The Doctors’ Loophole: What it is & How it Might Affect You

This is a guest post from Jan Miller, President of Miller Student Loan Consulting, LLC. Jan is a highly regarded student loan consultant that helps borrowers nationwide. We have no financial or business connection to Jan or Miller Student Loan Consulting, LLC. You can reach Jan via email at info@student-loan-consultant.com or follow him on Twitter or his LinkedIn profile. .

As a student loan consultant, I work with borrowers on various career paths. Some are architects, some are baristas and some are even actors living in Hollywood.

One of the biggest groups of borrowers I help are physicians. Because of their high debt amounts and their participation in Internship and Residency programs, doctors have some particularly special concerns when it comes to managing their student debt.

One of the most recent concerns that doctors are facing is the effect that Obama’s legislation will have on the so-called “Doctors’ Loophole.” But what exactly is it, and how does it affect a physician?

What is “The Doctors’ Loophole?”

The Doctors’ Loophole refers to a special loophole that exists in the Income Driven Repayment and Forgiveness Plans that the feds, perhaps, did not realize would benefit physicians so significantly.

Back in 2007, when the Income Driven and Forgiveness Plans were created, they were primarily designed to help those who had low incomes in relation to their total federal student loan debt.

Income Based Repayment and Pay As You Earn payments will always max out at the standard 10 year payment, no matter how much money the borrower makes. So, regardless of how much money a doctor ends up making, they will never have to pay more than what the standard 10-year amount would have required.

As a result, if a borrower’s income is low for a few years while in residency (and it usually is), his or her required monthly payment will be nice and low to match it. But if they have a large surge in income once they establish their practice (and doctors often do), then their required payment will never be higher than the standard required amount.

Interesting loophole indeed.

In addition to creating some very favorable conditions for monthly payments, this loophole can also result in large amounts of debt (i.e. hundreds of thousands of dollars) being forgiven for doctors who may be making hundreds of thousands of dollars a year by the time the loan is forgiven!

This unexpected benefit has been a happy boon for many physicians and other healthcare professionals – but there are many other people who aren’t too thrilled about it.

My Opinion + Recent Legislation

Personally, I have no problem with this beneficial loophole, since it is going to a group of professionals who a) already pay so much money for their education and b) are providing a tremendous public service.

However, such a large forgiveness benefit for high income earners has received a lot of criticism as of late, to the degree that it’s likely to be closed when new legislation is passed in some way or another.

Recently, Obama signed an executive action that will allow borrowers in the 15% Income Based Repayment program to take advantage of the 10% Pay As You Earn program, come December of this year (2015). And, his new budget proposal directly addresses student loans, so we can expect lots of changes to happen.

Because of all these legislation changes, I’ve been receiving questions from my clients – (especially those who are healthcare professionals):

• Is the Public Service Forgiveness program too good to be true?
• Can I rely on it?
• Will it be taken away from me?

And so on.

Interestingly, many doctors have made career choices based on their loan forgiveness potential. So, if new legislation breaks their promise of forgiveness, it’s going to cause a substantial problem for large number of people who were counting on this benefit.

Might the feds back out on their promise of student loan forgiveness once they realize that such a controversial loophole exists? Hopefully they will honor their word and follow their own rules, as they usually do when it comes to federal student loans.

Realistically Optimistic Projections

Although I cannot predict what Congress will do, or what legislation will be passed, I am hopeful that any new changes that limit healthcare professionals to how much they can have forgiven will only apply to “new borrowers” (those who took out loans after the new legislation becomes active).

After all, this would fall in line with the way they have always done it. When the regulations were changed in 1987, those who took out loans before that time period were still subject to the same rules prior to the changes. The same thing happened when they made additional changes in 1993.

Additionally, this type of grandfathering can also be seen with the Pay As You Earn (PAYE) program in its present state. For PAYE, newly instituted in 2014, if you have loans older than October 2007, you do not qualify for it. However, new borrowers with original debt after October 2011 do qualify for it.

Closing the Loophole

So, what will happen next? There are many ways to “close” loophole. They can keep everything as is, but remove the payment cap at the standard repayment, so the payment amount continues to rise with the borrower’s income.

Or, they can put a cap on the amount of total debt that can be forgiven.

They could also specifically eliminate doctors from the program, or disqualify internships and residency from qualifying PSLF employment.

Whatever happens if and when the loophole is closed, I believe that the chances that current borrowers who are participating in the programs now are probably safe and will continue to benefit from the current lower payments and the future forgiveness benefits.

However, it’s generally not recommended to base your career choices on forgiveness possibilities. Make sure you consider all factors, and speak with a trusted professional about your next best steps.