How to Utilize a Sign-On Bonus that Pays Student Loans

by Jude Boudreaux, CFP®, Sr. Financial Planner and Caleb Arringdale, TPC Tax Advisor

We recently received a message from a client asking for some advice. They were finishing their medical training and had accepted a full-time position at a hospital, that brought with it a substantial sum to pay down their student loan balance.  How should they utilize those funds to help them get started?

If you or someone you know has a similar question – here are a few considerations to help get them on the right track:  

  1. Determine if there are restrictions on how the funds are used.  Our physician client’s contract states that the funds are to be used to pay down Student Loans, but we have seen other offers for down payment assistance for relocation as well as the occasional bonus with no strings attached.  
  2. Verify the tax consequences.  Is the payment a lump sum bonus that will be paid like wages with taxes withheld? Is it paid as a forgivable loan structured over a period of time, such as 36 months?  If you’re receiving wages, then the details will be on the paystub that comes with your check and it is a first step to estimate your tax burden for the year.  If you’ve received a forgivable loan, there may be no taxes withheld and you should be prepared to pay taxes on the benefit you receive that year.  For our physician client in the example today, the payment was $100,000 forgivable over 36 months, 1/36th for each month they work for the hospital system or $2,778 per month, not including the accrued interest.  For 5 months in 2020 that’s $13,888 in income they’ll be responsible for paying taxes on, and in the full 12 months of 2021 that’s $33,333.  If you’re not planning to pay the taxes on those sums, you’ll end up with an unpleasant surprise come April.  
  3. Keep good records.  This particular offer came with the stipulation that it was to repay student loans, and that the physician was to provide proof that amounts were used for payment by providing cancelled checks if requested. It’s more than possible that the system will never ask for any information at all, but the burden of proof is on the employee in this situation and it’s wise to be on top of things.  
  4. Does the sum fall into Public Service Loan Forgiveness (PSLF)?  Receiving funds from your employer to repay student loans doesn’t necessarily exclude you from the ability to pursue loan forgiveness.  It’s possible to take the loan repayment funds, make monthly payments based on your income-based repayment plan, and document those payments to satisfy both the PSLF program and the requirements of your employer’s offer. 

Receiving any kind of bonus from your employer is a good perk but the devil is in the detail. There are a number of additional considerations that depend upon each individual situation so please be sure to consult your TPC planner or TPC accountant.


Jude Boudreaux, CFP®, is a Partner/Sr. Financial Planner in the Chicago and New Orleans offices of The Planning Center, a fee-only financial planning and wealth management firm. Email him at jude@theplanningcenter.com.

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