The COVID-19 pandemic has turned nearly everything on its head—including student loan repayment.
As millions of Americans—including those with large student loan debt—found themselves suddenly out of work or losing income last spring, the federal government sprang to action. It offered student loan borrowers relief in the form of:
- Suspended loan payments. For more than a year, borrowers have had the option of temporarily ceasing to make loan payments.
- A halt of collections on defaulted loans. This includes suspending the seizure of wages, tax refunds and Social Security benefits of those in default.
- A temporary 0% interest rate. In essence, the government temporarily has wiped out the cost of borrowing for millions of people.
The loan relief applies to all U.S. Department of Education-owned federal student loans. These measures have been extended through at least Sept. 30, 2021. However, private loans are not part of this program.
A large majority of students who attend medical school carry education debt. In fact, 92% of DO graduates reported having accumulated such obligations in 2020, according to the American Association of Colleges of Osteopathic Medicine. The median debt for such students was $275,000.
Such debt can cause hardships for millions of newly minted graduates, and even those well into their careers.
“It’s hard to balance the burden of debt with all of the other costs that come with a transition out of school and into your career and the rest of your life,” says Jennifer Nuckles, executive vice president and group business unit leader at SoFi, an online personal finance company.
The unexpected help from Uncle Sam has bought time for millions of borrowers struggling to repay their loans. It remains to be seen whether the government will extend the relief beyond September.
So, what are the best moves to make between now and then when it comes to your student loan debt?
Ask your employer for help
One of the best ways to repay student loans is to choose your employer carefully, Nuckles says.
A growing number of employers have instituted student loan contribution programs, which help employees pay off student loan debt faster and minimize their interest costs. Typically, the company makes a monthly payment directly to a graduate’s current loan servicer.
“Anyone who carries student loan debt will want to keep a close eye out for employer student loan contribution programs,” Nuckles says.
Late last year, federal legislation extended the ability of employers to give employees up to $5,250 tax-free dollars per year for qualified educational expenses. That money can be applied to student loan repayments, both principal and interest.
Prior to the change, any employer contribution to student loan debt repayment was considered taxable income, with recipients taxed between 12% and 37%, depending on their federal income tax bracket, Nuckles says. But now, the money will not raise an employee’s taxable income. The provision lasts through Dec. 31, 2025.
Simply being aware of this shift is important for graduates facing a mountain of debt.
“You can inform your employer and even advocate for the inclusion of student loan debt repayment as part of your benefits plan if your employer doesn’t currently offer the benefit,” Nuckles says.
Consider refinancing your loan
Now may also be a good time to refinance your student loans, as interest rates at private lenders such as Sofi, Credible and Laurel Road have declined, says Jason DiLorenzo, founder of Doctors Without Quarters, a national student loan advocacy organization.
“We are seeing fixed rates as low as 2.5% for five-year payment terms,” he says.
Residents and fellows who plan to transition to roles that qualify for Public Service Loan Forgiveness should “stay the course” with respect to their Income-Driven Repayment plan, DiLorenzo says.
However, those who are transitioning to practice this year and taking on for-profit roles “may wish to jump on these rates,” DiLorenzo says. “Rates are as low as we’ve ever seen them.”
He adds that his organization offers a free refinancing suitability analysis for all AOA members. In addition, AOA members receive a 20% discount on consultations with Doctors Without Quarters if they use the code “AOA20.”
AOA members also can receive a 0.5% discount on student loans refinanced with SoFi if they apply through this link.
DWOQ and SoFi are presenting a free webinar on May 19 at 7 p.m. ET on student loan best practices for doctors transitioning to practice. During this webinar, presenters will be discussing refinancing considerations in more detail.
Julie Fresne, senior director of student financial and career advising services at the Association of American Medical Colleges, acknowledges that refinancing into a loan from a private lender sometimes can save borrowers money.
“There are refinance loans out there that could potentially lower the interest rate once they get out of residency,” she says.
However, she notes that moving from a federal loan to a private loan can reduce a borrower’s options. Federal loan programs offer many flexible arrangements for borrowers, including deferment, forbearance and loan forgiveness.
“We always caution students to remember that they lose all of the flexibility and benefits of the federal loan program,” Fresne says. “Once you refinance, there’s no going back, and some programs like Public Service Loan Forgiveness are no longer an option.”
Wait for possible debt cancellation
The temporary halt on student loan repayments may soon give way to something even better: debt loan forgiveness.
Democratic leaders are pushing for forgiveness of up to $50,000 in student loan debt, although the notion of loan forgiveness—especially in such a generous amount—has created some controversy.
“President (Joe) Biden has indicated that he’s not committed to $50,000, but $10,000 may gain traction,” DiLorenzo says.
In addition, a little-noticed provision in the recent federal American Rescue Plan makes forgiven student loan debt a tax-free event.
Typically, forgiven debt is treated as income, and the borrower owes taxes on the debt in the year it is forgiven. But the new law suspends that requirement through the end of 2025.
“DO grads should know that any loan cancellation available to them would not be taxable,” DiLorenzo says. “It would simply reduce their overall debt starting with outstanding interest.”
DiLorenzo also says he is hopeful the new measure will spark a move to permanently eliminate the tax liability for Income-Driven Repayment Plan forgiveness.
Plan now for the future
While loan relief measures have been a godsend for millions of borrowers, the temporary suspension of payments is forecast to end in September. Many in the student loan industry expect that the Department of Education will begin sending notices out to bring people back into repayment sometime in August, Nuckles says.
The transition period “could be rocky,” Nuckles says. She notes that once notices go out, borrowers will likely flood support centers with questions.
Nuckles suggests using the next five months to create a plan to get ahead of potential backlogs. If your income has changed and you need to recertify it, file the paperwork in advance, she says.
“If you have questions about your specific situation, get in touch with your financial adviser or whomever you typically seek guidance from,” she says, adding that it is better to do so now than to wait until late summer or early fall.
DiLorenzo recommends that new graduates consolidate all their federal loans (into a single federal loan) after graduation, but before they start training. He notes that both Stafford and GradPLUS loans have six-month grace periods, but that this time period does not qualify for federal loan forgiveness through either Income-Driven Repayment plans or Public Service Loan Forgiveness.
By contrast, new graduates who quickly consolidate their loans and enter into an Income-Driven Repayment plan can get a payment as low as $0 into 2022—with the bonus that the clock will begin ticking on Public Service Loan Forgiveness as soon as they enter an IDR.
Finally, while it is important to focus on paying down your student debt, Nuckles still urges students to build an emergency savings account of three to six months of living expenses they can tap when times get tough.
So, if you receive an unexpected lump sum of cash—such as a tax refund, bonus, inheritance, or cash gift—consider putting at least some of the money into an emergency savings account rather than using it all to pay down your debts.
“Think of it as a buffer that you can rely on if you encounter unexpected costs, or have to go without income for any length of time,” Nuckles says.