Student Loan Repayment
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Related Resources
AAMC Documents
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Current Status
On August 10, 2008, President Bush signed the "Higher Education
Opportunity Act" (P.L. 110-315), completing the first Higher
Education Act (HEA) reauthorization since 1998. Among other provisions,
the bill clarifies the definition of "public health" in
the Direct Loan Public Service Loan Forgiveness program to include
health profession occupations, and creates a new loan forgiveness
program for medical specialists [see Higher
Education Act Reauthorization].
Loan Forgiveness for Service in Areas of National Need
P.L. 110-315 creates a new loan forgiveness program for service
in areas of national need . Under this program, "public sector
employees" and "medical specialists" are 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.
The bill 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.
Regulatory Activity
On July 1, 2009, the Department of Education published in the Federal
Register a notice of proposed rulemaking for new regulations
that implement the "College Cost Reduction and Access Act" (CCRAA,
P.L. 110-84). Carrie Steere-Salazar, Chair of the AAMC Committee
on Student Financial Assistance (COSFA), represented the AAMC and
graduate/professional schools on the committee.
At the March 5 negotiating session, the Department announced that
they would no longer use its regulatory authority to continue the
20/220 pathway of the economic hardship deferment, and would stop
accepting applications effective July 1, 2009. The economic hardship
deferment allows residents who meet certain debt and income criteria
to postpone loan repayments during their training, without the additional
interest that accrues in forbearance. The public comment period
for the proposed rule ended August 15. A final rule is expected
to be published in November 2008.
Background
On September 27, 2007, President Bush signed the P.L. 110-84. Among
the most notable changes, the measure includes a change to the definition
of economic hardship deferment, which eliminates the pathway that
most medical residents use to qualify for the program (the debt-to-income
ratio or "20/220 pathway"). The bill also creates new
income-based repayment and "public service" loan forgiveness
programs. Forbearance is not affected. Due to a temporary extension
by the Department of Education, the 20/220 pathway will be available
though July 1, 2009. Currently, educational loan servicers and lenders
should accept applications for the economic hardship deferment from
medical residents that qualify under the 20/220 pathway.
Economic Hardship Deferment
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.
Medical residents commonly qualify for the economic hardship deferment
based on their 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 based on a standard 10-year
repayment) 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 150 percent of the federal poverty line for the borrower's
family size. For a medical resident making the average first year
resident stipend of $44,747, at the current fixed 6.8 percent interest
rate, the borrower would need approximately $76,000 in federal education
debt to qualify for this deferment.
P.L. 110-84 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. In
November 2007 and 2008 regulations, the Department of Education
temporarily extended the 20/220 pathway until July 1, 2009, when
the new income-based repayment plan will be available.
Forbearance
Medical residents who do not qualify for the economic hardship deferment
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 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. Forbearance will continue
to be available after July 1, 2009.
Income-based Repayment
Effective July 1, 2009, a new income-based repayment program will
allow medical residents to cap their monthly repayments at 15 percent
of their income that exceeds 150 percent of the poverty line for
the borrower's family size ($15,315 for an individual). With an
average first year resident stipend of $44,753, the monthly payment
would be $368 compared to a typical 10-year repayment of $2,025
a month.
All residents will qualify for this program regardless of income
or debt levels. Similar to the economic hardship deferment, the
federal government will continue to pay interest on the subsidized
portion of the loan during the first 3 years of income-based repayment;
interest will continue to accrue on the unsubsidized portions. After
3 years, interest will begin to accrue on the subsidized portion
of the loan as well. After 25 years of income-based repayment, remaining
federal educational debt if forgiven; however, physicians are unlikely
to benefit from this provision.
A participant can elect to leave the income-based repayment program
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 Program
P.L. 110-84 also 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. P.L.
110-315 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 the income-based repayment program could save over $75,000 on
their total loan repayment.
AAMC Activity
On May 14, 2008, the AAMC sent its most recent comment letter to
the House Education and Labor Committee and the Senate Health, Education,
Labor and Pensions Committee regarding the conference of the "College
Opportunity and Affordability Act of 2007" (H.R. 4137) and
the "Higher Education Amendments of 2007" (S.1642). The
letter commented on provisions of the Higher Education Act (HEA)
reauthorization bills that affect medical education including loan
repayment, financial aid, institutional grant programs, and accreditation.
The AAMC also joined with the American Medical Association (AMA)
in a March 12, 2008, letter to the House and Senate education committees
urging reinstatement of the economic hardship deferment's "20/220
pathway." The AAMC-AMA joint letter noted that "medical
residents rely on the 20/220 pathway to help defray their high debt
burden," and "Borrowers with high loan debt may be deterred
from entering public health service, practicing medicine in underserved
areas, starting a career in medical education or research, or practicing
primary care medicine."
On October 12, 2007, AAMC President Darrel G. Kirch, M.D., sent
a letter to Secretary of Education Margaret Spellings expressing
concern that P.L. 110-84 created a "gap" in coverage for
medical residents between October 2007 and July 2009, during which
time they would not eligible for either the economic hardship deferment
or the new income-based repayment program. 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.
On December 3, 2007, then-Department of Education Assistant Secretary
for Postsecondary Education Diane Auer Jones sent a letter to the
AAMC regarding the P.L.110-84 and the economic hardship deferment.
The letter confirms that the 20/220 qualifying pathway for economic
hardship had not been changed. Furthermore, the letter notes that
changes in the economic hardship poverty line requirements will
expand eligibility for the program. Lenders currently should be
offering - and should never have stopped accepting applications
for the economic hardship deferment from medical residents that
qualify under the debt-to-income ratio.
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, Senior Legislative Analyst
AAMC Government Relations
mshick@aamc.org
(202) 862-6116
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