Maximizing PSLF: The Doctor / Lawyer / Parental Leave Loophole

Maximizing PSLF: The Doctor / Lawyer / Parental Leave Loophole

It’s no secret that my wife and I are pursuing PSLF.

In our Investor Policy Statement, one of our medium term objectives is anticipating loan forgiveness through PSLF. I’ve also mentioned our pursuit of loan forgiveness in several interviews, such as this one.

To clear any confusion, we are not pursuing forgiveness for my medical school loans. Those are completely gone. I have successfully paid off all of my loans during my first few years in practice by being a frugal resident and a disciplined young attending. Plus I wouldn’t qualify for PSLF anyway since I work in a large private practice medical group.

We are pursuing PSLF specifically to pay off my wife’s law school loans.

I fully admit that the title is kinda click-baity. When you include buzz words like “maximize”, “PSLF”, “doctor”, “lawyer”, and “loophole”, it’s bound to pique someone’s interest. Despite sounding so click-baity, the title perfectly describes our strategy in getting rid of my wife’s student loan debt.

And let me be clear. What we are doing is not illegal or shady. It’s not even really a loophole.

It’s just our way of maximizing PSLF given our unique situation.

 

Public Student Loan Forgiveness

Before I get into the nitty gritty details of our strategy, I should explain what PSLF is first.

PSLF stands for Public Service Loan Forgiveness.

In summary, the PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.

Keep in mind that the program has strict criteria and definitions. Below are some of the main definitions from the government’s PSLF site.

Qualifying employment

• Government organizations at any level (federal, state, local, or tribal).
• Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code.
• Required to complete and submit an Employment Certification for PSLF form at least annually.
• Must be considered a full-time employee by your employer or work at least 30 hours, whichever is greater.
  • Part-time employment in multiple qualifying jobs can meet full-time employment requirement if a combined average of at least 30 hours per week is worked.
  • Vacation or leave time provided by the employer or leave taken for a condition that is qualifying reason for leave under the Family and Medical Leave Act of 1993 is equivalent to hours worked in qualifying employment.

Qualifying loans

• Any non-defaulted loan received under the William D. Ford Federal Direct Loan (Direct Loan) Program.
• Loans under Federal Family Education Loan (FFEL) Program or the Federal Perkins Loan Program do not qualify. However, they can be consolidated into a Direct Consolidation Loan and may become eligible. Any payments on these loans prior to consolidation do not count as qualified payments.
• It’s very important to note if you decided to consolidate loans, you will lose credit for any qualifying PSLF payments made on Direct Loans prior to consolidation.
• If pursuing PSLF, it is wise to consolidate all federal loans (Direct, FFEL, Perkins) into a Direct Consolidation Loan BEFORE making any qualifying payments. That way, you won’t lose any credit.

Qualifying repayment plans

• Includes all of the income-driven repayment plans
  • Revised Pay As You Earn (REPAYE)
  • Pay As You Earn (PAYE)
  • Income-Based Repayment (IBR)
  • Income-Contingent Repayment (ICR)
  • Standard Repayment
• Every repayment plan has its pros and cons which is beyond the scope of this post. For most people, PAYE or REPAYE makes the most sense. But for our personal situation, IBR is the best plan (more on this later). ICR and the Standard Repayment plan makes no sense for a vast majority of people.

Qualifying payments

• Separate, on-time, full monthly payments made on an eligible loan after October 1, 2007 under a qualifying repayment plan (see above) while employed full-time by a qualifying employer (see above).
• After 120 qualifying payments you are eligible for PSLF.
  • Payments do not have to be made consecutively.
  • You cannot make extra payments to pay down the loan faster.

Once all of the above criteria have been met, submit the PSLF application for loan forgiveness.

If all goes well, your loan balance should zero.

[Cue Kool And The Gang] Celebrate good times, come on!!!

 

Student Loan Burden

Unfortunately, we can’t do any celebrating yet.

The burden of my wife’s $213,000 law school loans still lingers with us.

Currently, she is in her fifth year of making payments. So far, she has a total of 54 qualifying payments. She is almost half way to her 120th payment, which is scheduled to be made some time in 2024.

Ugh… 5 more years feels like an eternity.

To make matters worse, her loans have an average 7.38%. So during the past five years, her loan balance has steadily increased to a painful $264,000.

Ouch. That hurts.

I have no idea why law school is so darn expensive

I sorta get why medical school is costly. Somebody has to pay for anatomy labs, equipment, and medical facilities for an adequate clinical experience. But law school? Does it really cost that much for classroom space, law books, and programs like Westlaw? Yeah, I don’t get it.

And to be clear, my wife is (and has always been) very financially responsible.

$213,000 sounds like a lot for a loan, but she only borrowed the minimum for tuition. She worked several jobs to pay for living expenses. Remember, she’s a hustler. In fact, she even lived in a trailer home with a borderline crazy woman just because the rent was so cheap. But that’s a story for another day…

Planning for PSLF

Before graduating law school, my wife knew she wanted to work as a government attorney.

Big Law never appealed to her. She describes it as working 80+ hours a week, pushing papers, and answering to often abusive junior partners. It almost sounds like residency all over again, except with better compensation. But it’s not all about the money. She knew a lot of big law attorneys who were unhappy she did not desire that kind of life.

She briefly considered public interest and non-profit law. But a career with the government appeared to be a better fit for her and it provides a pretty good work-life balance roo.

Another great benefit of working for the government is that it is considered qualifying employment for PSLF.

Pursuing PSLF makes perfect sense because her debt to income ratio is quite high. While she had $213,000 in student loan debt, her starting salary was only $60,000.

Making Qualified PSLF Payments

My wife started making qualified payments a few months after starting her job . And shortly after that, we were married.

Because I make significantly more money than her, we file our taxes as “Married Filing Separately.” That way, my income is not considered with the calculation of her qualified monthly payments toward PSLF.

She makes qualified payments under the Income Based Repayment (IBR) plan. This is because she does not qualify for the PAYE plan and the REPAYE plan wouldn’t make sense.

In the REPAYE plan, my income would also be considered in her payment calculations despite our tax status as “Married Filing Separately.” If that were the case, her payments would likely be a whopping $30,000+ a month. Definitely, not the way to go.

So how are her monthly payments actually calculated?

Under the IBR plan, payments equal 15% of discretionary income. And discretionary income is defined as Adjusted Gross Income – 150% Poverty Line.

To put it simply:

IBR Payments toward PSLF = 15% (AGI – 150% Poverty Line)

As you can see, in order to minimize monthly payments (and therefore maximize total amount of loan forgiven), lowering your adjusted gross income is key.

 

Our Plan to Maximize PSLF

Let’s put some real life numbers into the equation.

In 2018, my wife’s monthly payments was only $263.

Here’s how it worked out.

To calculate IBR payments for 2018, my wife’s 2017 tax returns were taken into consideration. In 2017, her gross salary was about $81,800. Through her employer, she has both a 401k and a governmental 457 account. She maximized her contributions to both accounts, which was $18,000 for each account back in 2017.

So this made her 2017 adjusted gross income $81,400 – $36,000 = $45,400.

Back in 2017, 150% of federal poverty level for a family of two in the 48 contiguous states was $24,360

Therefore, her annual payment was 15% ($45,400 – $24,360) = $3,156

On a monthly basis, her payments were $3,216 / 12 months = $263 per month.

The math checks out.

The not-so-secret sauce in how we are able to do it

Here’s the truth.

Having my income makes it very easy for my wife to lower her adjusted gross income by contributing the max to her retirement accounts. On top of that, she contributes the max to her back door Roth IRA and has a decently sized taxable account to boot.

Without my income, it would be hard. I don’t care how fugal you are, it’s tough to save a lot and live a comfortable life in a high cost of living area, such as California. Nevertheless, we still manage to save 80% of my wife’s after tax income and about 50% of mine.

It gets even better

The above payments were for the year of 2018 by using 2017 numbers in the calculations. But what about for 2019 payments?

Recall that after our baby was born, my wife was granted a 14 month maternity leave. This is amazingly generous, even for European standards. For those who are curious, this is not standard. It appears to be a benefit that is unique to her office.

During this 14 month maternity leave, she is still able to make qualifying payments toward PSLF. According to the criteria, leave time provided by the employer or leave taken for a condition that is qualifying reason for leave under the Family and Medical Leave Act of 1993 is equivalent to hours worked in qualifying employment. Maternity leave definitely counts as leave under FMLA. Her employment status is protected since her employer still considers her a full-time employee and she is guaranteed her position when she comes back from leave.

Granted, most of her maternity leave is unpaid. But that’s okay because we don’t rely on her income for living expenses anyway. Most of it is socked away in investment accounts and saved. Again, we pretty much live off of half of my income.

So here’s the kicker

2019 will be interesting.

My wife’s 2019 payments will be calculated based on her income from 2018. Since our baby was born in March 2018, she received full pay up until then. Afterward, she received partial pay through FMLA short term disability for another two months during maternity leave. The rest of 2018 was unpaid. Almost all of her pay check went directly into fully funding her 401k and 457 accounts.

Because she maxed out her retirement accounts and had a lot of unpaid time, her adjusted gross income for 2018 is far below $31,995 (150% of poverty line for a family of three in 2019).

So the end result is that we could be paying $0 in monthly payments in 2019 that qualify for PSLF. That’s simply incredible.

Not only that, we plan on potentially having two more kids within the next five years. So we could conceivably get by with paying zero dollars for three separate years that qualify for PSLF loan forgiveness.

In total, we could end up paying only $20,000 to have more than $264,000 of loans forgiven tax-free.

Even accounting for the relative lack of tax breaks and the slightly disadvantaged tax bracket that comes with the status “Married Filing Separately”, PSLF is an amazing deal.

 

Final Thoughts

Several physician finance bloggers like WCI, PoF, and TPP discuss PSLF.  But as far as I know, I am the only physician finance blogger who is actively pursuing it. I could be wrong about this. And if I am, feel free to comment and correct me. I’d love to hear other peoples’ perspectives.

The bottom line is this. We are pursuing PSLF and filing our taxes “Married Filing Separately” because when we run the numbers, it makes complete sense from a financial standpoint. For us, having more than $264,000 of loans forgiven is an incredible deal.

Of course, personal finance is unique to each individual person or couple. What works for us may not work for you. Our plan only makes sense because my wife came out of law school with a high debt to income ratio, she has excellent maternity leave benefits with a qualifying employer, and unlike other attorneys she actually likes her job. If she hated her job, she would NOT stick with it just to have her loans forgiven through PSLF. Oh yeah, our plan also works because I make a decent income.

If you’re wondering if PSLF is right for you, read The Physician Philosopher’s book (not an affiliate link). He has a very detailed chapter on PSLF. At the time of this writing, it is free on Amazon Kindle. And if you like his book, don’t forget to rate it on Amazon. (The Physician Philosopher and I have no financial relationship.)

And if you want a personalized plan for destroying your student loan debt, consider checking out Travis at Student Loan Planner. He is a trusted consultant among the physician blogging community and he has helped many people save a lot of money over the life of their loans. You can book a consult with him here. (This is an affiliate link which means that if you sign up for services using this link I may receive a commission at no additional cost to you.)

 

Featured photo: my stethoscope, my wife’s law book, my daughter’s doctor themed cloth diaper

 

What do you think? Is this fair? Are you pursuing PSLF too? I’d like to hear your thoughts!