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On March 23, 2010, President Obama signed the Affordable Care Act (ACA, P.L. 111-148 and P.L. 111-152), which includes student loan legislative recommendations from the president’s FY 2011 budget request. The Higher Education Opportunity Act of 2008 (HEOA, P.L. 110-315) and the College Cost Reduction and Access Act of 2007 (CCRAA, P.L. 110-84), represent the first comprehensive Higher Education Act (HEA) reauthorization since 1998. Among other changes, these laws created a new student loan repayment system and eliminated the Economic Hardship Deferment. Forbearance is not affected by these laws.
Income-based Repayment (IBR): ACA reduces the repayment formula of the Income-Based Repayment (IBR) program from 15 percent of adjusted gross income to 10 percent, as well as reducing the maximum loan repayment duration from 25 years to 20 years before forgiveness. The IBR changes are effective July 1, 2014, and will only apply to new borrowers.
IBR allows medical residents to cap their monthly repayments at a reduced rate based on income. With an average first year resident stipend of $47,716, the monthly payment is $393 compared to a typical 10-year repayment of over $2,000 a month. All residents qualify for IBR regardless of income or debt levels. Similar to the economic hardship deferment, the federal government continues to pay interest on the subsidized portion of the loan during the first 3 years of IBR; interest continues to accrue on the unsubsidized portions. After 3 years, interest accrues on the subsidized portion of the loan as well. After 25 years of IBR, remaining federal educational debt is forgiven; however, physicians are unlikely to benefit from this provision.
A participant can elect to leave the IBR at any time. After leaving the program, the borrower can cap his or her monthly repayments at the 10-year repayment schedule the borrower would have held immediately before entering the income-based repayment program. Interest on the loans is capitalized at the time the participant elects to leave the income-based repayment program, most likely at the end of a physician's residency.
Public Service Loan Forgiveness (PSLF): CCRAA authorizes a new "public service" loan forgiveness program, effective July 1, 2009. Physicians will be eligible for the program after 10 years of loan repayment while practicing in a "public service" job. The definition of "public service" includes 501(c)(3) non-profit organizations, faculty in "high-needs areas (as determined by the Secretary of Education), and service at private organizations providing "public health" or "emergency management" services. HEAO clarifies the definition of public health to include "full-time professionals engaged in health care practitioner occupations and health care support occupations, as such terms are defined by the Bureau of Labor Statistics." Only Direct Loans are eligible for forgiveness, but borrowers may consolidate other federal loans under a single Direct Consolidation Loan. Physicians that participate in IBR could save over $160,000 on their total loan repayment.
Loan Forgiveness for Service in Areas of National Need: Note - Congress has yet to appropriate funding for this program. As such, the Department of Education has not implemented the program, and it is not available for student loan repayment.
HEOA authorizes a new loan forgiveness program for service in areas of national need. Under this program, "public sector employees" and "medical specialists" would be eligible for up to $10,000 in loan forgiveness over 5 years. Public sector employment includes "full-time professionals engaged in health care practitioner occupations and health care support occupations." Medical specialists are defined as residents that have been accepted to, or currently participate in, an ACGME-accredited graduate medical education training program or fellowship that requires more than 5 years of total graduate medical training and has fewer U.S. medical school graduate applicants nationwide than the total number of positions available under these programs or fellowships. CCRAA prohibits participants in the loan forgiveness program for service in areas of national need from receiving additional repayments for the same service under the new public service loan forgiveness program.
Economic Hardship Deferment: CCRAA changed the definition of economic hardship deferment by eliminating the debt-to-income ratio qualifying pathway. Medical residents are unlikely to qualify under this new definition.
Forbearance: Medical residents who do not wish to begin repaying their loans during training have the option of 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 a more 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.
Matthew Shick, J.D.
Senior Legislative Analyst, Government Relations
Telephone: (202) 828-0525
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