Here’s how doctors and lawyers can have 7-figure student debt
- One criticism of the general student loan waiver is that it can generally benefit high earners, such as doctors.
- Due to the structure of the system, some graduate degree holders have debts that they cannot repay.
- High interest rates, long-term repayment plans and uncapped borrowing could be the reasons.
Some dream jobs lead to nightmarish finances.
It’s largely thanks to student loans and sky-high debt that it can take to get an “MD” or “JD” after your name, and the type of loan that comes with those degrees – graduate PLUS loans – that allow borrowers to cover the maximum cost of participation for a program without any ceiling.
The number of Americans who owe at least $1 million in federal student loans has increased in recent years. As recently as 2013, there were only 14; in 2018, that figure rose to 101 people owing at least $1 million, according to the Ministry of Education confirmed at the Wall Street Journal four years ago.
This is something that is often overlooked when considering a large student loan forgiveness. Many Republican lawmakers have criticized the idea of canceling student debt for all federal borrowers because the highest earners, like doctors and lawyers, would benefit. In an apparent attempt to counter that criticism, Biden is considering $10,000 relief for borrowers earning less than $150,000 a year, The Washington Post reported — likely under the notion that an income cap would guarantee relief to those who need it most.
Here are three reasons that may explain why some generally well-paid graduates cannot pay off their debt.
High interest rates
Interest capitalization is often responsible for student debt balances that continue to grow. This happens when accrued interest is added to the original loan balance and future interest increases based on this higher principal amount.
Steve Pederzani, 37, is all too familiar with this. As a licensed attorney without a steady job, he took out grad PLUS loans to fund his education – but medical complications with his fiancée delayed his bar exam schedule by a few years, making his search for a more difficult job. Meanwhile, interest continued to accrue on his debt and principal soared to $347,000.
“There are a significant number of people like me who are forgotten,” Pederzani previously told Insider. “We are left behind.”
Student loan interest is the reason many borrowers find it difficult to eliminate their debt or even keep up with their payments. Most of the outstanding student debt in the United States is due to interest, which increases every month; even borrowers who make regular payments face high interest rates which maintain the debt or increase it even more.
Last month, interest rates rose for new borrowers. PLUS parent and graduate loans continue to have the highest interest rates, now at 7.54%. But the interest rate at the time a loan is taken out stays with the borrower for the duration of the repayment, so if the rate is particularly high one year, it will stay at that rate for however long it takes the borrower borrower to repay the debt. For example, if a borrower took out grad PLUS loans in the early 1990s, the interest rate at its highest point was close to 10%.
Biden’s education department is trying to limit interest compounding, which is when interest accrues and adds to the borrower’s principal balance, through a regulatory process which is to be implemented next summer.
Long term repayment plans
North Carolina podiatrist Kathleen LaRose graduated from medical school in 1987, after borrowing $277,000 in federal loans.
Twenty-eight years later, she owes $895,512.97 in student debt, which Insider verified — while following an income-based repayment plan that should have given her loan forgiveness three years ago.
While in her doctoral and residency program, LaRose’s loans were put on hold at the school, allowing borrowers to defer loan repayments until after graduation. But because her student loans were unsubsidized, interest continued to accrue during this time, adding to her principal balance and driving up the debt.
“I thought, ‘I’m going to work with a Ph.D. in this country, so I’ll make a lot of money and I can afford that,'” LaRose, now 55, told Insider. “But I never made a ton of money, and I kept the monthly payments based on income, and they were never late. But they’re just out of control now.”
Income-contingent repayment – the first version of an income-based repayment plan for student loans – was created in 1995 with the idea that borrowers would receive affordable monthly payments based on their income, with the promise of loan forgiveness after 25 years of repayment.
While several other versions of the plans were created over the next decade, many borrowers encountered problems repaying their debt due to high interest and problems transferring loans to new businesses, forcing them to repay their debt much longer than expected.
For example, Insider once spoke with Jason Harmon, who signed up for an income-based plan in 1995, but now — 27 years later — still has around nine years of repayment left. Indeed, the documents that tracked the progress of his payments were lost when his loans were transferred to a new company, which significantly extended his repayment period.
And for those with high-level degrees and not earning enough income right away, an extended repayment period can lead to the same issues.
Biden’s education department is expected to unveil a new, easier-to-use income-focused plan in the coming weeks to tackle issues borrowers have faced on long-term repayment plans, but borrowers are waiting. always details of what the plan will look like.
Uncapped graduateuate-school loan
Mike Meru, an orthodontist from Utah who made headlines in 2018 for having more than $1 million in debt, has most of his debt through grad PLUS loans.
He originally borrowed $601,506, an amount that almost double in May 2018, according to the Wall Street Journal.
There are no limits to the loans that borrowers can take out through graduate PLUS, loans exclusively for graduate and professional students. Loans allow graduate students and parents to borrow up to the full cost of a program, but there is no borrowing limit, which means people can end up with debt they are nowhere equipped to manage, even if they end up taking on high-earning careers. .
It’s a question that has been on the minds of both Democratic and Republican lawmakers. Three Republicans recently introduced legislation that would thwart Biden’s plans for targeted loan forgiveness, and one of their proposals capped borrowing for graduate students to ensure they only incur debt they can afford.
Education Undersecretary James Kvaal said in June that soaring PLUS loan debt was “certainly something we’re watching.”
“Not all of these programs have a strong economic return that would allow you to repay these loans,” Kvaal added. “So that’s something we’re monitoring very carefully. We’re looking at it. One thing we’re looking at is whether there should be additional disclosures” like giving graduate students data on potential earnings, and all PLUS borrowers more information on loan repayment.