Defusing the Student-Loan Debt Bomb

Ifreke Williams, a third-year med student, stands in front of a camera holding a print-out of her outstanding student-loan debt to date, and the numbers are sobering: “Medical School Debt: $226,000 (Now)—$295,000 @ Graduation.”

Williams shared her story with HuffingtonPost.com to raise awareness of the staggering amount of debt many medical students face, along with the difficult career and life decisions that result from it.¹ “The thought of starting life with such a huge debt is very frightening, especially since I plan on going into primary care and not a lucrative medical specialty or subspecialty,” she writes.

Medical student loan bill: $160,000

Medical students in the Class of 2009, including both public and private schools, graduated with a median student-loan debt of $160,000, according to a survey by the Association of American Medical Colleges (AAMC).² But that figure is skewed by the number of students who receive financial assistance from their families, schools, scholarships or other forms of aid. Students like Williams who need to rely almost entirely on loans to pay their education costs often borrow far more: The AAMC survey found that 17% of private-school grads had incurred debt of $250,000 or more.

Students leaving med school with the equivalent of a mortgage in debt is severely limiting the choices young physicians can make—both in terms of their families and their finances. More residents burdened with six-figure debt are shunning family medicine and primary care, concerned with the relatively low pay and looming threat of sharp reductions in government Medicare payments. Physician shortages in primary care are the most pronounced in rural areas and in regions of the country where the cost of living is high. And, regardless of their chosen field, many young physicians find they must make sacrifices in their personal lives to service their debt, such as putting off buying a house or starting a family.

Policy makers are finally starting to take notice of the impact education debt is having on the U.S. healthcare system, and new legislation is being considered to help ease the burden. We’ll look at some new and existing government programs that are attempting to help physicians manage, or in some cases eliminate, their student-loan debt.

Married couples get a break with new IBR rules

Two important changes went into effect on July 1, 2010, that may make some physicians eligible for the Income-Based Repayment (IBR) plan that were not eligible before. A change in the way household income and debt is formulated could mean lower payments for married couples.

IBR is a payment option for federal student loans that keeps monthly loan payments affordable with payment caps based on the borrowers’ household income and family size. In most cases, loan payments are less than 10% of their adjusted gross income. Borrowers in the plans are also eligible for forgiveness of any remaining student-loan debt after 25 years—or just 10 years if they work in the public service sector, including jobs in government and nonprofit 501(c)(3) organizations. The program covers most federal loans. The 10-year payment period doesn’t have to be consecutive; so, for example, a borrower can work in public service for five years, go into the private sector for a few years, and return to complete the 10-year requirement when the time is convenient.

Under the rules that went into effect in July, IBR eligibility will be based on either the balance when the loan first entered repayment or on the current loan amount—whichever is greater. So borrowers with loan balances that have increased due to accrued interest would be eligible to qualify based on what they actually owe. An online calculator available at www.ibrinfo.org/calculator.php, can tell you if you’re eligible for IBR under the new rules.

Up until July 1, married couples who both had federal student loans typically paid higher monthly IBR payments than single borrowers. For married couples who file jointly, lenders will now use a formula that factors in the couple’s total outstanding federal student-loan debt and adjusted gross income to come up with the minimum monthly payment. Previously, the formula didn’t combine the couple’s total student-loan debt, leading to monthly payments that were up to twice the amount that two single borrowers would have to pay.

If you’re married and your spouse has federal student loans too, contact your lender to ensure your payments reflect this new rule change.

Forgiveness programs on the rise

Physician shortages have vastly increased the number of national, state, and local loan-forgiveness programs offered to young physicians, most with the aim of boosting the number of physicians in primary care. Currently, there are a number of state and federal bills under consideration that would offer loan-forgiveness or partial-repayment programs to physicians who agree to work in certain fields or underserved areas of the country.

There are already a number of loan-forgiveness programs available for physicians. The most widely known is a program by the National Health Service Corps (http://nhsc.hrsa.gov), which makes loan repayments for physicians who practice for a certain number of years in areas of the country with severe physician shortages. Its full-time program starts with an initial award of $50,000 for two years of service, and a new part-time pilot project begins with an initial award of $50,000 for four years of service. Participants in the program may be eligible to extend their service until all of their debt is paid.

A growing number of hospitals and private healthcare systems are extending loan forgiveness to attract young physicians as well. A listing of hospitals and other organizations that offer loan forgiveness can be found at www.finaid.org/loans/forgiveness.phtml.

New ombudsman to resolve disputes with private lenders

Finally, the new provision of the 2010 financial reform bill creating new Federal Student Aid Ombudsman may help borrowers find relief in dealing with problems they encounter with private lenders. The ombudsman will be dedicated to helping students with private student loans resolve disputes and other problems with lenders. An ombudsman position already exists in the Education Department for federal student loans, but it excluded private loans.

The need for more oversight of non-government loans became abundantly clear over the last decade as the use of private student loans exploded: Between 2000 and 2008, total education borrowing with private loans soared from $6 billion to $24 billion, according to the College Board.³ In 2009, private loan borrowing was slashed in half, as access to credit dried up in the wake of the financial crisis.

Often students who borrow with private loans do so because they’ve already maxed out the federal loan borrowing limits. Generally, there are no borrowing limits for private student loans, which can often lead students to overextend themselves. There are also no limits on private loan interest rates. With the exception of subsidized Stafford Loans, the rate on government loans is currently capped at 6.8%. Variable private loan rates can climb to 20% or more, and penalties for late payments can be equally steep.

The new ombudsman won’t have the authority to impose changes in the terms or conditions of individual student loans. Still, the office is designed to help find a fair and equitable solution for student problems.

If you are having a problem with a private lender, contact the ombudsman at http://fsahelp.ed.gov or call (877) 557-2575. You may also email a detailed letter explaining your problem to fsaombudsmanoffice@ed.gov, or write to the U.S. Department of Education, FSA Ombudsman, 830 First Street, NE, Fourth Floor, Washington, D.C. 20202-5144.

The new ombudsman’s office will also be responsible for issuing annual reports to congressional lawmakers on prevailing issues and trends within the private student loan industry, shining some much-needed light on practices that may be harming borrowers.

Sidebar: How Student Loans Affect Your Credit Score

For many graduates, taking out a student loan marks the beginning of their official credit history. Credit-rating companies consider student loans installment debt, in the same category as a mortgage or home-equity loan. Though you may have hundreds of thousands of dollars in debt, the size of your student loans isn’t as much of a factor in calculating your credit score as your ability to repay it. This is why it’s so important to never miss a payment to any lender.

Many students ding their credit scores quite by accident because they miss making their first student-loan payment—often because they weren’t aware it was due. Students move, addresses on file aren’t kept up to date, and payment notifications get lost in the mail. To avoid this, make sure you keep careful records on all of your outstanding student loans, and notify lenders when you move.

If you’re in a financial bind and you miss a payment, your credit score could drop by as much as much as 50 points. But if you enter a deferment or forbearance program with your lender, it shouldn’t adversely affect your score. Credit-scoring companies generally view these as temporary programs and so generally don’t factor them into the scoring. If you’re struggling to make payments, contact your lender to explore available debt-relief programs immediately before you miss a payment. To learn more about credit scores and how they’re formulated, visit MyFico.com (www.myfico.com).

Sidebar: Online Resources

FinAid

(http://finaid.org)

The most comprehensive source of up-to-the-minute student financial aid and student loan information, including advice and tools for parents, students, and graduates.

Student Loan Borrower Assistance Program

(www.studentloanborrowerassistance.org)

Run by the National Consumer Law Center, this site provides student loan borrowers with information on their legal options and rights, and has breaking news on government rules and legislation that may affect your loans.

IBRinfo

(www.ibrinfo.org)

A Web site with news, information, tools, and advice on the Income-Based Repayment (IBR) plan run by the Institute for College Access & Success.

First Facts

(www.aamc.org/programs/first/students/factsheets.htm)

Brief informational financial aid and student loan worksheets for help with repaying student loans from the Association of American Medical Colleges.

This edition of Oncology Fellows is supported by Genentech, a member of the Roche Group.