The Optometrist's Guide to Student Loans
Chapter 3: Loan Forgiveness
There are there main ways where an optometrist can get their loans fully forgiven:
(a) Public-Service Loan Forgiveness (PSLF) 10 years
(b) Total Loan Forgiveness (IBR) 25 years
(c) Total Loan Forgiveness (PAYE/REPAYE) 20 years
(a) Public-Service Loan Forgiveness (PSLF) 10 years
Started in 10/2007, doctors working for non-profit organization for 10 years can have their students loan fully forgiven if all requirements are met without a tax bill.
Let analyze each PSLF requirements more in details:
1) Qualified Federal Direct Loans Only:
- Perkins Loan are technically ineligible but if you consolidate them through the Direct Consolidation Loan, then you are good.
- Caution: Because if you been making a standard 10 years or income-driven qualified payment, and then decide to consolidate. BOOM, you officially hit the reset button on your PSLF timeline and have to start the 10 years period all over again.
2) Qualifying Monthly 120 Payments
- You cannot make the process go any faster than 10 years by making additional payment or larger amount
- Payment don’t have to be constructive so if there is a gap in your full time employment, you can pick up where you left off
- Payment must be paid in full within 15 days of due date.
3) Right Income-driven Repayment Plan
- Must be under a qualifying repayment plan count such as income-based repayment (IBR), income-contingent repayment (ICR), Pay-as-you-earn (PAYE), Revised-pay-as-you-earn (REPAYE), and payments under the 10 year Standard Repayment Plan.
- Tip: Do not sign up for the standard 10 years Standard repayment since it is the most expensive choice and our goal is pay the least amount of money over 10 years.
4) Work Full time (at least 30hrs) for government agency or certain types of non-profit organization under Section 501(c) (3) IRS coder
- This is extremely important! Many non-profit organization are consider public service but are not tax-exempt, thus not eligible for the PSLF program
(b) Total Student Loan Forgiveness (20 or 25 years)
- Professionals who are doing income-based repayment (IBR) for 25 years (or 300 monthly payments).
- Professionals who are doing pay-as-you-earn repayment (PAYE, or REPAYE) for 20 years (or 240 payments).
IMPORTANT UPDATE (10/2021): 6 Massive PSLF Changes
On Wednesday Oct 6, 2021, the US Department of Education announced a massive overhaul to their 10-year Public Service Loan Forgiveness Program, essentially affecting all optometrists working for non-profit clinics like VA, IHS or non-profit universities.
As you already know, 10-year PSLF program allows optometrists with federal student loans to make 120 qualifying monthly payments while working full-time for a qualifying employer (non-profit 501 (c)) to have the remainder of their balance forgiven. These qualifying employers can include any federal, state, local or tribal government and not-for-profit organizations.
Here are the Key Points, but Click Here to Read "6 Massive PSLF Changes + 3 Student Loan Tips for Optometrists" in 2021
(1) Payments made on non-Direct federal student loan such as FFEL, Perkins loans now qualify for PSLF
(2) ALL type of repayment plans will now qualify for PSLF
(3) Previous payments made PRIOR to direct loan consolidation will now count toward PSLF
(4) Full audits of payment rejections due to technicalities
(5) The optometrist’s time spent in active duty will count toward PSLF, with a plan for all federal employees
(6) You have until October 31, 2022 to apply for relief under expanded PSLF
Should I Pursue Student Loan Forgiveness?
Okay, let’s talk about the huge mythical elephant in the room which is Student Loan Forgiveness. Here is something to consider: you still have to pay tax on any loan forgiven (aside frm 10 year PSLF) which is a huge financial tax burden. Let’s do an example and work out the math:
Dr. Normal has a typical student loan debt of $200,000 at an interest 6.8%. She is making a $100,000 salary and decides to do IBR (10%) with a hopeful 25-years loan forgiveness, which means her monthly payment is only $833. So, after 25 years passed, she is only paying $249,900, which is barely enough to cover the $340,000 total Interest payment that accumulated during the loan duration.
She is not even attacking the principle amount of $200,000. So, in the end, she is still left with a total student loan amount of $90,100 interest left + $200,000 original loan = $290,1000.
Assuming the same income bracket of 32% for high-earning doctors, she will get smacked with a Tax Bill of $92,832. This basically means she ends up paying $342,732 (almost 1.75x the original amount).
I know shocking right?? The math doesn’t even work out! I am all for the support of the good old U-S-A, but that is a LOT of trust to pay in our government for 25 freaking years. Also, under the fine print, not all federal loans will get approved (such as the federal family education loan). You must consider the fact that educational budgets/program and tax laws get changed all the time. Every new white house administration will run its policies differently. Who know what new orange-colored fanatic will be the next president.
Now let imagine the WORST-CASE SCENARIO. What if somehow the program gets eliminated?
Dr. Normal is stuck with a $342,732 student loan bill with NOTHING to show for it after 25 years. Furthermore, there are just too many rigid moving gears within each program and this is the perfect storm waiting to happen.
Also, you need to make 240-300 qualifying payments. What if you miss one IBR payment due to some financial emergency? Or, if you decide 10 years down the line, you want to aggressively pay off student loans sooner due to an increase in income or trying to obtain pre-approval for a home mortgage loan (which assesses your debt to income ratio).
Even, under the 10 years Public Service Loan Forgiveness (PSLF) program, you need to be full time for a non-profit. What if you get sick or go on maternity leave, and need to be part time? Technically, then the program won’t count repayment made, each month that you are considered “part time”.
As we began to write this article in 2019, we figured that at least a few professionals who started the 10 years PSLF program back in 10/2007 should have their loan forgiven in 10/2017. We have scoured every news outlet and financial blog online; we found ONE single person who got their loan forgiven via the PSLF. We did unfortunately find multiple PSLF lawsuits made by borrowers against loan providers for misleading information of what a non-profit is defined as or delay in qualifying payments. These hard-working professionals are basically screwed and have to restart their loan payment with nothing to show for the last 5-10 years. Now fast-forward in 2022, PSLF applicants are slowly getting approved but it was due to Biden's massive overhaul of the PSLF 10 years program to fix up some the glitches.
The takeaway is, a lot of things in life can happen in 10 to 25 years! You cannot predict the future; no matter how well prepared you thinks you are. The simple point, being in debt for 20-25 years significantly limits your wealth building.
"A lot of things in life can happen in 10 to 25 years! You cannot predict the future; no matter how well prepared you thinks you are. The simple point, being in debt for 25 years significantly limits your wealth building, that is why we do not advocate loan forgiveness programs for the majority of ODs"
Three Situations to Consider Loan Forgiveness:
While we do not advocate any type of loan forgiveness, there are often 3 situations that we encounter where we do recommend for optometrists to consider for their own financial situation
- (1) 10-year PSLF Forgiveness: An optometrist working full time for 501 (c) or government agency and is fully committed to staying employed for 10 years minimum. Fully aware of all requirements of the program and keep all careful records, while maintaining consistent contact with FedLoans. We recommend keeping saving up for PSLF Side fund just in case PSLF get eliminated by the government
- (2) 20/25 year Total Forgiveness: Any optometrist with existing high-risk medical condition that makes them prone to partial/full disability or death in the near future. This is even more significant to pursue this route if they don’t qualify for disability or life insurance due to lack of prior coverage. Start saving for massive tax bill for all loans forgiven in case they are alive after 20-25 years (Yay!)
- (3) 20/25 year Total Forgiveness: Any optometrist with debt to gross income ratio of 3:1 or greater. While it isn’t impossible for an optometrist making $100,000 with a massive student debt of $300,000 to finish up paying off their loans, they would have to be on strict budget (literally living on beans and rice), pull off saving for retirement and would take significantly longer than 5-10 years to pay off their debt. Sometime the shovel isn’t mathematically big enough to for the massive hole. But they should consider refinancing in the near future if their financial situation changes (such as moving to lower cost of living state, higher salary, eventual reduction in student loans). Start saving for massive tax bill for all loans forgiven.