Physician student loan repayment plans

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Disha Spath, M.D.

Table of Contents

A review of recent changes in the physician student loan repayment plans.

STUDENT LOANS STARTED ACCRUING INTEREST on Sept. 1, 2023, and payments resumed in October. So let’s take a moment to  consider what has changed in the student loan repayment landscape

A look at the landscape

President Biden’s administration announced some major changes to Income Driven Repayment (IDR) plans at the end of June, 2023.

IDR plans were designed to calculate the monthly payment due as a percentage of a borrower’s (or borrower’s household) discretionary income. Ideally, borrowers were allowed to make more affordable payments — then have the rest of their loans forgiven after 20 or 25 years of payments.

Prior to the changes proposed, these plans included the Income Based Repayment plan (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) and Income Contingent Repayment plan (ICR).

The forgiveness from these plans is available to any federal borrower with direct loans. Prior to the pandemic, this forgiveness was taxable. The federal tax bomb is still on hold until Jan. 1, 2026 (state tax may still apply).

To qualify for tax-free Public Service Loan Forgiveness (PSLF) after 10 years of payments, borrowers were generally advised to be in one of these plans while making payments to get the maximum forgiveness possible with the least out-of-pocket cost.

Changes introduced

The changes announced by the Biden administration make the IDR plans even more attractive for some earners, while adversely affecting some high-income borrowers. Let’s deep dive into the changes.

REPAYE will now become SAVE (Saving on A Valuable Education). REPAYE was attractive to many borrowers because it included an unpaid interest subsidy — it forgave50% of the accruing interest every month. SAVE will now forgive 100% of the interest left unpaid after the monthly payment.

Also, the monthly payment will be calculated differently. It used to be 10% of discretionary income (DI) calculated as adjusted gross income (AGI) minus 150% of the federal poverty line. With the SAVE plan, discretionary income will now be AGI minus 225% of the federal poverty line, and payment for undergraduate loans will be lowered to 5% of discretionary income.

This will make the plan very desirable to lower-income borrowers. In fact, borrowers who owe less than $12,000 will get forgiveness after 10 years of payments.

Higher-income families will need to remember that there is no cap to payment in the REPAYE or the SAVE plan, so their payment could still be higher than what they would pay in standard repayment. However, the SAVE plan now makes it possible for higher-income families to lower their payments by filing their taxes married filing separately instead of jointly, so that only one income is used to calculate the monthly payment. Married filing separately could still be an issue in community property states where income must be divided equally when filing, so it is very important for borrowers to consult an accountant, student loan advisor, or the loan servicer to see how this plan would affect them.

Borrowers should also be aware of some changes to the Income Based Repayment plan (one of the IDR plans). Borrowers whose payment used to be too high in the REPAYE plan could switch back to IBR in the past, as it allowed for payments to be calculated using the married filing separately loophole, and the payments were capped at less than or equal to the standard payment.

With the new changes, borrowers will no longer be able to switch back to IBR after making 60 payments in REPAYE or SAVE as of July 2024. So borrowers who will be transitioning from being low-paid residents and fellows going into very high-paying specialties may want to compare their payments in save versus the new IBR plan prior to the July 2024 switchback deadline.

Borrowers should also be aware that the monthly payment for IBR will now be 15% of DI if loans were issued before July 2014 and 10% of DI for loans issued after July 2014.

Deferment change

One silver lining for borrowers who have been making payments for many years this year is the IDR waiver. The IDR waiver defines a one-time payment recount in 2023 that would add months to their repayment count with a more generous definition of months in repayment. Deferments from unemployment, cancer treatment and military service will now count as months when payments were made. Certain forbearances will now also count.

Many borrowers have already started to see these changes make a big impact on their loan forgiveness trajectory. One caveat to the IDR waiver is that the loans forgiven must be federal loans. Borrowers with older commercially held FFELP loans would have needed to consolidate by Dec. 31, 2023, to be eligible for the payment recount.

While the restarting of student loan payments will be jarring, the changes outlined above will most likely lighten the impact and reduce the payments for many families. You can find out what kind of loans you have and what repayment plan may be best for you by visiting studentaid.gov. •

 

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Disha Spath, M.D.

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