On September 7, 2007, the House and Senate approved the Conference Report (100-317) for H.R. 2669, also known as the “College Cost Reduction and Access Actâ€. This Act was signed into law by the President of the United States on September 27, 2007 with an effective date of October 1, 2007.
Why should you care? The Act, while providing additional benefits to undergraduate students, eliminated the economic hardship deferment qualification known as “20/220â€, used by many health profession students to delay loan repayment while in residency or fellowship. Prior to the passage of the Act, a borrower would be eligible for the economic hardship deferment if they met two requirements: 1) employed full-time with federal education debt burden equal to or greater than 20 percent of monthly income and 2) the requirement that income minus the education debt burden was less than 220 percent of the greater of the minimum wage rate or the federal poverty line for a family of two.
Under the new rule, in order to qualify for the economic hardship deferment, a borrower’s income cannot exceed the greater of either the minimum wage rate or 150 percent of the poverty line applicable to the borrower’s family size with no regard to the amount of repayment of loans. According to the American Medical Association (AMA), 67 percent of medical residents qualified for economic hardship deferment under the 20/220 criterion. As the American Association of Medical Colleges (AAMC) states the average medical student debt is over $120,000 a year for public schools and $160,000 for private schools, this new revision creates a fiscal dilemma for many residents.
Many organizations, including the AMA and AAMC, are lobbying for change because during the deferment period, the federal government pays interest on the subsidized portion of the loan, but interest continues to accrue on the unsubsidized portion. The AAMC reports “…at the end of a student’s three years of residency, the $120,000 median debt of a 2006 public medical school graduate using the federal direct loan program will have grown to $151,342, and the $160,000 median debt of a private medical school graduate will have grown to $205,707. These graduates’ monthly payments will be $1,718 and $2,336, respectively, if they pay over the default period of10 years, and $1,022 and $1,389, respectively, if they extend repayment over 25 years.†If the borrower is not eligible for economic hardship deferment or eligibility for economic hardship deferment has expired (either through no longer qualifying or having used all 3 years) this debt will be increased by the compounded interest on the subsidized Stafford loans (approximately $34,000 for the average public medical school in 2006) that usually are interest-free during deferment in residency.
The only options other than deferment are: repayment, pursue an income-contingent repayment plan available through the U.S. Department of Education, or go into forbearance. Forbearance is available for the entire duration of a medical internship or residency, regardless of the length of the program. Laws regarding forbearance are not impacted by the Act. Under forbearance, no payments are required; however interest continues to accrue and the federal government no longer pays interest on the subsidized portion of a borrower’s loans (which could be up to $8,500 of your Stafford loans a year.) An additional difference between deferment and forbearance is interest may be capitalized under forbearance, adding insult to injury in the form of additional debt.
On November 1, 2007, the AMA reported that the Department of Education has granted an extension until fall of 2008 for correction of this provision. On November 2, 2007, Senator Richard introduced a bill, S.2303, to amend the Higher Education Act of 1965 regarding the definition of economic hardship as well as there are revisions to the Higher Education Act circulating through Congress. So please remember to contact your Senators and Congressperson to support this new legislation! The AMA has a web site to make it easy to send a message to your Senators and Representatives and voice your concern.
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