Student loans and tax filing strategies for doctors

Michael Foley, CFP, CSLP, CKA © Northstar Financial

With ongoing student loan changes and tax season approaching, it’s critical to revisit how tax filing decisions impact student loan repayment. Many borrowers are navigating delays in processing their repayment applications, leading to uncertainty around their future payments. Filing an extension on your taxes could serve as an insurance policy, ensuring that you continue reporting a lower income if your application is delayed and you are asked to recertify later with a higher income.

Given the complexities of student loan repayment, this article revisits tax strategies that doctors should discuss with their CPAs to ensure they remain efficient with their repayment plans.

How Are Student Loan Payments Calculated?

A common misconception among borrowers is that their monthly payment is based on their total student loan balance. This leads many early-career doctors to panic when they see their debt load. Fortunately, federal Income-Driven Repayment (IDR) plans base payments on income and household size rather than loan balance.

Hannah Flodin, CSLP © Northstar Financial

Income-Driven Repayment (IDR) Plans

IDR plans allow borrowers to set payments based on discretionary income, which is defined as income above 150% of the federal poverty line for their household size. Payments are typically 10% or 15% of discretionary income, depending on the specific plan.

• The old Income-Based Repayment (IBR) plan requires 15% of discretionary income.
• PAYE and the new IBR plan require 10%.

These percentages make a significant difference in long-term repayment planning. While some repayment options are written into law (like IBR), others—such as PAYE—exist as a Department of Education regulation and could be changed more easily in the future.

Which Income Numbers Are Used?

Borrowers can report their most recently filed tax return (if within the past two years) or submit pay stubs for a more current assessment. The Adjusted Gross Income (AGI) listed on Line 11 of Form 1040 is the key number the Department of Education uses.

Married Borrowers & Filing Separately

For married borrowers, filing jointly means that both spouses' incomes are counted when calculating student loan payments. However, certain repayment plans allow borrowers to file separately so that only their own income is considered.

This strategy is particularly useful for doctors whose spouses earn a high income. Especially while in residency. However, filing separately comes with trade-offs, including potentially losing tax credits and deductions, so it’s important to evaluate whether the savings in student loan payments outweigh the tax disadvantages.

For those in community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), there’s an additional strategy where income can be split evenly between spouses when filing separately. This can significantly reduce reported income and lower payments.

Why Lowering Your Student Loan Payment Matters

Reducing payments can be a strategic move for doctors in two key scenarios:

• Public Service Loan Forgiveness (PSLF) & Long-Term Forgiveness
  • PSLF offers tax-free loan forgiveness after 120 qualifying payments while working for an eligible non-profit employer. Since only payments made while working for a qualifying employer count, lowering your payment maximizes the amount ultimately forgiven.
  • While PSLF is written into law, meaning it requires congressional action to be changed, there is still uncertainty. There’s bipartisan support for the program, making it less likely to be eliminated outright, but modifications are always possible.
  • The new PSLF Buyback Program—which allows borrowers to make lump sum payments for past periods of service—may face legal challenges since it was created through regulation rather than law.
• Keep a Lower Payment to Tackle Other Financial Planning Items
  • Borrowers can typically report income from two years prior for their IDR plan which could be helpful to keep the payment temporarily lower to allow borrowers the margin to do things like build up cash reserves, pay off credit card debt, etc.
  • Once you report your income, you will be able to keep that payment for the next 12 consecutive months.
  • Filing a tax extension allows doctors to even further delay reporting their most recent (likely higher) income and instead use a prior, lower income to set their payments.

For example, if a doctor earned significantly less in 2023 but saw a major income jump in 2024, filing an extension on their 2024 taxes means that their most recent tax return available to student loan servicers remains their lower-income 2023 return. This could keep payment reporting lower all the way to the extension deadline in October of 2025.

Pretax Contributions: Reducing Your AGI to Lower Payments

Since student loan payments are based on AGI, pretax deductions can help lower it.

2025 Contribution Limits for Pretax Accounts:

• 401(k)/403(b)/TSP/457(b): Up to $23,500
• HSA: Up to $4,150 (individual) or $8,300 (family)
• Traditional IRA: Up to $7,000 (or $8,000 if 50+)

Although the Roth alternative is an attractive option, by maxing out pretax retirement contributions, borrowers can reduce their reported AGI and lower their student loan payments.

For example, if a doctor earning $250,000 contributes $23,000 to a 401(k), their AGI drops to $227,000—resulting in a lower student loan payment for the next year.

The Future of Repayment Plans: What to Watch For

The student loan landscape continues to evolve, and recent legal developments add another layer of uncertainty:

• The Overturning of the Chevron Doctrine
  • The overturning of this legal precedent now limits federal regulators’ (like the Department of Education) power. Since PAYE is a regulation (not a law), it could face more scrutiny and be modified or removed more easily.
  • IBR, on the other hand, is written into law, making it a safer long-term option for borrowers who qualify.
• Potential Legal Challenges to PSLF Buyback
  • The PSLF Buyback Program could be challenged in court since it was introduced via regulation, not through legislation.
  • While PSLF itself is more secure because it was passed into law, borrowers should be aware that new benefits created by the Department of Education could be subject to legal hurdles.

Final Thoughts: Strategic Student Loan Planning

With so many moving parts in student loan repayment, doctors need to be proactive in planning their repayment strategies. Filing separately, maxing out pretax contributions, and strategically using tax extensions can help lower payments and optimize forgiveness benefits.

However, given the evolving legal landscape, it’s crucial to base decisions on what is currently written into law rather than relying on policies that could change more easily. Doctors should work closely with a student loan strategist (CSLP) and a tax professional to ensure they are making the best financial choices.

By staying informed and working with the right experts, doctors can navigate these complexities and ensure they are optimizing their student loan repayment strategies in 2025 and beyond.

Are you a medical professional with student loans looking for financial planning help? Michael and Hannah would love to meet you! Contact: FoleyTeam@northstarfinancial.com

Disclosure: Michael G. Foley CFP®, CSLP® - Associate Partner, Financial Advisor- 6720 N Scottsdale Rd Ste 290, Scottsdale, AZ 85253 Phone: 480-712-7285 The views depicted in this material are for information purposes only and are not necessarily those-of Cetera Advisor Networks, LLC. They should not be considered specific advice or recommendations for any individual.This is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific, legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought. Neither Cetera Advisors Networks LLC nor any of its representatives may give legal or tax advice.The examples presented in this video are for illustrative purposes only and should not be deemed a representation of past or future results. Securities offered through Cetera Advisor Networks LLC, member FINRA/SIPC. Advisory services through Cetera Investment Advisers LLC. A registered investment adviser. Cetera is under separate ownership from any other named entity.