Forbearance -> No Capitalization Anymore?

[DennyCrane MD]

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Hi,

Everything I have searched and read on SDN indicates that choosing forbearance will lead to capitalization during residency. Thus it's not a savvy option.

However, a speaker from AAMC visited our school not long ago. She clearly emphasized that if we choose medical residency forbearance, and apply for forbearance promptly each year, that the capitalization will not occur during residency, until the end of residency.

This is a big deal. I just wanted to make sure that other people have heard of this and whether this is actually true.

 

[fleshwound]

Should call each loan servicer and ask when they capitalize the interest

 

[RangerBob]

Hi,

Everything I have searched and read on SDN indicates that choosing forbearance will lead to capitalization during residency. Thus it's not a savvy option.

However, a speaker from AAMC visited our school not long ago. She clearly emphasized that if we choose medical residency forbearance, and apply for forbearance promptly each year, that the capitalization will not occur during residency, until the end of residency.

This is a big deal. I just wanted to make sure that other people have heard of this and whether this is actually true.

I've never heard anything about interest not capitalizing during forbearance--I'm pretty sure the AAMC speaker is confused (the speaker we had didn't know much about repayment either... fortunately our financial aid director was fantastic). I believe mandatory forbearance (that's what you can use as a medical resident) capitalizes interest just as often as normal forbearance. The only difference is your servicer has to approve your forbearance application (hence the term "manditory." In addition I don't think there's a limit to how many years of forbearance you can use--as long as you're still a resident).

I think the speaker is thinking of the old days when residents could apply for a deferment during residency. Unfortunately that disappeared along with those nice and low interest rates...

If you enter IBR, you interest won't capitalize again until you leave IBR/forget to reapply on time. Often this occurs when you become an attending--this might also be what the speaker is getting confused with... It's also one of the prime benefits of IBR--the gov't pays your unpaid subsidized interest (for up to three years), you interest doesn't capitalize, and you get credit towards loan forgiveness (if it sticks around).

Regardless of what you do (forbearance vs repayment), your interest will capitalize six months after graduating (when your grace period ends). That's sort of a bummer, since it's the equivalent of taking out another $5-40,000 loan, depending on how much you borrowed. But there's no way to get around that capitalization except for paying off the interest.

 

[The White Coat Investor]

In general, you should use PAYE (the new IBR) in residency. Very little reason not to.