Student Loans for High Income Earners

Wealth Advisor

Jamison, a wealth advisor with EWA, discusses the optimal way to structure student loans, particularly for high-income earners like specialized physicians earning around a million dollars annually. He presents a case scenario involving a surgeon who had six years qualifying for Public Service Loan Forgiveness (PSLF) during her residency and fellowship, switched to private practice, and then moved to a nonprofit hospital. The surgeon had four years left on her loan payments to qualify for PSLF. Jamison explores different payment options, including refinancing and aggressive payoff. The conclusion was that the client decided to refinance and pay off the loan aggressively to avoid limitations on her income and potential uncertainties related to government loan forgiveness programs.

Video Transcript

Hi. I’m Jamison, a wealth advisor with EWA. In this video, we’re going to talk about how to best structure your student loans. If you are a high income earner, what I mean by high income earner is you’re making around a million dollars a year, especially if you’re a specialized physician.

A lot of times this is the case, you may have half a million dollars in student loans. And the question becomes, if you’re working for a nonprofit, do you qualify for Public Service Loan Forgiveness?

Is your income going to be too high where the loans get paid off before anything is forgiven? Or do you refinance and pay them off? We’re going to walk through a sample scenario of a situation that we just helped a client through.

So in this situation, this is a very specialized physician. She is a surgeon, just signed a second contract, going to be making about a million dollars a year for a specialized physician. Generally, they’ve gone through residency, fellowship, and they probably have at least four to six, sometimes eight years that may qualify for Public Service Loan Forgiveness.

So this scenario, this client, she had six years qualify for Public Service Loan Forgiveness through residency and fellowship, worked at a private practice group for the last three years, was off of Public Service Loan Forgiveness.

Obviously with the COVID-19 pandemic, didn’t have to make any payments. Now is switching from private practice to a nonprofit hospital. Income again is going to be about a million dollars a year. And she would have four years left on her loan payments until she qualified for Public Service Loan Forgiveness.

So the question becomes, is income going to be too high for anything to be forgiven in after four years, or does it make sense just to pay the loans off? So in this scenario, the current loan balance is $250,000.

1st scenario we’re going to look at is if they refinance to a five year loan, assuming a 5% interest rate, the monthly payment would be about $4,700 per month. They just paid that out over the length of the loan for five years, they would have paid about $282,000 in towards the loan.

If they paid that same loan off in a three year period at 5%, interest payments would be about $7,500 a month and they would have paid about $270,000 in towards this loan. So the question becomes, what if we qualified for public service loan forgiveness for the next four years?

And is that going going to save them money versus refinancing and paying it off aggressively? The first scenario we’re going to look at is their contract is an $800,000 contract with RVU production bonuses on top of that.

So what if income stays at about $800,000 for the next couple of years? What does that scenario look like? So when you are qualifying your income for student loan purposes, they are going to look back two years prior in income.

So for 2023 loan payments, they’re going to look back at 2021 income because that’s the latest tax. The tax returns that you would have on file, your 2022 tax returns haven’t been completed yet. So that’s going to work in this client’s advantage.

If we look back at 2021 income, adjusted gross income is about 350,000. And then 2022 income again, they haven’t started the new contract yet, so their adjusted gross income will be about 450,000. So really can take advantage of two years of lower income payments before the new contract kicks in.

As you can see on the chart on the screen here, after those two years, the loan balance would be about 188,000. And then assuming adjusted gross income is around 800,000, they would have paid after four years, 230,000 into this loan and about $42,000 would be forgiven.

So in this scenario, financially, it would make more sense to qualify for public service loan forgiveness, but with production bonus. And this surgeon is going to be working very hard to build their practice up at the new hospital.

Um. They want their income to obviously be as high as possible with high production. So the second scenario we’re going to look at is, what if the income is about a million dollars a year? After the four years, the loan balance that would be forgiven is about $2,000, and they’ve paid $270,000 into the loan.

So pretty much the exact same. If they paid the loan off in three years versus incomes at a million, what does all this mean? And what the discussion with this client was they decided they want to just refinance, pay off as soon as possible for a couple of reasons.

One, they didn’t want to feel limited with their income and worrying about, what if I have to keep my income down to try to save on the loan payments on the balance that would be forgiven. That’s kind of a competing goal with trying to build their practice up and be as productive as possible.

And the other thing was, they decided a million things could happen with a government loan and with loan forgiveness. What if laws change? What if something doesn’t qualify and the payments don’t count?

So they decided that $40,000 savings that could be the case is not worth just paying it off as aggressively as possible. If you have any questions on your student loans and your financial situation, feel free to reach out and we’re happy to help you.

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