Student loan regulatory updates and fluctuating financial markets have captured major headlines in recent months. For health professional students and recent graduates, it is especially important to keep abreast of these changes due to their potential impact on debt retirement strategies. This article reviews recent regulatory changes and provides an overview of the considerations all students, residents and new physicians should evaluate in order to ensure they make the best decisions regarding their debt.
Legislative and Regulatory Updates Impacting Student Borrowers
Due to the growing concern regarding the rising cost of education and associated student debt levels, the Obama administration has proposed multiple changes to federal student loan relief programs. These updates may impact debt retirement strategies and potential savings opportunities, so below we have highlighted the critical updates that all health professional students and recent graduates need to consider when repaying their debt.
Enhancements to Income-Based Repayment (IBR) – The ‘Pay As You Earn’ Initiative
As you may be aware, IBR is a federal repayment program which limits borrowers’ monthly payment to 15% of their discretionary income and provides loan forgiveness for any remaining balance after 25 years of making qualifying payments. IBR helps eligible borrowers obtain payment relief and interest savings, asthegovernment will pay any interest that accrues on borrowers’ subsidized loans not covered by their reduced monthly payment, for up to three years after IBR begins.
Recently, President Obama introduced the Pay As You Earn initiative, which will accelerate enhancements to the IBR program originally scheduled for July 2014. Beginning as soon as 2012, Pay As You Earn will reduce monthly payments to 10% of discretionary income and forgive outstanding loan balances at the end of 20 years for eligible borrowers. This may result in thousands of dollars in potential savings and help certain borrowers recognize greater payment relief on their loans. Proposed eligibility requirements for Pay As You Earn require that a student must 1) have taken out their first federal loan no earlier than 2008 and 2) take out at least one more federal loan in 2012 or later, but this may change as the Department of Education finalizes the details of this initiative over the next six months.
In order to obtain the greatest savings through federal student loan relief programs, such as IBR, all recent graduates should file a tax return this year regardless of income level, because how and when taxes are filed can have a direct impact on savings obtained. Monthly payments under IBR are based on a borrower’s Adjusted Gross Income (AGI) and a tax return can be used as income documentation for this purpose. Additionally, married borrowers must also consider the tradeoffs of “married filing jointly” versus “married filing separately” because of the impact reported AGI has on the benefits of IBR. This decision is dependent upon several factors including each partner’s income, potential deductions, and federal educational debt levels.
Unique Consolidation Opportunity – Special Direct Consolidation Loan Program
The recently introduced Special Direct Consolidation Loan program will be available from January 1st through June 30, 2012. This program provides borrowers with at least one commercially-held FFEL loan and at least one federally held loan with the ability to consolidate with the Direct Loan (DL) program and receive up to a 0.5% interest rate reduction (including 0.25% for ACH), with rates capped at 8.25%. Loans made through the Special Direct Consolidation Loan program will be eligible for Public Service Loan Forgiveness (PSLF) and borrowers who qualify for this opportunity will have their previously made IBR payments applied to the new consolidation loan(s).
Only federal Direct Loans are eligible for PSLF, so borrowers interested in applying for PSLF will need to transfer any FFEL loans to DL via the Federal Direct Loan Consolidation program, or for a short time, through the Special Direct Consolidation Loan program. PSLF provides tax-free loan forgiveness to federal loan borrowers who make 120 qualifying payments while working for an eligible public service entity such as a non-profit hospital or health system.
Consolidation can take months to complete, so in order to position loans for maximum benefits, recent graduates should begin the consolidation process as soon as they have determined a repayment plan. Borrowers with loans at various rates may need to perform multiple consolidations grouped by interest rates in order to maintain the flexibility to retire higher rate debt more quickly. All decisions regarding consolidation should be approached strategically, as the timing, structuring, and benefits of loan consolidation are unique to each borrower.
Elimination of Subsidized Stafford Loans for Graduate Students
Unlike the items above, the next two changes are not positive ones for health professionals currently enrolled in graduate programs.
Included in the Budget Control Act of 2011, subsidized Stafford loans will be eliminated as a loan option for graduate students as of July 1, 2012.* The elimination of subsidized Stafford loans means that graduate students will no longer have access to the interest subsidies once paid by the government during certain periods such as borrowers’ in-school, deferment or grace periods. However, students will still be able to borrow unsubsidized Stafford loans.
It is important to note, however, that this legislation is not retroactive. This means the current benefits associated with subsidized loans will remain intact for borrowers who have obtained these loans prior to July 1, 2012.
Elimination of Interest Rebate for On-Time Payments
The Budget Control Act of 2011 also included the elimination of the on-time payment rebate incentive for loans disbursed on or after July 1, 2012. At that point, borrowers will be responsible for the full origination fee on all federal Direct Loans they borrow (4% for Grad PLUS loans). Similar to the aforementioned subsidized Stafford Loan change, this legislation is not retroactive, so loans secured for this year or previous years will not be impacted.
Evaluating Loan Options
Understanding all available loan options will help ensure students obtain the optimal financing to meet their needs. Both federal and private loans should be considered, as the benefits of each vary by borrower.
Federal loans, such as Stafford loans and Grad PLUS loans, are available to help health professional students cover the cost of their education. These loans can provide significant benefits to borrowers, including interest subsidies, eligibility for deferment and forbearance, and applicability to repayment plans such as IBR and PSLF. They are also dischargeable in circumstances such as death or total disability. Due to the above characteristics and the fixed interest rate, federal loans are often viewed as the best option for many borrowers.
Due to limits on Stafford loans, some students may have to borrow a significant amount in Grad PLUS loans to cover the cost of their education. These loans have a 4% origination fee (as noted, the 1.5% fee rebate available now that will be discontinued in 2012) and a fixed interest rate of 7.9%. Due to this relatively high interest rate given today’s historically low rate environment, certain students who may not benefit from IBR or other federal student loan relief programs should evaluate the benefits provided by lower rate private loan options.
Recent changes in the private loan marketplace have created an opportunity for certain borrowers to obtain significantly lower interest rate loans (in some cases below 4%). It is recommended that students explore the availability of these lower cost alternatives in order to minimize accrued interest costs on their loan portfolio. However, careful analysis must be performed when evaluating private options. Rates often differ significantly across lenders and borrowers and a majority of private options have variable rates. Additionally, private loans generally do not offer the same repayment options and benefits as those available through the federal options described above.
Taking a Comprehensive Approach to Managing Your Debt
It is critical to understand that as a student or recent graduate, your student loan and debt retirement strategies may be impacted by a number of factors like the aforementioned regulatory updates. In addition, due to time constraints and an emphasis on career building activities, most students and recent graduates lack the time and resources to explore their options to properly manage their outstanding debt, and thus, can miss out on opportunities to save thousands on the cost of their debt. Since debt can have a significant effect on most graduates’ financial net worth, it is important that debt be given equal consideration in any financial plan.
We hope this article has provided you with some insight into your student debt and repayment as well as clarified any previously misunderstood information relating to the recent legislative and regulatory updates. Understanding how to effectively manage your student debt burden as part of a comprehensive financial plan is necessary as you prepare to navigate financial decisions often faced by young professionals. To ensure you make the best financial decisions, we recommend researching your options and consulting with a financial professional who has expertise in the management of student loan debt.
Todd Balsley graduated from Harvard Business School in 2005 and is the Executive Vice President of Marketing and Client Services at GL Advisor. GL Advisor offers a unique service designed to help graduate students and young professionals manage their debt burden and other financial matters in order to improve their overall financial position. GL Advisor helps clients lower the cost of student loan debt, obtain payment relief as needed, and save time so they can focus on their career. To receive a free analysis of your student debt, sign up to receive a free personalized assessment at www.gladvisor.com/SDN.
*Please note that there are two exceptions to this change: graduate students whose degree requires preparatory coursework or whose teacher certification requires a specific course will still be allowed to borrow a subsidized Stafford loan.
GL Advisor is a division of Graduate Leverage, LLC (GL). GL Advisor does not offer all services to residents of North Dakota at this time. Investment services are provided by GL Investment Advisory Services, LLC.