awaiting IBR and loan consolidation - please advise!

[rkaz]

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Hello, I'm a PGY1 who has to start paying loans soon, as I graduated from medical school in May and my grace period ended mid-November. I had also taken out loans prior to medical school (prior to 2007) from the FFEL program (federal stafford loans from private lender with variable interest rate).

Prior to my grace period ending, I was overwhelmed with a huge bill of over $1,900+/month in repayments, as I had been put into the standard 10 year plan. Being clueless about all this loan stuff, I found out I needed to apply for IBR to extend my repayment terms (as I wouldn't qualify for PAYE as a portion of my loans were taken out before 2007). Although most of my loans (over $170,000+ are at the 6.8% interest, I have about $11,000 of FFEL loans at a much cheaper variable rate (presently between 2-3% interest). I am also applying for consolidation of these loans (into the Fedloan program), which would simply my life by not having to make so many checks each month, and which would also qualify me for PSLF. I was told by Fedloan that there wouldn't be any special deals on the consolidation loans, but that it would simply be a weighted average between the interest rates of all the loans.

Since I applied for IBR and consolidation at the end of November, I was told to apply for forbearance until my IBR clears, so I called the Fedloan and they submitted a forbearance until the end of January.

I was reading how applying for forbearance is bad because it causes loans to capitalize, and now I'm really confused (as I'm not well versed in what all this means). Did I make a mistake in applying for forbearance? I can still pay the full $1900-2000 for the first month (as I have a few thousand dollars saved up) and ask for the forbearance to not be processed if this would help? However, I wouldn't be able to pay more than a month or so of the full amount, as the monthly payments are about 70% of my take-home resident's salary (though I could afford the $484 IBR monthly payments). Furthermore, I would have preferred to avoid paying money prior to consolidation since it won't be counted towards the 120 payments for PSLF.

My other question to you guys is if there are any better rates I could get in the process of consolidation, other than simply the weighted average of the 2 rates. I do plan to apply for automated payments from my bank account after consolidation to get the additional 0.25% off. I just wanted to ask you all if there are any better deals to apply for, before I get locked into an interest rate for the next 25 years - as I presume you can't get a lower interest rate once you are already locked in.

In summary my questions are:
1) Should I request to cancel the forbearance (if it harms me in some way) and just pay the full amount for the 1st or 2nd month while IBR/consolidation is processing?
2) Are there any good deals I should know about for loan consolidation that can help me get a lower interest rate?

I'd be so grateful for any assistance. Since my first payment wouldn't be due until mid-December (even without forbearance through January), I haven't defaulted yet on anything as per my understanding, as I was told we have one month to submit payment from when grace period ends. However I do need to act quickly, if any changes are required. Thanks so much for your time!!!

 

[RangerBob]

Your loans would capitalize anyway--they capitalize at the end of your grace period (technically the start of repayment) regardless of whether you go into IBR or not. Capitalization means that the interest you've accrued is added to the principle, so now your interest gathers interest.

The only difference is if you put your loans in forbearance now you'll have 1-3 more months of interest that capitalizes. In my mind that's no big deal (though would've been nice to avoid) and not worth making a full payment for. All that interest that accumulated while you were in medical school is going to capitalize regardless of what you do.

The main thing is to make sure to re-file for IBR on time, as your interest will not capitalize again until you leave IBR--you can imagine if you're making IBR payments while in residency for and then forget to reapply on-time and get shifted to the standard repayment plan, the capitalization of 1-3 years' worth of interest that could've otherwise been prevented is a big deal.

With that said--if you can afford to make a big payment, then pay off as much interest on those 6.8% loans as you can, prior to capitalization. That will give you the most bang for your buck. You may have to specify that you want to pay off the interest evenly on all the 6.8% loans so that it doesn't get applied to interest on your 2-3% loans (makes more sense to pay off interest on the high-interest loans only)

With regards to consolidation--there are private banks that give competitive rates, but then you lose all benefits of federal loans (IBR, PSLF--if that actually sticks around), so I don't think they're worth it unless you're planning to pay off your loans within the next 10 years.

I would also recommend just consolidating the FFELP loans together (and not with your direct loans at 6.8%)--it would bring them into the direct loan program (making them eligible for PSLF, which I doubt will be around, but if it is it's worth taking advantage of), and keep those loans at their low rate. If you check the box saying you're consolidating so they will become direct loans for the purposes of the PSLF program, they will be consolidated with FedLoan, which it sounds like is what you want. If all your loans are with one lender, then you make just one payment, even if you have 55 loans.

The main benefit of this is, should you decide to pay off your loans more aggressively, it lets you pay off the highest interest rate loans first. Those loans at 2-3% aren't gathering much interest compared to the 6.8%, so you save money by paying them off last. Granted, $11,0000 isn't a ton of principle to accrue interest on, but it is something, and when you consolidate your rate is rounded up the nearest eighth of a percent (so that has a bigger impact if you consolidate the other $100k+). Unless your other loans aren't with FedLoan, you might as well just consolidate the low-interest FFELP loans together and leave it at that.

 

[rkaz]

(deleted - double post)

 

[a runner]

Your loans would capitalize anyway--they capitalize at the end of your grace period (technically the start of repayment) regardless of whether you go into IBR or not.

Are you sure about this? I thought if you go straight from grace period to IBR, your interest from school will not capitalize because you never enter a regular repayment plan.

 

[RangerBob]

Are you sure about this? I thought if you go straight from grace period to IBR, your interest from school will not capitalize because you never enter a regular repayment plan.

Unfortunately yes, I am sure. It doesn't matter what repayment plan you enter--your interest capitalizes at the end of your grace period. If you enter IBR/PAYE, it won't capitalize again until you leave IBR/PAYE (which could be every year if you don't reapply on-time...).