On Wednesday, August 23, 2022 President Biden announced a new federal student loan relief plan. Altogether, there are 4 big changes that may affect physicians and other young professionals with federal student loan debt:
1. Student Loan Forgiveness. Many people on the far left lobbied the President to forgive up to $50,000 in student loans. They cited evidence that college tuition has skyrocketed in recent years and stated that many of the people who took out loans in undergrad did not fully understand the repercussions of taking out such large debt burdens at a young age. Many teenagers were led to believe that the salary they would make after graduating college would make up for the amount they took out in student loans, which has not been true. However, several people on the far right disagreed. They did not want President Biden to forgive any amount of student loans. They feared that wide-spread forgiveness would worsen inflation and benefit college educated individuals who already make a high income. The President compromised and landed somewhere in the middle.
His new plan approves $10,000 in loan forgiveness for individuals making $125,000 or less (and couples with a combined income of $250,000 or less) using 2020 or 2021 tax returns. Individuals who went to college on a Pell Grant (and also make $125,000 or less) will qualify for up to $20,000 in forgiveness. The Biden Administration’s goal is to give added relief to Pell Grant recipients who come from disadvantaged backgrounds. The income cap of $125,000 is in place to ensure that upper class Americans aren’t getting debt relief they may not need.
This means that most residents and fellows will qualify for forgiveness. It also means that some attending physicians in lower paid specialties and doctors working part time will qualify. Because this income cap is based on adjusted gross income, not salary, doctors who put lots of money into pre-tax retirement accounts may be able to qualify for forgiveness as well.
This student loan forgiveness plan also states that those who have student loan balances of $12,000 or less when they graduated from undergrad will now have the balance automatically forgiven after they make 10 years of payments (although I doubt this will apply to most doctors)
2. Extending the Pause on Student Loan Payments. Many people with federal loans haven’t had to pay on their loans in over 2 years. At some point, those payments would need to be restarted. Unfortunately, many people have gotten so used to not making payments on their student loans that restarting them would be a burden. But it is not just the borrowers that would have difficulty restarting payments. Loan servicers were having issues with administration. By law, your loan servicer would need to warn you months in advance of any payment due and they hadn’t yet started contacting borrowers. Plus, large federal loan servicers like Fedloans were in the middle of switching borrowers to new loan servicers like MOHELA. Long story short, the system was not prepared to start the payments in September and with midterm elections on the horizon, it wasn’t politically favorable to start the payments in the fall either. As a result, the payment pause has been extended. Payments will continue to be paused until December 31st 2022. Federal student loan payments will resume in January of 2023.
3. Changing The Way IDR Payments Are Calculated. As it currently stands, income driven repayments (IDR) are when you make student loan payments based on your income (instead of making payments based on the total amount of debt you owe). The thought is that basing the payments on your income will make the payments more affordable for low-income and middle class Americans who have high debt burdens and modest salaries. The amount you pay under these income driven repayment plans ranges from 10% of your discretionary income to 20% of your discretionary income depending on the plan. President Biden’s new student loan plan would change that.
The Biden administration has pitched a new income driven repayment plan. With this new plan, those who have student loans from undergrad will have their payments capped at 5% of their discretionary income (instead of 10% of their discretionary income). This will effectively cut their monthly payments in half. Plus, the administration will change what is considered “discretionary income.” Previously, your discretionary income was your Adjusted gross income (the amount of money you pay taxes on) minus the 150% of the poverty line for your state and family size. Now it will change. According to the website, “no borrower earning under 225% of the federal poverty level (which is about $15/hour or less) will have to make a monthly payment. In other words, the amount that is considered “discretionary income” will be changed in a way that benefits the borrower and requires them to pay less money per month. People who make around $15/hour might not have to pay anything at all.
4. Preventing Your Student Loan Balance From Growing. Another feature of the new student loan repayment plan mentioned in the proposal is that student loan balances will not grow from year-to-year while in repayment. This is likely the most meaningful change for doctors and young professionals because one of the biggest complaints about student loans has been the high interest rate. It is discouraging to have to take out six-figure student loan debt in medical school and then have the balance grow while you were in training as a resident and fellow. Under the proposed new student loan repayment plan, this will never happen again.
The current proposal is for the government to have a new income driven plan that will automatically forgive the unpaid interest on your student loans (think of it like the REPAYE plan, but better). This means if you are in-training as a physician and you have $250,000 in student loans with an interest rate of 5% on your loans. Your balance will never grow to be more than $250,000. Why? Because the government will pay the unpaid interest. What do we mean by “unpaid interest?” Let me give you an example.
If you have $250,000 in student loans with an interest rate of 5% and your income driven repayment amount as a resident is $200 a month then your monthly payments (of $200x12 months) will not even cover the interest that is accruing on your loans. This means that even if you make your payments on time, your student loan balance will grow from year-to-year. With this new student loan repayment plan the government will forgive all that unpaid interest which will prevent your balance from growing year-to-year. Not having your student loan balance grow while you’re in training will save lots of docs tens of thousands of dollars in interest payments. (And basically eliminates the need for any trainee to refinance their loans) This is HUGE.
While I’m excited about the changes there are still a few questions and details we need to explore such as:
How to handle people with undergrad and grad school loans. With the new changes, people with loans from undergrad only pay 5% of their discretionary income. But what will happen to people who have loans from undergrad and grad school? Will they pay 5% or 10%? Will it be a weighted average?
The overall structure of this new IDR plan. Will high earners be able to make payments based off of the 10-year standard repayment plan? Will married couples be able to exclude their spouses income? Will they remove interest retroactively or just going forward? This all remains to be seen.
While there are many questions left to be answered, these changes are considered a step forward in the right direction. Another change would potentially be to put some sort of cap on tuition rates or make college more affordable. You can stay up to date on all the changes by clicking here: https://studentaid.gov/debt-relief-announcement/.