Nervous About the Government Taking Away PSLF? Start a PSLF Side Fund

By Dr. Jim Dahle, WCI Founder

The Public Service Loan Forgiveness (PSLF) program provides tax-free forgiveness for federal direct loans once 120 monthly payments have been made toward it while employed full-time by a government employer or a non-profit (501(c)(3)). These payments can be made through any Income Driven Repayment (IDR) program or the standard 10-year repayment programs. While available IDRs seem to be frequently changing (and some may not exist by the time you read this), we’re talking about Income Contingent Repayment(ICR), old and new Income Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Saving on a Valuable Education (SAVE) if it survives in court.

Since most residencies and fellowships are nonprofits and since most residents and fellows enrolled in the various Income Driven Repayment (IDR) programs qualify for payments that are a fraction of what they would owe in the 10-year standard repayment program, a doctor who made many relatively small payments during training stands to have a great deal of their student loan burden forgiven tax-free upon completing 120 payments. For someone who was enrolled in an IDR program during most or all of their training and is subsequently working for the military, VA, or a nonprofit, going for PSLF is a no-brainer.

But many PSLF enrollees have for years feared the legislative risk inherent in any program that exists at the whims of Congress. Despite the report that more than 1 million people have obtained PSLF in the past few years, they fear the program will be changed and that they will not be grandfathered into the terms of the old program. This lack of faith in Congress leads some doctors to a drastic and potentially foolhardy course—they simply ignore the program even though it could be worth tens or even hundreds of thousands of dollars to them.

This “PSLF Side Fund” post was written originally in 2018, when few people had yet received PSLF, and so there was little faith in it and a lot of fear about legislative risk. Since the 2024 election, “executive risk” has been added to the equation as the Trump administration has discussed everything from closing the federal Department of Education (where the federal student loan programs are currently housed) to eliminating non-profit status for hospitals. So it seemed appropriate to update and re-run this post.

A few weeks ago, Forbes published a piece with the headline “GOP May Cut Off Student Loan Forgiveness for 4.8 Million Healthcare Workers,” that detailed some of the changes the Republican-led Congress was considering so it could extend President Trump’s tax cuts from 2017 that are set to expire in 2025. Wrote Forbes:

“Historically, previous attempts to change or repeal PSLF would have grandfathered in current borrowers; it’s unclear at this time whether that would be the case for the upcoming reconciliation bill, which hasn’t yet been drafted or finalized. But specifically targeting PSLF may not be necessary to block student loan forgiveness for millions of Americans working in healthcare. The same House Budget Committee memo calls for changing the tax code and fully eliminating the nonprofit status of hospitals . . .

At least 4.8 million Americans work for nonprofit hospitals and associated entities, according to the Kaiser Family Foundation. This includes doctors, nurses, social workers, medical technicians, administrative support staff, and others. Since PSLF is an all-or-nothing program—meaning borrowers cannot receive student loan forgiveness until they complete the 120 qualifying payments and 10 years of qualifying employment—these workers would effectively be cut off from loan forgiveness under PSLF if the nonprofit status of the hospital that employs them is eliminated. Many of these workers may have made decisions to work in a nonprofit healthcare setting specifically to pursue the benefits of the PSLF program.”

Naturally, this article set off alarm bells for those who are or who are thinking about pursuing PSLF. While it’s probably not prudent to start panicking yet, there is something you can do if you’re worried about PSLF going away before you get your loans forgiven. The solution to a lack of faith in PSLF is not to leave the program—it is simply to hedge your bet by using a “PSLF side fund.”

Don’t Give Up on PSLF

For years, people emailed me to tell me they were REALLY worried PSLF wasn’t going to work out because the bureaucrats managing the program couldn’t seem to keep track of what loans they had and how many valid payments they’d made. But in the last five years or so, hundreds of thousands of people have received PSLF, and their student loans that were worth hundreds of thousands of dollars simply vanished, tax-free.

But with this fresh idea that a Republican Congress and the Trump administration will combine to somehow get rid of PSLF and not grandfather anyone in to its term, your best solution is to start a PSLF side fund (and keep a copy of every promissory note you’ve ever had, every communication you ever have had with the bureaucrats, every annual certification form you’d had signed, and every payment you’d ever made). But hey, if you want to pay off your loan because you’re 99% sure you’ll never receive PSLF, it’s a free country.

More information here:

Student Loan Repayment and PSLF in the Trump Era

The Politics of Student Debt Forgiveness

PSLF Side Fund

The idea behind a PSLF side fund is that if Congress changes the law AND doesn’t grandfather you in (or the bureaucrats can’t find a record of all those payments you made), you now have a pot of money you can instantly use to pay off your student loans. If PSLF stays and you eventually get forgiveness, you can then use that money for a house down payment, some really awesome vacations, a new Tesla, or add it to your retirement stash.

My goal in suggesting docs use this side fund is two-fold. First, it keeps them in a program that I believe is highly likely to give them a ton of money eventually. Second, it keeps them from using “I’m going for PSLF” as an excuse to not live like a resident for the first 2-5 years out of residency. You still need to live like a resident, you’re just sending those $10,000 payments to your investment account every month instead of your lender.

Once you understand this concept, it usually seems like a no-brainer. The next question, of course, is what kind of account and investment should this money go into?

Where to Invest Your PSLF Side Fund

Ideally, a new residency graduate is living like a resident. This should provide enough money to max out all available retirement accounts (401(k)/403(b), 457(b), a personal and spousal Backdoor Roth IRA, your spouse’s available accounts, and maybe even an HSA); start working toward a down payment on the dream home; AND still put enough money into the PSLF side fund that it would equal the remaining student loan burden in less than five years. In that case, the “where” question is easily answered—in a taxable account.

However, the new graduate who has foolishly decided not to live like a resident may find that they are forced into the unsavory choice of EITHER maxing out retirement accounts OR saving up the PSLF side fund in a taxable account. In that situation, I would generally lean toward maxing out the retirement accounts for the short- and long-term tax benefits and the additional asset protection. If PSLF stays put, the money is already in that tax-protected space you could never get back if you don’t use it.

If PSLF goes away, they’ll be faced with the choice of whether to actually take money out of the retirement accounts, pay any taxes and penalties due, and pay off the loans. But at least they’ll be back to a net worth of “broke” with whichever choice they make. (I’d probably leave it in the retirement accounts and continue the student loan payments, but then again I wouldn’t be in that position because I lived like a resident.)

If the doc thinks that PSLF is going away and that they would actually withdraw from the accounts if it did, then they may pass on those retirement account benefits and just invest the money in taxable to decrease the withdrawal penalties.

More information here:

3 Backup Plans If SAVE Is Eliminated

Staying the Course Despite the Trump Tariffs

How to Invest Your PSLF Side Fund

Once you’ve decided WHERE (i.e., which account) to invest your PSLF side fund, you now need to decide HOW (i.e., which investment) you’ll invest the money in the account. While it is generally a bad idea to invest money you may need in the next five years into risky investments like stocks and real estate, one must also consider the likelihood of actually needing that money in the next five years. If you judge that chance as highly unlikely, it’s fine to invest the money as you would the rest of your retirement funds—i.e. for the long run in an aggressive mix of stocks, bonds, and real estate, although I would stay away from illiquid investments like an investment property or an illiquid private real estate fund or syndication.

If you think there’s a pretty decent chance you’re going to get hosed, then stick with safer investments such as a high-yield savings account, a high-interest CD, a bond fund, or a balanced fund. The less faith you have in PSLF, the more conservative your investment should be.

If it were me, I’d be maxing out all of my retirement accounts and saving up my PSLF side fund in stock index funds in a taxable account. But I’ve got a lot of faith that PSLF will still exist in some form 5-7 years from now and that, even if it doesn’t, those already enrolled in the program will be grandfathered into its current terms. I guess time will tell if that faith is misplaced. If you do decide to refinance your loans for whatever reason, we appreciate you supporting the site by using our affiliate links found here. We get paid and you get a better deal than you would if you went directly to the companies. WCIers have been reporting rates in the high 4% range lately (as of February 2025).

What do you think? Where and how do you think a PSLF side fund should be invested and why? Are you worried about the current-day politics?

[This updated post was originally published in 2018.]