• A criticism of broad student-loan forgiveness is it may benefit typically high earners, like doctors.
  • Because of the system's structure, some advanced-degree holders have debt they can't pay off.
  • High interest rates, long-term repayment plans, and uncapped borrowing could be reasons.

Some dream jobs lead to nightmare finances.

It's largely thanks to student loans and the exorbitant debt it can take to get an "MD" or "JD" after your name, and the type of loan that accompanies those degrees — graduate PLUS loans — which allow borrowers to cover up to the full cost of attendance for a program without any caps. 

The number of Americans who owe at least $1 million in federal student loans has been growing over the past few years. As recently as 2013, it was only 14; by 2018, that figure ballooned to 101 people owing at least $1 million, the Education Department confirmed to The Wall Street Journal four years ago. 

It's something that often gets overlooked when considering broad student-loan forgiveness. Many Republican lawmakers have slammed 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 in relief for borrowers making under $150,000 a year, The Washington Post reported — likely under the notion that an income cap would ensure relief went to those in most need.

Here are three reasons that may explain why some typically high-earning graduates can't clear their debt. 

High interest rates

Interest capitalization is often to blame for student-debt balances that continue to surge. It happens when accrued interest is added to the original loan balance, and future interest grows based on that higher principal amount.

Steve Pederzani, 37, is all too familiar with that. As a licensed attorney without a steady job, he took out grad PLUS loans to finance his education — but medical complications with his fiancée pushed back his bar-exam timeline by a few years, which made his job search more difficult. During that time, interest continued to build on his debt, and the principal ballooned to $347,000.

"There are a substantial number of people like me that are being forgotten," Pederzani previously told Insider. "We're being left behind."

Interest on student loans is why many borrowers experience difficulty eliminating their debt, or even keeping up with their payments. Most of the outstanding student debt in the US is due to interest that grows every month; even borrowers who consistently make their payments face high interest rates that keep the debt up or grow it even larger.

Last month, interest rates rose for new borrowers. Parent and grad PLUS loans continue to have the highest interest rates, now at 7.54%. But the interest rate at the time a loan is taken out sticks with the borrower for the duration of repayment, so if the rate is particularly high one year, it would stay at that rate for the time it takes a borrower to pay down the debt. For example, if a borrower took out grad PLUS loans in the early 1990s, the interest rate at its highest point was near 10%.

Biden's Education Department is attempting to limit interest capitalization, which is when interest accrues and builds onto a borrower's principal balance, through a regulatory process set to be implemented next summer.

Long-term repayment plans 

Kathleen LaRose, a podiatrist in North Carolina, graduated from medical school in 1987, having borrowed $277,000 in federal loans. 

Twenty-eight years later, she owes $895,512.97 in student debt, which Insider verified — all while on an income-based repayment plan that should have granted her loan forgiveness three years ago.

While she was in her doctoral and residency program, LaRose's loans were placed on in-school deferment, which lets borrowers postpone loan payments until after graduation. But since her student loans were unsubsidized, interest continued to accrue during that period, adding to her principal balance and causing the debt to surge.

"I thought, 'I'm going to be working with a doctorate in this country, so I'll make a lot of money and be able to pay this,'" LaRose, now 55, told Insider. "But I never ended up making a ton of money, and I've maintained the monthly income-contingent payments, and they've never been in arrears. But they're just wildly out of control now."

The income-contingent repayment — the first version of an income-based repayment plan for student loans — was created in 1995 under the idea borrowers would get 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 in the following decade, many borrowers ran into trouble while paying off their debt because of high interest and issues with loan transfers to new companies, leaving them repaying their debt much longer than they were promised.

For example, Insider previously spoke with Jason Harmon, who enrolled in an income-based plan in 1995, but now — 27 years later — he still has an estimated nine more years of repayment. That's because paperwork that tracked his payment progress got lost when his loans were transferred to a new company, which extended his repayment period significantly. 

And for those with high-level degrees who don't earn sufficient income right away, an extended repayment period can bring the same issues.

Biden's Education Department is expected to unveil a new, easier-to-use income-driven plan in the coming weeks to combat issues borrowers have faced on long-term repayment plans, but borrowers are still awaiting details of what the plan will look like.   

Uncapped graduate-school borrowing 

Mike Meru, a Utah orthodontist 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, a number that nearly doubled by May of 2018, according to The Wall Street Journal. 

There are no limits on loans borrowers can take out through grad PLUS, loans exclusively available to graduate and professional students. The loans allow graduate students and parents to borrow up to the full cost of a program, but there are no borrowing limits, meaning that people can end up with debt they're nowhere equipped to handle, even if they eventually enter high-earning careers.

This is an issue that has been on both Democratic and Republican lawmakers' minds. Three Republicans recently introduced legislation that would counter Biden's plans for targeted loan forgiveness, and one of their proposals was capping borrowing for graduate students to ensure they take on only debt they can afford.

Under Secretary of Education James Kvaal said in June that spiraling debt from PLUS loans was "definitely something we're watching."

"Not all of those programs have a strong payoff economically that would allow you to repay those loans," Kvaal added. "So it's something we're watching very carefully. We're studying it. One thing that 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. 

Read the original article on Business Insider