Economic Hardship Deferment (HRD)
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Related Resources
AAMC Documents
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Current Status
On September 27, 2007, the President signed the "College Cost
Reduction and Access Act" (CCRAA, H.R. 2669, H. Rpt. 110-317),
the budgetary provisions of the current Higher Education Act (HEA)
reauthorization. Among the most notable changes, the measure includes
a change to the definition of economic hardship deferment, which
has the potential to eliminate the pathway that most medical residents
use to qualify for the program. The AAMC has prepared materials
outlining the CCRAA's potential impact on medical residents, as
well as a detailed analysis of the HEA Conference Report. Currently,
educational loan servicers and lenders should accept applications
for the economic hardship deferment from medical residents that
qualify under the debt-to-income ratio.
Background
All federal student loans have a grace period (usually six months)
following graduation before entering the repayment phase. At that
point, borrowers may apply for a deferment of payments on their
education loans for certain reasons, including economic hardship.
Currently, qualified borrowers are entitled to use the economic
hardship deferment for periods of up to one year at a time, not
to exceed three years cumulatively. During the deferment, the federal
government continues to pay the interest on the subsidized portion
of the resident's loan portfolio. Interest on the unsubsidized portion
of the borrower's portfolio continues to accrue during this time.
Eligibility for the economic hardship deferment is based on an
individual debt-to-income ratio. To qualify, a borrower must be
employed full-time, the borrower's federal education debt burden
(defined as the required monthly payment) must be equal to or greater
than 20 percent of the borrower's monthly income, and the borrower's
income minus the education debt burden must be less than 220 percent
of the greater of the minimum wage rate or the federal poverty line
for a family of two. For a medical resident making the average first
year resident stipend of $44,753, at the current fixed 6.8 percent
interest rate, the borrower would need approximately $106,000 in
federal education debt to qualify for this deferment.
Medical residents whose eligibility for the economic hardship deferment
has expired (either through no longer qualifying under the debt-to-income
ratio or having used all three years) have the option of beginning
to repay their loans, or going into forbearance. Under forbearance,
no payments are required; however, interest continues to accrue
and the federal government no longer pays interest on the subsidized
portion of a borrower's loans. In addition, interest may be capitalized
under forbearance, making this an expensive option for borrowers.
Under a special provision passed in 1993 (when the two-year internship
residency deferment was eliminated) borrowers are able to forbear
their federal loans throughout the duration of their ACGME-accredited
residency program, regardless of the length of the program.
Recent Legislative and Regulatory Activity
The CCRAA changed the definition of economic hardship deferment,
effective October 1, 2007. The new definition does not include the
debt-to-income pathway, which is the most common means by which
medical residents obtain eligibility. While the final conference
agreement increased the maximum qualifying income for the first
pathway, it is unlikely that residents will continue to qualify
for the economic hardship deferment. Under the new definition, a
borrower's income cannot exceed the greater of either the minimum
wage rate or 150 percent of the poverty line applicable to the borrower's
family size. For an independent single student the maximum qualifying
monthly income will be $1,276. A chart in the AAMC's detailed analysis
of the HEA Conference Report outlines the complete qualifying incomes
by family size.
However, before the debt-to-income ratio pathway is eliminated
from practice, the Secretary of Education must incorporate the change
into regulations (rules for the administration of Department of
Education programs). The Department of Education published new regulations
on November 1, 2007, that did not make any changes to the debt-to-income
ratio. The regulations include a change in another provision of
the economic hardship deferment that will increase the debt-to-income
ratio by 50 percent, allowing more residents to qualify for the
deferment. Previously, a resident's monthly income less monthly
loan payments could not exceed 220 percent of the federal poverty
line for a family of two. Under the new regulations, a resident's
monthly income less monthly loan payments can not exceed 220 percent
of 150 percent of the federal poverty line for the borrower's family
size.Another round of negotiated rulemaking will address this definition
of economic hardship and all remaining provisions of the CCRAA.
The CCRAA also created a "gap" in coverage for medical residents
between the implementation of the new economic hardship definition
and a new income-based repayment program that is effective July
1, 2009. During that time, medical residents would not have been
eligible for either the economic hardship deferment or the new income-based
repayment program. Medical residents currently participating in
the economic hardship deferment and graduates of the class of 2008
could be affected. An October 29 letter
from the Department of Education to Representative Howard "Buck"
McKeon (R-Calif.) indicates that the Department will continue to
offer the economic hardship deferment for borrowers that meet the
debt-to-income ratio qualifying criteria. The letter does not indicate
any end date for the debt-to-income ratio pathway. The letter also
states the Department's intentions to publish a Dear Colleague Letter
on this issue.
Earlier in 2007, both the House and the Senate approved extensions
to the Economic Hardship Deferment as part of their HEA reauthorization
packages: the "College Cost Reduction Act of 2007" (H.R.
2669), an education budget bill approved by the House on July 11,
2007, and the "Higher Education Access Act of 2007" (S.
1762), the corresponding Senate education budget bill approved by
the Senate on July 19, 2007. H.R. 2669 completely eliminates the
three-year limit on the duration of deferment. S. 1762 extends this
three-year limit to six years. However, netiher of these extensions
were included in the final conference agreement (H. Rpt. 110-317)
for the "College Cost Reduction and Access Act" (CCRAA).
AAMC Activity
On October 12, 2007, AAMC President Darrel G. Kirch, M.D., sent
a letter to Secretary of Education Margaret Spellings commenting
on the CCRAA. In the letter, the AAMC recommends:
- Temporarily extending the debt-to-income ratio pathway until
the new loan repayment program takes effect in 2009; and
- Allowing current participants in economic hardship deferment
to finish out their remaining years of eligibility.
The Secretary is granted authority for these actions under the
remaining statutory definition of the economic hardship deferment:
"a borrower shall be considered to have an economic hardship if-
such borrower meets such other criteria as are established by the
Secretary by regulation." The statute further directs, "in establishing
criteria … the Secretary shall consider the borrower's income and
debt-to-income ratio as primary factors." [20 U.S.C. 1085(o)] The
AAMC encourages the Secretary to exercise this authority to ensure
that the transition enacted by Congress is realized in a prudent
and orderly manner.
In a July 11, 2007, letter to the House and Senate education committee
Chairs and Ranking Members, the AAMC supported the full elimination
of the three-year limit on the economic hardship deferment as proposed
in H.R. 2669. The Senate proposal (S. 1762) would only expand the
three-year limit to six years. The letter notes "In their fourth
post-graduate year, resident physicians are forced to make loan
repayments that average close to 40 percent of their monthly income.
In their sixth post-graduate year, this figure jumps to 45 percent
and reaches almost 50 percent of their monthly income by their eighth
post-graduate year."
On March 29, 2007, the AAMC endorsed Sen. Christopher J. Dodd's
(D-Conn.) "Medical Education Affordability Act" (S. 1066),
which would extend the Economic Hardship Deferment for the entire
duration of an internship, residency, or fellowship program. Sen.
Dodd's bill does not require the borrower to apply annually.
As part of the AAMC's initial recommendations to 110th Congress
on the reauthorization of the Higher Education Act, the Association
recommended extending the economic hardship deferment to the length
of a borrower's accredited residency program. The AAMC also recommended
that all school-certified debt be included in the total debt level
for purposes of calculating qualification for the deferment.
Contacts
Matthew Shick, Legislative Analyst
AAMC Government Relations
mshick@aamc.org
(202) 828-0525
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