Public Service Loan Forgiveness: What’s new, what’s left out, and what steps to take

A silver lining of the pandemic is that it sparked intense conversations about how to address student indebtedness and led to recent changes that impact many physicians and students across the nation. Right now, federal student loan payments remain paused and federal student loans are not accruing interest. However, payment requirements and interest accrual are set to resume on May 1, 2022, which will be an end to a significant pandemic-era benefit for many physicians.

At the same time, the Biden administration recently announced a major overhaul to the Public Service Loan Forgiveness program. Here’s what you need to know about the changes to the program and some steps you can take to take advantage of them.

PSLF Overhaul

The Public Service Loan Forgiveness program was first introduced in 2007 as part of the College Cost Reduction and Access Act under the George W. Bush Administration. As a skeptic of governmental benefits — especially those that can benefit high-income earners such as physicians — I recall having many discussions with my medical school classmates about how to best approach the new program.

Will the government actually forgive these loans? Will we be taxed on the forgiven balance? Will my employer qualify? Will payments made during residency and fellowship count toward forgiveness? Above all, the question we wanted to answer was: Is this the best fit for me and my future?

Shortly after the program was introduced, it was obvious that, although physicians could benefit, the program surely was not designed for physicians. After all, it disproportionately benefits specialists, who spend more time in residency training. It’s another disincentive to pursuing primary care.  

Still, here we are, more than a decade later and the program is getting its first major overhaul. Although the changes, again, seem to not directly consider physicians, we can rest assured that we are at least included in the benefits.

Perhaps the most important thing to know about all the changes is that these were all introduced through executive action. This means the changes are all temporary, modifiable, and even reversible with the stroke of a pen if this or a future administration chooses to make adjustments. It does appear, however, that the Biden administration is committed to solidifying a permanent overhaul to the PSLF program and has taken the initial steps to do so.

Here are some key points about the new changes that are important to know.

What’s new:

Payments made on any repayment plan count toward PSLF, even non-income-driven plans.

Payments made on Direct loans and FFEL loans count toward PSLF, including payments prior to consolidation.

Military deferments will count toward PSLF.

In all, these changes are expected to allow roughly 22,000 borrowers to become immediately eligible for forgiveness and give an additional two years of progress to about 550,000 borrowers. Many physicians will be included in these changes.

Importantly, significant investments are also being made to improve the processing time and the dismal approval rate of forgiveness applications. Some reports suggest 99% of applications were denied in the first year applicants were eligible for forgiveness in 2017.

What’s left out:

Despite all the positive changes to the PSLF, there are still some significant problems and shortcomings to the program.

First, the new program changes are temporary. For Federal Family Education Loans (FFEL) to be considered, they must be consolidated to a direct loan prior to the Oct. 31, 2022, deadline. With millions in line for PSLF, and a large number with existing FFELs, this likely means long processing times. The temporary nature of the program changes could mean uninformed borrowers will miss out on participating in PSLF.

Next, the program continues to only include those who are employed by nonprofit or government entities. Physicians are the epitome of public servants; however, the program defines public service by the tax status of the employer, not the nature of the service to society. This is a significant limitation for physicians and many others in health care.

Lastly, this program still only applies to federal student loans and excludes any private student loans. Given the ever-increasing cost of attendance at medical schools and the other costs associated with becoming a physician, many students turn to private student loans for additional funds during training. The PSLF does not consider payments to these loans when calculating income-based loan payments, nor are these loan balances eligible for forgiveness under the PSLF program.

What should I do?

Given the significant changes announced by the Biden Administration regarding the PSLF program, and the temporary nature of the provisions, it is important to conduct a comprehensive review of your student loan indebtedness — whether you are a medical student, early-career physician or seasoned physician.

Beware of scams and fee-based services. Because of the interconnectedness of tax planning and loan repayment as part of a comprehensive financial strategy, you should always talk about these changes with your financial team.

Here are a few additional steps to take:

Confirm with your federal loan servicer that your contact information and other basic information is correct, so you receive important announcements and confirmations.

Submit an updated employment verification to account for all of the months you were employed by a PSLF-qualifying employer.

After submitting your updated employment verification, mark your calendar and/or set a reminder to gather all necessary paperwork and submit your forgiveness application as soon as you are eligible to do so.

If you have FFEL loans, consider consolidating them to a Direct Consolidation loan by the Oct. 31, 2022, deadline so that all qualifying payments on those loans will be included in your PSLF.

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