Written by Kevin Burkle, CFP, CSLP | Founder of HCP Wealth Planning
As a financial advisor who works with healthcare professionals, student loans are a top concern for many of my clients. One of the most satisfying parts of my work is when I am able to help clients get a plan in place that takes the stress of carrying that debt off their shoulders. However, at times this work can be frustrating. This is because sometimes clients will come to me having already made mistakes with their student loans that are irreversible. This could involve refinancing federal loans whey they should not have, spending years unnecessarily making higher monthly payments because they are in the wrong income driven plan, and thinking they have been earning credit towards Public Service Loan Forgiveness when they were not. Since it's better to learn from other people's mistakes instead of your own, I have compiled a list of the ten most common student loan mistakes I see healthcare professionals make.
- Entering your graduate school loans into deferment or forbearance after graduation: While it can be tempting to postpone those payments while you are settling into your new job after graduation, deferment or forbearance could end up costing you thousands. The interest on loans will continue to accrue while you are not making payments. The interest ends up getting added into your principal and you end up paying interest on interest. For a lot of healthcare professionals with federal loans, especially those who will qualify for PSLF, it may be best to get on an income driven payment plan that creates a payment you can actually afford, and starts the clock towards forgiveness. That clock doesn't start as long as you are in deferment or forbearance. For private loans, you should shop for the lowest refinance rates to see if you can consolidate them into a single monthly payment you can afford.
- Not properly maintaining an inventory of all your loans: Not only is it important to stay organized so that you don't accidentally miss any payments, when trying to figure out the best student loan debt strategy, you have to begin by knowing all the details of every single federal and private loan you have ever borrowed. This is especially true for your federal loans as the complex rules that dictate the options and strategies available to you depend on things such as loan type, when you first borrowed, and loan status. For your federal loans, the only proper way to get all of your loan details is to download your federal loan file from studentaid.gov. For your private loans, you need to download a recent credit report. You can do this for free once per year at www.annualcreditreport.com which is a safe, federally authorized site. You can then determine that all of the loans that show up on your credit report but not in your federal loan file are private loans.
- Paying a "debt relief company" to help you with your student loans: There are a lot of scams out there where companies are promising to help you cut your payments in half or eliminate your debt all together through some "government program". They may also charge you a high amount of fees to help you consolidate your federal loans into an income driven repayment plan. The reality is that there is no easy path to loan forgiveness. And when it comes to consolidation, these debt relief companies have no power to negotiate any kind of special rates for your federal loans. They may help you enter into an income driven repayment plan, but there is no reason for you to pay anybody just to do that. All of the forms can be obtained online and you can complete the entire process yourself for free. It is also likely that they put you into the wrong income driven plan as they have no qualifications to help you properly assess which plan is best for you.
- Choosing REPAYE without considering potential future changes to income: This one is especially true for medical residents. Let's say you choose REPAYE when you enter medical residency. Given the average medical resident income, your payments will be pretty low, but once you leave residency and your income shoots up, so will your monthly payments as they are tied to that increased income. They may increase to a higher monthly payment that is higher than if you had stuck with the standard 10 year plan because with REPAYE, THERE IS NO PAYMENT CAP. To make matters worse, once your income increases dramatically, you may not be eligible to switch to IBR or PAYE , which do have a payment cap. This is because in order to do so, your payments would have to be lower than what they would be calculated as under the standard 10 year plan.
- Choosing an income driven plan without consideration of future changes to marital status: The other potential issue with choosing REPAYE right out of graduate school has to do with marital status. One of the common student loan debt strategies that can be utilized is to file your taxes married separately. This allows you to exclude your spouse's income from your monthly payment calculation for income driven plans, which can reduce your payment dramatically. However, this is only allowed for IBR and PAYE. REPAYE doesn't give you this option. So if you are single might choose REPAYE because at the time it provides you the lowest monthly payment. But if you get married in the next couple of years, you could be costing yourself thousands more than if you took a long term view of your income and marital status and chose a different repayment plan. Just keep in mind that filing married separately basically eliminates your ability to make Roth IRA contributions, so you may want to explore back door Roth Contributions.
- Refinancing your federal loans through a private lender without even considering the potential benefit of PSLF and income driven plans: Refinancing may very well be the best course of action, but it is simply impossible to know for sure unless you crunch the numbers on the income driven plan options. Its extremely important to go through that process on your own or with a qualified professional because once you refinance to private loans, you can NEVER get those into an income driven repayment plan, and those private loans will NEVER be eligible for PSLF (at least given the current laws). This is the biggest and most common student loan mistake I see people make.
- Not submitting your PSLF employment certification form EVERY year: It is not uncommon for your studentaid.gov federal loan file to report an inaccurate count for your PSLF payments. This can happen for a number of reasons and you do have the ability to apply for a manual recount, but that process could take many months. It is not actually required to submit an employment certification form each year, but doing so decreases the risk of a miscount. If you submit it each year, and keep meticulous records, worst case scenario if you have to apply for a recount, that process will go much more smoothly.
- Not maxing out your employer benefits to reduce your AGI and potentially reduce your monthly income driven repayment by a large amount: Contributing to your 401(k) or 403(b) reduces your AGI, therefore reducing your monthly income driven loan payment. You could potentially save more for retirement AND reduce your monthly student loan payments, without having less cash flow in your pocket. Other employer sponsored benefits such as an HSA or FSA, and some employer group term life insurance plans also reduce AGI. This can be a powerful lever to pull when determining a strategy for your loans. This is also why you shouldn't rely on phone reps from federal loan servicers for advice. They get paid to take as many calls as possible and will not take the time to consider strategies like reducing AGI and filing taxes separately. They simply recommend whichever income driven plan provides the lowest payment based on your current income and debt. That's it.
- Making extra payments when targeting PSLF: If you have thoroughly examined possible loan debt strategies, and you are confident you will qualify for forgiveness, the name of the game is to pay as little as possible towards your loan debt each month. Yes, it may be a little stressful to watch your total balance actually increase each year due to negative amortization, but you have to trust the process and understand that if you are sure you are going to qualify for PSLF, it doesn't actually matter what your loan balance grows to since at the time of forgiveness, that balance is wiped clean, tax free. (Note: only forgiveness through PSLF is tax free, standard loan forgiveness after the required 20 to 25 years of payments under income driven plans is taxable). Warning: this is especially true if you are benefiting from the CARES Act and your federal loan payments have been suspended.
- Not shopping around for the best refinance rates: Much like shopping around for mortgage refinance rates, it's important to shop for the best student loan refinance rates. We recently went through this process with my wife's student loans and the interest rates offered varied quite a bit. A small difference can potentially add up to thousands more in total costs so its worth your time and effort. Get 3 to 5 rate quotes and don't forget to ask about cash bonus offers. If rates happen to be very similar, consider other important factors when choosing a company such as flexible payment options, cosigner release options, and customer service
Bonus: Not exploring additional federal and state student loan forgiveness programs aside from PSLF: Nurses, physicians and other healthcare professionals have access to a variety of federal and state programs to help with their student loan debt. For example, my wife is an RN at the Mayo Clinic, and all of her loans are private so she doesn't qualify for PSLF, but she qualifies for the Florida Nursing Student Loan Forgiveness Program which reimburses her up to $4000/year for 4 years. This forgiveness is tax free. Not too shabby. Other states offer similar programs which you can easily find through a google search. There are also federal government payment assistance programs for healthcare professionals such as the repayment assistance offered by the NHSC.
The world of student loan debt is complex. As long as you take the time to understand the rules and all of your options you can put yourself in a position to choose the best strategy and reduce the anxiety that student loan debt can create.
If it all seems a little overwhelming and you think you may benefit from the student loan expertise of a CFP® and Certified Student Loan Professional®, HCP Wealth Planning offers student loan debt planning for a small one-time fee.
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