Public Service Loan Forgiveness is a government program in which federal student loans get forgiven after 10 years of work at a qualifying non-profit or government organization. I’m going to assume for the purposes of this article that you are at least a little familiar with the plan. You can read more about it here.
There are a variety of considerations one must take into account when considering a job that qualifies for Public Service Loan Forgiveness. Often times the dentistry isn’t very exciting and the areas that offer these kinds of jobs can be somewhat remote. But I want to answer the economic question. How valuable is Public Service Loan Forgiveness from an economic standpoint?
I recently had a new grad that was offered a job at a public clinic in central California that would have qualified him for PSLF. We’ll call him Dr. Holliday. The salary was going to be $100,000 a yr and there was the potential to earn another $20-30,000 a year based on patient volume. Let’s assume $120,000 a year total compensation with an adjusted gross-income (AGI) of $110,000. AGI is your total income minus certain deduction allowed by the government and is the number used for determining your loan payment under the repayment plans. We’ll assume that income goes up by 3% a year. We will also assume $450,000 of student loans at an average of 7% interest. Okay, now we are ready to answer the question.
In order to qualify for the Public Service Loan Forgiveness, you have to be enrolled in a repayment plan (PAYE, RePAYE, IBR, etc.). So don’t forget to do that. (Side note: some residency programs do in fact qualify you for PSLF. You will need to be receiving a salary. Make sure you look into this if you are going into residency). Using this government calculator here, we can see that under the PAYE plan Dr. Holliday would be paying $768 dollars a month for the first year. After 10 years, he would have paid about $105,000 in total student loan payments (This includes the income increases. Remember, as your income goes up, so too does your monthly payment. In year 10 the monthly payment would be around $1000 a month). If Dr. Holliday made 10 years of qualifying payments, his debt would be forgiven and there would be no tax bill. His income would be reduced on average by about $13,000 a year to make his loan payments. Although the loan payments only average about 10k a year, he would need to earn about $13,000 a year because of the taxes he would have to pay.
The best way to determine the economic value of the PSLF program is to figure out what one would have to do in the private sector to end up in the same situation 10 years from their career start date.
So, let’s say Dr. Holliday has a friend, Dr. Earp (same debt assumptions). Dr. Earp wants to be debt free in 10 years, just like Dr. Holliday. But Dr. Earp received an offer for $180k in the private sector. He likes the idea of being debt free in 10 years but he wants to pay off his student loans using his higher salary. Who got the better deal?
If Dr. Earp wants to be debt free at the end of year 10, he will have to make the standard payment amount. But he could probably refinance in the private sector and get a lower rate, say 5.5%. If he did this, his monthly payment would be about $4,890 for 10 years. If he made this payment every month for 10 years, Dr. Earp would, like Dr. Holliday, be debt free in 10 years. But it would have cost him a lot more money than Dr. Holliday. Dr. Earp would be paying $58,680 a year to make his loan payments. Which means after Loan payments he gets to live on $121,320. But don’t forget about taxes. At $180,000 a year in income, Dr. Earp would pay an effective federal tax rate of somewhere in the neighborhood of 25%. We will ignore any state income taxes for now, but realize that his tax rate could be higher. So to make his annual payment of $58,680, he would actually have to earn about $80,000 (which again would be higher if you live in a state that has income taxes). In summary, Dr. Earp needs to earn about $67,000 more in gross income ($80,000 Dr. H’s Gross Student loan cost -$13,000 Dr. E’s gross student loan cost) than his friend Dr. Holliday to be in a better situation. In this example, Dr. Holliday would likely end up with a higher net worth or greater lifestyle capacity at the end of 10 years assuming all other things equal as he has $7,000 more in gross income after loan payments.
So you might say that in this example, the economic value of the PSLF program is $67,000 a year. Because that is what Dr. Earp would have to earn in the private sector just to have his loans paid off in 10 years based on these assumptions.
In other words, if you are looking at a job in the private sector and debating between another job that would qualify you for PSLF, and paying off your debt is your primary concern, the private sector would need to pay you at least more than $67,000 to be a better deal.
Keep in mind that these are assumptions and each situation is different. I have seen new grads in employment situations that qualify for PSLF making $140,000 a year. And I have also seen new grads in the private sector making $120,000 a year. And state income taxes could make the PSLF program even more valuable.
Again, there are far more reasons to choose a job than getting your loans paid off. And I actually hope that your reasons for working are not primarily economic. But hopefully this gives you a framework for how to choose wisely.
If you need help comparing a situation, please feel free to contact me.
~Ryan Schulte, financial advisor
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS).OSJ: 750 B Street #2740 San Diego, CA 92101 ,612-746-2200. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. WestPac Wealth Partners, LLC is not an affiliate or subsidiary of PAS or Guardian. CA Insurance Lic. #0F03557 | Guardian and its subsidiaries do not endorse or have any direct or indirect responsibility with respect to this activity | Pinpoint #2016-26545. This material contains the current opinions of Ryan Schulte but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.
About Ryan Schulte
Ryan Schulte is a financial advisor who focuses his practice on Dentists. He works with young dental professionals that are transitioning in their careers and helps them manage their student loans, understand the insurances they need and how to design them, how to investment money without speculating and gambling, what it means to be an independent contractor and a business owner, understand their tax situations and a variety of other issues unique to dentists. Ryan lives in the mountains near Yosemite with his wife and 5 boys on 4 acres that they affectionately refer to as the “The Schulte Farm.” Ryan serves on a community development council dedicated to redeveloping an industrial zone in Madera County. He also coaches little league and enjoys hiking, brewing beer, playing softball and soccer. His contact info can be found at www.ryanschultecfp.com.