Student Loan Mistakes
While not the most exciting financial topic in the world, student loans are a large financial obstacle many of my clients face because of the high cost of medical school. This column is going to focus on a handful of common mistakes I see and how to help avoid the financial damage they inflict.
Failing to recertify your income and family size on a yearly basis
Set a reminder on your phone or computer’s calendar to recertify your income each year well before your loan’s deadline. Failure to submit your income documentation each year will cause your loan servicer to automatically deduct a much higher monthly payment, usually the amount of a standard 10 year repayment, from your checking account. Failure to recertify also causes your accrued interest to capitalize into the principal.
Not understanding the full time job requirement
To qualify for PSLF, you must work for an eligible employer AND be working full time. From the PSLF handbook, “if you only have one employer, you must meet your employer's definition of full-time employment or work at least 30 hours per week, whichever is greater.” If you have multiple jobs, both employers must qualify and your total hours must exceed 30 hours.
Never submitting the PSLF employment certification form
You are not technically required to submit the PSLF employment certification form (ECF) until you reach 120 monthly payments. However, waiting that long is not a good idea. Submitting the document after you make your first payment will allow you to confirm that you have the right type of loans, your employer qualifies, and you can verify the student loan servicer is accurately tracking your number of payments. It’s a lot easier to fix an error if you catch it after making one payment instead of after 60.
Switching into REPAYE without understanding its two major negative changes
Revised Pay As You Earn (REPAYE) is the newest Income Driven Repayment option that launched in December of 2015. It offers some advantages, particularly depending on when you took out your loans, but there are two main negative changes you need to be aware of. First, if you are married and file your taxes separately, you can exclude your spouse’s income from the equation that calculates your IBR or Pay As Your Earn (PAYE) monthly required amount. For REPAYE, you cannot exclude your spouse’s income based on tax filing status. So if you are trying for PSLF and your spouse makes an income but does not have federal student loans, this change with REPAYE is a big negative and likely means REPAYE does not make sense for you. Second, REPAYE does not have a monthly payment maximum. IBR and PAYE monthly payments will never exceed the 10-year standard repayment amount. REPAYE does not offer this benefit. The higher your potential future income will be and the lower your student loan balance is, the more of a problem this might be. REPAYE certainly isn’t all bad as there were some good changes. However, I have seen some people switch from IBR or PAYE to REPAYE without understanding the potential negatives.
Not understanding the difference between FFEL and Direct Loans
When the government created the Public Service Loan Forgiveness (PSLF) program and Income Based Repayment (IBR), they allowed both Federal Family Education Loans (FFEL) and Direct Loans to be repaid under IBR. However, and this is a big however, FFEL are not eligible for PSLF while Direct Loans are eligible. Straight from StudentAid.gov: “PSLF is available only for Direct Loans. However, if you have loans made under another federal student loan program, you may consolidate those loans into a Direct Consolidation Loan, which is eligible for PSLF.” So FFEL in their original state are not eligible for PSLF but they are eligible for consolidation into a forgivable loan. Luckily FFEL loans have not been issued since 2010 so only loans taken out before 2010 could have this problem. There are numerous other details to this situation that are too nuanced for the scope of this column. If you are trying for PSLF and you are not positive all your loans are Direct Loans, you need to check now. If you find some are FFEL, contact me or another professional to help you evaluate your options.
This article was originally written in July of 2016