The Best PSLF Backup Plan for Physicians

With cases pending in the supreme court regarding loan forgiveness, it felt like a pointed time to publish a post on Public Service Loan Forgiveness (PSLF). As many of you know from reading my content, my wife and I chose to refinance our student loans years ago. I stand by this decision as it lowered our rate and forced us to create robust financial habits early on.

However, PSLF can be a godsend for many medical school graduates. I often share that the AAMC’s 2020 data state that the average indebted medical student graduates with approximately $209,000 in educational debt. For those planning on lower-paying specialties or pursuing more extended residency programs, PSLF is a game changer. However, with loan forgiveness making the news recently, repayment anxiety can grow. Here is the best PSLF backup plan for physicians.

What is Public Service Loan Forgiveness (PSLF)?

For medical students diligently studying (and arguably living under a rock), let’s briefly define PSLF and why it is essential. In short, PSLF is a federal student loan forgiveness program designated to provide debt relief to individuals working in public service occupations, including physicians.  

The U.S. Department of Education established the program to forgive remaining balances on eligible federal student loans for borrowers who have made 120 qualifying/certified payments while working full-time for qualifying employers (then includes most residencies and academic medical centers).  

Who qualifies for PSLF?

Physicians can qualify for PSLF if they work full-time (i.e., as residents) for a government organization at any level (federal, state, local, or tribal), a non-profit organization (that is tax exempt under Section 501(c)(3) of the Internal Revenue Code) or other types of non-profit organizations.  

Public Service Loan Forgiveness is excellent for physicians because the nature of our education is expensive and can take a long time to pay off. PSLF offers Income-Driven Repayment plans that give borrowers low monthly payments based on their incomes and family size. PSLF also provides tax-free forgiveness of the remaining loan balance once paid off (for now…)

What does the U.S. Department of Education get out of this deal?

PSLF incentivizes physicians to say in the public sector, such as working in underserved areas or for non-profit organizations and academic hospital systems. As such, PSLF encourages physicians to choose these positions despite potentially lower pay compared to private practice. If you want to know more information, seek professional advice, and make sure to check out StudentAid.gov.

Debt elimination is a must.

Now that we have a synopsis of PSLF behind us, let’s talk about why all this matters. The debt burden can be overwhelming for most trainees and early career physicians. Navigating loan repayment can also be challenging. There are a wide array of options. How does a physician begin to know if their loan repayment plan is the correct strategy for them? Further, making poor financial choices early in one’s career can have significant repercussions later in life. The Motivated M.D. wants to ensure that all medical school graduates who carry debt know their options and how to navigate uncertainty.  

I think rapid debt elimination is a must. All physicians should live well below their means early in their careers. They should use these first few years to rapidly eliminate debt (or pursue PSLF), develop healthy financial habits, build a working budget, and invest in their future. It is simple to list but more challenging to implement.  

As one works to grow their wealth, debt elimination is a must. Aside from your mortgage, your educational debt will likely be the most significant liability you must overcome while building your net worth. As such, having a sound debt elimination plan is crucial. Further, guarding against financial disaster and the unexpected is equally as important. Given that so many physicians pursue PSLF, it would behoove them all to have a backup plan should the program change… or cease to exist.  

Having a backup plan is sound financial practice.

The point I will make is straightforward, but needs to be said nonetheless. Having a backup plan, no matter how certain the situation, is always sound financial (and life) advice.  

For PSLF, there is history and expectation now that the program has gained notoriety over the past years. Because of this, it would be incredibly difficult for the program to dissolve completely, but not an impossibility. For individuals pursuing PSLF or planning to, understanding the program’s intricacies is priority number one. However, a close second is having a backup plan should these ‘fair financial winds’ change direction.  

One soapbox I like to preach on is the importance of an emergency fund. These tend to be relatively ubiquitous in the personal finance community. The idea is that you house a readily available pool of money, generally 3 to 6 months of living expenses, in anticipation of unexpected financial emergencies. This fund will often sit undisturbed for years, waiting on that fateful time when your car is totaled, your air conditioning fails, or you become unemployed. No one wants these situations to transpire, but they do, unfortunately. An emergency fund allows one to avoid financial catastrophe should a situation like this arise.  

Having a backup plan for PSLF is no different. Creating a PSLF’ backup fund’ is not something you want to ever spend, but it is there in case of emergency. Why do I feel strongly about this? Keep reading…

Loan forgiveness is under constant scrutiny.

The first on my list of ‘grievances’ is that it feels like loan forgiveness is under constant scrutiny lately. Whether it truly is or has just appeared in the news recently is hard to say. Yet, our political climate has created parties that constantly work to undo what prior administrations have created. In the case of the Biden Administration, there has been sweeping loan forgiveness, increasing ease of access, and broadened inclusion criteria. Great news for those looking to have their loans forgiven. 

I am not here to say whether loan forgiveness, on principle, is right or wrong. I only wish to shine a light on the fact that the Biden administration has helped create avenues for loan forgiveness. As such, this portion of his political agenda has fallen under the microscope. It has been fraught with litigation and is now pending review in the United States Supreme Court. For our non-American readers, this is a big deal.  

Aside from a Supreme Court decision hanging in the balance, there is a conservative house and a 2024 election just around the corner. These are all potential opportunities for PSLF to be criticized, reviewed, and changed again. This makes me nervous for anyone pursuing PSLF without a ‘plan B.’

High-income professionals are easy targets.

My second ‘grievance’ has to do with our profession. As physicians, it is no surprise that we make significant incomes. No matter your specialty or subspecialty, you are primarily considered ‘rich’ by most standards. I could rant all day about the difference between a high-income and ‘wealth,’ but that is another discussion for another day.

In our current political climate, if PSLF were to remain under scrutiny, it is plausible that there would be further consideration on who should get their loans forgiven. I can imagine a world where those in higher tax brackets (i.e., high-income earners) would be re-considered for forgiveness. “Why should they get their loans forgiven? They make so much money!” I can hear the politicians shouting it now.  

This may be fear-mongering, but I remain concerned that those who make the most would be the first excluded from loan forgiveness should the program be altered, addended, or changed. Again, I am not here to discuss the principles or ethics behind this, just to share my opinion on why all physicians should have a loan repayment backup plan.  

The future is uncertain.

Look, no one knows what the future holds. I believe that PSLF is somewhat well-established at this point. I also think that it is unlikely to radically change soon. However, given our political climate, I remain skeptical that it will become a timeless institution. I do not believe the guaranteed forgiveness of debt to larger and larger populations will remain indefinitely. As an incentive for individuals to work in the public sector, I think it is excellent. As a business strategy for a country operating in a growing deficit each year… I remain skeptical.  

This post is not meant to scare anyone. It is only meant to share my concerns about a loan repayment strategy that may not always be ‘set in stone.’ I do think that PSLF as a loan repayment strategy, as long as it is offered, should be the first reimbursement strategy considered for all medical school graduates carrying debt. However, I challenge all medical school graduates to also self-educate regarding personal finance. I further challenge them to expect the unexpected and have a plan for when financial climates change.  

Now that I have expressed my concerns, let’s talk the best PSLF backup plan for physicians!  

The Best PSLF Backup Plan for Physicians (PSLF backup fund)

OK, last point here. What is the purpose of sharing my anxieties if I don’t provide you with a reasonable solution? This idea is not original to me. Many have argued for years that individuals planning to pursue PSLF should keep a ‘backup fund.’ So what is a ‘PSLF backup fund,’ and how does one incorporate it into their finances?

The concept of a PSLF backup fund is to support you in the random (and unexpected) chance that a transition in government coincides with radical changes (or dissolution) of the PSLF program. In this scenario, you have a relatively liquid fund of money waiting to protect you on such an occasion.  

Honestly, the idea is simple. Though you may be making Income-Driven Repayment (IDR) Payments, you should save a large portion of money as if you had refinanced your loans. So, let’s give an example. This will be overly simple math FYI (and likely not grasp the entire picture), but hopefully, it gets my point across…

A ‘PSLF backup fund’ example:

Dr. Works-Hard graduates from medical school with an average medical education debt burden. To simplify the numbers, we will say she carries $200,000 of educational debt (all unsubsidized loans) at graduation. She attends a 3-year internal medicine residency program, and interest accumulates from her interest rate of 5% compounded monthly. She is enrolled in a qualifying IDR plan during residency and makes a minimum payment of $100 a month. After residency, her debt would total approximately $228,419.11. The benefit is she has already made three years’ worth of certified payments toward PSLF; only seven more years to go!

Dr. Works-Hard lives below her means.

Now, Dr. Works-Hard lives well below her means for the first five years of her attending career. Now she is a hospitalist working in the community and makes $250,000 before taxes. Her husband is the childcare for their two children. She is pursuing PSLF and remains enrolled in a certified Income-Driven Repayment (IDR) payment plan. For this example, we will say she is enrolled in REPAYE. This means that for the remaining seven years of her PSLF ‘life cycle,’ she will make certified REPAYE payments.

With an adjusted gross income of $250,000 and a student loan burden of $228,419.11 at 5% compounded monthly, her monthly payments will be approximately $1,736 (by my best calculations). At this rate, assuming no changes to PSLF, she will pay a total of $203,707 over her remaining seven years of PSLF. This will mean that ultimately $113,221 will be forgiven at ten years (120 certified payments). So, how does she plan a backup fund around this?

Dr. Works-Hard calculates how much to set aside.

Given that she wishes to have a ‘PSLF backup fund,’ just in case, she has calculated how much she would need to roughly pay off the loan in 5 years. At the start of her attending career, she would have $228,419.11 in debt remaining. If she wished to ‘ideally’ have a fund that could pay off that debt in 5 years, she would need to save approximately $4,350 a month. However, subtracting her actual REPAYE amount ($4,350-$1,736), she should save roughly $2,614 monthly on top of her IDR (REPAYE) payment. As such, she will make her certified monthly payment toward PSLF and accrue a ‘PSLF backup fund’ should something with the program change. 

Five years into her attending career, she would have only two years left of PSLF payments before her remaining loans are forgiven. She would also have a backup fund of nearly $156,840. If this is housed in a retirement fund with a real rate of 5% (compounded annually), then after five years, it would total roughly $173,328. This is perfect because after making certified monthly IDR (REPAYE) payments of $1,763 to PSLF, her educational loans would total $175,085.09 at five years.  

Dr. Works-Hard’s loans are forgiven and she has a backup plan.

With this, Dr. Works-Hard is only two years away from having nearly $113,221 of loans forgiven and all her educational debt gone. Further, if the institution of PSLF remains, she will now have a retirement account with $173,328 that she can use to help her family reach their remaining financial goals. Better yet, if something with PSLF changes or the institution dissolves, she has a ‘PSLF backup fund’ ready to help her pay off her debt so she does not face unexpected financial challenges in her mid-career.  She has now officially executed the best PSLF backup plan for physicians!

Take home points

OK, enough with all the doom and gloom. I live with financial anxiety and always wish to be prepared for ‘the unexpected.’ This can often constrain our finances, but it also gives me a sense of security for myself and my family. We are investing in our future as we work to rapidly eliminate our debt. For those pursuing PSLF, an excellent option for a large majority of medical school graduates, make sure you understand the details of the program. If you don’t, find a professional who can help you. Know that the future of PSLF is challenging to predict.

PSLF is likely here to stay, but fortune favors the prepared!

I suspect PSLF will remain and thus be a viable option for many. However, if you want to simultaneously work toward loan forgiveness and guard against the unexpected, keeping a ‘PSLF backup fund’ may be an option. In the best-case scenario, your loans are forgiven, and you already have a huge retirement fund to help you reach other financial goals. In the worst-case scenario, PSLF doesn’t work out, but you already have money for this scenario. Either way, you win! Thank you for reading The Best PSLF Backup Plan for Physicians. As always…

Stay motivated!

The Motivated M.D.

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