FDIC-Insured – Backed by the full faith and credit of the U.S. Government
The Education Department on January 10, 2023, shared the details of the Biden Administration’s proposed reforms to the income-driven repayment program (IDR). During the initial announcement in August 2022, these reforms were overshadowed by the president’s plan for a one-time, set-amount loan forgiveness, despite these changes to IDR being potentially more beneficial in the long term.
Many doctors are disqualified from the partial loan forgiveness ($10,000 per borrower, $20,000 if a Pell Grant recipient) because their income is higher than the $125,000 income cap or $250,000 for married couples filing jointly. (This forgiveness is currently blocked in the courts and may be overturned). But, these new changes to IDR plans could have a big impact on doctors’ finances.
Here’s what you need to know about these changes and how the new income-driven repayment program affects physicians, dentists and veterinarians.
What is income-driven repayment?
Income-driven repayment plans set your monthly student loan payment at an amount that is intended to be affordable based on your income and family size, according to the Federal Student Aid website.
The current plan options are:
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Pay As You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
Each plan calculates your monthly payment based on a percentage of your discretionary income, which you pay for a set number of years. Once you complete the total length of payments, the remaining balance is forgiven.
The Biden Administration’s proposal calls for a simplification of IDR offerings, phasing out PAYE and ICR plans and limiting enrollments into IBR. Borrowers with Parent PLUS loans will still be able to use the ICR repayment plan.
A brief history of the income-driven repayment program
Income-driven repayment plans first became available to borrowers in 1994, when Congress established the Income-Contingent Repayment Plan. In 2007, the federal government launched a more generous version of the previous plan, calling it Income-Based Repayment. In 2010, 2014 and 2015, the federal government created Pay As You Earn, New IBR, and Revised Pay As You Earn, respectively.
Today, roughly 8.5 million federal student loan borrowers are enrolled in an IDR plan, representing about a third of all borrowers in repayment.
What will change in the new income-driven repayment plan?
The new plan, which will be a revised version of REPAYE, includes these changes:
- $0 monthly payments for any individual borrower who makes less than 225% of the poverty level
- Monthly payments for undergraduate loans capped at 5% of a borrower’s discretionary income, if they do not qualify for $0 payments
- Unpaid monthly interest will be covered, so a borrower’s loan balance will not grow as long as the required monthly payments are made
While graduate loans, including medical school, dental school, or veterinary school loans, will remain at 10% of the borrower’s discretionary income, borrowers with both undergraduate and graduate loans will pay a weighted average between 5% and 10%.
Other changes to be made include:
- Raising the amount of income that is considered non-discretionary, therefore protecting it from repayment
- Forgiving loan balances after 10 years of payment, rather than 20, for borrowers with original loan balances of $12,000 or less. This may not apply to many doctors as balances are typically much higher than $12,000.
- Simplifying enrollment by providing an opt-in for borrowers to allow the Department of Education to automatically pull their income information each year, removing the need to recertify their income annually
- Borrowers not currently in an income-driven repayment plan could see forgiveness
- Credit given towards forgiveness if a borrower was in more than 12 months of consecutive forbearance or 36 months of aggregate forbearance
Though the benefits of these changes are most significant for low-income borrowers with solely undergraduate loans, doctors will still be positively impacted.
How do changes to income-driven repayment affect doctors?
Physicians, dentists and veterinarians can reap the benefits of these changes through strategic decisions that can lower monthly payments or help along the way to Public Service Loan Forgiveness.
Additionally, the simplification of the enrollment and recertification of income into income-driven repayment could help doctors and doctors-in-training save time and mental effort.
How to take advantage of income-driven repayment changes
An official start date for these changes has not been announced, though the Department of Education aims to begin implementing some of these changes later this year.
Enrollment in this new plan is not available now, but if you want to enroll in the future and are unable to make the standard payments currently, you may want to enroll in another IDR plan. Once the new program is available, you will be able to switch from your existing plan into the new one.
Why change the current income-driven repayment program?
Since 1980, the total cost of four-year public and private college has nearly tripled, even when accounting for inflation. Medical, dental and veterinary schools are following the upward trend. According to a report from the Association of American Medical Colleges, medical education costs have been rising at double the rate of inflation.
Federal support has not kept up with these dramatically rising costs. While Pell Grants once covered almost 80% of the cost of a four-year public college degree, it now covers under a third.
Cumulative student loan debt of all borrowers had increased dramatically in the last few decades. In 1995, the total federal student loan balance stood at $187 billion. Since then, the balance has increased 766.3%, or 45.1% annually to $1.617 trillion.
This debt burden weighs heavily on the more than 45 million borrowers, preventing many from building wealth and achieving financial freedom. Biden’s plan aims to target “debt relief as part of a comprehensive effort to address the burden of growing college costs and make the student loan system more manageable for working families.”
How should I deal with my student loans?
Doctors often face large student debt burdens when graduating. According to the Education Data Initiative, on average, physicians graduate with about $241,600 in debt, dentists with $292,169, and veterinarians with $183,302.
Each doctor has a unique loan balance, financial situation and long-term plan, so your student loan payment plan should be individual to you. Working with a financial planner experienced with student loans, especially those who consistently work with physicians, dentists and veterinarians, can help you find the best repayment strategy for you.
Through our Build Your Team program, you can get connected to an industry-specific financial planner who can help you determine the best ways to deal with your student loan debt — totally for free! Get connected and learn more here.
More resources to help you:
Student loans are a complex topic. Want to learn more? Find more on our Resources page or check out one of our curated articles:
