I got this email from a reader recently on how many physicians are not getting Public Service Loan Forgiveness (PSLF) because of laws in their state regarding who can employ doctors:
I think you should devote one blog to what type of Doc employers would qualify for the PSLF program. Obviously, if a physician is employed directly by the VA [Department of Veterans Affairs], a City or State clinic or hospital, or a state or federal operated correctional facility it meets the 501(c) / govt employment requirement.
However, many physicians’ employment relationship are through a group practice that contracts with a specific health care organization. The biggest being Permanente which contracts with Kaiser.
The health care organization may indeed be a non-profit but the doctor actually works for a profit based group practice and is not eligible for PSLF. This entire issue needs clarification and ‘exposure.’”
I couldn’t agree more. We’re very familiar with the largest groups like Kaiser that pose huge challenges to physicians wanting to get loan forgiveness.
Why and where are physicians having trouble getting employment through nonprofit hospitals?
There’s a fantastic explanation of the physician PSLF employment problem in the initial version of the Aim Higher Act released by U.S. House Democrats:
The Aim Higher Act also makes it explicit that physicians working at a non-profit hospital or other health care facility in states that prohibit the direct hiring of these individuals, such as California and Texas, can also have their loans forgiven through PSLF.”
This law was just a proposal. It hasn’t passed and probably won’t unless Democrats win an electoral sweep in 2020.
University hospitals in states like California and Texas have no such problem hiring physicians directly since they’re faculty members.
That’s why PSLF-eligible physicians in California right now almost always work at places like the VA, UCLA or the University of Southern California (USC) instead of Kaiser Permanente.
For whatever reason, certain state laws in places like Texas and California prevent hospitals from employing physicians directly.
This probably originated from fears that physicians would lose compensation and/or autonomy.
Think of the big business of nonprofit hospital chains. Physicians have clearly seen their independence and pay take a hit, and the profits are disproportionately going to the hospitals.
What probably started as a protective measure by physicians has ended up hurting younger, highly-indebted physicians who could have gotten PSLF if not for this bizarre, state-specific employment rule.
How to handle your loans when your residency is at a for-profit hospital
Another issue is that there are huge hospital chains like the Hospital Corporation of America (HCA) that don’t qualify for PSLF because they are for-profit entities.
Here’s another obstacle faced by a physician reader:
Unfortunately my residency was sponsored by a for-profit hospital chain and I could not qualify for PSLF status although the funding for residency was through government sponsored Medicare. I am currently employed by a non-profit hospital chain, but my group practice is a for-profit organization so PSLF is not available.”
This doc would be sitting at exactly zero credit toward PSLF post-training.
Should they just refinance during residency? Not so fast.
First, using Revised Pay As You Earn (REPAYE), an income-driven repayment plan, during residency would probably have been the best choice. REPAYE gives interest subsidies that often result in the effective interest cost being lower than what you’d get by refinancing as a resident.
Also, there’s a chance a resident at a for-profit hospital could get an attending job at a not-for-profit hospital.
In almost every case I’ve seen, physicians in this situation with more than $200,000 in loans should still utilize PSLF instead of refinancing.
If you start at a for-profit hospital for residency and follow that with a non-qualifying job as an attending, getting PSLF will be very challenging.
Utilizing PAYE or REPAYE as a holding strategy for your loans
Imagine this scenario: Democrats pass a version of the Aim Higher Act that makes all nonprofit hospitals count for PSLF, even if you’re employed by a for-profit group.
If you had refinanced within the past few years, you’d feel pretty annoyed at not being eligible for the hundreds of thousands in potential forgiveness you could have gotten.
This is a real risk for Kaiser Permanente physicians and others employed in for-profit group practices contracted to not-for-profit hospitals.
In an example outside of California or Texas, I had a physician client in the Midwest who was a part of the last physician group not brought under the hospital’s umbrella. The plan was that they would be employees within a few years.
In his case, I suggested forbearance while he waited, since none of his payments were PSLF-qualifying.
You could certainly do that, but then the interest compounds — and you only get three years of total forbearance to use in the first place.
So, for most physicians seeking loan forgiveness while employed at Kaiser Permanente, you could enroll in either REPAYE or Pay As You Earn (PAYE), for example, to keep the interest costs down. That’s a qualifying payment plan for PSLF.
If Congress changed the rules, you would qualify.
Who shouldn’t be on PSLF if employed at a unique, for-profit group practice affiliated with a hospital?
If your student debt-to-income (DTI) ratio is below 0.5, then you’ll have a hard time getting much of your debt forgiven if you’re an attending at a place like Kaiser Permanente.
If you have a DTI ratio over 2-to-1 as an attending, you likely have a ton to gain if PSLF happens. You might even be better off going for loan forgiveness under PAYE or REPAYE in the private sector, which takes 20 to 25 years.
A physician with a debt-to-income ratio between 0.5 to two should make the decision based on their individual situation after consulting with a group like ours. Before refinancing, a physician at a non-PSLF-qualifying hospital with a DTI over two definitely needs a professional review before jumping into refinancing.
Many of these non-PSLF-qualifying hospitals are in community property states
No offense to Texas and California, but the more I learn about these states’ rules, the more complicated it gets.
Both states are community property states. You can utilize something like the breadwinner loophole to cut your payments by as much as half compared to someone living in a regular state like New York.
That means a lot of Kaiser physicians will refinance when they could put their loans onto a plan like PAYE, where they’d potentially get large loan forgiveness benefits that don’t even involve PSLF.
Other big for-profit physician groups have the same PSLF-qualification problem
Imagine two primary care docs in Los Angeles. One works at Kaiser, and one works at UCLA. Both have great benefits, good time off, see plenty of patients and perform vital health services in their community.
Yet the UCLA physician is eligible for PSLF, and the Kaiser one is not.
Congress clearly didn’t foresee this problem when they passed the PSLF bill.
Democrats would say ‘let’s expand PSLF and make the Kaiser Permanente doctor eligible,’ while Republicans would see the example above as a reason why PSLF should be repealed for future borrowers.
Look into non-PSLF forgiveness programs if you’re at a non-qualifying hospital
Many more physicians could benefit from the 20 to 25 year private sector forgiveness available under PAYE and REPAYE.
Yes, you have to pay taxes on the forgiven balance. But a pediatrician with $300,000 of medical school debt working at Kaiser Permanente might pay the same amount under PAYE as with a 10-year private refinance — but over twice as many years. That would result in a lower total cost in today’s dollars by as much as six figures.
Clearly, your options are far more complex as a physician at a non-PSLF-qualifying hospital. Hit us up at email@example.com for a custom plan unique to your situation if you have more than $200,000 of student debt.
Any questions about your loans as a “for-profit-group-employed physician?” Comment below!