Income based loan repayment consequences for socialized med / Primary Care

[Habeed]

For those of us who will owe a very large amount in loans by the end of med school, the following details in the fine print may be of interest : http://www.nasfaa.org/publications/2007/gdefermentibr091307.html

For example, in my situation, I will owe $353,000 if everything "goes well", at the end of medical school.

That would be peanuts compared to the average earnings over a 20 year period for a high end specialty, such as anesthesiology, radiology, dermatology, neurosurgery, and other big money-makers. However...

There are several big risk factors that we all face, however. Some of these risks are unavoidable.
1. Due to subjective grading or just flat out lack of talent, a high end, lucrative residency is not guaranteed no matter how hard we work in medical school.
2. We might choose primary care because we found it more rewarding, or wanted to finish residency sooner with better hours.
3. We might quit medical school or fail. A small chance, but it could happen.
4. We might become partially disabled or injured or convicted of a crime and unable to ever work in the medical field again.
5. The U.S. Federal government might socialize medicine, creating a system like in the United Kingdom, with all physicians federal employees making $120k a year
6. Reimbursements might continue to decline or midlevel providers might replace most primary care physicians.
7. You might burn out or want to take a year off, without being crushed by missed payments.
8. Nuclear war, DNPs opening their own neurosurgery residencies, whatever scary possibility you want to dream up.

Well, as the law currently stands, it isn't that bad. Note the following quotes :
"There is no minimum qualifying debt and no maximum disqualifying income." You could owe $350k and make $120k as an FP in an underserved rural area. Your debt payments would be capped at 15% of your income.

"Once a borrower has made income-based repayments for a period of 25 years, the remainder of the borrower's federal debt is forgiven". Go ahead and borrow the max if you want to...Also, if you choose to quit medicine and work for $80k a year in research, you won't go bankrupt or have loans until death.

Interest on the loans is capitalized at the time the participant elects to leave the income-based repayment program, most likely at the end of a physician's residency.

This means that if the worst happened, and you decided to work as a janitor instead, and were unable to even pay the interest on your loans, the unpaid loan interest would not become part of principle. The income-based repayment program actually seems like a great deal overall, because it provides a mechanism to get out of debt in case something goes wrong.

You could seriously abuse this and borrow more money in student loans than anyone dreamed of before. Go ahead and rack up the max of $40k in undergrad staffords, and then go to private law AND medical school. Sure, you would owe $500-$600k, with most of the money at 8.5% interest...but you would still only pay 15% of your income max. Heck, take a vacation for a couple of years in Europe, reporting only 10k a year income!

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[MOHS_01]

For those of us who will owe a very large amount in loans by the end of med school, the following details in the fine print may be of interest : http://www.nasfaa.org/publications/2007/gdefermentibr091307.html

For example, in my situation, I will owe $353,000 if everything "goes well", at the end of medical school.

That would be peanuts were I to match into a high end specialty.

There are several big risk factors that we all face, however. Some of these risks are unavoidable.
1. Due to subjective grading or just flat out lack of talent, a high end, lucrative residency is not guaranteed no matter how hard we work in medical school.
2. We might choose primary care because we found it more rewarding, or wanted to finish residency sooner with better hours.
3. We might quit medical school or fail. A small chance, but it could happen.
4. We might become partially disabled or injured or convicted of a crime and unable to ever work in the medical field again.
5. The U.S. Federal government might socialize medicine, creating a system like in the United Kingdom, with all physicians federal employees making $120k a year
6. Reimbursements might continue to decline or midlevel providers might replace most primary care physicians.
7. You might burn out or want to take a year off, without being crushed by missed payments.
8. Nuclear war, DNPs opening their own neurosurgery residencies, whatever scary possibility you want to dream up.

Well, as the law currently stands, it isn't that bad. Note the following quotes :
"There is no minimum qualifying debt and no maximum disqualifying income." You could owe $350k and make $120k as an FP in an underserved rural area. Your debt payments would be capped at 15% of your income.

"Once a borrower has made income-based repayments for a period of 25 years, the remainder of the borrower's federal debt is forgiven". Go ahead and borrow the max if you want to...Also, if you choose to quit medicine and work for $80k a year in research, you won't go bankrupt or have loans until death.

Interest on the loans is capitalized at the time the participant elects to leave the income-based repayment program, most likely at the end of a physician's residency.

This means that if the worst happened, and you decided to work as a janitor instead, and were unable to even pay the interest on your loans, the unpaid loan interest would not become part of principle. The income-based repayment program actually seems like a great deal overall, because it provides a mechanism to get out of debt in case something goes wrong.

You could seriously abuse this and borrow more money in student loans than anyone dreamed of before. Go ahead and rack up the max of $40k in undergrad staffords, and then go to private law AND medical school. Sure, you would owe $500-$600k, with most of the money at 8.5% interest...but you would still only pay 15% of your income max. Heck, take a vacation for a couple of years in Europe, reporting only 10k a year income!

OK.... So I should be jumping up and down in sheer joy and blissfully ignorant exuberance at the potential prospect of being an indentured servant to loan managing companies for an ever longer period of my life?

REALLY??? Is that the good news that we are to take away from this?

 

[bcat85]

353k is hardly "peanuts" unless you match into "Vacuuming money out of a safe."

I see what you're getting at but uhhhh.... why would you do that?

 

[OncoCaP]

Being on some kind of repayment plan (other than the one where you are paying principal plus interest in the usual way) plus the huge sum of the debt relative to your income could hurt your credit score and thus affect you in a negative way that goes beyond what is mentioned here (not being able to borrow as much for a home, etc.). Don't count on this program to go as smoothly as advertised (your credit record might make you look like a delinquent borrower). However, it does point out that the student loan program does has some safety nets. Also, most physicians manage to pay their debt back. If your point is that we shouldn't worry excessively about student loan debt, your point is well taken.

 

[Bushido416]

Actually this is a really bad idea for the economy. This is why I'm predicting a crash in the college loan markets. If you lend to people who cannot repay...history majors ....art history majors...philosophy majors....pick your poison. If they cannot pay and either default or don't make enough and then let their loans become forgiven then companies lose money. They lose money then we get a more strict and difficult loan system. So in the end this is just bad for the economy and the future of people wanting to go to college med and law school. But whatever it's like pollution in most people's mind out of sight out of mind or the i'll be dead mindset when the S*** hits the fan. Oh well my 2cents.

 

[Blesbok]

Seriously, what kind of specialty are you planning on matching into where $353k is peanuts?

 

[ninjapenguin]

Seriously, what kind of specialty are you planning on matching into where $353k is peanuts?

Gold diggerology. It's all the rave these days!

 

[TMP-SMX]

Gold diggerology. It's all the rave these days!

Yep. Marry rich.

 

[randomlogik]

My thought is do you really expect the income payment program to last 25 years without being changed? My luck I would get several years into repayment, only for the gov to discontinue to program.

 

[rgerwin]

353K isn't peanuts, but it's becoming more common. I will have that, plus my husband, well, you can imagine. In the times of rising tuition alot of people are going to have too accept this kind of debt as a reality and figure out how to pay it off. That means, specialize. I honestly don't see America functioning on a capped physician salary of $120K(British docs actually make closer to $140K) plus the current tuitions. It would be an absolute disaster.

 

[LADoc00]

353K is OBSCENE how did manage that?


If you pay on a 15 year schedule (usually the norm) and interest rates rise any significant level you will be paying 3500 bucks a month!

post tax.

Household Size Minimum AGI (IBR) Minimum AGI (ICR)
1 $298,678.00 $222,709.00
2 $304,078.00 $226,309.00
3 $309,478.00 $229,909.00


Now if you dont make payments in residency, which you cant and the interest compounds, which it will on at least some of that debt and long term interest rates soar to 1979 levels....
you could be looking at 5K month payments easily.

You will need to make almost 300K minimum....do you realize that? That would eliminate pretty much most medical specialities...

 

[Habeed]

300k minimum to what? The income based repayment plan states that I would have to give up 15% of my income. 15% of family practice's 140k is about $20k...maybe 30k including taxes. That leaves 110k as income. Sucks, but it isn't starving.

Were I to make 300k, I would pay about $60k before tax on the income based repayment plan, leaving 240k as income. That's just fine for any reasonable lifestyle.

Anyways, the way I "managed" that is that I will be attending a private med school that costs 40k per year, and I have to do a post bacc masters at that school to get into the medical school proper. The post-bacc costs another 36k in tuition. That 353k number factors in accumulated interest, and 25k in existing student loans as well.

It looks like I have to blow the doors off the competition and be as close to the top of the class as I can possibly manage, in order to service this much debt. I would need a residency that not only pays a lot historically, but is one that isn't easily outsourced or flooded with new graduates. That eliminated Derm and Rads right out (Derm has too few people in the field, and is supposed to be easier than internal medicine, so they could double the number of spots easily. Rads because it can be outsourced to anywhere in the world, although at the moment it does take a BC radiologist to do reads) Orthopedics, Neuro, ENT, CT, Plastics...none of those are going to be getting any easier any time soon, or less stressful and risky. I suspect that specialty surgeons will make bank for the foreseeable future.

 

[rgerwin]

People need to wake up and realize that $350 isn't hard or uncommon. every person at my school not in the armed services will graduate with about that. add interest, and there you go. And we're a primary care-focused school! I'll probably go into anesthesia. After malpractice and possible higher taxes, even $175K(forexample) is alot of funds. That leaves at least $100K every year. It won't take near 15 years, which will curb some of that interest off the price tag. That's the key. pay it off fast.

 

[LADoc00]

300k minimum to what? The income based repayment plan states that I would have to give up 15% of my income. 15% of family practice's 140k is about $20k...maybe 30k including taxes. That leaves 110k as income. Sucks, but it isn't starving.

.

Umm, I thought income based repayment was only for residency training.

If you use income based repayment forever and are only making 140K/paying 20K you will be negatively amortized (depending on interest rates) and your balance due will GROW throughout your life....

 

[rgerwin]

That's a good point. Eventually, a certain amount of income will disqualify you for income-based repayment.

 

[Habeed]

LADoc00 and rgerwin : that's the point. Read my original post : after 25 years, remaining debt is forgiven. So, if it is negatively amortized, meaning that payments are less than the rate the debt is growing, that is, in a way, a good thing. It means that after 25 years on the income based repayment plan, I would owe more than the original debt, on paper. And, that 400k or whatever in debt would be wiped free with the stroke of a pen.

Currently, the law doesn't say that : it says there is no disqualifying income or debt level for income-based repayment. Sure, the rules might change, but it would probably be illegal for the government to change the terms for borrowers already in repayment.

Also, the 25 year timer starts the first day of residency.

Finally, if I am reading the rules right, under this plan I could take a vacation whenever I wanted. Take a year off or do research for a year? My payments would be reduced to what-ever my income is for that year. (well, ok, the government might calculate this like they do FAFSA student aid, where they are a year behind...but the point remains)

So, were I to go spend a year in Europe or a nice cruise, I would not have to pay more than 15% of my income above the poverty line that year. If I made less than that, my payments would be $0.

 

[AMDFAO]

http://www.finaid.org/calculators/ibr.phtml

You can run numbers here. Keep in mind anything written off is taxable income. I'd like to think 100 actuaries ran numbers before the program was unveiled to ensure that the "right" folks see relief (they really like teachers at the Dept of Ed). I think to avoid the tragedy, the feds would put a limit on the GradPLUS rather than rewrite the IBRP and from a long term standpoint, I don't see that as a positive.
There's only so much cash you can leave in your Corp to keep your AGI low and I'm not sure after all the work and studying you'd want to live like a pauper for 25 years to see the pawltry amount written off with a whopping $150,000 AGI and $334,000 in debt. Keep in mind that out of the $150,000 you are still going to see a good amount going to taxes (28% and then SEP if you're your own business) and you still need to live.
For this plan I would want the best damn financial planner, lawyer and tax attorney I could hire with what was left of my $150,000 AGI.
Kudos for an interesting post.

 

[MOHS_01]

LADoc00 and rgerwin : that's the point. Read my original post : after 25 years, remaining debt is forgiven. So, if it is negatively amortized, meaning that payments are less than the rate the debt is growing, that is, in a way, a good thing. It means that after 25 years on the income based repayment plan, I would owe more than the original debt, on paper. And, that 400k or whatever in debt would be wiped free with the stroke of a pen.

Currently, the law doesn't say that : it says there is no disqualifying income or debt level for income-based repayment. Sure, the rules might change, but it would probably be illegal for the government to change the terms for borrowers already in repayment.

Also, the 25 year timer starts the first day of residency.

Finally, if I am reading the rules right, under this plan I could take a vacation whenever I wanted. Take a year off or do research for a year? My payments would be reduced to what-ever my income is for that year. (well, ok, the government might calculate this like they do FAFSA student aid, where they are a year behind...but the point remains)

So, were I to go spend a year in Europe or a nice cruise, I would not have to pay more than 15% of my income above the poverty line that year. If I made less than that, my payments would be $0.

Wow... I have no intention of making this personal, but I cannot decide if that line of thought is incredibly lazy, irresponsible, contriving, or all of the above...

Trying to find a loophole out of paying back debt, while keeping in line with trends in America among the masses (credit card debt relief, the "mortgage crisis", etc), is decidedly un-American. It used to be "you reap what you sow"; now it seems that more and more want to "reap what you may sow, but be sure to take some from the other guy as well".

The appropriate issues here are two fold, really: ensuring the ability for a physician to earn enough compensation to pay back that which they knowingly borrowed, and attempting to contain medical education costs to a level that is reasonable. Anything other than those two goals (and arguments can be made against the latter) is nothing more than asking for a subsidy.

Debt is never "wiped free with the stroke of a pen". Money borrowed is paid back by someone, always. There are no free rides.

 

[Habeed]

AMDFA0 : You bring in some interesting ideas. In principle, "min-maxing" this program would mean I would try to have most of the money I made stay in a clinic I owned. I would only "pay myself" what I needed as income, and in turn losing 15% of the that for this loan repayment program.

Theoretically, it sounds like I could have an ownership stake in a clinic that could eventually be worth millions of dollars, and yet only pay the "taxes" using income-based loan repayment on the money I took home. Then, once the 25 year timer is up, I could sell the clinic and collect a deferred multi-million dollar payday all at once. Capital gains and income taxes only apply to assets you sell as far as I know.

To abuse this loophole to the maximum : I would match a surgical sub-specialty, such as neuro, ortho, plastics, ect. I would put all the money I made (300k+ is the national average) except for what I needed for personal income back into the clinic. If it were successful, the clinic could grow into a small hospital, like you see around town. Effectively, I would be "making" hundreds of thousands a year in assets. Update : the problem with this approach is liability. An outpatient or inpatient surgery center is a business with huge liability risks. Bad idea to keep your money in such a business in order to avoid paying income and 'student debt' taxes. There's probably another loophole that would let you avoid this problem, however.

As for the ethics of it:
I was being narrow in my thinking, just seeing what would happen, worst case scenario, if I either wanted family practice or was forced to choose it. And I didn't do the analysis past the point of well, there's no way to pay off 353k in debt with 150k in income except for this new income based repayment system.

Further, the whole reason why Family Practice physicians make 150k is because a government agency, Medicare, sets reimbursements to make this happen. Basically, the way I see it, the Feds are responsible for all of it. They're responsible for tuition being so sky high (by enforcing the restrictions that prevent new med schools from being opened), they're responsible for not paying Family Practice physicians what they are worth, and they are the ones who will be guaranteeing my student loan debt. So, "sticking it to them", and abusing a loophole to get my debt wiped after 25 years of paying 15% of income is not against my sense of fairness or ethics.

This is all hypothetical, it's incredibly unlikely it'll all work this way, but if it did happen, that 350k or so in tax money used to wipe my debt would just be payback for medicare wasting my time and paying 25 cents on the dollar for 25 years.

I don't see it as weaseling out of debt, I see it as recognizing the rules for what they are, and setting up the best possible outcome.

Update : I used the calculator at http://www.finaid.org/calculators/ibr.phtml#help10 , and in every scenario I threw at it, sticking with income based repayment had the lowest net present value. Whether I made 140k after residency or any number higher than that, IBR was cheaper...even without the government picking up part of the tab.

 

[AMDFAO]

I am the "them" you refer to who you don't have a problem sticking it to. "Them" also includes the other posters and their families who have paid their taxes to pay for these loan programs allowing you the good fortune to be able to attend med school even if you can't afford it. I tell my kids when they graduate: "If you ever defaulted on these loans I will find you and personally beat the livin' crap out of you. Why? I didn't go to work everyday to pay my taxes which allowed you to achieve your goal only to have you give me the big F U; I would take it very personally." I don't think other FA's say anything remotely close...
Where on earth do you think the money comes from?
The fact that you can do something does not mean you should. Where is your dignity and appreciation? Be a man and pay what you owe and let those less fortunate (and altruistic) have the forgiveness.

 

[MOHS_01]

AMDFAO,

What you (and I) have spoken to is part of a larger problem in America today -- the steady drift away from personal responsibility and a increasingly socialistic slant to the thought processes of a very vocal portion of society. People are far too quick to lay blame on others for self-inflicted woes, all to willing to essentially steal from others to pay for personal consumption of goods and services, and constantly looking for the easy way out.

For example, I would love to have a farm to raise my family on -- yet I cannot because of the high price of land anywhere near a sizable population center (I could with my f'ing tax bill, though), combined student loan debt (with my wife), mortgage, childcare costs, and the costs associated with caring for aging family members, etc.

Personal responsibility would dictate the management of debt levels, including student loans, to a level that can be reasonably serviced upon entrance into the workforce. If you are paying for school out of pocket and don't have deep pockets to begin with, perhaps significant consideration should be given to either attending a state school to limit tuition costs, signing on with a potential employer to help defray the costs, or, God forbid, deciding to accept the costs and pay up (or deciding that the costs are not worth the rewards). I paid for mine (had no choice in the matter), racked up >150k (my part, my wife's contribution is roughly the same), and thought that was a ridiculous sum. Contrary to what some idealistic studies say, students do (and should) at least partially base their specialty selection upon debt levels -- it is the responsible thing to do for your family (and apparently now society), if not for self.

I understand that there are those who rationalize this as "making the best out of the hand that they are dealt". I would like to point out, once again, that the focus should be on containing costs and ensuring adequate compensation; nothing more, nothing less.

 

[UserNameNeeded]

I'm not sure why there's so much vitriol here-- people do all sorts of things like pay huge amounts of money to tax specialists (who even have intellectual property rights to tax loopholes and strategies they discover) to avoid paying any more taxes than they have to. How is this strategy any different?

I'm not arguing this is a sound way to handle the federal student loan debt, but the law was structured in this way, so it makes no sense to be condemning a person for considering doing something that's totally legal. Maybe I'm not understanding the coversation...

 

[MOHS_01]

I'm not sure why there's so much vitriol here-- people do all sorts of things like pay huge amounts of money to tax specialists (who even have intellectual property rights to tax loopholes and strategies they discover) to avoid paying any more taxes than they have to. How is this strategy any different?

I'm not arguing this is a sound way to handle the federal student loan debt, but the law was structured in this way, so it makes no sense to be condemning a person for considering doing something that's totally legal. Maybe I'm not understanding the coversation...

Buddy, you have not seen vitriol in this discussion -- only in the conflict averse world of physicians (and other medical professionals) could this rather benign exhange of ideas be construed as harsh or abrasive.

I do not advocate tax evasion, the exploitation of little known or exotic loopholes, etc -- but I do believe that this is fundamentally different as well. When one borrows money they enter into a binding contract to pay that money back -- years of service may count as forgiveness, in which case the employer implicitly pays a higher rate than what is realized on the pay stub, yet is reflected on the W2 in the form of debt forgiveness.

As I said before, this is not personal in any way -- I simply want people to understand the significance and size of the problems that we are facing, acknowledge said problems, and form a cohesive front in the battle to fix these problems. Asking for increased government intervention, even if it is in the form of "loan forgiveness", is inviting more problems -- including a justification for devaluing the services that you will ultimately be providing.

We cannot have it both ways. I would rather be paid appropriately than be forced into holding my hat out for more governmental handouts.