‘Doctor’s Loophole’ Is a Sweet Deal for Some Physicians and Med Students
September 9, 2015

There’s lots of press these days about how terrible doctors have it with their horrific six-figure student loan burdens. And they have a point: The median all-in cost to go to medical school, including books, shelter and the occasional meager meal (I know, right?!) is over $207,868 at public colleges and $278,455 at private schools. As a result, more than half of all medical school graduates enter practice owing $100,000 or more in school debt. 37 percent of male medical school graduates and 33 percent of female medical school graduates the average medical debt by gender among medical school graduates leave school owing over $200,000.

Medical Debt load among residents. Source: 2014 Medical Salary and Debt Report

Medical Debt load among residents. Source: 2014 Medical Salary and Debt Report

And these kids haven’t even bought their first set of good golf clubs, yet.

The bad news is, the average resident’s salary is just $55,300, according to the 2014 Medscape Residents Salary and Debt Report.
The good news is, the average resident’s salary is just over $55,300, according to the 2014 Medscape Residents Salary and Debt Report.

Why is that relatively low salary level in residency good news for newly-minted physicians? Because under salary-based student debt repayment programs, that relatively low initial income becomes the basis for a debt repayment program that’s capped at 10 years. Using the Department of Education’s own guidelines, that $55,300 isn’t sufficient to pay off a $200,000 debt in that amount of time.

So debt remaining after the end of a ten-year program winds up forgiven (that is, picked up by the taxpayer.)

But physician compensation doesn’t stay at the $50,000 to $60,000 level forever. Indeed, it won’t be long before most of these doctors see their incomes triple. So if you qualify, you will wind up paying down your medical school debt at a middle class income even though you are earning much more.

Here’s how it went down:

In 2007, Congress was responding to public concerns about the increasing difficulties recent graduates were having in repaying mounting levels of student loan debt. They therefore authorized a series of programs that allowed borrowers to flex their repayment plans based on their incomes. Currently, the three programs available for federally-guaranteed loans are the Income-based repayment plan (IBR), the Pay As You Earn Plan, and the Income-Contingent Repayment Plan (ICR). And if you go through these repayment plans under the Public Service Loan Forgiveness Program (PSLF), available to certain borrowers working at a variety of non-profits and government agencies, the term of payments always maxes out at 10 years. This happens no matter how much debt you rack up, and no matter how low your income-based repayment plan sets your monthly servicing. No matter what you earn, you will only ever have to pay back the 10-year amount. Go into private practice and increase your income 10-fold? It doesn’t matter. Your payment doesn’t change. Develop a lifesaving procedure or technology and patent the result and become a gazillionaire? It doesn’t matter. Your payment won’t change. And at the end of that 10 years, under current rules, that debt is supposed to be forgiven.

That said, hedge your bets. It hasn’t been 10 years since the program first passed, so we don’t know for sure yet what Congress will do in 2017, when the first batch of participants walks away from substantial student loan balances (at public expense). There are some voices in Washington calling for a substantial reduction in the amount of debt that can be forgiven under the program.

Possible measures include:

  • Capping the total amount of debt that can be discharged under the program (Last year, President Obama’s budget proposal – which was not adopted – called for capping the amount at $57,000).
  • Lengthening the PSLF payment terms for longer than 10 years.
  • Including all spousal income into the debt servicing calculations.

The rules in place now are not necessarily the ones that will be in place tomorrow. However, given past precedents, chances are very good that even if Congress plugs the loophole, they will still grandfather in anybody who is already enrolled in the program.