On Wednesday, August 24, 2022, just as the COVID-19 administrative forbearance on federal student loans was expiring, President Biden unveiled a major announcement affecting the student landscape forever. The headline garnering the most attention was a lump sum loan forgiveness program for low and middle-income borrowers. The plan offers up to $10,000 of forgiveness for borrowers earning under $125,000 per year individually or married couples making under $250,000. There is also up to an additional $10,000 forgiveness for borrowers who hold Pell Grants.
Another feature of the Biden-Harris Administration's announcement was the extension of the suspension of payments and interest on federal student loans. Instead of the forbearance expiring on August 31, 2022, the extension gives payment relief through the end of the year. What initially began as a six-month reprieve in March 2020 under the CARES Act, the administrative forbearance has allowed borrowers to forgo payments for over two and a half years. During this time, borrowers have been earning credit toward forgiveness programs such as Public Service Loan Forgiveness (PSLF). The announcement indicates that this will be the "final extension" of the payment and interest forbearance. Borrowers should plan to have their payments resume in January 2023.
Finally, there was also a proposal for a new income-driven repayment (IDR) plan within the announcement. The intention of this new IDR plan will be to allow borrowers to cap their payments at a lower amount than any of the existing plans. We anticipate more updates on the plan's specifics, such as enrollment eligibility requirements.
Perhaps the group most affected by the announcement in the medical community, residents, and fellows, may benefit from all three parts of the President's plan. The extension of the payment pause will continue to allow residents to save hundreds of dollars rather than having to make payments under their income-driven repayment plans. As with all the extensions, these months of no student loan payments will continue to count toward forgiveness programs such as Public Service Loan Forgiveness. This will allow residents to get another four months closer to the 120 payments currently necessary for tax-free forgiveness under PSLF. Many residents have never owed a student loan payment since the administrative forbearance has lasted almost three years.
In addition, residents and fellows are in a unique position within their careers. They have completed rigorous schooling to become doctors yet are not quite earning the income they know is promised for their sacrifices. During training, most residents and fellows earn under the cap to be eligible for the $10,000 forgiveness – $125,000 per year.
The $10,000 forgiveness will have varying impacts on doctors. With many medical and dental school graduates accruing six-figure loan balances, the $10,000 balance reduction may be just a fraction of their total debt in the bucket. For others, it will get them markedly closer to the goal of paying off their loans. But, on the other hand, the lump-sum forgiveness may feel insignificant to any resident or fellow with their eyes set on loan forgiveness. Whether they are aiming for Public Service Loan Forgiveness, National Health Service Corps Loan Repayment, or a different program, the $10,000 forgiveness for borrowers in this group will likely not change their outlook on their debt repayment strategy.
The impact of the new Income-Driven Repayment plan on doctors is still to be determined. The announcement did not reveal specific aspects relating to eligibility for the new plan. However, the details that have been disclosed are improvements from previous IDR plans, such as lower monthly payments (from 10% of discretionary income to 5%), greater interest subsidies, and a shorter repayment period necessary for the IDR forgiveness option (from 20 years to 10 years for loan balances under $12k).
Some attending physicians will qualify for the $10,000 forgiveness. Be sure to check your latest tax return to identify if your total income is under the threshold to be eligible for the lump-sum forgiveness.
Just like residents, fellows, and all the 43 million student loan borrowers in America, attending physicians with federal student loans should benefit from the extended forbearance of no payments and interest. The extra four months of forbearance should be a welcomed announcement whether you plan to pay off your loans on your own because a forgiveness program is unavailable to you or you are working toward PSLF or another forgiveness option. In addition, for attendings not eligible for PSLF, the time under the administrative forbearance has allowed them to direct their payments to the principal balance or direct their regular monthly payments to other efforts like saving and investing.
As mentioned above, the impact of the new Income-Driven Repayment plan on doctors is still to be determined. Therefore, it will be critical to pay attention to the latest announcements and act quickly to ensure you do not miss an opportunity to lower your income-driven repayment amount.
Another key element of the August 24th announcement was an indication that the deadline for the limited PSLF waiver would not be extended beyond October 31, 2022. So, keep reading if you do not know about the amazing opportunity many attending physicians can take advantage of with the limited waiver.
Last year, the U.S. Department of Education announced some significant changes to the rules and qualifications around the PSLF program. As a result, borrowers could receive credit for past payments made on loans that would otherwise not qualify for PSLF. In addition, if you have worked for a qualifying employer for ten or more years, you may immediately be eligible for tax-free student loan forgiveness.
Payments made under previously ineligible repayment plans or toward ineligible loans, such as loans under the Federal Family Education Loan Program, may now count as qualifying payments toward the 120 payments necessary to achieve PSLF.
The waiver currently ends on October 31, 2022, and there has been no indication of that deadline being extended. A section on the StudentAid.gov website from the Department of Education offers steps to determine if you qualify.
Exactly one week before the forbearance of payments and interest was set to expire, the Biden-Harris Administration, along with the Department of Education, announced an extension through the end of 2022. Borrowers who were setting their sights on payments and interest accumulation to resume in September but have now been given four more months to enjoy the reprieve. The language in the latest announcement indicates that this extension through December is the "final extension."
The extension of no payments and interest will be automatic. However, preparation and action may be required once the administrative forbearance finally expires in January 2023.
Many borrowers have become accustomed to living without a student loan payment. For some, this was a difference of thousands of dollars each month. Whether you have been using the extra cash flow to pay off other debts or adding to your savings and investment accounts, it may be necessary to adjust your cash flow strategy to re-accommodate your student loan payments in January 2023. If you have not found a way to save the suspended student loan payment, then that monthly amount may have found its way into your everyday lifestyle expenses. If this is the case, it may be extra challenging to resume your student loan payment in February and might call for a refreshed look at the monthly budget.
To read more about what your payment amount will likely be when payments resume, check out our blog on How to Prepare for Federal Student Loan Payments Resuming.
As always, the team of professionals at Spaugh Dameron Tenny will continue to monitor the changes occurring in the student loan space. As other changes are announced, be sure to check back here for updates. If you'd like to schedule a time to review your specific student loan strategy or overall financial strategy with one of our advisors, we would love to be a resource. And, if you are interested in learning how SDT can help you with your financial goals, please connect with us.
Will Koster is a financial planner with Spaugh Dameron Tenny. The experience of losing his father as a teenager helped Will find his calling in financial planning. He has a passion for working with dentists and physicians, helping them navigate their unique wealth creation journeys. In addition, Will has become the in-house expert on student loans after completing the Certified Student Loan Professional® training.
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For over 65 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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