How best to use loan payoff grant

[Human Generated Name]

My wife has been at her current primary care position in a medically under-served area for the last two and a half years and just started a three year service obligation to receive a state grant of $105,000 toward loan repayment. The grant is paid out over three years and the money will be sent directly to her. Additionally, her job qualifies for PSLF and she has been tracking her eligibility for that with a likely forgiveness eligibility date in 2021. Her loans are currently:

Federal loans- $240,000 ($40,000 subsidized, $200,000 unsubsidized, all at 6.8%) Currently in IBR. Most recent recalculation puts her monthly payment at $750, but I expect that to rise for each the next 2 to 3 years with income increases.

Private loan ($14,000, at 2.5%) Currently paying about $175/month with a minimum payment of $117/month.

The repayment grant will be paid out as $25,000 at the end of the first year, $35,000 at the end of the 2nd year, and $45,000 at the end of the final year.

I am a specialist less than a year out of fellowship with a very similar loan burden, who should also qualify for PSLF around 2020. Thus we have not been paying very aggressively towards the loans or refinanced them with the goal of maximizing our forgiven amount and instead maximizing our tax protected space and saving our additional money in taxable and an emergency fund. We decided to stay in IBR when rePAYE was offered due to the concern about capitalizing interest when we changed plans and that our incomes could rise to the point where 10% of our disposable income would have been above the standard repayment cap of IBR and resulted in a higher payment.

My questions is this: Given the low interest rate on my wife's private loan and the uncertainty about PSLF, does it make more sense to pay off the private loan as part of the first year's payment, or as part of the last year's payment? My best estimation is we would pay about $900 in additional interest on her private loan by paying it in the final year, versus gambling that PSLF will stay in it's current uncapped condition and the even greater interest accumulated there will be forgiven with the rest of the balance. I also think the grant expects her to prove that she used to money to pay the loans with, and that we cannot pay things off ahead of time and just keep the money. Any other creative thoughts?

[shantster]

My guess is that you want to maximize the grant and PSLF to pay as little as possible on your end. A few questions:

1. How exactly is their accounting on her repayment? Are you able to use the lump sum payment provided each year to make monthly payments in the amount of the monthly payment or do you have to take the lump sum and immediately apply it to the loans?

2. For PSLF purposes, if you put a big payment down and choose "apply to future payments," does that count towards your number of payments? For example, if you choose to put down $7500 in one payment and apply to future payments, would that count as 10 of your required 120 payments? I would not think it would move your "clock" forward in when you get your repayment, more that each month that passes would be considered a "paid" month.

 

If you are able to pre-pay the sum for PSLF purposes, it would make sense to put that money directly to the federal loans with the plan to apply to future payments and not have to worry about paying those out of your pocket for a number of years. The private loan interest is quite small so you can pay it over time. Alternatively, you could simply put in the $9000 (12 months of $750/month if no changes in that time period) that would be required directly to the federal payments to apply for the entire year, then pay off the private loan in entirety, then put the remaining funds to the federal loan as future payments.

 

If you aren't able to do any pre-payment on the federal loans for PSLF purposes, and you are able to store the money from the grant for monthly payments (and not a lump sum), you could keep the money to pay off the federal loan bills each month. I would presume that you are required to use the entire yearly stipend in that 12 month (1 year) time period so you could save all the money needed for each month's payments (both federal and private) in a side fund and put the remainder in a lump sum to the private loan, which will not be forgiven in PSLF.

[Human Generated Name]

I actually hadn't thought of using the grant as the monthly payments. The only language about the payments that I could find in the documents my wife has just says this

"The terms of loan repayment granted under this article shall be as follows:

(a) After a program participant has completed one year of providing services as a physician in a medically underserved area, up to twenty-five thousand dollars ($25,000) for loan repayment shall be provided.

(b) After a program participant has completed two consecutive years of providing services as a physician in a medically underserved area, an additional amount of loan repayment up to thirty-five thousand dollars ($35,000) shall be provided, for a total loan repayment of up to sixty thousand dollars ($60,000).

(c) After a program participant has completed three consecutive years of providing services as a physician in a medically underserved area, an additional amount of loan repayment up to forty-five thousand dollars ($45,000) shall be provided, for a total loan repayment of up to one hundred five thousand dollars ($105,000)."

Nothing about any requirements for how to use the money or the lump sum payments that I was assuming. I think your recommendations to use them as the monthly payments for the PSLF requirements is a great idea that will maybe let us make the payments until she qualifies for PSLF and save the rest of the money for other goals. Thanks!

[Zaphod]

Human Generated Name wrote:

I actually hadn’t thought of using the grant as the monthly payments. The only language about the payments that I could find in the documents my wife has just says this

“The terms of loan repayment granted under this article shall be as follows:

(a) After a program participant has completed one year of providing services as a physician in a medically underserved area, up to twenty-five thousand dollars ($25,000) for loan repayment shall be provided.

(b) After a program participant has completed two consecutive years of providing services as a physician in a medically underserved area, an additional amount of loan repayment up to thirty-five thousand dollars ($35,000) shall be provided, for a total loan repayment of up to sixty thousand dollars ($60,000).

(c) After a program participant has completed three consecutive years of providing services as a physician in a medically underserved area, an additional amount of loan repayment up to forty-five thousand dollars ($45,000) shall be provided, for a total loan repayment of up to one hundred five thousand dollars ($105,000).”

Nothing about any requirements for how to use the money or the lump sum payments that I was assuming. I think your recommendations to use them as the monthly payments for the PSLF requirements is a great idea that will maybe let us make the payments until she qualifies for PSLF and save the rest of the money for other goals. Thanks!

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Unless they actually pay loans, the "repayment" is simply more income with a different label on it. They will usually issue it and you can do whatever you want with it.

It may be a good idea to put it in your taxable as the side account accumulation in lieu of making full payments as sort of an insurance against PSLF not working out or a larger than expected tax bill.

[DMFA]

Many of these repayment programs do not allow for you to be on any other repayment or forgiveness program.  I'd go back and re-read the fine print.

My wife was on PSLF but our state's physician loan repayment program did not allow for it and, since we'd may nearly as much with PSLF as we would with a shorter-term lower-interest refi (because she no longer has a PFH), we refi'd with SoFi and are doing PELRP.  However, our state pays directly to the loan servicer, so we don't even get the option as to what to do.

Also find out if any of that money is taxable, e.g. if you'd get a 1099 for it at the end of the year.  You'd get income plus self-employment (up to 15.3%) taxed on it.

[mpdoc]

Is this through the National Health Service Corps State Loan Repayment Program?  There is some guidance here: https://nhsc.hrsa.gov/currentmembers/stateloanrepaymentprogram/faq/#terms (I've copied and pasted below)

The NHSC is (in my experience) a slow moving bureaucracy but is quite picky about making sure the instructions are followed to the letter, and the penalties for any breach of contract are severe.  I'd try to get any guidance they give you on PSLF payments in writing, but even if you get bad info from the state I wouldn't count on that getting you "off the hook" for penalties.

Might help to run the numbers and figure out what the largest possible payment on IBR will be (I think it's capped at the 10 year standard repayment amount) to figure out the optimal timing for paying off the private loan.

Good Luck!!

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Do you consider the Public Service Loan Forgiveness Program a service obligation (making the provider ineligible for NHSC SLRP)?

We don’t consider the Public Loan Forgiveness Program a service obligation. Thus, providers participating in it are eligible for the NHSC SLRP.

What requirements must clinicians meet in order to apply for our state SLRP?

To qualify for the NHSC SLRP, clinicians must meet the following criteria:

1. Be a U.S. citizen (either U.S. born or naturalized) or U.S. National with a valid, unrestricted health care license or certificate for the state in which he or she practices.


2. Have no other existing service obligations/commitments (e.g. Primary Care Loans)


3. Be free of judgments arising from federal debt


4. Cannot have:
   
   
   
   1. Defaulted on any federal payment obligations
   
   
   2. Breached a prior service obligation to the federal/state/local government or other entity, even if he or she subsequently satisfied the obligation
   
   
   3. Had any federal or non-federal debt written off as uncollectible or received a waiver of any federal service or payment obligation.
   
   
   
   


5. Must be currently employed or have accepted full-time (minimum of 40 hours per week) / half-time (a minimum of 20 hours per week) providing direct patient care in an
   eligible discipline, at an approve site located in a designated HPSA.


6. Must agree to use the NHSC SLRP funds only to repay qualifying educational loans.

[Human Generated Name]

Thanks for the replies. This program is a state run repayment plan and not part of the NHSC program. I went back to check their criteria and they only state that you cannot have another contractual service obligation to be eligible. I would think that PSLF should be fine, just as the NHSC seems to view it, given the lack of any contract or service obligation to receive it. I also looked into how it was paid out, but couldn't find anything from the program itself. My wife has a few colleagues that have been through the program, so she will ask them. The IRS does have one publication that addresses payment situations like this. https://www.irs.gov/publications/p970/ch05.html

The pertinent part is this:

Student loan repayments made to you are tax free if you received them for any of the following.

• The National Health Service Corps (NHSC) Loan Repayment Program (NHSC Loan Repayment Program).


• A state education loan repayment program eligible for funds under the Public Health Service Act.


• Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in under served or health professional shortage areas (as determined by such state).

I think she pretty clearly qualifies for the third definition, so hopefully that won't be confusing to show on the taxes next year. Based on what you have recommended I think we'll probably use the money as the monthly payments for the federal loan and to pay down the private loan over whatever time period my wife feels most comfortable with. That should give us a nice buffer while we see if PSLF still exist in its current state when she qualifies. Thanks again.

[shantster]

If you can simply keep the money and use it for monthly loan payments, it might be easiest to open a side checking account, put that money in there, and use it for minimum monthly payments for both the federal loans on IBR amount and private loan. Unless your IBR payments go up significantly, the grants will be enough to pay the monthly minimums for each loan for more than 3 years. That way you keep the money separated in case you need to provide any form of documentation that it was used specifically for student loans.