Member Benefits Spotlight

Tuesday, July 01, 2014 12:50 PM

John Collins and Jason DiLorenzo, GL Advisor

Obama’s 2015 budget proposal and its potential impact on medical graduates

Every year the President publishes a budget proposal for the upcoming fiscal year. President Obama has always worked to appeal to younger generations, recognizing their potential as a critical voting demographic and their plight as one that must be addressed. An example of this is his announcement in October 2011 of the Pay As You Earn (PAYE) program, leading to the program’s implementation in July 2012.

PAYE is an improvement of the previously existent income-based repayment (IBR) program, capping monthly payments at 10 percent instead of 15 percent of discretionary income and allowing for the forgiveness of the remaining federal student loan balance after 20 years of payments instead of 25. However, the PAYE program as it exists today is only available to those borrowers with no outstanding federal student loan balance on Oct. 1, 2007, AND a disbursement of federal student loan funds after Oct. 1, 2011, while all borrowers with a partial financial hardship (most medical graduates entering residency can demonstrate this) are eligible for IBR.

Public service loan forgiveness (PSLF) is a separate program that works in concert with the two aforementioned repayment plans, relieving public or nonprofit sector workers of their remaining federal student loan balance after 10 years and 120 qualified payments while employed in the sector. For many young medical professionals, this program provides much needed relief, especially as the salaries of primary care physicians and internists, often employed by non-profit entities, stagnate while demand for their expertise increases.

Under the 2015 budget proposal from the Obama administration, all borrowers would be able to limit their monthly payments to 10 percent of their discretionary income, as PAYE-eligible borrowers may do today. This by itself is welcome news, as even smaller initial payments allow medical residents to more easily manage their cash flow at the start of their careers. However, the cap on payments (currently the 10-year standard payment amount) would be removed, suggesting that borrowers who eventually earn higher incomes may be required to pay significantly more than the standard 10-year payment would necessitate. For certain specialties, this could translate into an increase in payments made during residency to those required as an attending physician, such that these programs actually increase the cost of one’s debt over the life of the loan.

Of equal importance are the proposed changes to the forgiveness programs. Framed as a requirement aimed to “protect against institutional practices that may further increase student indebtedness,” Obama proposes to limit the amount forgiven through the PSLF program to $57,500. This number, derived from the federal student loan borrowing limit for an independent undergraduate student, is well below the $160,000 - $220,000 average federal education debt load of 2014 medical school graduates, not to mention future medical school graduates. With inelastic demand for medical school education, this change would likely have no impact on tuition rates at university programs across the United States.

In addition to the changes to PSLF, all borrowers, regardless of their employment, would be eligible to have balances of up to $57,500 forgiven by the federal government after 20 years or qualified payments. Balances in excess of this figure would remain an obligation of the borrower until paid in full or 25 total years of repayment. While the $57,500 limit to the forgiveness value at 20 years is not necessarily advantageous to certain borrowers, the proposal also allows balances forgiven at years 20 and/or 25 to avoid tax consideration, whereas the existing legislation considers these forgiveness amounts taxable as income (PSLF is tax-free).

To examine how this may impact a 2014 medical school graduate, we’ve prepared a simple analysis. Let’s start with the average debt portfolio mix for a medical school graduate. With just under $200,000 at just under 7 percent, our graduate’s education debt is certainly a sizable concern that must be addressed strategically. Given the terms of Pay As You Earn and Public Service Loan Forgiveness, our borrower strides into residency confident that she will effectively manage her debt in an affordable, cost-effective fashion.

Utilizing today’s programs, our newly minted MD or DO can do just that. If shedoes her residency, which we’ll assume is a four-year program, as well as her first six years as an attending in nonprofit, 501C3 hospitals while repaying her debt under the terms of PAYE, she’ll be eligible for forgiveness of her entire balance at the end of 10 years. During this 10-year period, her highest monthly payment is less than $1,400. The balance remaining at the time of forgiveness is just under $230,000, and she spends a total of about $97,000. We assumed this doctor practiced in one of the primary care specialties, with an average salary of about $167,000 over her first six years as an attending.

But if the proposal recently laid out by the administration was approved as is and forced upon the thousands of students and borrowers who’ve already developed a reliance on the current program details, the economics would look much different. Our doctor’s average monthly payment would increase by an average of $400 per month and she wouldn’t be done paying her debt for an additional 10 years, spending nearly $200,000 more to retire her debt.

For attendings, those of you actively participating in a residency or fellowship, or those on the precipice of graduating from medical school, you should be reassured by a few things. For one, the master promissory notes (MPNs) you signed in order to borrow each loan you took out for medical school included language about PSLF and your right to utilize the program. Thus, a legal contract between you and the federal government says you borrowed under the assumption you’d be able to utilize the PSLF program under the terms of the program at the time you took out the loan.

Second, if you’re actively working toward repaying your loans through the PSLF program and have made economic decisions based on the program’s details, you’ve demonstrated a detrimental reliance on the terms as they exist today. As such, the federal government is obligated to grandfather you and others in the same situation through any changes to the laws, based on historical legal precedent. In summary, this means you’re very unlikely to be affected by the proposed changes.

However, if you’re an M1, M2, M3 or future medical student, you may take comfort in similar facts, including that your existing loans required you to sign MPNs that include the mention of PSLF. Additionally, the unintended impact the proposed changes to the PSLF program would have on the supply of health care would harm the success of the Affordable Care Act. Many students and young health professionals see PSLF as a means to make their career serving others possible, especially in light of the lack of growth in primary care physician wages.

Recognizing these facts, GL and many other institutions are advocating on behalf of graduate students and professionals in hopes that the detrimental changes to PSLF and the repayment programs are not passed into law.