Loan Conundrum

[DocYuki]

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PGY-1 FM here in the mid-west, non-academic program. Sorry to dredge up this tired issue, but I've been dealing with a tough fork in the road for awhile now. Ultimately it boils down to this: Are the chances of taking a post-residency FM job that has loan-repayment worth the potential risk of going Income-Based Repayment vs. Standard Repayment?

The "risk" of IBR I'm speaking of is the runaway interest that seems to build up quietly in the background while you pay less than your Standard Repayment friends. I'm signed up for standard right now to keep my long-term loan repayment much lower. But many of my colleagues are doing IBR and landing loan-repaying positions. They say at least 50% of positions they are being offered, offer loan-repayment. It almost seems like a sin not to go IBR. The only caviat is that you'd want to rely on taking a position that helps with loans, and that seems risky to me. But I'd save a ton of $ during residency and actually be able to save up (for other things).

Not sure what opinions are on this, I've just been totally torn and its a very, very big decision. Sorry if its an ill-placed threat or a bad time to ask.

 

[lowbudget]

I'm not very familiar with all of the aspects of IBR and will defer to those who know more, but based on what I read, it sounds like there's very little downside going IBR. IBR allows you to make affordable monthly payments on your loans while you have low income (resident/starting attending) while the clock is running on the interest. Standard Plan's monthly payments might be too high for some residents and the only residents who could afford it is if the loan is in deferment or forebearance and the opt make payments during the period when they're not required to.

One thing that you need to read up on is this "idea" of runaway interest. From what I read, if you go IBR, your interest accrues but does not compound. WOW. What a deal. Most loans, like credit cards, will take unpaid interest and make it part of the principal in the next period, and apply interest to that P+I sum. With IBR, they don't do that; they simply take the unpaid interest and say, ok, you owe that in the future. That's a huge advantage to go IBR.

I didn't see anything in IBR about pre-payment penalty. So, if you happen to come across extra cash (or want to "save"), there's nothing stopping you from paying down on the principal to bring your principal value down earlier. The "value" (i.e. rate of return) on making that extra payment is equal to the interest rate you would have paid on the loan (e.g. 6%). Right now most savings rate on savings accounts are, what, 0.5%... maybe 1%? If you can make a 6% return today, rather than putting cash in the savings account to "save", I would "save" by prepaying those 6% loans.

I read that you can easily go from IBR to Standard at any time, but the only time you can go from Standard to IBR is if you have financial hardship. That's a nice option for IBR.

My question why would a job that offers loan repayment care if you are on the IBR or standard repayment plan? Loan repayment is loan repayment...

 

[asap6]

where does it say that interest doesnt accrue while in IBR?

 

[DocYuki]

My question why would a job that offers loan repayment care if you are on the IBR or standard repayment plan? Loan repayment is loan repayment...

That's the big reason why I'm probably switching to IBR...if I'm going to sign up for a position that has loan-repayment anyway, may as well have had a more pleasant repayment plan during residency. I'm not sure if its totally unique to FM, but programs seem to use loan help as a big bargaining chip to get applicants these days.

 

[MT Headed]

Since you have the cash (flow) to repay the loan at the standard rate, why not switch to IBR, but pull the Standard payments out of your bank account each month. Pay the minimum IBR amounts, and save the leftovers in a low risk account.

If you land a loan-repayment position, voila you now have access to all that bonus savings.

If you don't land a loan-repayment position, immediately put all of your "savings" into the loan, and then continue to make Standard size payments until the loan is gone.

It seems that the only cost to this strategy is that your best low-risk savings vehicle will likely earn less interest than the rate on the loan. Therefore you will lose a teensy amount of money while you simultaneously maintain a savings and a loan. But this small (and temporary) cost will in all likelihood worth the potential reward.