Are Student Loans Hanging Over Your Head?

You’ve worked hard to secure a spot in college, persevered through the academics and have graduated. However, according to, in 2015, about 71% of college graduates leave school with an average of $35,051 in debt. This is nearly quadruple the average debt among graduates in 1993. For medical school graduates, the debt was an average of $180,000 in 2015 according to the Association of American Medical Colleges. This can be a daunting black cloud entering the work force and certainly going into residency.

It can be tough to keep up with the changing landscape of debt reduction options and determining the best solution for your specific situation. In December of 2015, the U.S Department of Education launched a new student loan repayment plan called Revised Pay As You Earn (REPAYE) plan which builds upon the previous plans: Income-Based Repayment (IBR) and Pay As You Earn (PAYE). The new plan caps monthly loan payments at 10% of an individual’s discretionary income. This is available to all graduates with federal direct loans, regardless of when the borrower first obtained the loans. In addition to the monthly payment cap, REPAYE will forgive remaining debt after 20 years for those who borrowed for undergraduate study and 25 years for those who borrowed for graduate study.

A few things to consider:

  • Discretionary income is defined by the U.S. Department of Education as “the difference between your Adjusted Gross Income and 150% of the poverty guideline for your family size and state of residence”. The Department of Health and Human Services (HHS) released updates of the poverty guidelines Jan. 25, 2016. As an example , for a family of four in Texas, the poverty guideline is $24,300.
  • REPAYE does not have a monthly maximum payment so if your income takes off, you could end up with a higher payment than you would under the previous plans, IBR and PAYE. You are required to recertify your income every year.
  • Unlike IBR and PAYE, the REPAYE program does NOT have a marriage provision when considering income. If you are married, whether you file taxes separately or jointly, your spouse’s income is still expected to be reported.
  • You should consider the number of qualified payments you’ve made before consolidating loans into REPAYE to factor in possibly resetting the clock towards the forgiveness timeline.
  • When the loan is forgiven, the remaining balance is taxable as ordinary income by the Internal Revenue Service (IRS) which could cause a large tax liability.
  • In all income-driven plans, the government provides an interest subsidy benefit if the monthly payments cannot keep up with accruing interest. The government will pay 100% of the difference on subsidized loans for the first three payment years. REPAYE includes an extension whereby the government pays 50% of any unpaid interest after the three years. REPAYE also includes payment of 50% of the difference on unsubsidized loans indefinitely. This could be particularly attractive to residents with large debt balances and low current income resulting in the 10% cap not covering the full interest amount.

Another option available to those working for the government or other non-profit 501(c)3s is the Public Service Loan Forgiveness Program (PSLF). This requires full time employment (at least 30 hours per week), direct loans and payments made after October 1, 2007. If you have a Federal Family Education Loan (FFEL) or the Federal Perkins Loan (Perkins Loan), they do NOT qualify for the PSLF; however, they may become eligible if you consolidate them into the Direct Consolidation Loan. From the point of consolidation, you would need to make the required 120 payments prior to forgiveness. Only one payment per month counts towards this 10-year timeline. You cannot increase payments in an effort to accelerate the timeline.

You will not receive PSLF unless you make the majority of your 120 qualifying monthly payments under an income-driven repayment plan. The first borrowers eligible for PSLF will be October 2017. If your loan is forgiven, it is NOT considered income by the IRS and therefore you do not have to pay federal income tax on the amount forgiven.

According to, there are two other forgiveness options:

  • Physician Forgiveness: Several states offer student loan forgiveness programs to doctors (some also include pharmacists, dentists, nurses and other health care professionals). New York, for example, offers up to $150,000 to physicians who commit to working in an underserved region for five years.
  • Nursing Repayment Program: This program repays up to 60% of student loans for registered nurses who agree to work full-time (32 hours or more each week) for two years in a nonprofit facility that needs nurses. Nurses that choose to work a third year have the opportunity to repay an additional 25% of their student loans. For more information, you can visit the website of the Health Resources and Services Administration.

There is not a one-size-fits-all solution when it comes to structuring and subsequently eliminating student loans; many factors should be considered. If you’re a resident, you should consider if you plan to pursue PSLF. If yes, then using one of the income based repayment options makes sense. If you plan to pursue forgiveness more long-term (20/25 years), then you should likely maintain direct federal loans versus a private lender. Are you married? What does your spouse earn and do they have student loans? The interest subsidy offered by REPAYE is attractive while you’re in training with low income. The subsidy essentially lowers your effective interest rate; however, once you become an attending, the benefit disappears as income increases. You could consider refinancing through a private lender at that point, but you run the risk of a higher rate than your original loan.

We are available to educate and assist our clients and communities through the process of debt reduction along with ensuring any decisions you make are in line with your overall goal plan. But it’s always important to consult with your student loan servicer(s) before making a change to your existing plan(s).


Federal Student Aid, An Office of the U.S. Department of Education