-C for the IRS. You would file this along with your taxes. Apparently at this time, this form is in vain and has no meaning but I consider this as just a set up for future taxation laws. My opinion on this matter still remains pessimistic.

The truth.

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This is my story on being a half a million dollars in student loan debt.  This financial weight is not only troublesome to our bank account but also an emotional and sometimes humorous tale.  How did I get here?  That deserves a blog post on its own.  To be fair, I am a practicing physician and am considered a high income earner.  But this is still an enormous amount of debt.  I believe that there are many others in this crisis situation.  I’m going to share my debt story starting with transparency.  I hope that I will be able to help some, or give hope to others.  This all starts with my own total transparency.  I am posting below snapshots of my account balances.

Screen Shot 2018-01-14 at 5.24.48 PM

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Grand total: $507,226.27 !!

– Dr. J