Student Loan Changes For Doctors

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/.

How To Tackle Student Loan Debt

If you’re like me, or one of the millions of Americans who have student loan debt, I understand your plight. Learning about the different servicers, figuring out the repayment plans, and familiarizing yourself with terms like “refinance” and “consolidation” can be a bit daunting. Although many young professionals may have already come up with a plan to tackle their student loans, there can be a bit of a learning curve for new graduates. Here are some simple steps to help you tackle your student loan debt:

Step 1 = Figure out how much student loan debt you have. If you filled out a FAFSA form and received student loans from the federal government, then you can go to https://studentaid.ed.gov/sa/ to see your total student loan debt balance. You will need to input your FSA username and password in order to login (this is the same username and password you used to fill out your FAFSA form). Keep in mind, the total amount of student loan debt you have will include the principal (how much you actually borrowed) and the interest (the amount the government charges you each year until you pay the money back). If you took out private loans from outside banks, foundations, or corporations you will need to contact them directly (if they haven’t already started contacting you first) to determine how much you owe.

Step 2 = Find out the interest rates and the servicers of each loan you have. When you took out a student loan from the government, it was issued by the Federal Department of Education. However, there are different sub-departments within the Department of Education that handle your loan repayment. These “sub-departments” are called loan servicers and they are who you actually contact when you repay your student loans.

For example, I took out loans through the Federal Department of Education, but my loan servicer is Nelnet. Thus, Nelnet is who I pay when my loan is due. You might have taken out a loan through the Department of Education just like me, but have a different servicer (such as Great Lakes, Mohela which took over for Fedloans, Navient formerly known as Sallie Mae, etc). You must pay back your particular loan servicer directly. Once you login into the website and find out the servicer each of your student loans, you need to look at the interest rates on these loans. Chances are that you have different interest rates on each loan since the interest rate may have fluctuated as you took out loans from year to year. Your goal is to determine the range of interest rates you have on your student loans.

I know this may sound complicated, but it’s quite easy. I’ll walk you through what it was like for me. As soon as I logged into the website I had to accept a waiver. Then, I was able to see the total amount of student debt I owed (which was pretty high given my status as a medical student, but I digress). Anyway, I could also see the number of loans I had taken out and the fact that all of my loans had the same servicer (Nelnet). You may have different servicers for different loans, so be careful. Once I saw this listing of my student loans, I could then expand the tab (by clicking an arrow) and see the amount of each loan, the interest rate on each loan, and the date on which my next payment on that loan was due. If I click “view details” I can see the date on which I took out the loan and the interest that has accrued on it up to this point, among other things.

Step 3 = Understand the pros and cons of student loan debt consolidation. Debt consolidation is when you combine all of your loans into one giant loan with one interest rate. Consolidating your loans has advantages and disadvantages. The advantages of consolidating your loans (through the federal government) is that you combine all of your loans into one giant loan. Your new interest rate will be the weighted average of the interest rate on all of your loans. If you do not consolidate then you will have a different loan for each semester in which you took out money, each with different interest rates and potentially different loan servicers. This can get confusing.

By consolidating (through the federal government) you are able to combine all of these loans into one loan and focus on paying that one loan only. Having one giant loan, instead of many different smaller loans, tends to look better on your credit report. Another advantage of federal consolidation is that any loan that may not have counted towards loan forgiveness programs can now count towards those programs after you consolidate your loans (through the federal government).

The disadvantage of consolidating your loans is that any interest that has accrued on your loans will be added to the principal amount. Let me explain. If you took out unsubsidized loans, then interest accrued on those loans while you were still in school. Once you consolidate your loans, all of the interest that has accrued on your loans to that point will be added to the principal amount of the loan. For example, if you have taken out a total of $50,000 in student loans and $3,000 in interest has accumulated on the loans during that time, then if you consolidate your loans you will have a new loan with a new principal amount of $53,000 (that includes the $50,000 you borrowed plus the $3,000 that had already accumulated in interest).

I should mention that you have the option to consolidate your loans through the federal government or through a private company or bank. Although a private company may be able to offer incentives to get you to consolidate through them, I would advise you to consider consolidating through the federal government instead, if you choose to consolidate in the first place. The advantage of consolidating your student loans through the federal government is that you are still eligible for many of the benefits that come with federal student loans.

The federal government is much more understanding when you go through life changing situations. If you lose your job, become disabled, or have some life altering event that prevents you from making your student loan payment you can ask the government to put your loans into deferment or forbearance. Although they are slightly different, both of these options will grant you temporary relief from having to pay back your loans for a few months up to a few years. Most private companies will not give you this option.

Plus, many federal loans can usually be “forgiven” after a certain length of time. In fact, many federal income-driven repayment plans and programs will forgive your loans after 10-25 years. So unless you are secure in your job and are making a lot of money, I’d suggest consolidating your loans into one giant loan with the federal government if you feel you need to consolidate at all. Doing so, allows you to keep the protections that come with federal loans and makes your student loans easier to manage in the process.  

What am I doing? Consolidating. Even though my loans are already with the same loan servicer (Nelnet) with fixed interest rates, I need to consolidate in order to waive my grace period and start making payments under Public Service Loan Forgiveness as soon as I can. Graduates have a 6 month grace period before they have to start paying back their loans. While most graduates appreciate this grace period, I plan to opt for Public Service Loan Forgiveness (PSLF). Under PSLF, I'll be enrolled in an income-driven repayment plan that caps my repayment at 10% of my income until my loans are forgiven. However, PSLF doesn't kick in until after the grace periods ends. If I wait 6 months for the grace period to end, I will miss out on 6 months of low payments that could count towards PSLF. In order to waive the grace period, I must consolidate.

My point? If you have multiple loan servicers, variable rate loans, loans that don’t automatically qualify you for a loan forgiveness programs, or plans to pursue PSLF specifically, then consolidating through the federal government may be beneficial for you as well. 

Step 4 = Think twice before you refinance your loans. Although refinancing can be similar to consolidating, the terms are different. Consolidating your loans is when you combine all of your loans into one giant loan and the interest rate you pay is the average of the interest rate you had on each individual loan. Refinancing is different. Refinancing is when you combine all of your loans into one giant loan and pay a LOWER interest rate than what would have been the average on all the loans. Refinancing can only be done outside of the federal government through a commercial bank, credit union, or some outside company.

The advantage of refinancing is that you pay a lower interest rate than you would have otherwise which can save you thousands of dollars. The disadvantage of refinancing is that you lose the protections and benefits that come with having federal loans. After you refinance, you are no longer eligible for federal deferment or forbearance if life takes a turn. Most importantly, you are no longer eligible for federal student loan forgiveness programs. Unless you are certain that you will not be pursuing any student loan forgiveness programs and have enough job security that needing deferment or forbearance is unlikely, then you may want to wait to refinance.

What am I doing? Choosing not to refinance right now and revisiting the subject in a few years. As a graduating medical student who will start residency training as a physician, I am in a unique situation. My plan is to enroll into an income driven repayment plan through the federal government. I will pay my student loans on time each month until I finish residency training and fellowship. Afterwards, I will decide to work in academics or private practice. If I choose academics I will keep my loans with the federal government and opt for public service loan forgiveness (which forgives my loans within 10 years). If I do not choose to work in academics, I will refinance my loans with a private company and plan to pay them off in 5 years.

Step 5 = Enroll into a repayment plan that is best for you. There are many different repayment plans. You need to check with your loan servicer to see which repayment plan options you qualify for or use the repayment estimator to get a general idea. If you don’t choose a plan, you will be automatically enrolled in the standard repayment plan which puts you on track to pay off your loans within 10 years. Although this plan will save you money in interest payments, the monthly payment required may be higher than you can afford.

If this is the case, enroll in one of the income-driven repayment plans. These plans only require you to pay 5% to 15% of your income in students loan payments and will automatically forgive your loans after 20-25 years, if you haven’t already paid them off. (If you opt for public service loan forgiveness, then your loans will be forgiven in 10 years).  Income driven repayment plans are ideal for anyone who plans to get their loans forgiven via public service loan forgiveness or some other type of loan forgiveness program.

Step 6 = Look into loan forgiveness programs and submit the necessary paperwork. I alluded to this above, but as you think about your student loans it’s important to consider whether or not you are considering some sort of loan forgiveness program, most notably public service loan forgiveness. Although this program will forgive your loans after making 10 years of payments, you need to ensure that you have properly enrolled into it.

You can refer to the student loan website but essentially you need to have direct loans through the federal government, work at some sort of academic institution or non profit organization, and make 10 years of on-time qualifying payments. If you know you want to enroll in this program, then you can fill out the form on the student loan website.

To summarize: there are 6 steps you need to take to start tackling your student loans. First, go to the student loan website and figure out how much money you owe. Then, determine your loan servicer and the interest rate on each of your loans so you can figure out who to contact to start repaying them. Next, you need to understand the pros and cons of federal debt consolidation so you can figure out if you should combine your loans into one giant loan or not. Remember to think twice before you refinance your loans since doing so will make you ineligible for federal loan forgiveness programs. After that, enroll into an income-driven repayment plan, if your monthly payments under the standard plan are higher than you can afford. Lastly, look into government loan forgiveness programs and submit the necessary paperwork to enroll.

Tell me, was this helpful? Do you feel more like you have a game plan on how to tackle your student loans?