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July 26 2016

Loophole Forgives Loan Debt of Well-Off Doctors

Patrice L. Onwuka

Thanks to the unintended consequences of a so-called “doctor’s loophole” future doctors are getting six figure debts forgiven by the federal government.

When researchers examined surveys of graduating medical school students, they found a spike in the number who plan to participate in federal debt forgiveness program.

Medical school is expensive. Students spent on average more than $32,000 for one year of in-state tuition at a public medical school in 2015 and more than $52,000 at a private medical school. Over four years, medical students rack up more in debt than 85 percent of American households earn in a year. Some estimates put the amount that the median medical school borrower owes at $162,000 in 2012.

Despite carrying heavy debt, doctors aren’t the broke graduates living on their parents’ sofas. They manage on between $50,000 and $60,000 in their first few years while in residency or training. It’s not too long after that that their salaries begin to double, triple, and more.

Yet, many recent medical-school graduates are taking advantage of a federal student loan forgiveness program that’s wiping their balance sheets clear of more than $130,000 in debt. This is a finding from a study published by the Journal of Internal Medicine.

The Public Service Loan Forgiveness, created in 2007, was meant to forgive debt for those who choose to take jobs in government and the nonprofit sector such as public defenders and teachers. Once you make ten years’ worth of payments (120 months of payments) any balance remaining would be forgiven, tax-free. In addition, payments are capped at 10 percent of discretionary income.

A small share of primary-care doctors who work in underserved areas could also qualify. Working for a non-profit hospital may count even in a role like a surgeon. This is where the unintended consequences kick in. For a resident making $60,000 a year, you would benefit from capped payments based on a modest income. If you stick out those ten years, your income would likely rise just in time for your payments to be forgiven. Is that what creators of this program intended? Likely not.

The Wall Street Journal reports:

They started with an annual survey of all graduating medical-school students across the U.S. conducted by the AAMC. The survey asks them to list, among other things, their intended specialty and whether they planned to use the debt-forgiveness program. The share planning to get forgiveness has risen steadily. Overall, 25% of doctors who graduated from medical school in 2014 said they intended to use the program, up from 10.6% in 2010. Doctors of all types intend to use it, including highly paid surgeons.

The researchers looked at 2,416 borrowers who graduated from medical school in 2014 and determined that, on average, each would get roughly $131,000 forgiven, tax-free, in 2024. That comes out to a total of $316 million. (The figures use a discount rate of 6%. Without the rate, the average forgiveness would be about $200,000 in 2024 dollars.)

Is anyone surprised that some Americans game the system? Like ObamaCare, social security disability, and other federal benefit programs, this program provides a powerful incentive to take advantage of what’s available. With no one monitoring abuse of programs, they can continue to grow with no accountability.

Debt forgiveness in exchange for going into underpaid careers that help the poor, sounds egalitarian, but is misguided. As borrowers from the federal government (or anyone that loans funds), you have a responsibility to repay that loan. The agreement you sign confirms that you will try your best to repay that loan. The federal government offers ways to lower payments or get forbearance during tough financial times. It’s irresponsible though to take out high loan sums fully pecting that it will be written off. Someone pays for that debt forgiven: taxpayers.

Doctors have potential for high earnings over their careers. They are least in need of loan forgiveness, but if the program has no restrictions and caps on who can apply based on factors such as earnings potential, average salaries, and availability of work, etc., then it’s not surprising that young doctors are jumping on the loan forgiveness bandwagon.

The Wall Street Journal adds that the Obama Administration is aware of the potential for doctors to take advantage of this program and has proposed capping loan forgiveness at $57,500 in two budgets.

Student loan debt forgiveness is a Band-Aid solution. The cost of college has skyrocketed in the past three decades in large part because of increased federal financing. Institutions of higher education charge students more knowing they have a guaranteed funding source from Washington. Students borrow more to pay for school and find themselves on the hook for the loan debt incurred. In the case of these doctors, they then take advantage of loan forgiveness and we taxpayers are on the hook for every dime of debt incurred. There’s nothing free or fair about that.

Independent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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