As it stands today, the law that went into effect on October 1, 2007, could signal an end to economic hardship deferment as we know it by eliminating debt-to-income ratio. In the past, if a borrower’s monthly payment was greater than 20% of their income and if their income minus their debt was not greater than 220% of the Federal Poverty Level, they qualified for economic hardship deferment. As a result, most medical residents were eligible for this deferment because of the substantial difference between their monthly loan payment and their residency income. Eliminating debt-to-income ratio would leave forbearance or repayment as the only options. To see how this would affect medical students about to enter residency, please see “Losing debt-to-income ratio: what it would mean for students entering residency” below.
But as of October 11, 2007, there is record of an email exchange between a high ranking official at the Department of Education to an official at NCHELP communicating that the department will be retaining the debt-to-income ratio. Based on this information, T.H.E. and our servicer, Great Lakes, are continuing to process new economic hardship applications under debt-to-income ratio.
Stay in touch with T.H.E. as we continue to monitor the latest Department of Education changes. If you have heard of any other developments about debt-to-income ratio from schools, other guarantors or lenders, please share it with us and your colleagues in the comments portion of this blog.
Losing debt-to-income ratio: what it would mean for students entering residency:
- An average of almost $7,000 of additional interest to repay. After capitalization, that extra interest accrual will end up costing $9,578 on a 10-year term (an additional $80 a month) or $14,442 on a 25-year term (an additional $48 a month).
- A new repayment plan created to help students who no longer qualify for hardship deferment but face a “partial financial hardship” doesn’t start until July 1, 2009. This leaves limited options for minimizing payment obligation both during and after residency.
One option in addition to forbearance is repayment. Two ways students can make their monthly payments more manageable are:
- Extending the repayment term to 25 years – this option is available if students owe at least $30,000 in federal student loans. Students can always pre-pay with no penalty.
- Making an interest-only payment – this option will further reduce monthly payments. Students can make interest-only payments for a period of time (usually between a quarter and a third of the loan repayment period). Payments will increase once this period of reduced payments ends.
The Department of Education’s willingness to reconsider eliminating the debt-to-income ratio is most likely a result of petitions by organizations such as the Association of American Medical Colleges, which wrote a letter to Secretary Spellings. As schools, now is the time to contact your senator, representative, and the Department of Education and tell them what an unfair burden the elimination of debt-to-income ratio would place on medical students.