Forbearance while making voluntary payments, versus IBR

[wamcp]

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Searched the forums for my question, couldn't find any answers - apologize if this is a stupid one, but why don't people choose forbearance while making voluntary monthly payments? Why does everyone seem to advocate IBR?

I ask because our financial aid counselor gave a talk and said this is one of the most feasible options during residency.

For example, I have a loan balance of 214K on graduation this year at 6.4% interest rate.
-IBR would mean giving 380/month on 48000 salary.
-Whereas if I choose to forbear, and I voluntarily pay 1500/month (thanks to some contribution from my spouse's income), I would actually start hacking away at the principal and decrease my total cost. Would this be a poor decision versus IBR?

Also, if I choose IBR, am I allowed to voluntarily pay more than the mandated amount per month?

 

[sazerac]

If you do IBR, you can make more than the minimum payments, and those payments will qualify as IBR payments for the purposes of the various forgiveness programs.

I will let the experts answer the reason some folks immediately enroll in IBR at the start of residency - it has something to do with subsidized loans (if you have them) and the nature of capitalized interest. This is all basically interest "at the fringes" of your loan, but given the loan sizes these days even small things like not accumulating interest-on-interest can add up quickly. Hopefully somebody more knowledgeable can chime in here with the exact details.

 

[RangerBob]

I agree--doing IBR makes sense from a couple points:

1) While in IBR, your interest doesn't capitalize. That could save you thousands, or tens of thousands, over the life of your loans. It all depends on whether you are able to stay in IBR as an attending (ie., you interest may never capitalize again if you go into a lower paying specialty). Even if you go into a high-paying specialty, you're still saving a few years of capitalization (saves you quite a bit), and then if you have a high paying specialty, you can pay off all that interest before it capitalizes, as it capitalizes when you leave IBR (which if you time your application right, could be a year after you finish residency--plenty of time to pay off interest before it capitalizes--though you may as well just apply all that extra money to your highest interest loans/principle)
2) While in IBR, you can make more than the minimum payments--and you can apply those extra payments all to your highest interest loans first. So you save money by selectively paying off your highest rate loans (granted, you can do this if you put your loans in forbearance)
3) If you do IBR, the government will make up the difference in the interest accrued on your subsidized loans that your monthly payment doesn't cover, for a max of three years. That should save me a few thousand over my residency.

Basically, no one knows about the future of programs like loan forgiveness via IBR/PAYE--there's a threat right now with people concerned about proposed new changes. But we do know that right now the government will pay for your unpaid monthly subsidized Stafford interest that accrues, and it essentially "pays" you by not capitalizing your interest if you stay in IBR (make sure you always reapply on-time!). Given that IBR monthly payments are easily affordable for most residents (assuming you don't have five kids, live in NYC, etc.), then I think it makes a ton of sense to enroll in IBR and get those benefits. When it comes to finance, whether we're talking about loans or taxes, it literally pays to know what the government "pays" you for, and that can save you a lot in the long run. Especially when you owe a lot of money.

One thing to keep in mind is if you file your taxes with your wife jointly, then IBR takes her income into account as well--so your payments may be more than $380/month. On the other hand, if she owes money as well, that gets taken into account. You could always run an analysis, but I'd imagine IBR plus paying extra so that you pay $1500/month in total (with the non-IBR payment all going towards your highest interest loans) would save you money over paying $1500/month on your highest interest loans, even if your IBR payment is double or triple that $380/month because of your wife's salary. Preventing capitalization can really save you a lot!

Unfortunately there's no way to prevent capitalization when you start repayment (interest will capitalize at the start of IBR--just not again after that as long as you're in the program).

 

[Scorcher31]

I agree--doing IBR makes sense from a couple points:

1) While in IBR, your interest doesn't capitalize. That could save you thousands, or tens of thousands, over the life of your loans. It all depends on whether you are able to stay in IBR as an attending (ie., you interest may never capitalize again if you go into a lower paying specialty). Even if you go into a high-paying specialty, you're still saving a few years of capitalization (saves you quite a bit), and then if you have a high paying specialty, you can pay off all that interest before it capitalizes, as it capitalizes when you leave IBR (which if you time your application right, could be a year after you finish residency--plenty of time to pay off interest before it capitalizes--though you may as well just apply all that extra money to your highest interest loans/principle)
2) While in IBR, you can make more than the minimum payments--and you can apply those extra payments all to your highest interest loans first. So you save money by selectively paying off your highest rate loans (granted, you can do this if you put your loans in forbearance)
3) If you do IBR, the government will make up the difference in the interest accrued on your subsidized loans that your monthly payment doesn't cover, for a max of three years. That should save me a few thousand over my residency.

Basically, no one knows about the future of programs like loan forgiveness via IBR/PAYE--there's a threat right now with people concerned about proposed new changes. But we do know that right now the government will pay for your unpaid monthly subsidized Stafford interest that accrues, and it essentially "pays" you by not capitalizing your interest if you stay in IBR (make sure you always reapply on-time!). Given that IBR monthly payments are easily affordable for most residents (assuming you don't have five kids, live in NYC, etc.), then I think it makes a ton of sense to enroll in IBR and get those benefits. When it comes to finance, whether we're talking about loans or taxes, it literally pays to know what the government "pays" you for, and that can save you a lot in the long run. Especially when you owe a lot of money.

One thing to keep in mind is if you file your taxes with your wife jointly, then IBR takes her income into account as well--so your payments may be more than $380/month. On the other hand, if she owes money as well, that gets taken into account. You could always run an analysis, but I'd imagine IBR plus paying extra so that you pay $1500/month in total (with the non-IBR payment all going towards your highest interest loans) would save you money over paying $1500/month on your highest interest loans, even if your IBR payment is double or triple that $380/month because of your wife's salary. Preventing capitalization can really save you a lot!

Unfortunately there's no way to prevent capitalization when you start repayment (interest will capitalize at the start of IBR--just not again after that as long as you're in the program).

I agree with Ranger. It would likely save more money paying IRB and putting all the extra money on your high interest loan. Still it would be smart to crunch the numbers. Ranger left out borrowers benefits. To my understanding (you would have to double check on this) you miss out on repayment borrower benefits while in forbearance. You may be able to decrease the interest rates in all of your loans quite significantly by going into IRB, using automatic debit and hitting whatever criteria are for your borrower benefits.

 

[wamcp]

Wow thanks for the informative responses guys. IBR seems to be the way to go either way I look at it then, I wonder why my financial aid speaker didn't really stress the importance of preventing capitalization here