Update: The Biden Administration has extended the pause on repayment of federal student loans until January 31, 2022. 

Paying Off Student Loans

During residency, medical students are hit hard by student loans. Not officially in school anymore and not officially a working physician. They’re stuck in the void, a big expensive void. The average medical student loan debt was  $251,600 back in 2016.

As the chart below shows, 0% of people – aka no one – graduated med school with no debt.

student loan debt

If you have a federally funded student loan, there’s been a pause in payments as part of the response to COVID-19. The Care Act provided student loan forbearance, including on loans through the Parent Plus program. During forbearance, there was no penalty for non-payment and no interest accrued on your account. But it comes to an end on September 30th. As of October 1, 2021, payments on these student loans resume.

(Read: Coming Out of Forbearance: Forbearance and Your Credit)

Private Student Loans

Private student loans weren’t protected under the Cares Act. Medical residents with private loans either continued to make their payments or worked with their banks. Most private lenders offered options for refinancing. Hopefully, medical residents have taken advantage of it.

Remember, most lenders look at your potential income, not your current salary. Medical students may get loans that another person with the same income can’t. The lender wants to keep their business once they’re an attending physician. But if miss a single payment, the loan will go into default. There is no grace period. Private lenders are not required to offer “get out of default” programs. The loan will be sent to a collection agency within 120 days. Not only is your credit damaged, but bankruptcy is not an option. Student loan (private or federal) is not discharged.

Don’t be passive – if you’re struggling to meet your payments, reach out to your lender.

Federal Programs for Student Loan Repayment

The U. S. government has four programs to provide relief for people who are buried in student loan debt. All of them allow your payments to be aligned to your income.

All of them require an application to determine your eligibility:

  • REPAYE: Revised Pay As You Earn Repayment Plan
  • PAYE: Pay As You Earn Repayment Plan
  • IBR: Income-Based Repayment Plan
  • ICR: Income-Contingent Repayment Plan

Federal student loans in default are not eligible for repayment plans. Forbearance ends on September 30, 2021. If you’re concerned about making payments, be sure to apply before that date.

These loan payment plans can be used by any borrower with an eligible student loan. The modifications lower the payment but will extend the term of the loan. The longer the loan, the more interest you pay.

On any of the four, a remaining loan balance at the end of the term is forgiven. But only if you’ve made your payments in good faith. Be aware that any forgiven debt at the end of your term is taxable.

The U.S. Department of Education offers subsidies for interest on Direct Subsidized student loans. These loans are available for lower-income students. The interest is paid if the student is enrolled in school, during the 6-month grace period, and any deferment plan.

Discretionary Income

All income-based repayment plans reference “discretionary income” as a baseline for your payments. Discretionary income is calculated as follows: Taxable Income  – (150% × HHS federal poverty guidelines).

Get your adjusted gross income (AGI) from your last tax return. Find the poverty level for your state and household size. Multiply that by 150%. Then subtract that total from your AGI.

That is your annual discretionary income.

If you live in Virginia with a spouse and 2 kids – the poverty level is $26,500. Multiplied by 150%, it’s $39,750. If your AGI is $60,000, you subtract $39,750 to get $20,250. The size of the household matters, but all states except Alaska and Hawaii have the same poverty threshold.

REPAYE

Anyone with an eligible federal student loan can apply for this program. (Note that Parents Plus loans and Subsidized Federal Stafford Loans for parents are not eligible for REPAYE.)

The term of the repayment plan is 25 years for graduate or professional studies – which includes medical residents. It’s 20 years for repaying loans are from undergrad. The monthly payment is normally 10% of your discretionary income. You can use this calculator to see your possible loan payments. When you’re accepted into REPAYE, you’re also eligible for a federal student loan interest subsidy.

Each year REPAYE borrowers need to recertify their income. There’s no application fee and you should get a reminder from your loan servicer. When you’re income goes up, your loan payment amount goes up. But there are no income limits to be eligible for the REPAYE plan.

PAYE

The PAYE plan also breaks out payments at 10% of your discretionary income. Use the calculation above to determine to find your annual discretionary income. Multiply that by 10%, then divide the total by 12 to get your monthly payment. If that amount is more than the payment on a 10-year Standard Repayment Plan, you do not qualify.

The term of the loan repayment plan is 20 years. But there are more restrictions on eligibility.

To qualify for PAYE, you need to have borrowed your first federal student loan after October 1, 2007, and you need to have borrowed a direct loan or a direct consolidation loan after October 1, 2011.  After 20 years any remaining student loan balance is forgiven.

As with REPAYE, federal student loans made to parents are not eligible for this plan.

IBR

The Income-based Repayment plan sets its monthly payment at 15% of your discretionary income. As with the PAYE program, you do not qualify if your payment would be more than the standard 10-year Standard Repayment Plan. For some applicants, the 15% payment versus the 10% may make the difference in their eligibility.

The term of the loan varies. If you’re a new borrower as of July 2014 – it’s a 20-year term. If you started your loans earlier than July 2014, it’s 25 years. As with all other repayment plans, you must recertify your income.

As with REPAYE, federal student loans made to parents are not eligible for this plan.

ICR

Any borrower of a federally funded student loan is eligible for this repayment plan.

It’s the only repayment plan that provides relief to parents who took out student loans. The pandemic hit many of them harder than the students they support. The following loans are eligible when consolidated:

  • Direct PLUS Loans made to parents
  • Subsidized Federal Stafford Loans (from the FFEL Program)
  • Unsubsidized Federal Stafford Loans (from the FFEL Program)
  • FFEL PLUS Loans made to graduate or professional students
  • FFEL PLUS Loans made to parents
  • FFEL Consolidation Loans that did not repay any PLUS loans made to parents
  • FFEL Consolidation Loans that repaid PLUS loans made to parents
  • Federal Perkins Loans

As you move forward, make sure you understand the impact of consolidating the loans. Consolidation can affect the benefits of certain loan types.

REPAYE or Refinance?

If you’re comparing options between a repayment program and refinancing, there are some things to consider. First, do not refinance if you’re planning to apply for Public Service Loan Forgiveness. It will take you out of the running.

The other thing to look at is interest subsidies. REPAYE offers a monthly subsidy that waives 50% of your unpaid interest. That’s significant. After the subsidy is applied, compare that interest rate to the offers for refinancing. As your payment grows higher, the subsidy has less impact on the rate. That’s when you might consider refinancing.

The obvious reason for an income-driven repayment plan is not enough money. This is particularly true during residency. The good news is that lenders who refinance student loans are updating their policies. Remember, a doctor’s potential income plays a part in their loan decisions. Don’t be afraid to test the waters – even if you’re struggling with a low payment. You might be pleasantly surprised.

Policy Impact on Student Loans

The Biden administration has taken action to support certain student loan recipients but no general debt forgiveness. Calls during the campaign for $50,000 in debt forgiveness on all federal student loans were never an option. There is an agreement on $10,000 in debt forgiveness overall, but it’s stalled. Congress wants it enacted via Executive Order and the White House wants legislation.

Given the gridlock in DC, it’s unlikely to see any relief soon. The American Rescue Plan did include guidance for colleges and universities to cancel student loan debt during the pandemic.

The new administration has rolled back the partial student loan cancellation for 72,000 borrowers who were defrauded by private colleges. Those borrowers will now get 100% of their loans canceled. The cumulative total is 1 billion dollars.

Students with disabilities got some relief as well. Their loans were discharged, but they missed a submission date for some paperwork. They lost their discharged status as a result. This policy has been reversed and student loans for 41,000 disabled Americans regained their discharged status.

Using the Borrower’s Defense program, 18,000 former students of the now-defunct ITT Technical Institutes received $500 million in student loan cancellation.

Student Loan Forgiveness Programs

Here are some options for student loan forgiveness.

 Teachers

Teaching in a low-income school system can make you eligible for student loan forgiveness. Teachers must work full-time at a low-income elementary or secondary school for 5 years to receive forgiveness on $17,500. Teachers must have a Direct Subsidized or Unsubsidized loan to qualify. These loans must have been taken out before the end of your 5-year qualifying services.

Teachers can create an account and get more information here.

Public Student Loan Forgiveness Program (PSLF)

This program has three very specific eligibility components:

  • Direct federal loan
  • 30+ hours at non-profit or government employer
  • 10 years of on-time monthly payments

It takes 10 years of payments before forgiveness is offered. The good news is you need to be on a government repayment plan – REPAYE, ICR, etc. At least your loan payments will be more manageable – which is good. The salary for most non-profits or government positions is far lower than working in the private sector. Especially when you’re first starting your career.

You need to recertify once a year and anytime you change jobs. Once you make 120 monthly, on-time payments, the remaining balance of your loan is discharged. The discharge is not taxed, unlike forgiven balances on repayment plans.

Borrower Defense

If the college misled you or lied about their services, job potential, or credentials, you may be able to get your loan discharged. This applies to federally backed student loans, whether the school is still active or closed.

Complete and Total Disability

If you are a disabled person, you may qualify to have your student loans discharged. To be eligible, you need to show proof of disability from one of three sources:

  • Veterans Administration: Provide proof of a service-connected disability that is 100 % disabling
  • Social Security: Prove eligibility for benefits received on SSI or SSA
  • Your doctor: MD certifies your mental or physical inability has or will last 60 months and can be expected to result in death.

Establishing disability status is the challenging part here. If you already meet the requirements, the discharge should be no problem.

Dealing with Student Loans

Student loan debt doesn’t have to run your credit or your quality of life. There are ways to reduce your payments whether you have federal loans or private loans.

For private loans, see what your options are to refinance your loan. Remember, there are fewer protections if you default on a private loan. Make timely payments and be proactive if you need to refinance.

As far as federal student loans, look at your options. Choose from four income-based repayment plans based on your situation. Apply now – don’t wait until the forbearance period ends. Remember if you’re interested in Public Service Loan forgiveness, you need to be enrolled in one of them.

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