A $310,284.24 PSLF Success Story

People often ask me if I know anybody who has successfully received public service loan forgiveness (PSLF). For the past couple of years, my answer has been that I’ve seen multiple verified examples of PSLF but didn’t know anyone personally (in real life). That’s mostly because I graduated in 2012, so my former classmates are still at least a year away.

That changed recently because last month a colleague of mine had his loans forgiven. He’s given me permission to share some illustrative parts of his story and provided me with a very detailed timeline. It’s a good case study, and I’ve added references to relevant background/discussion throughout.

Without further ado, here is his (annotated) story:

8/94 – First Stafford loan (FFEL) disbursed ($2,625). The local bank immediately sells the loan to Sallie Mae after collecting the origination fee.

• You’ll notice that he is a nontraditional physician who went to school initially back in the 90s but then went back to pursue medicine in the 00s. The Federal Family Education Loan (FFEL) program was created in 1992 as a public/private partnership where “federal” loans were given by private banks in exchange for generous fees from the federal government and a guarantee against cases of default. FFEL supplied 80% of federal student loans until 2008.

8/95 – University converts to the Direct Loan system.

• The Direct Loan program, which we all currently enjoy, coexisted with FFEL in the 90s. However, individual borrowers didn’t get to choose. The school picked either FFEL or Direct for its federal aid. At this time, due to a combination of purportedly better customer service (and marketing), most schools chose FFEL.

5/98 – Undergraduate graduation followed by consolidation under the Direct program ($11,118, subsidized loans only)

• This was an optional step for convenience at this point but the beginning of a very helpful pattern. PSLF didn’t exist yet (announced in 2007) but astute borrowers will know that the federal government is only interested in forgiving loans that it actually holds (Direct loans). The only way to make FFEL loans qualify for modern income-driven repayment plans and PSLF is to consolidate them into a Direct Consolidation loan. The same consolidation necessity also applies to the now-defunct “low-interest” Perkins loan program that was shuttered in 2015.

5/05 – Consolidation of undergraduate and (non-medical) graduate school loans under the Direct program ($45,437 subsidized, $24,599 unsubsidized). Direct loans assigned to ACS/Xerox Education Services (“DL Servicer”) for servicing, the only Direct Loans servicer at the time.

• So after finishing graduate school, he re-consolidates to add his grad school loans to his original undergrad consolidation loan.

9/07 – President George W. Bush signs the College Cost Reduction Act of 2007, establishing the Public Service Loan Forgiveness Program (PSLF)

• In 2007, the Democrats held the House and Senate. The CCRA passed in the senate 78 – 18, and Bush signed the law. It’s hard to imagine any bill like this not being voted strictly along party lines these days. For further reading, see the first PSLF chapter of my book, available free online here.

7/10 – Consolidates new FFEL medical school loans under the Direct program ($69,707.25 subsidized, $171,973.74 unsubsidized). The consolidation waived the 6-month grace period and signing up for automatic payments lowered the interest rate by 0.25% to 6%.

• While his older loans were Direct Loans, his medical school chose the FFEL program. You can see what so many people got this wrong. He informed me that back in May 2010, someone from the AAMC actually came to his school to talk about PSLF and what to do to qualify (including consolidation). This was rare golden advice back in the day, as most borrowers either kept the wrong loans (FFEL, Perkins) or used the wrong payment plan (graduated or extended). By consolidating after graduation, he was able to waive the otherwise mandatory 6-month grace period and enter repayment early. Read more about the importance of Direct consolidation here.
• The interest rate of federal loans changes every year depending on the yield of a 10-year treasury note. During my era, for comparison, it was always 6.8%.

8/10 – Began repayment using the original Income-Based Repayment (IBR) Program.

• The original IBR was the first modern-day plan within the income-driven repayment (IDR) umbrella, later joined by PAYE and REPAYE. Income-contingent repayment, the less generous original, dates back to 1993. IBR had payments of 15% of discretionary income, capped payments at the 10-year standard repayment amount if income rose sufficiently, and also allowed for loopholes like utilizing “married filing separately” to lower payments and maximize forgiveness.

9/11 – ACS/Xerox (“DL Servicer”) loses Direct servicing contract and loans were transferred to another servicer, which canceled automatic payments without notification and resulted in a “late” payment.

• While there have been recent plans to consolidate all federal loan servicing with a single company (again), for most of the PSLF-era there have been multiple servicers (e.g. Navient, Nelnet, FedLoan, Great Lakes, etc). Of all the services, only FedLoan processes payments for those intending to utilize the PSLF program.
• Submitting an employment certification form (ECF) for PSLF automatically switches borrowers to FedLoan, but back in the day, being bounced around wasn’t all that uncommon either. In fact, my loans were transferred to a new servicer a year after I graduated. Each time this happens, you’ll have to set up a new account and auto-pay must be re-established. It’s common to lose a month during the process, and sometimes the servicers themselves might place you on an administrative forbearance if they couldn’t get the job done in the interval between monthly payments.

1/12 – Submitted first employment certification form (ECF) for potential PSLF, triggering the automatic transfer of servicing to Pennsylvania Higher Education Assistance Agency (PHEAA, “MyFedLoan”). The transfer process takes greater than 1 month, resulting in a missed opportunity for a monthly payment.

• When you file for your Direct consolidation, you are able to choose your servicer. If you are considering PSLF at all, you want to select FedLoan to prevent any delays from an unnecessary transfer down the road.
• Additionally, while you would think that the transfer of your payment records would be easy-peasy, it isn’t. Apparently, at least in the recent past, actual paper was involved. Achieving PSLF on-time relies on a correct payment count, and the source of many folks’ incorrect payment counts is the payment information from old servicer accounts prior to the transfer. While FedLoan is objectively not a good company, they do better with their own counting.

1/14 – Employment verified but payment counts were inaccurate. Submitted complaint with bank statements to show the error. While there was no response, it seemed to be fixed in later iterations.

• Incorrect payment counts are a common headache source for borrowers and are often off by years due to small errors in the data. And while it’s easy to request a manual recount, they’ll tell you upfront that the process might take two years. For obvious reasons, they also prioritize those who are closer to the 120 payment number.
• When there are payment count or processing issues and FedLoan doesn’t fix them promptly, there are now a few ways to call in bigger guns. You can file a complaint with the Office of Federal Student Aid here and with the Consumer Finance Protection Bureau here. If neither one of those works, then contact the FSA Ombudsman.

6/15 – Residency complete; employment verified.

• While it’s considered good practice to submit ECFs annually, at the minimum you want to do so as you leave a qualifying institution. You don’t want to be trying to track down someone at HR willing to sign your form years down the line.

6/16 – First fellowship complete, employment verified.

• He’s doing a great job.

11/16 – Switched from IBR to the new Revised Pay as You Earn (REPAYE) payment plan created through an executive order by President Barack Obama in 2015. Annual income verification timing was moved to the end of the calendar year, and one qualifying monthly payment opportunity was lost; 2017 payments now based on 2015 (trainee) income.

• Note that because he didn’t meet the eligibility criteria for PAYE, REPAYE was his only chance to lower his payments from 15% to 10% of discretionary income, resulting in significant savings.
• During the switch, his annual recertification timepoint moved later in the year. Recall that payments are based on your most recent tax return, which is in turn based on the previous year’s income, so there is a considerable lag between when your income goes up and when you start paying for it with regards to student loans.
• You should expect to always lose a month when switching between repayment plans. Your interest also capitalizes, though that is irrelevant with regard to loan forgiveness. With IBR, in particular, the lost month was specifically included in the process.

6/17 – Second fellowship complete; employment verified.

• The more training you do, the better deal PSLF becomes. Because of the lag in payment increases, some physicians will almost certainly receive loan forgiveness after never making an attending-sized payment.

8/17 – Graduate school (MPH) enrollment triggers automatic deferment (without notification), another month lost while the deferment waiver was submitted and processed.

• Most people who are full-time students cannot meaningfully make student loan payments on prior debt (and they’re usually taking on more!), so any time you become a full-time student, the system is set up so that you are automatically placed on an in-school deferment.
• You can waive this and continue repayment on loans from prior schooling, which is very helpful for PSLF for those who go back to school but are still working full-time at a qualifying institution. (But no, in case you’re wondering, you can’t simply waive this on new/current loans and start making qualifying PSLF payments on those new loans while still in school even if you somehow were also working full-time.)

8/18 – Employment verified with 4 payments not appropriately counted; request submitted for a manual recount (which would take almost 2 years to complete).

• Two years is what FedLoan considers par.

3/20 – President Donald Trump signs the Coronavirus Aid, Relief, and Economic Security (CARES) Act, essentially canceling the final 7 payments and neutralizing the effects of the prior errors.

• The CARES act (which included 0% interest and $0 payments) has benefited a lot of people. In addition to helping keep less fortunate borrowers financially afloat, it’s also been a boon for those going for loan forgiveness, in particular those near the end of their journey currently enjoying larger salaries and consequent larger payments. Further discussion here.
• An intern is often looking at $0 payments anyway. A resident may be saving a few hundred bucks per month. But many attendings are saving thousands of dollars per month through the CARES act forbearance, which counts these no-pay months as qualifying payments for PSLF.

10/20 – FedLoans sent notification that 120 payments had been reached (during the CARES forbearance); PSLF application/final ECF submitted, but an employer error on the application results in a 1-month delay.

• The language of the CARES act was clear, but some folks were still petrified that somehow the CARES act forbearance wouldn’t count for PSLF. It does.
• The HR department has a tendency to sign these forms incorrectly. Every signature should be legible and every date completely clear for an ECF to be accepted.

1/21 – PSLF application approved. $82,438.65 subsidized and $227,845.59 unsubsidized forgiven.

• Congratulations!
• (Note that subsidized loans are no longer given out for graduate school like medical school, but regardless the interest is only subsidized while still in school.)

Verdict

In the end, this story demonstrates most of the classic PSLF teaching points. It’s a real program. It can be administratively complex, especially for older borrowers, but it boils down to making sure you have Direct Loans and picking an IDR plan. Everything else is just optimization to maximize forgiveness by paying as little as possible over the course of the 120 qualifying payments, keeping records, and complaining if someone else messes something up.

It can provide a very large amount of tax-free loan forgiveness.

However, for some borrowers, this forgiveness does not result in significant cash savings given the relative compensation differences between academic positions and private practice.

People who borrow in the neighborhood of 1x their annual salary or less can feel more or less confident in picking whatever job they want and know that they will be able to service their debt. For these people, PSLF is a great benefit of pursuing your passion for public service but not a reason to take a job you don’t want. For those that borrow 2x or more, PSLF is a real reason to consider a qualifying job.