[i]KH: In 2014, more than 43 percent of public university graduates reported debts of $200,000 or more.[ii] And since the elimination in 2009 of the government program known as the “20/220 Pathway,” interest on government student loan debt accrues during residency, when most don’t yet have the income to support the monthly payments. This means residents either need to repay from their residency salary—often a nearly impossible proposition—or go into forbearance, which can lead to the debt level doubling or even tripling. Today, balances of $400,000 or more are not uncommon for specialized physicians.This problem is particularly pressing for physicians considering the potential for compression of physician incomes for these higher-end specialties. While those in fields on the lower end of incomes for physicians, such as primary care, may increase in the coming years, incomes for specialists are likely to see a flattening or decline in the compensation curve in the future. The expected flattening is largely the result of new physicians’ desire in moving away from single site practices and trading off higher compensation potential for security (that groups can provide).
With these increases in debt levels, are student loans the next financial bubble to burst?
KH: Student loans have surpassed credit cards with a higher average rate of defaults in 2014—or 13.7 percent. However, with the federal government funding more than 90 percent of the financial markets, the implication for capital markets tends to be muted.[iii] The effect for individuals is different given that, for all student loans, borrowers pay the same interest rate regardless of credit quality and income potential. What that means is those who do repay are over-charged with rates that subsidize those who default. The fact is, repayment can vary greatly from person-to-person. For example, the cohort default rate (CDR) for college dropouts is 16.8 percent while the CDR for college graduates is only 3.7 percent. In addition, during the past three years the CDR of Grad PLUS loans has been less than one percent. For select standalone medical schools supported by non-profit health systems, the weighted/average CDR rate is even lower at 0.52%.[iv]
How has all this debt load affected physicians?
BC: There are conflicting reports on the effect of student loan debt on a physician’s decisions. While some studies, including a 2009 report by the U.S. Government Accountability Office, insist that personal interests, rather than economic factors—such as income expectations and education debt—continue to drive specialty selection, recent surveys suggest otherwise.[v]
Physicians with higher debt relative to their peers reported choosing a specialty with higher income potential and they may be less inclined to work in underserved locations. Students with higher debt levels also reported they felt higher levels of stress related to debt and that it, and the constraints of their repayment obligation, caused them to delay personal long-term goals such as getting married, starting a family, or buying a home.
Further, some reported they would be less likely to choose to become a physician again if presented with the opportunity to revisit that decision.[vi] Additionally, there are indications that medical student debt also affects the diversity of candidates being drawn to the profession.[vii]
What is the LinkCapital® solution to the increased student loan debt borne by health professionals?
BC: We offer lower rates than the industry standard and repayment options designed for different medical professionals.
For example, there are refinancing options for residents that include reduced interest rates and fully deferred payments throughout residency and fellowship, which are generally not available to residents through the most common government loan programs.
For employed physicians, nurses, and other practitioners, the rates are reduced even further. For all of our loans, there are no upfront costs and the loan can be repaid at any time, without penalty. The products can also work as a supplement to the loan repayment programs currently in place at many health systems, which significantly reduces the cost to the organization while still providing benefit to the borrower/employee.
Can you give us some examples of how the LinkCapital® model works?
KH: Take Anna, who is in a five-year pediatric oncology residency and had a $325,000 student loan balance at an average rate of 6.9 percent. Once her training is complete, Anna would have faced a total repayment obligation of $415,000 over a 10-year period and a payment of $4,200 per month. If Anna works with us, her rate has dropped to 5.75 percent, and she is able to defer payments through her residency without going through the process of forbearance. In doing so, Anna will accrue $21,000 less during her training period. Once repayment begins, this translates into $575 per month of savings, or $69,000 during the life of the loan.
For physicians, nurses, and all other health system employees, our fixed rates are lower than the federal government rates, with variable rate options as low at 2.51% APR.
What advice do you have for younger physicians?
KH: Develop a budget to get a picture of what your future spending habits would look like as you work to pay off your student debt. Spend the time to come up with a plan to repay your loans, then stick to it.
While coming up with an effective strategy for whittling down a six-figure debt can certainly be daunting, the ramifications for falling behind on your debt can be disastrous—in some states physicians can lose their medical licenses for not making payments.
Repayment alternatives such as income based repayment (IBR), pay-as-you-earn (PAYE), and income-contingent repayment (ICR) all seek to help students eliminate debts over time. That said, those with high debt loads and high interest rates will need to do a careful analysis to ensure they select the right repayment plan, as well as an analysis of the rates and types of loans in order to decide whether consolidation is a wise move.
Additionally, carefully consider the implications of adding more debt such as zero down home mortgages, credit cards, and auto loans. It’s not uncommon to make decisions based on what financial institutions will approve, but keep in mind that some banks don’t incorporate a physician’s student loan in their debt to income requirements for mortgages. That oversight could result in you qualifying for a mortgage loan greater than what you can realistically afford.
So what is the catch?
BC: As a group, physicians can be skeptical about financial products, and wisely so. With a non-profit as our larger investor, transparency is important to us. We know our loans are not for everyone, and we’re upfront with potential borrowers when that’s the case.
For example, medical professionals looking to use Public Service Loan Forgiveness (PSLF) or the National Health Service Corps (NHSC) loan forgiveness options will not find a comparable option among our offerings. We source our loans with private investment capital, and the expectation is that it will be repaid. Therefore, while we can offer reduced interest rates and flexible repayment terms, public service loan forgiveness is not a part of our platform. Link suggests having a review with one of our medical loan specialists to determine if PSLF actually provides any benefit, given in many cases the savings don’t outweigh the potential liability if the program is capped, taxed or eliminated completely.
KH: Those who do plan to take advantage of PSLF should know that President Obama’s FY 2016 budget includes a cap on PSLF at $57,500 and limits the education tax incentives to only the first five years.[viii] These changes could have a major impact on borrowers who plans to make use of PSLF in the future or those who plan to use education tax incentives.
With so many student loan refinancing alternatives available, what should borrowers be asking?
KH: Most borrowers will focus on repayment terms, interest rates, and monthly payments. Those are the basics, but there are a few other questions that often get overlooked:
- Do you charge an upfront fee to refinance my loans and are there any prepayment penalties?
- Do I have to change my checking account to get your rates?
- What happens to my family or co-signer if I die or become disabled before repaying my loan?
- For residents and fellows, am I required to make payments during my residency or fellowship?
- For residents and fellows, do I need a USMLE license? Do I need to be board certified?
Many of our alumni are health care executives, how can they play a role in assisting medical professionals with their student debt loads?
BC: From the employer perspective, there are a variety of avenues for helping the medical professionals they employ. Some employers go the avenue of sponsoring a Loan Repayment Assistance Program, though there are specific tax and regulatory issues that must be considered. Beyond sponsoring their own programs, employers should provide employees information and resources to help them improve their financial picture. It’s an employee benefit that can help improve the stability of your workforce.
How might these executives as employers assist their employees in taking advantage of the LinkCapital® model?
BC: Given the busy schedules of residents, fellows, and practicing physicians, executives can participate by partnering with us in communicating the opportunities to their employees.
Because many younger medical professionals are comfortable with social media and online relationships, we have developed online content, virtual webinar events, and one-on-one web-based conferencing to educate prospective borrowers and to navigate them through the application process. While keeping information confidential, our back-end analytics can report back adoption to senior management on an aggregate level (read email, viewed website, called our support line with questions, watched webinars, or started application) up until the application begins. Organizations can further reduce the borrowing rate for their employees by incorporating some of our private structures.
Our world is graduates of health care administration programs. Are they eligible?
KH: Yes, once employed they are eligible to participate in our programs as well.
Disclosure: Daniel Zismer serves on the Advisory Board of Link Capital. This publication is not an endorsement or recommendation of products or services provided by the company.
U.S. Department of Education, Three-year Official Cohort Default Rates for Schools
. FY 2011. http://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html
.Cohort default rate (“CDR”) is a statistic published by the U.S. Department of Education which measures the number of borrowers defaulting on their Federal loans within the first two years of repayment and therefore is not a full representation of the overall losses in a portfolio given it doesn’t incorporate all defaults and the timing and the recoveries on such loans.
Committee of Interns and Residents. Recommendations on Medical Student Debt and Physician Training
, submitted to the California 1115 Waiver Renewal Expert Stakeholder Workgroup on Workforce. http://www.cirseiu.org/wp-content/blogs.dir/53/files/2015/01/CIR-MedStudentDebt-1115Waiver-01062015.pdf