An important pre-tax vs Roth argument that is often missed, from “Why Pre-Tax Retirement Contributions Are Better Than Roth In Peak Earning Years (Even If Tax Rates Increase)“:

The most powerful argument for a pre-tax account as a retirement savings vehicle is that it comes with the option to convert the pre-tax dollars in the account to Roth at any time. That is to say, the account owner can choose when they want to be taxed on the funds in the account (which is what happens when pre-tax funds are converted to Roth), and make those dollars tax-free from that point on. Which makes it very useful to have pre-tax funds available to convert to Roth in years with lower-than-normal income, such as the years between retiring and beginning Social Security and/or RMDs. During this time, the funds can be converted to Roth and taxed at a lower rate than they would have been during high-income working years, or in later years when Social Security and RMDs push the owner into a higher tax bracket.

Notably, Roth accounts do not have this option: There’s no way to move funds from a Roth to a traditional account and take a tax deduction in a higher-than-normal income year (i.e., the opposite of what someone would do with a Roth conversion). The ability to choose when income is recognized only goes in one direction, from traditional to Roth. So from a tax timing perspective, it’s more valuable to have pre-tax funds, with the possibility of converting them to Roth during lower-income years, than to have Roth funds that stay Roth no matter what.

Which is ultimately why, even if tax rates are expected to go up at some point in the future, it can still make sense to contribute to a pre-tax traditional retirement account. Whether or not tax rates increase, the tax timing opportunities to recognize income from pre-tax accounts will still exist. For higher earners, if there’s a reasonable chance of having several low- or zero-income years after retirement, it can make sense to defer the recognition of some of their income from a higher-tax year into a lower-tax year by making pre-tax retirement contributions.

As in, the Roth conversion option gives high-earners the benefits of a Roth contribution without committing to high taxes upfront. Play your cards right and you could even take out some of that pre-tax money tax-free in retirement too. The article’s discussion of historical taxes is worth the read.

The important counterargument is that, in real life, the effective investment between a maxed-out pre-tax and Roth account is already not apples to apples. As in, $10k in a Roth has already been taxed and is therefore reflects a greater than $10k investment. Many people (including presumably most doctors) investing in pretax accounts do not take the extra money they would need to max out a Roth and invest that in a taxable account alongside their pretax contribution. It’s all a set-and-forget it payroll deduction. So, optimized tax considerations aside, many retirees will end up with more money to spend with the Roth contribution just because they saved more money upfront. The option for a Roth conversion is powerful, but it adds complexity and requires timing, two things investors often struggle with.

Both types of accounts have strengths, and all outcomes are a combination of math and behavior in a largely unpredictable tax context.

Via Loaded by Sara Newbomb:

“Specifically, when the future self shares similarities with the present self, when it is viewed in vivid and realistic terms, and when it is seen in a positive light, people are more willing to make choices today that may benefit them at some point in the years to come.” —Hal Hershfield.

Hershfield’s research suggests that the more we visualize our future self as really, specifically being just like us, the better we are able to act on current plans that feel deprivational to provide for the future.

Does your salary come from your employer? Not at all! Your employer is simply renting your time and skills. Your salary is the result of your internal resources being turned into a valuable asset that you lease to your employer in the form of labor. Your skills are the asset. Your salary comes from you.

You are your most important asset-generating resource to nurture and protect.

Just like your future self doesn’t benefit if you go sprinting on the hedonic treadmill, your future self also doesn’t benefit if you burn out so badly that you jeopardize your ability to work in your profession at a high level. You have needs now and in the future, and neither should be ignored.

Newcomb’s nice section on needs starts with our old friend Maslow:

It is quite true that man lives by bread alone—when there is no bread. But what happens to man’s desires when there is plenty of bread and when his belly is chronically filled? At once other (and “higher”) needs emerge and these, rather than physiological hungers, dominate the organism. And when these in turn are satisfied, again new (and still “higher”) needs emerge and so on. This is what we mean by saying that the basic human needs are organized into a hierarchy of relative prepotency. —Maslow, 1943, p. 375

I’m not sure I’ve ever read a single word from the “hierarchy of needs” primary source before.

Then, we combine that with this less staid perspective of wants versus needs:

Every moment each human being is doing the best we know at that moment to meet our needs. We never do anything that is not in the service of a need. There is no conflict on our planet at the level of needs. We all have the same needs. The problem is in strategies for meeting the needs. —Marshall Rosenberg

And she brings that around to personal finance:

How many times have you tried to cut back on a certain expense only to find yourself splurging later? This comes from the fact that what we have called wants are actually needs. The core message of Rosenberg’s work was that every action a person takes is intended (consciously or unconsciously) to meet a basic need, and that our needs are universal. Any one of our needs might feel more important than another in a given situation, depending on the person and the circumstance. On one day, you may feel a powerful need for intimacy. The next, you may desperately seek solitude.

[…]

Very often, when people are trying to make ends meet, their first strategy is to start cutting expenses. While this is a great instinct, and we often do want to cut back on our spending, the problem with this approach is that if you do not take the time to ask yourself what need that expense was meeting, you will find that your new budget is very uncomfortable. Just like a dieter who restricts himself too much only to find himself eating an entire pizza in a late-night frenzy, we can do more harm to our finances than good by ignoring our needs when we cut our expenses.

Her rule of thumb:

If everyone cannot have it at once, it’s a strategy, not a need. Dig deeper to find the real need.

Wants are strategies for filling needs. The need is non-negotiable, but the strategy is mutable.

I wrote about this last September, but it’s important enough that I’ll repeat myself with more bullet points and shorter sentences.

The Summary

• The new SAVE student loan plan has a generous unpaid interest subsidy: every dollar of accrued interest that isn’t covered by your monthly payment is waived.
• SAVE also has a feature (“loophole”) that allows some borrowers to enter repayment early and benefit from that 100% subsidy on unpaid interest, effectively making qualifying loans (Grad PLUS loans, old loans from undergrad) interest-free while in school.

The Background

• The SAVE plan’s 100% unpaid interest subsidy is a significant benefit, especially for those with low incomes that allow for qualifying $0 payments.
• Normally, you cannot enter repayment for the loans you take out while in school. As in, you cannot enter repayment during medical school for the regular Direct Unsubsidized (“Stafford”) loans you take out to pay for medical school. Ditto for undergrad loans during undergrad.
• There are two exceptions: 1) Grad PLUS loans 2) Regular Direct loans taken out for previous schooling (e.g. undergraduate loans while in graduate school)

The Benefit

• Graduate students like medical students with undergraduate loans can waive the in-school deferment and enjoy 0% interest on those undergrad loans during graduate school.
• Graduate students with new PLUS loans can waive the in-school deferment and also benefit from the subsdized interest rate during school.
• (The income limit for an individual to have $0 loans in the continental US is ~$32,800, so you can earn some money and still do this.)

The Risk

• PLUS loans have higher interest rates and origination fees. While the interest rate will be lower in school with this loophole, the origination fee is unavoidable. If/once you make enough money to lose out on the unpaid interest subsidy, PLUS loans have higher rates.
• The temptation to try to exclusively use PLUS loans to benefit from the subsidy is risky as the SAVE program isn’t codified in law, and PLUS loans cannot be converted to conventional unsubsidized loans. You’re also really not supposed to, your school may not let you, and those schools that do could ultimately get in trouble for going out of order and lose access to the Direct loan program.

The Plan

• Contact your servicer and request the removal of the in-school deferment.
• Choose the SAVE plan and make monthly payments. Unless you are gainfully employed, it will likely be $0. If you have a working spouse who earns a substantial income, you may need to file taxes separately in order to exclude their income and benefit the most from the subsidy.
• You will need to repeat the process every semester for new loans as your school will update your servicer that you’re in school and the servicer will automatically apply the in-school deferment.
• If for some reason you want to stop repayment (e.g. get a good job while in school, get married and don’t want to file taxes separately), no biggie. You still have access to the in-school deferment while in school.

PSLF?

• The extra effort and decreased interest have no benefit if you achieve Public Service Loan Forgiveness (PSLF), as PSLF is a time-based program. It doesn’t matter how much you owe.
• However, this technique could still be a reasonable hedge given you never know what kind of job you’ll end up wanting/taking.

Every new student loan plan has created some presumably unintended management strategies (i.e. “loopholes”). Over the years, some features have been removed from newer plans, like the “payment cap” from IBR & PAYE that previously capped your payments at the 10-year standard amount no matter how much money you earned. Others have been codified, like the “married filing separately” loophole that allows you to exclude your spouse’s income when calculating your monthly payments (present with IBR/PAYE, excised from REPAYE, but now back in SAVE).

A small loophole in REPAYE became a big loophole with SAVE based on its 100% unpaid interest subsidy. In the SAVE plan, whatever interest isn’t covered by your calculated monthly payment is entirely waived. Negative amortization is a thing of the past. This is true even for $0 payments, meaning that those with low incomes functionally have an interest-free (0%) loan.

This is a great perk of being in repayment for many borrowers, including medical residents (as I wrote about here).

It’s also an incentive to try to enter repayment as “early” as possible. There are two scenarios where a medical (or other graduate) student can do this:

1. Waive the In-school Deferment for Undergraduate Loans

For regular Direct loans, you cannot enter repayment until you leave school and finish the six-month grace period. You can consolidate after graduation to waive the otherwise mandatory grace period, but you can’t change their in-school status while still in school.

You can waive the in-school deferment for loans from previous schooling. From the Official PSLF FAQ:

Q: If I return to school and qualify for an in-school deferment on my Direct Loans that are in repayment, can I decline the deferment and make qualifying PSLF payments while I’m in school?

Those graduate students with loans from undergrad can therefore enjoy a generous unpaid interest subsidy for their undergrad loans while completing their graduate studies. For many medical students, 0% undergrad loans during grad school can easily reach five-figure savings.

Also, these extra years of $0 payments during grad school will also qualify for the baked-in long-term currently-taxable (not PSLF) IDR loan forgiveness. Not relevant to most doctors, but certainly relevant to many others.

I wrote about this “loophole” way back in the Further Facets of Income-Driven Repayment chapter of the book.

2. Waive the In-school Deferment for Current PLUS Loans

PLUS loans are technically never in-school status; they’re automatically placed in an in-school deferment.

That in-school deferment is actually optional for PLUS loans. Yes, you can contact your servicer and waive the deferment for PLUS loans. With the current PLUS rate of 8.05%, that unpaid interest subsidy leads to substantial (potentially massive) savings.

Note that you may have to repeat this process every semester as you take out new loans.

Ben Braun has a nice article in Doctored Money about his successful implementation of the PLUS loan method.

Caveat: PSLF

This extra effort and decreased interest have no impact/benefit if you achieve PSLF. PSLF is a time-based program; you don’t get a gold star if the amount forgiven is higher or lower.

This technique would still be a reasonable hedge given the uncertainty of the future even when planning for PSLF.

PLUS to the Extreme

Historically, most students would like to avoid PLUS loans. Their interest rates are always 1% higher than the corresponding rates for standard direct loans (hence the “plus”), and they carry a much higher origination fee (aka “loan fee”), 4.228% instead of the usual 1.057%.

They simply cost more, and needing to take them out also means you’ve borrowed more. Borrowing more money makes people sad.

With this loophole, there’s an argument for trying to skip out on regular loans and just take out PLUS loans. The overall slightly higher rate would be more than mitigated by the 0% rate during school.

Functionally, the government has opened a backdoor into “subsidized” loans (that don’t accrue interest while in school) that used to be available for graduate students until 2012. The irony is that with the SAVE program, PLUS loans are now a much better deal than they’re supposed to be.

Note that there’s an immediate downside to this in that higher loan fee, so there’s actually an upfront cost that’ll take several months to break even on.

Take Home

Entering repayment early isn’t a bad idea at all. It wasn’t a bad idea during the REPAYE era, and it’s frankly a pretty amazing deal with SAVE.

I don’t know how easy it would be for the government to specifically close this loophole, nor how interested they will be in doing so. Some legislators would love to shutter the PLUS program, but I suspect it’s relatively safe. For the conventional loophole implementation, there really isn’t any downside: If you want to put your loans back in deferment while in school, that is always available to you as long as you are enrolled accordingly. So there really isn’t any risk as far as I can tell.

Trying to exclusively use PLUS loans out of order just to benefit from the subsidy is, I think, a much riskier venture. The SAVE program isn’t codified in law, and you can’t convert PLUS loans to conventional unsubsidized loans, so that’s a one-way street I would not personally recommend.

The Biden student loan forgiveness plan was blocked by the Supreme Court, but the new repayment changes are currently (and will likely stay) alive and well. The “New REPAYE” plan has been rebranded: SAVE (“Saving on a Valuable Education,” in case you were wondering).

Here are the take-home points, mostly courtesy of this brand new White House briefing:

Lower Payments for Undergrads

For undergraduate loans, cut in half the amount that borrowers have to pay each month from 10% to 5% of discretionary income.

SAVE–like PAYE and REPAYE–uses 10% of discretionary income for graduate borrowers as well as a weighted average of those numbers if you have debt from both undergrad and grad school.

Lower Payments for Everyone

Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment under this plan.

Discretionary income is currently defined as 150% of the poverty line. This change will decrease payments for all borrowers except those with very high incomes.

For example, in the continental US, the poverty line for an individual in 2023 is $14,580. This means the income excluded for a single person for PAYE/REPAYE is $21,870 and for SAVE will be $32,805.

In practice, this means that not only will PGY1 residents have $0 payments, a lot of PGY2 residents probably will too. A later years resident certifying an income of $60k for example would have their payment decreased from $318/mo to $227/mo under the new plan.

10-year Forgiveness for Low-volume Borrowers

Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less. The Department estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.

This long-term non-PSLF forgiveness takes place after 20 years for undergrad borrowers and 25 years for graduate borrowers, which is unchanged from REPAYE. This income-driven repayment (IDR) loan forgiveness is currently set to become taxable again in 2025 and is irrelevant for the majority of doctors.

A Full Unpaid Interest Subsidy

Not charge borrowers with unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower’s loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low.

This will be huge for residents, who often find themselves in the situation of “negative amortization” when their calculated monthly payments do not cover accruing interest.

The REPAYE unpaid interest subsidy waived half the unpaid amount; SAVE waves it all.

It also means those $0 payments interns typically enjoy yield an effective 0% interest rate. Amazing!

But furthermore, no matter what you owe, you’ll probably feel like you have a 0% interest rate loan outside of the mandatory monthly payment. Technically, our example resident with that $227 monthly payment would have an effective rate of 1.36% on a $200k loan balance (less than inflation = free money)

Truly, one of the great pains for residents–especially those with big loans–was to watch the amount they owed balloon while they slogged through training. No more! You might not make any progress, but your loans won’t grow.

The generousness of this combination–lower payments, waived interest, and more built-in forgiveness–has raised the possibility that some private companies will sue the government to shut this down. I don’t think they have a real chance of winning that case.

The unpaid interest subsidy also means that waiving the in-school deferment for undergraduate loans while in graduate school (or the deferment for any PLUS loans) would be also an easy way to save a lot of interest, as those loans would effectively become 0% interest rate while in school with a typical student’s income.

The Married Filing Separately Loophole

Not mentioned but still important: The Married Filing Separately Loophole, which was closed in REPAYE, has been reopened. This means that married borrowers can choose to file taxes separately in order to exclude their spouse’s income from the payment calculation.

This has historically been especially important for residents with high-earning spouses and has been a key reason to pick PAYE (and occasionally IBR) instead of REPAYE (discussed at length in the Maximizing PSLF chapter).

With everything else + the reopening of this loophole, SAVE is a great plan for borrowers and overall greatly simplifies student loan management.

The Payment Cap

The one important “loophole” of PAYE and IBR that remains closed from REPAYE appears to be the removal of The Payment Cap. With the older plans, your monthly payments were capped at the amount of the standard 10-year repayment even if 10% of your discretionary income would be a larger number. This created a PSLF boon for doctors with long training because even with their subsequent high income they would never “pay their fair share.” Even so, for the vast majority of people nationwide, SAVE will be better than PAYE.

The government’s plan is that SAVE replaces REPAYE, and they close PAYE and ICR to new borrowers. The intention is also to close PAYE to even current borrowers who simply want to switch starting summer 2024, but doing so would actually go against precedent, so we’ll see how that plays out when some of these operational details are finalized. If your income is set to rise high enough in the future for the payment cap situation to be relevant–and PAYE is closed–IBR (which is in the actual 2007 law passed by Congress) will probably always be available. We’ll know more when the plan is fully in effect.

For those currently in PAYE or considering choosing it now while still available, the only practical consideration that is relevant is this payment cap situation with regard to loan forgiveness. For doctors set on PSLF, one would need to compare the savings from lower payments during residency with the potential savings from capped payments as an attending.

As an example, the maximum monthly payment on the older plans for our hypothetical $200k borrower was $2,220. In SAVE, you only hit that amount with an annual income of around $330k. So the “optimal” choice depends on how much you borrow, how much you earn, and how many years of attending income you have before achieving PSLF.

This would mostly affect people with relatively high attending incomes relative to their debt. The most future-proof plan given the uncertainty of a medical career would be to choose SAVE, and that is what I suspect the vast majority of residents would choose even if they had the option. If nothing else, the lower payments during residency will probably impact your life more than lower payments as an attending.

For those with massive loan balances and plans for work that wouldn’t qualify for PSLF, then the payment cap consideration is also potentially relevant to the 25-year IDR loan forgiveness, but this is a very uncommon scenario for physicians (further discussed in this chapter).

Conclusion

Because the plan only improves upon REPAYE without downsides, all borrowers on REPAYE will automatically be switched over to the new plan:

Borrowers who sign up or are already signed up for the current Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in SAVE once the new plan is implemented.

Easy peasy.

For recent graduates, the COVID payment freeze has been and the new SAVE plan will be a huge boon, even if the $10k student loan forgiveness that some residents would have received didn’t pan out.