PSLF, ETFs, and FSAs

Transcription – WCI – 257
Intro:
This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.
Dr. Jim Dahle:
This is White Coat Investor podcast number 257 – PSLF, ETFs, and FSAs.
Dr. Jim Dahle:
This episode is brought to you by Laurel Road for doctors. Laurel Road is committed to serving the financial needs of doctors. You take care of us, it's time someone took care of you.
Dr. Jim Dahle:
White Coat Investor readers and listeners receive a cash bonus when you refinance your student loans with Laurel Road. Laurel Road's easy-to-use online application process allows you to see personalized rate options in only a few minutes. Plus, we don't charge any application or origination fees or prepayment penalties.
Dr. Jim Dahle:
For terms and conditions please visit www.laurelroad.com/wci. Laurel Road is a brand of KeyBank NA, a member of FDIC. All credit products are subject to credit approval.
Dr. Jim Dahle:
All right, let's do our quote of the day today. Should we start with that? This one comes from Mr. Money Mustache. He said, “Frugality is great. No, not just great. It's the only non-ridiculous lifestyle for the thinking person.”
Dr. Jim Dahle:
I like that. And I like you guys. I like what you do. I appreciate what you do. I hope your patients, your clients appreciate what you do because you spent a long time learning how to do what you do. It's hard and there's liability. And sometimes you're working at night, evenings, weekends, holidays, whatever.
Dr. Jim Dahle:
I'm getting ready to go on holiday as soon as we finish recording this. I've got a flight to Canada waiting for me. So, by the time you hear this, I'll be back from my trip. I'll tell you all about it, but I'm looking forward to it. All we got to do is answer some of your questions and I get to go on vacation.

Dr. Jim Dahle:
What do you need to know about? Well, April 9th through 17th is the Passive Income MD Real Estate Academy. You can sign up again for that April 9th through 17th. That link will be whitecoatinvestor.com/prea. Check that out.
Dr. Jim Dahle:
Remember, this is Peter Kim's Passive Income MDs course on private real estate investing. We're talking about syndications, funds, etc. If you don't know how to evaluate a syndicator or a fund, the investment as well as the operator, this is the course that teaches you how to do it. You also get access to that private community there, where you can work with others to vet deals and learn more about how to do that. Check that out at whitecoatinvestor.com/prea.
Dr. Jim Dahle:
Hey, if you haven't nominated your favorite financial educator, these have to be practicing docs or dentists, you can also do that this month. We'll be closing up that application process by the end of the month. Every year, we award this to somebody. It's a thousand dollars cash award to someone doing this out of the goodness of their heart.
Dr. Jim Dahle:
They can't be bloggers. They can't be a financial advisor. We're talking practicing docs, dentists who are doing this for their colleagues, for their trainees, for students and nominate them. We want to recognize them and we want to recognize what they're doing. We want to encourage other people to do the same thing. So, if you would like to put a nomination in for that, you can do that at whitecoatinvestor.com/educator.
Dr. Jim Dahle:
All right, let's take your questions. The first one is about FSA funds.
Speaker:
Hi, Jim. Thanks for all that you do. I've got a question about using FSA funds to make donations of goods. If I have unused medical FSA funds, and I buy a variety of products like feminine hygiene products or baby care products, and then want to donate that to a local shelter, can I write off those donations on taxes? Furthermore, if I use funds from one year, say 2021, but I don't make the donation until 2022, which year do I count the deductions for? Thank you.

Dr. Jim Dahle:
All right. Here's the deal. You are not supposed to be able to use an FSA for anything besides healthcare expenses that you and your family use. You're not supposed to be able to use an FSA to buy something that you then donate and take a tax deduction for. That's not the way it works.

Dr. Jim Dahle:
Now, is the IRS going to catch you? Probably not. They're probably not going to catch you. Let's be honest, but you're breaking the rules of FSAs. That's not how they work. It's supposed to be stuff that you are going to use.
Dr. Jim Dahle:
As far as how you take a deduction when you donate something to charity it's in the year you donate it is when you can take that deduction. So, I don't think you should be buying stuff with your FSA that you're just planning to donate to charity.

Dr. Jim Dahle:
See if you can figure out a way to put less in your FSA or have your employer concentrate, or compensate you in a different way, or buy stuff that you'll actually use eventually for your health. There's lots of things you can use an FSA for. There are all kinds of eligible expenses that you can use FSA money for.
Dr. Jim Dahle:
The difference between a flexible spending account, of course, and an HSA, a health savings account is in the HSA you can roll money over into the next year, whereas an FSA is use it or lose it. That's the main difference. But there are all kinds of things that you can buy with an FSA that you might not have thought about. They've got extensive lists online. There's got search tools that you can use online.
Dr. Jim Dahle:
But let me just go through some common eligible stuff that you can use it for. Acupuncture, ambulances, artificial limbs, artificial teeth, birth control treatment, blood sugar test kits for diabetics, breast pumps, lactation supplies, the chiropractor, contact lenses and solutions.
Dr. Jim Dahle:
Crutches, dental treatments, office visits and co-pays, drug addiction treatment, drug prescriptions, eyeglasses, fluoride treatments, flu shots, guide dogs, hearing aids and batteries. Infertility treatment, that's a common one for docs.
Dr. Jim Dahle:
Inpatient alcohol treatment, vaccines, vasectomy, vision exam, walkers, canes, wheelchairs, midwives, laser eye surgery, insulin, lab piece. There are all kinds of stuff that you can use this for. Certain over-the-counter drugs and medications, stock up on your ibuprofen. There's lots of stuff you can buy with your FSA. It's probably not something to be mixing around with your charitable donations though.

Dr. Jim Dahle:
All right, let's take our next question off the Speak Pipe. This one's from Catherine.

Catherine:
Hi, I have a question about the pros and cons of living off of loans versus living off of savings and investments. Basically, as I start medical school, I can either take out the maximum amount of loans or I can use the $60,000 that I have saved in an investment account right now that's outside of an emergency fund outside of retirement savings to live off of for the next four years.
Catherine:
I hate to use the money that I've invested because it's making great returns, but I also hate to max my loans and take that on. I’m not really sure what math would make more sense there. Thanks.

Dr. Jim Dahle:
All right. Let's get into the math of it to start with. The first question is what are the scenarios in which you can come out ahead taking out loans? Scenario number one is that your investments earn more after-tax than the loans cost you. So, if you're taking out loans at 6%, which is pretty typical for med school loans, and you earn 10% and keep 7% after-tax, then you've come out ahead. That is why this can work out for you.
Dr. Jim Dahle:
Obviously, on a risk-adjusted basis, it's pretty hard to beat 6%. 6% guaranteed is a pretty attractive return actually. Because if you look at the guaranteed investments out there, we're talking about 2% at best is what you're going to get on those, with the exception of I bonds and that's probably temporary.
Dr. Jim Dahle:
But the other thing to keep in mind here about this is the other way that you can come out ahead, which is to have someone else pay off those loans. So, you get the best of both worlds. You get to take out all this money, spend it on whatever you want, pay for your medical school. Take out a little extra, go down to the bar with it, buy a season ski pass with it.
Dr. Jim Dahle:
And then because they're federal student loans and you end up working for a 501(c)(3) after you come out of training, you get them forgiven under public service loan forgiveness. That could also come out ahead. It doesn't feel very right to me necessarily to take out money you don't need to do that, but it's not illegal. And you could come out ahead doing that.

Dr. Jim Dahle:
Now, would I recommend that? No. What I recommend, if you have money that's not in retirement accounts, I would use that for medical school. $60,000, whether you spread that out 15 a year or whatever, and that keeps you from taking out private loans or whether you front load it and use it to pay for the first year so that you don't have to start taking out loans and that interest doesn't start piling up on you until your second year. That's probably what I would do.
Dr. Jim Dahle:
If I was starting med school and I had $60,000, I would use it to pay for med school. You're investing in yourself. That's going to be a way better investment than anything you can invest in financially. So, I would use your money to pay for med school. That's what I'd do.
Dr. Jim Dahle:
Now, whether you do it all at once, or whether you spread it out over a few years to try to improve the types of loans you get, that's what I would do. But is it possible you can come out ahead through this moral hazard? I'm not saying you're immoral, that's not what the word means. It's an economics term.
Dr. Jim Dahle:
When they're offering something like loan forgiveness, it causes people like you to make decisions differently and that's called moral hazard. And the idea is that you take out loans that you wouldn't have otherwise taken out if PSLF didn't exist. So good luck with that decision, but those are the things to keep in mind as you make it.
Dr. Jim Dahle:
All right. Let's take a question now about ETFs. This one comes from Tim, who I think all of you know pretty well.

Tim:
Hi, Jim. This is Tim in Salt Lake City. Is it okay to buy ETFs with market orders? I know that you're supposed to buy when the spread is relatively small, so ideally in the middle of the trading day. But I've also heard that limit orders may protect you from things like flash crashes or large spreads. But honestly, putting in limit orders is kind of annoying. So, I wanted to get your take on whether you think market orders are okay, or whether limit orders are worth the extra effort.
Tim:
The second question, a little mini question, is what do you think about buying an ETF by the dollar as opposed to by the share? Now, many brokerages are offering partial or fractional ETF shares. And so, it's nice to put in just a dollar amount and buy that amount. Is that okay or somehow, they're getting a hidden fee in there with those? Thanks, bye-bye.
Dr. Jim Dahle:
Tim, that's a great question. Let's do the first one first. Limit orders or market orders. When I first started trading, ETFs is what is technically called. I don't actually really trade them. I just kind of buy and hold them and occasionally tax less harvest them and occasionally donate them to charity.
Dr. Jim Dahle:
But when you do that, everybody says put in limit orders so you don't get burned. And so, I put in limit orders. And sometimes it'd execute right away, like when the price was falling and when the price was going up, it wouldn't execute. And then I'd have to go back in and put another limit order in and put another limit order in, and I'd do it three or four times and end up paying 25 cents more than when I first put the order in. And I was super annoyed about it.

Dr. Jim Dahle:
And so more recently, in the last couple of years, I'd just been putting them in market orders. Here's the deal. If you look at the ETFs I’m buying, these are super liquid ETFs. High volume ETFs, things like the Vanguard total stock market ETF VTI. This might be one of the most widely traded ETFs out there, or the small-cap value ETF VSF or the Vanguard REIT ETF VNQ.
Dr. Jim Dahle:
These are not like obscure little ETFs nobody's heard of. These are major ETFs, high-volume ETFs. And if you put a market order in, the spread is like a penny or less, and it's going to execute right away. And so, that's what I've been doing. I've just been putting in market orders and no big deal. I watch them make sure they actually execute it and pretty much that's what happened. What I see is what I get and no big deal.

Dr. Jim Dahle:
I basically stopped using limit orders. I just use market orders for those ETF purchases. Whether I'm doing it in my 401(k) at Fidelity, whether I'm doing it in my taxable account at Vanguard, I've been using market orders.
Dr. Jim Dahle:
The second question is, should you do this cool feature, this fractional share feature? And I think it's super convenient because it eliminates one of the problems of using ETFs. One of the reasons I prefer traditional mutual funds over ETFs is that you can just put the dollars in. You don't have to calculate out the shares aside from the fact that you can put the order in and it just takes place at the end of the trading day. But you can do that.
Dr. Jim Dahle:
Essentially, it’s the same thing with fractional shares. You can just pick the dollar amount. I want to put $5,000 into VTI and you can just do that at Fidelity.
You can't do it Vanguard because they don't allow fractional share trading. But if your brokerage is a place that allows it, sure, why not? I think it's super convenient. It's no big deal to have fractional shares in there.
Dr. Jim Dahle:
I wish all brokerages would do it. I suspect all will eventually, but I think it's actually probably a better system to allow that. So, I wouldn't worry about it all. I don't think there's an extra fee. You're not losing anything there. If you are, it's pretty trivial, especially with these very liquid ETFs that most of us are using, which are basically Vanguard index fund type ETFs.
Dr. Jim Dahle:
All right. Next question is about the recent fiasco at Vanguard. If you want a reason to hate Vanguard, this is a reason to hate Vanguard. Take a listen.

Chad:
Hi Jim. This is Chad from Georgia. Jason Zweig had an interesting article in the Wall Street Journal on January 22nd. He reported that Vanguard's target-date retirement fund 2035 and 2040 distributed approximately 15% of their total assets as capital gains.
Chad:
This was felt to be related to a change in the minimum investment requirement for institutions which prompted many institutions to get out of the standard fund and into an institutional equivalent.
Chad:
Jason Zweig goes on to report how individual investors holding these retirement funds and taxable accounts got hit with large tax bills. One person with $3.6 million in the fund got a $150,000 tax bill. I'm curious what your take is on this situation and what lessons can be learned. I assume holding ETFs as opposed to mutual funds in taxable accounts could protect someone from an event like this. Thank you for all you do.
Dr. Jim Dahle:
All right. Yeah. So, if you want my take on it, you can go back and read a blog post I published on February 7th, 2022 called Four Lessons from the Vanguard Target Retirement Long-term Capital Gains Distribution Disaster. And that's what it was. Vanguard totally dropped the ball here. They did not stop to think about what the consequences of what they were doing was.
Dr. Jim Dahle:
Now, what they are doing is actually good for lots of people and lots of investors. They were lowering the expense ratio to be in these funds for a number of different institutional investors. Including maybe your 401(k), maybe some pension you're in. So, it was a good thing they were trying to do, but they didn't think through the consequences.
Dr. Jim Dahle:
What they did was they lowered the minimum investment to get into a particular share class of the target retirement funds. And so, a bunch of people that could get into those basically sold the other share class and bought this share class. But in this particular case, they were technically different funds.
Dr. Jim Dahle:
For these people, these 401(k)s and pension plans, it was no big deal because they're not taxable investors. They're inside a 401(k), there's no tax consequences to realizing a capital gain.
Dr. Jim Dahle:
But what ends up happening when they leave is that it forces the fund, that is now smaller, to sell assets off. And that realizes capital gains, and those must be distributed to the remaining investors.
Dr. Jim Dahle:
This is a big problem in a lot of actively managed funds in that the fund starts doing really well. People pile money in and the fund starts not doing well. People pile out and then the fund still got all this capital gain. So, it has to sell all these appreciated shares and the people who are still in the fund get hit with the taxes for that.

Dr. Jim Dahle:
And so, it's a big problem investing in actively managed funds in a taxable account, especially if the fund does really well and then does really poorly. Think about a fund like the ARK funds. They're technically ETFs, but if they're mutual funds, you could have this sort of an issue, where you could end up paying capital gains on money that you never actually made any money on. It's one of the downsides of the mutual fund wrapper, mutual fund type of investment.
Dr. Jim Dahle:
But in this case, the lessons to learn, there's basically four of them. Number one, target retirement funds, life strategy funds, other funds of funds are not for taxable accounts. They're for retirement accounts. I've always told you to only put them in retirement accounts. Everybody else who knows anything about investing tells you only to put them in retirement accounts.
Dr. Jim Dahle:
I get it that people want to keep things simple, and this does help you keep things simple, but sometimes there's a price to be paid for simplicity. Like Einstein said, “Make things as simple as you can, but not more simple.” And this is the case of making things more simple than you really can. This is the price you pay if you tried to keep those funds in a taxable account.

Dr. Jim Dahle:
Lesson number two is that you can get massive capital gains distributions without actually having any capital gains. And that's important to understand with mutual funds. Number three, funds without ETF share classes are vulnerable. Now, that's especially actively managed funds as I mentioned, but even index funds that don't have ETF share classes, have some vulnerability here. Like a Fidelity index fund, for example.
Dr. Jim Dahle:
Beautiful thing about the Vanguard index funds is they've got that ETF share class. And so, if you got to have this sort of a scenario happen, you can give the shares essentially to the ETF creators that can basically break down ETFs into their component parts and they can take the capital gains. Any fund that doesn't have an ETF share class has that vulnerability and the target retirement funds do not have an ETF share class. That makes them in situations like this much less tax-efficient.
Dr. Jim Dahle:
And lastly, fund companies, even Vanguard, aren't always on your side. I don't know that anybody thought about this in advance, but certain companies certainly had some competing priorities to weigh.
Dr. Jim Dahle:
They want to service institutional investors and want to service individual investors. They want to take care of those who invest inside retirement accounts and pensions, and those who invest outside of them. But in this case, they either consciously, or without a conscious decision didn’t care more about those individual investors who had target retirement funds inside a taxable account.
Dr. Jim Dahle:
Now, my understanding is they've made some changes to ensure this won't happen again. But there are no guarantees. So, a pretty lousy situation for anybody who's holding those funds in a taxable account.
Dr. Jim Dahle:
All right, let's take another question about exponential technologies.

David:
Jim, this is David from California. This isn't so much a podcast question as it is a podcast subject suggestion. How about discussing exponential technologies and perhaps inviting Rick Edelman on for a Q&A session. He's pretty much an expert in the field and no longer associated with the company that bears his name. Thanks a lot.
Dr. Jim Dahle:
I don't pretend to be an expert on exponential technologies. What are we talking about with these? We're talking about things like virtual assistance, human augmentation or cyborgs, big data, biotechnology, blockchain, cybersecurity, lots of exponential technologies out there.
Dr. Jim Dahle:
And oftentimes when people want to talk about some sort of thing like this, they're talking about investing in the companies that are doing these sorts of things. And this reminds me of the big rush to invest in ARK ETFs last year. Everyone was like, “Oh, all this stuff's going to change the world. You got to invest in it, put your money in it.” And then of course it became a bit of a bubble. And everybody rushes in, then everyone realizes maybe it's not all that and a bag of chips and rushes back out.

Dr. Jim Dahle:
I'm not going to pretend I know about all these exponential technologies so that I can explain them all in great detail, nor am I saying you can't make money by investing preferentially into stocks that are associated with these technologies.
Dr. Jim Dahle:
What I am saying is that the market probably knows more than you do, and you may be better off just buying these sorts of companies at market weight using a low cost broadly diversified index fund rather than trying to find a guru, whether that's Rick Edelman or somebody else to tell you which ones are going to do particularly well, which of these dozens of exponential technologies are really going to take off and create a lot of value and end up being a great investment and which ones aren't because I truly have no idea. The good news is, I own them all. If they're publicly traded. I own them.
Dr. Jim Dahle:
All right. Let's talk about active managed accounts. This is a question from Michael on the Speak Pipe.

Michael:
Hi, I'm a big fan. I have a question regarding someone with established finances in his mid-50s, who has been saving in tax-advantaged accounts for many years, at the point where my advisor has strongly suggested that my net worth and funds that is mostly ETFs and some individual stocks and mutual funds in my brokerage accounts have gotten to a point where there are major advantages to a separately managed account, where in paired stocks might follow an index. So, it's passive in that way, but actively managed in the sales.
Michael:
The point is to recoup some tax-loss harvesting, and over years actually, be after taxes what I might be able to achieve in an S&P ETF or mutual fund. So, if you can weigh in on the pros and cons of moving into that direction, I'd really appreciate it. Thank you.

Dr. Jim Dahle:
All right. You didn't give me a lot of specifics to work with here. I'm going to go with my gut on this and tell you, you probably need a new advisor. This sounds to me like an advisor trying to justify their fee by introducing complexity into your life.
Dr. Jim Dahle:
I think the ability to have some extra tax loss harvesting is an absolutely stupid reason to invest in individual stocks. Here's the reason why. Especially if it's like, now you're big enough that you can do this. I don't buy it, and here's why.
Dr. Jim Dahle:
Remember what tax loss harvesting is good for. You can use it to offset an unlimited amount of capital losses or capital gains rather, and you can deduct $3,000 of it against your ordinary income a year. I am sitting on hundreds of thousands of dollars of tax losses that I have harvested over the years without ever having any individual stocks using nothing but ETFs and mutual funds.

Dr. Jim Dahle:
I've got plenty of tax losses and I've got six figures I haven't even harvested that I may harvest later this week due to the latest correction. It is not very useful to me unless I have some huge capital gain event coming down the road. Now, I suppose it's possible that I could sell White Coat Investor for a large capital gain at some point down the road. And so, I'm probably going to still continue to accumulate these tax losses.
Dr. Jim Dahle:
But if I just took the tax losses I have now and used them for $3,000 a year against my ordinary income, I'd have enough to live to be 200 or 400 or 500 years old. No problem. I got plenty of tax losses.
Dr. Jim Dahle:
So, the idea of accumulating more of them is not particularly appealing to me, not something I would pay a large fee for. For example, let's say, this advisor wants to charge you 1% a year to do this. Say you have a $5 million portfolio. That's $50,000 a year. How is he possibly ever going to recoup that cost by providing enough value with tax-loss harvesting? He's not, especially when there's the risk of underperformance that comes from taking on the uncompensated risk that comes with individual stocks.
Dr. Jim Dahle:
There are some things out there where people are basically trying to have you kind of build an index fund yourself, that might make some sense at some very low fee, but most of the people trying to sell you actively managed accounts or active managed services end up providing you what my parents had when I first became financially literate and help them look at their investments.

Dr. Jim Dahle:
And what was that? That was some schmuck underperforming the market while charging them 2% a year, and churning the account like mad. Luckily it was in a SEP IRA. So it wasn't in a taxable account causing massive taxes, but it would've been if it was in a taxable account. Because he was pretending that he could time the market, that he could pick stocks. And he couldn't.
Dr. Jim Dahle:
All I had to do was show him what his money would've done if I put it in a total stock market index fund, and all of a sudden, my parents didn't want to be with that advisor anymore.
Dr. Jim Dahle:
And I suspect you're in a similar situation. I don't have enough specifics. You didn't leave enough information, but those are my general thoughts on actively managed accounts. So, it's very hard for there to be more value provided than the fee that is being charged on those, especially if their big claim is that they're going to make it back on tax-loss harvesting.
Dr. Jim Dahle:
You can tax loss harvest with broadly diversified index funds and ETFs, no problem. I assure you the market will go down from time to time and you'll be able to tax loss harvest. I hope that's helpful to you.
Dr. Jim Dahle:
I brought Andrew, my partner in crime from studentloanadvice.com on the podcast to help us with our next couple of questions. Thanks, Andrew, for being with us today.

Andrew:
Yeah. I’m happy to be here.

Dr. Jim Dahle:
Our next question comes from Peter. Let's take a listen. This is about public service loan forgiveness.

Pete:
Hi, Jim, it's Pete calling from Boston. I'm a urologist in academic practice. And I have a question about PSLF. I recently received a letter saying the department of education is now offering waivers for people who previously did not have an eligible loan, but who've worked for a qualifying employer and have made 120 on-time payments that they now might be eligible for PSLF.

Pete:
The question I have for you is, have you heard about this? What do you know? And more specifically to my situation, I graduated from medical school in 2003 so I was frankly too old for the program, but I have made 120 qualifying payments and work for a qualifying employer.
Pete:
What they're suggesting is you might be able to convert your loan into a direct consolidation loan and get credit for these back payments and be eligible for PSLF. The question I have is, if I go through and change my loan to a direct consolidation loan, keeping in mind, mine is going to be paid off in 20 years. But if I come up with a new loan, that'll be paid off in 30 years and go into one of the income-based repayment programs, is this actually going to be beneficial?
Pete:
I know this is a long and confusing question, but frankly, I'm confused. And I'm wondering if you can shed some light on this. Thanks again for all your help. I appreciate everything you do.
Dr. Jim Dahle:
Do we know about this, Andrew? Yes. We know about this. We've been talking about this for months.

Andrew:
We know all about it.
Dr. Jim Dahle:
Yeah. So, give him the answer. What's the scoop on this new PSLF waiver that goes through Halloween?
Andrew:
Yeah. Recently, this came out on October 6th, 2021. This time-limited waiver came out and what this has done is it's shaken up a lot of the world for public service loan forgiveness. And the reason why they've been able to do that is, in the event of a national emergency or war, essentially, the legislators can change up student loan law, albeit temporarily, which COVID has fit within that realm.
Andrew:
And so, essentially the payments that you have made, any payment, as long as you have qualifying employment should qualify. And you detailed one of the key steps is doing a direct federal consolidation. Because in the old rules, when you completed a consolidation, what it did is it erased all of your prior payment history. And we have run into this time and time again with so many clients that like you graduated med school in the 1990s or early 2000s.
Andrew:
And it just so happens that those loans that you got for med school were these family, federal education loans, and these were not eligible for public service loan forgiveness. Essentially, you got the short end of the stick, just because you borrowed before 2007, 2010, when a lot of the newer loans, these direct federal student loans, were starting to get issued.
Andrew:
In short, yes, the next step would be to complete a direct federal consolidation. Once that goes through, then during that application, you'll have to pick a repayment plan, but I'm assuming you already made the 120 payments. You don't need to make any more payments and then you'll need to certify your employment, use an employment certification form, and then a couple more months to go, and then you should be able to receive the immediate tax-free loan forgiveness.

Dr. Jim Dahle:
Yeah, it's awesome. It's basically been expanded this year. Even people that didn't meet the requirements in the program, when the program was introduced, it just got a whole lot more lenient. And that was actually president Biden taking advantage of the COVID emergency to put some emergency rules in place. Take advantage if you can.
Dr. Jim Dahle:
All right. Our next question is from email, it's actually a two-part question. The doc introduces it. “I'm an academic physician about two and a half years out from training, definitely pursuing PSLF with about 100 qualified payments to date.”
Dr. Jim Dahle:
He has two questions. The first one, “In addition to funding retirement and a six-month emergency fund, I've been saving a PSLF side fund in a high yield savings account. My PSLF side fund will equal my med school debt burden, which is now $325,000 with over $120,000 in interest on top of $200,000 in principle. More or less coincident with the current projected end of the federal student loan holiday in May, 2022.

Dr. Jim Dahle:
I anticipate that at that time, my attending level monthly payments will be large enough to finally cover the accruing interest and that my debt won't grow meaningfully in my final year, year and a half of qualified payments.
Dr. Jim Dahle:
What do you recommend I do with the side fund during that time? I know a high yield savings account is the most risk-averse option. Do I just leave it there earning less than 1%? The rest of my personal investments are in low-cost index funds. When would you start adding some of those PSLF side fund monies into index funds too?” Why don't you give your take on this Andrew, and then I'll give mine?
Andrew:
Yeah. Congrats on your success so far. Now that you're out of training, you're making an attending income. It is super important that you start paying yourself first. That means putting money into your 403(b) account, perhaps maxing that out. 457s, if you have that option as well, HSAs, Backdoor Roths. You should definitely be contributing to those accounts.
Andrew:
And then if you have additional money on top of what you already have paid for your student loans, then you can put it into a taxable account. If you no longer need to be putting anything towards that public service loan forgiveness side fund. And then whatever that looks like in terms of investments, low-cost index funds, real estate, whatever that may be moving forward to help build your net worth.
Dr. Jim Dahle:
I think he's talking about the money in the side fund here, though, Andrew. At what point do you say, “You know what? This is going to happen. I'm not going to leave it in high yield savings anymore, making 0.5%. I'm going to invest it.” What do you think? Is it time to invest in it? Is PSLF enough of a sure thing here that we can take on more risk with these PSLF side funds?
Andrew:
Yeah. I definitely think that what a lot of people are doing and what a lot of clients of mine are doing is that they're not just leaving it in high yield savings accounts. They're putting this in low-cost index funds and they're like, “Okay, well, I've got five years of an investment horizon. Yes, there's going to be some fluctuation in the market. It's going to go up. It's going to go down.”
Andrew:
But over that long period of time, and this is just assuming that they don't give you the tax-free loan forgiveness, and they don't completely change the rules, which if they did, that could completely kind of flip things upside down. But in essence, you might just get started putting that into whatever your preferred investment is. If it's a low-cost index fund, whatnot, that you can really start kind of building that over time. And using that as kind of a down payment effectively, if you were to leave academic medicine and move into private practice. But it sounds like you're just going to do this for a couple more years until you get your loans forgiven tax free.

Dr. Jim Dahle:
Yeah. I've been talking about a PSLF side fund for a long time, years and years and years and years. Let me see what the date is on the first time I ran this post here on the PSLF side fund, this idea that you save money up on the side. It looks like I ran it first, and maybe it was only 2018. I thought it was a while back.

Dr. Jim Dahle:
But at any rate, the point of a PSLF side fund was to protect you from two things. One was something happening to the program. The legislative risk, the congressional changes, whatever. Because at that point, people were going, “This program's been in place for 10 years and I haven't heard of anybody that's gotten PSLF, maybe something's going to happen to it. I know it's in the promissory note, but there's a certain amount of risk there.”

Dr. Jim Dahle:
The second reason you had it was just in case your life changed and you decided you didn't want to work for a 501(c)(3) anymore. You didn't want to be full-time anymore, or something happened and you just wanted the freedom to go do something else. So that's why I told people, “Hey, save up this PSLF side fund, then you're not behind your peers who are living like a resident and paying off their loans like crazy within a couple of years.” That was the idea behind a PSLF side.
Dr. Jim Dahle:
Well, I think the last few years have shown us that this is a real thing. People are getting public service loan forgiveness, tens of thousands of people a year are getting public service loan forgiveness. I think the legislative risk for anybody that's a year out of receiving this is essentially gone.
Dr. Jim Dahle:
If you think the risk of you leaving this job is also essentially gone, I'm not sure you need a PSLF side fund anymore. I think it's probably time to move that into your regular investments, whatever that might be. Whether that is paying down a mortgage, whether that is putting it toward 529s for your kids, whether that is investing it for retirement, whether that is investing for retirement in a mutual fund portfolio, whether that is starting a real estate empire. Whatever you would do with this money, if you received PSLF, I think it's probably time to go ahead and do that.
Dr. Jim Dahle:
You're basically at the end of this process, everybody's getting PSLF that knows the rules and is qualifying for them. I think it's probably time to maybe even phase out the idea of a PSLF side fund except to protect you from your own career changes. You think it's too early to say that, Andrew? You think they still need to keep it in relatively safe stuff, at least some of it?
Andrew:
I think at this stage in the game, they're close enough there. And if they're just going to stick around in that position for two more years with the increase of people that are actually receiving public service loan forgiveness. A couple of years ago, it was like 3% or 4%, but over the last couple of months, we've seen that success rate move up to somewhere in the teens. And I'm assuming that that number will continue to go up that it's a pretty sure-fire thing now that they're going to get there and receive that loan forgiveness.
Andrew:
I definitely think they can start shifting their mindset towards some of their other financial goals like you had stated earlier. Saving for different things other than just putting money aside for this side fund.

Dr. Jim Dahle:
Yeah, for sure. It's been interesting to watch the last few years as it becomes a trickle to more of an avalanche. Even those numbers you're throwing out there though, where it was 1% of the people that applied, those are really honest numbers. Those aren't people who actually qualify to get PSLF. Most of them didn't qualify. And I think the denominator they're using is everybody filing an annual certification form. 16% of those filing an annual certification form is not too bad, given that most of those people don't have their 120 payments yet.

Andrew:
Yeah. And the first four years nobody could receive loan forgiveness in the public service loan forgiveness program until October 2017. Because the program was enacted in October 2007. So, you had all these people applying back then in the early days. And they were factored into the overall success rate number. And obviously, nobody could receive it until that point in time.
Andrew:
That was diluting that number way far below what it is, but over the last five, six months, because of this waiver, there's been about 70,000 or 80,000 people that have now gotten public service loan forgiveness. So, it really gets the number up to about 90,000 because in the first four years, there were only about 10,000 – 12,000 – 15,000 or so borrowers that had gotten it. But over the last six months or so that number has gone way up. So, we'll definitely start to see that this is much more of a sure-fire thing. And if you qualify, definitely throw your hat there, and give it a shot.

Dr. Jim Dahle:
Yeah, for sure. All right. The second part of his question was initially when graduating from medical school, I was given bad advice, conflating consolidation with refinancing. Therefore, I didn't consolidate my federal debt for fear of eliminating PSLF eligibility. My PSLF qualified payment counts are identical on all of my 20 or 30 individual direct loans. And all of them are PSLF eligible.

Dr. Jim Dahle:
Is there any benefit for me in consolidating now under the waiver? Would it raise my credit score, for example, to have a smaller number of loans, even though the balance is the same? I’m buying my first home in the next two to three years.
Andrew:
Yeah. Short answer, no. Doing a direct federal consolidation, it's not going to benefit you at this point. And like you stated, the number of your payment count, and this is a huge concern for so many out there. You have one loan that has a 100, and then you got one that has 80. If that was a situation then, okay, perhaps you could look into consolidation. But at this point in time where the counts are the same, your eight and a half or so years in you're only two years out, why would you make things more complicated in this situation?
Andrew:
Because as you can see, if your company, the loan servicers as is right now will overcomplicate things. So don't throw another thing in there to make this more complicated. Yes, it would take your 20 to 30 loans and make it two loans. So, from an administrative perspective, it might be a tad easier, but I wouldn't touch it at this point. Continue to make your two years of payments, do those application certification forms, and then just completely wipe your hands of this. And you'll be so happy when you reach that point.

Dr. Jim Dahle:
Yeah. Don't rock the boat at this point. He says he's buying the home in the next two to three years, and you're going to have this paid off in a year and a half via PSLF. This is going to be perfect. Your credit score is going to take a bump and you're going to be perfectly situated to get a mortgage.
Dr. Jim Dahle:
All right. So, what are people talking about when they're coming and meeting with you at studentloanadvice.com? What are the questions and concerns people have this year?

Andrew:
Obviously, with the timing of everything that's been on hold for two years, I think that's always on people's mind is what's going to happen with payments. Are they going to get pushed back again? What about income recertification? What should I do about taxes? I think kind of starting with income recertification, and this is a really big topic because the rules are that every single year you need to recertify your income.
Andrew:
And if you don't, they're going to send you this scary email that the loan interest is going to capitalize. They're going to put your loan to forbearance maybe for a month, or you're no longer going to qualify for that payment cap. They're going to put you on the standard tenure payment plan, whatever.
Andrew:
They're going to throw out a bunch of those different scare tactics, but just so you know, you can go to studentaid.gov or your loan servicers website, and it should show you the next time that you need to recertify your income. And if it is prior to November of 2022, just move it back one year.
Andrew:
That means if you log into studentaid.gov, and it says that May 2022, you need to re-certify your income. It's not going to be until May 2023. So that has a huge impact and has been a huge benefit for so many of you out there. I'm meeting with clients that haven't recertified their income since 2018, 2019.
Andrew:
Now they're a high-paid surgeon, and they're still making payments on their resident or even their interim income. They're only paying $50 to $100 a month on their student loans. Obviously keep those payments as low as you can for now. Assuming that you're doing one of the like public service loan forgiveness.
Andrew:
And then I think kind of the second point is that if your income has gone down since 2018 or 2019, go ahead and recertify. You can get a lower monthly payment. But if you don't do anything, just assume that the payments that are going to start up here again in May are going to be based on your income pre-pandemic.

Dr. Jim Dahle:
Yeah. Well, interest rates are rising these days. How is that impacting borrowers?
Andrew:
Yeah. It's super easy with those of you that have private student loans. If you can get a lower rate, go ahead and lock that in before the Fed raises rates in March. As I'm recording right now here, they're anticipating, the economists are saying that they're going to raise rates a couple more times this year.
Andrew:
For those that have private student loans very, very easy right now, if you can get a lower interest rate. And that usually happens when you've graduated training, you graduated med school, you got married to another high earner. Your credit situation has improved. Go ahead, refinance those loans.

Andrew:
But for those of you with federal student loans that have been sitting on the side line for two years now in refinancing, it gets a little bit tougher. Do I want to take advantage of 0% interest for the next two months, or do I want to lock in a low rate right now?
Andrew:
I think what we're saying right now is that if you're going to refinance your federal student loans, go ahead, get some quotes. It's a really easy process to get preliminary quotes on the different private lenders that we work with very often. It takes five minutes and they're going to give you essentially what they would offer you with quotes, because you don't want to be paying that 6%, 7%, 8% on your federal student loans any longer come May.
Andrew:
If you're looking to refinance your federal student loans, then look to do that, coming up here in April, because once you get the preliminary quote, they give you 30 days to pull the trigger on that. Then you can also kind of keep in mind if the Fed ends up pushing back a federal student loan interest again. But I'd encourage you, make sure that's kind of high priority as it's a dual-edge sword because rates are starting to go up and you don't want to be stuck paying a higher rate than you should.

Dr. Jim Dahle:
Yeah. So, you can get those links that we have from the White Coat Investor to those student loan refinancing companies. You can find those at whitecoatinvestor.com/student-loan-refinancing. If you go through those links, not only do you get the best rates you can possibly get, you get cash back and you get access to our online course, Fire Your Financial Advisor absolutely free, $800 value. That's definitely the best place to shop around when you're looking to refinance. But as you approach May 1st, that's probably the time to be doing it.
Dr. Jim Dahle:
A couple of good things about it. Number one, you'll be ready to pull the trigger just as interest starts accumulating again. Number two, if they do extend it again, then you haven't yet pulled the trigger and you can still back off. I think April's going to be a big month for people running the numbers on their student loans, for sure.
Dr. Jim Dahle:
We're recording this March 8th, but by the time it runs, by the time you're hearing this, it's already April. So, it's time to go to whitecoatinvestor.com/student-loan-refinancing if you are looking to refinance loans and see what you are eligible for.
Dr. Jim Dahle:
All right, what else is going on in the student loan world here, Andrew? I understand you've been seeing a lot of questions about taxes and student loan repayment.
Andrew:
Yeah. And it just comes with the time of year. We are coming up on tax season. When this goes live, it's going to be right before tax day. Just because the way that you file your taxes can have a massive impact on the repayment plan that you're in. And there's a lot of nuances to that. Whether you're single, or you're married. What state do you live in? And does your spouse have debt? Do they have income?
Andrew:
Those are all important factors that can play into the way you file your taxes and repayment plan. And a really common example I see is a dual physician couple, both earning good money. And they're making, let's say $30,000 a month. And for simplicity, they're both making $15,000 a month after tax, all the contributions that they make. Monthly payments, like pay as you earn, would be about $3,000 a month. If they were just doing regular old, married filing jointly, because the pay as you earn plan takes about 10% of your monthly income.
Andrew:
But what if they were to do their taxes married filing separately? What that can do is it could cut their payment in half. Because then the payment is only based on the borrowers' income, not their spouse's income.
Andrew:
So, if they were both making $15,000 a month, instead of the payment being $3,000, it could be $1,500 a month, which over the course of a year, that's about $20,000 less of student loan payments. And let's just assume they had five more years until they reached loan forgiveness. In aggregate, that could be about $100,000 less money that they end up paying towards their student loans, which that's a massive figure.
Andrew:
And oftentimes, that's a really big point is that every single dollar that you pay towards your loans, when you're doing a loan forgiveness track is a dollar that you can't get back. So, if there's a way to minimize those payments, this can be quite beneficial to maximize the upside for PSLF.
Andrew:
However, when you do that, you do end up having to pay more in taxes or it ends up changing the tax liability. So that's where you need to have a good CPA or an accountant on your side. I know White Coat has some excellent resources there.
Andrew:
But just so you know, these CPAs and tax advisors, they don't quite understand the intersectionality of how student loan repayment and taxes intersect. And that's what we do every single day at studentloanadvice.com, is help people to figure out which repayment plan would fit best with their financial goals to get their loans done as soon as possible.
Dr. Jim Dahle:
Yeah. It's even more complicated than that because you got to think about what kind of retirement plan you're using. Whether you're making Roth contributions or traditional contributions and all that, has effects on how much you're paying on your student loans.
Dr. Jim Dahle:
If you're in any sort of a complicated student loan situation, you're married to another high earner, maybe both of you have student loans, maybe one or both of you is going for PSLF, it's well worth a few hundred dollars to book a consult with studentloanadvice.com and get some specific information about your situation.
Dr. Jim Dahle:
If you need to do that, you can book that at studentloanadvice.com. Thanks, Andrew, for coming on and helping us with these questions.
Andrew:
Thanks for having me.
Dr. Jim Dahle:
I hope you've enjoyed this episode. We've covered PSLF in great detail. We've covered ETFs. We've covered FSAs.
Dr. Jim Dahle:
This episode was brought to you by Laurel Road for doctors. Laurel Road is committed to serving the financial needs of doctors. You take care of us, it's time someone took care of you. White Coat Investors can receive a cash bonus when they refinance their student loans with Laurel Road.
Dr. Jim Dahle:
They're an easy to use online application process that allows you to see personalized rate options in only a few minutes. Plus, they don't charge any application or origination fees or prepayment penalties.
Dr. Jim Dahle:
For terms and conditions visit www.laurelroad.com/wci. Laurel Road is a brand of KeyBank NA, a member of FDIC. All credit products are subject to credit approval.
Dr. Jim Dahle:
Don't forget Peter Kim's Passive Real Estate Academy is going on sale. It's open for enrollment. That's whitecoatinvestor.com/prea. Also don't forget to nominate your favorite financial educators for the White Coat Investor financial educator award. That's whitecoatinvestor.com/educator.

Dr. Jim Dahle:
Thanks for those of you leaving us five-star reviews and telling your friends about the podcast. Our latest five-star review said, “Jump started my financial education. I love the addition of Dr. Spath. Great perspective and voice to pair with Dr. Dhale. Love the show. Only wish I found sooner. Great primer to stimulate learning about finances for a doc, especially for someone who isn’t quite ready to dive into reading a few financial books.”
Dr. Jim Dahle:
Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.