It’s been made pretty clear to me Congress really doesn’t care about professional and graduate students, especially medical students. There are no Pell grants for graduate studies. The College Cost Reduction and Access Act of 2007 repealed the 20/220 rule, which generally allowed physicians in training to qualify for hardship deferrals of their loans. More seriously, the Budget Control Act of 2011 eliminated subsidized loans to graduate students starting this school year. Not only are the newer loans unsubsidized, but they’re at twice the rate of undergraduate subsidized loans (6.8% vs 3.4%). The only real benefit left for doctors is the Public Service Loan Forgiveness program, although some people think this possibly very beneficial program could easily be modified to prevent most physicians from getting any significant forgiveness from it at all.
PSLF and IBR
The public service loan forgiveness program (PSLF) works together with the Income Based Repayment program (IBR.) If you have a relatively low income compared to your loans, the IBR program reduces the amount you pay each month. The interest isn’t forgiven, it’s just added on to the balance of the loan. But your payments are based on your ability to pay, rather than the amount of debt you have. Student loans are generally on a ten year payment plan, but if you’re paying less than you otherwise would, the term gets longer. If you still have debt after 25 years (changing to 20 years), meaning you had a really high debt to income ratio for your entire career, then the rest is forgiven at that point. What the PSLF does is move up that forgiveness date from 20-25 years to 10 years IF you work for an eligible employer- public health, city/state/federal health care providers such as the VA, or a 501c corporation such as a non-profit hospital. I suppose it might even be possible to incorporate your private practice as a 501c corporation, but you’d need to discuss that with an attorney. Doing so might allow you to further limit your income (keeping it within the corporation) and further reducing your debt payments, then paying it out to yourself as a big bonus after debts are forgiven.
How it works
IBR currently caps your payments at 15% of discretionary income, which is defined as the difference between your adjusted gross income (AGI, line 38 on the 1040), and 150% of the poverty line, which changes by state and size of family. For a family of four in my state, the poverty line is $23,050, so 150% of that would be $34,575. A resident making $45,000 a year would have a discretionary income of $10,325. 15% of that would be $1549, or $130 a month. An attending making $200K a year would have a discretionary income of $165,425 and would owe up to $2068 a month. Notice how these figures have nothing to do with the amount owed. On a ten year plan, a 7% loan on $100,000 would require monthly payments of $1161. Thus if both the resident and the attending had $100K in loans, the resident would qualify to make lower payments under IBR but the attending would have to make the $1161 monthly payment. If they had $200K+ in loans, the resident would pay the same $130 a month and the attending would pay $2068 a month.
This 15% figure is being reduced to 10% for new borrowers as of 2008 who take out at least one loan in 2012 or later. This will include med students going forward from here obviously, so we’ll use the 10% figure in our calculations below.
How Much Can Be Forgiven?
So the more you owe and the less you make, the more you could possibly have forgiven. Let’s consider a rather extreme example. Let’s say a resident comes out of medical school with $400K in debt. For 3 years as a resident he makes $45K a year and makes payments of $87 a month. Then he goes into fellowship for three years, making $55K a year and making payments of $170 a month. Upon graduating he gets a job making $200K with the same 501c non-profit hospital he did his residency and fellowship at, and makes payments of $1379 per month for the next four years, at which point the balance of the loans are forgiven.
At this point he has paid a grand total of $87*36+$170*36+$1379*48= $75,444 and the loan balance is upwards of $700,000. He ends up having $324,556 of the original loan forgiven just for working for a non-profit for four years. This is a far better deal than any military or similar scholarship. He gets to make private practice pay (instead of the far lower military pay), he doesn’t have any deployments or other military hassles, and he gets an extra $90K+ in loan forgiveness each year in addition to his salary. In fact, if one calculates the forgiveness as the difference between $700K and the $75,444 he actually paid, he’s getting $156K+ in loan forgiveness each year, nearly doubling his salary.
What Could Go Wrong?
There’s a real problem here. Imagine how this will play out in the press; I can see the headlines now: “Doctors Get $700K From Your Tax Dollars!” Obviously most doctors will have far less than $700K forgiven, but there’s a serious moral hazard at play. Since the amount you pay back is primarily determined by your salary and not the amount of loans you take out, there’s no disincentive to borrowing as much as you possibly can. Even if you don’t need the money, you might as well invest with it. Even students whose family can pay for their medical school would max out their loans and just invest it. It isn’t that hard to find a job at a 501c. My state’s largest health system is a 501c and employees thousands of docs. I’m sure it’s the same elsewhere.
But the medical student relying on the PSLF program is running several very serious risks. Let’s discuss each in turn:
1) He might not be able to match at a 501c residency or fellowship. If it’s not a 501c, those years don’t count toward PSLF. In fact, once med students and residents understand PSLF (a tall order I’ll admit) those residencies/fellowships at 501c hospitals are going to become more and more competitive. If I were a residency program director you better believe that every one of my applicants would be quite aware that my program is at a 501c.
2) He might not be able to, or might not want a job at a 501c. Every specialty and area of the country is different with regards to the possibility of securing 501c employment. Once employers understand the PSLF program, they’re likely to offer you a lower salary, negating some or all of the forgiveness you might get.
3) Congress might make it so residency and fellowship years don’t count toward the PSLF years. For most medical students (like in the example above where the student only had $100K of debt) the big savings comes from the lower salaries while you’re in training. If those years don’t count then only those with ultra-high debt burdens and/or low salaries will get much forgiveness.
4) Doctor might just be excluded from PSLF outright. If you haven’t noticed, doctors don’t have many friends in Congress or The White House. It would really suck to have made tiny payments for ten years then find out that you now owe $700K in high interest loans that can’t be discharged in bankruptcy.
5) Congress may change the rules so that once you no longer qualify for lowered payments under IBR that your higher income now has to offset accrued forgiveness. Rather than limiting your payment to the standard payment, they could force you to still make an “income-based repayment”, but based on your higher income. Essentially IBR would swing both ways.
I’d hope that even if some of these changes occurred that some people would be grandfathered in, but I certainly wouldn’t count on it, especially given the length of time between taking out the loans and the time they may be forgiven (which could be up to 14 years or more.)
What Should You Do?
Without this program, I’d recommend that you pay down a 6-8% non-dischargeable debt as soon as you possibly could. But the possibility of having hundreds of thousands of dollars forgiven might make it worth running these risks. Certainly if you have a large debt burden and a relatively low-paying specialty, it would behoove you to only consider residencies at 501c eligible hospitals, and then stay on (or go to another 501c hospital) for a few years. By the time you’re an attending you should have a pretty good idea of your career plans for the next few years and be able to make a more informed decision about whether to pay the minimum amount on the loans or not. But I don’t think I’d take out any more loans in medical school than I absolutely needed. Not only would it be morally wrong, but I think the risks you’d be running (primarily that the program changes) are just too high. I dislike that the PSLF program as currently designed will encourage medical education costs to skyrocket for all but those willing to go through a prescribed career pathway. But these are the rules of the game you’re playing. You’re more likely to win if you know them inside and out.