Question

I heard the One Big Beautiful Bill Act (OBBBA) made significant changes to the federal student loan programs. How should I be managing my student loans now?

Answer

Indeed, OBBBA will have a massive effect on student loan management going forward, particularly for new medical students. For the last decade or more, there was little reason for any student attending an institution eligible for federal loans to use private loans. However, a cap of $50,000 per year ($200,000 total) has now been instituted on professional school borrowing. That means that many medical students will again need to use private loans to pay for a substantial part of their education.

Private loans generally have higher interest rates and worse terms than federal programs, but perhaps most importantly, are not eligible for generous Income Driven Repayment (IDR) plans and the Public Service Loan Forgiveness (PSLF) program, the mainstays of physician student loan management techniques for the past 15 years. This change, along with others, will generally make staying in the federal student loan system and seeking student loan forgiveness less attractive as a strategy. Thus, the alternative strategy of refinancing your student loans (early and often) and paying them off rapidly by living frugally (live like a resident!) as a young attending has become more attractive.

For those who have already completed school but still have student loans, the picture is decidedly better. As expected, not only did PSLF remain completely intact, but current borrowers were mostly grandfathered into existing programs, at least for a while. The biggest changes have occurred with the IDR plans. Within a few years, the only IDR plans that will exist are Income Based Repayment (IBR) plans and a new one, called the Repayment Assistance Plan (RAP). Only RAP will be available to new borrowers.

Out with the Old

The alphabet soup of prior IDR programs, including ICR (Income-Contingent Repayment), PAYE (Pay As You Earn), REPAYE (Revised Pay As You Earn), and SAVE (Saving on a Valuable Education) will all be gone within three years. Although simplification of this system is likely good policy, RAP is not as generous to borrowers as prior programs, especially SAVE. Forbearance and deferment, although never very good options, are also even less generous than they were.

The payments in RAP are based not on discretionary income, like prior IDRs, but on adjusted gross income (AGI), a higher amount. A typical resident will pay something like five to seven percent of their AGI (perhaps $300 per month based on an AGI of $60,000) as a student loan payment and a typical attending will pay 10 percent of their AGI (perhaps $2,500 per month based on an AGI of $300,000). Nobody will have a $0 monthly payment anymore, as there is a minimum required payment of $10 per month.

Like the SAVE plan, unpaid interest will be waived (plus a $50 subsidy), although with the higher payments required, there will be fewer people with unpaid interest. This will have the nice benefit of ensuring federal student loans do not balloon during residency as they did prior to the implementation of SAVE. If applicable, every child you have will also reduce your monthly payment by $50. Current borrowers can (and often should) stay in their current IDR plan until mid-2028, when they must transition to either IBR or RAP. Given its legal challenges, those in SAVE may wish to transition even earlier.

The group of borrowers hurt the most by changes was those whose strategy had been PAYE forgiveness because of a very high debt-to-income ratio. Under PAYE, after making payments for 20 years, the remainder of the debt was to be forgiven. Although this was not as attractive as PSLF (which comes after 10 years and offers tax-free forgiveness), it did not require the borrower to work full-time for a non-profit employer. In fact, the borrower did not have to work at all if they had access to other funds to make required payments. Now, these borrowers will have to transition into either IBR (which offers forgiveness after 25 years) or RAP (which offers forgiveness after 30 years). That could make a difference of hundreds of thousands of dollars in additional payments and taxes.

Finding the Best Strategy

Although the new rules themselves can be confusing, the best student loan strategies require an even higher level of thinking. For example, taking a slight pay cut to work in academia and qualify for tax-free PSLF forgiveness six or seven years out of training might have made a lot of sense when all of the loans were federal. When half or more of the loans are private, the amount of forgiveness may now be substantially lower than the additional amount earned in a non-academic position.

Your student loan strategy can be affected by how you file your taxes, which type of retirement account you use, and which IDR program you choose. Given all of the changes, now is a good time to visit with an informed advisor or even consult with a specialized student loan advisor to work out the best personalized strategy for you moving forward. Although change is never fun, it is likely that student loan policy will be far more stable over the next four years than it has been since the onset of the pandemic, allowing physicians to plan their financial future better than has been possible in recent years.

Dr. Dahle blogs at https://www.whitecoatinvestor.com and is a best-selling author and podcaster. He is not a licensed financial advisor, accountant, or attorney and recommends you consult with your own advisors prior to acting on any information you read here.