Loan deferments in residency ?

[Flopotomist]

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Hey guys -

So I have been accepted at school, and now have to choose between loan programs. Nearly all of them allow for residency deferments, but only for 3 years. If you do a 4 year (or longer) residency, how on earth do you make those payments on a resident's salary? This must be a common problem. Just want to make the right decision now. Advice appreciated.

 

[jschwartz]

did you have an exit interview yet?? your school advisor and your loan lender can help with your particular situation more than anyone on this forum. but in short, the key to doing a longer residency and/or fellowship is forbearance -- worst case scenario is usually paying interest...and once it capitalizes, paying interest on interest, but you can always survive until you start getting a real paycheck.

 

[ChiSoxMD]

did you have an exit interview yet?? your school advisor and your loan lender can help with your particular situation more than anyone on this forum. but in short, the key to doing a longer residency and/or fellowship is forbearance -- worst case scenario is usually paying interest...and once it capitalizes, paying interest on interest, but you can always survive until you start getting a real paycheck.

also, sometimes it is better to let the interest capitalize, rather than pay interest only. If you consolidate at a fixed low rate like 3-4%, instead of making interest payments, you can put that money away in an IRA, 401k, etc, and over the long run make 10-11%. So sure, you pay interest on interest at 4%, but you earn interest on interest at 10%.

 

[Methyldopa]

also, sometimes it is better to let the interest capitalize, rather than pay interest only. If you consolidate at a fixed low rate like 3-4%, instead of making interest payments, you can put that money away in an IRA, 401k, etc, and over the long run make 10-11%. So sure, you pay interest on interest at 4%, but you earn interest on interest at 10%.

Interesting point. But I personally think it is better to pay off interest so it doesn't capitalize (just another way banks screw you), after all interest payments are tax deductibles as long as you earn less that $65K (and once you're out of residency, I'd imagine all doctors earn more than that and therefore cannot use that deduction).

Then again tossing money into an IRA is also tax deductible.

Your best bet is probably paying off as much of the interest as possible while puting some money away (some sort of balance, if that is possible with a residency salary???).

 

[Methyldopa]

but in short, the key to doing a longer residency and/or fellowship is forbearance --

Forbearance should always be a last resort, because it bumps up your interest rates. For fellowships you can get a fellowship deferrement. I'm not sure what you can do for longer residencies like Neurosurg. I guess you're just screwed, but then again you'll make bank once you're out of residency (so you probably can afford to do a forbearance).

 

[lilycat]

First off, just because a loan holder offers deferment doesn't mean you will automatically get it. This can apply in both consolidation and non-consolidation situations. Usually what happens is they apply a formula looking at your salary and the total amount of federal loans that you have; if you took out loans from your school, those typically don't count into the formula, although you still have to pay them back at the same time. If you meet whatever arbitrary criteria they have, then you are eligible for deferment. If you don't, then you can apply for forbearance. A lot of residents I know only met criteria for deferment for their intern year, but not after that. However, pretty much anyone can get a forbearance, but as someone else mentioned, it messes up your interest rate.

Also, keep in mind that you can try to negotiate with your loan companies. They may send you an initial payment that looks outrageous on your resident salary. However, if you come back to them with your salary, the total amount of loans you have outstanding, and some estimate of cost of living in your area, you can probably get the payment reduced to something more manageable. They would rather have you pay some part, even if its miniscule, vs. defaulting on an amount that was unrealistic at that stage of life.

 

[BCS_001]

I spent the day yesterday reading about all of these options. I agree that forebearance is useful, but should be avoided if at all possible. As mentioned, the interest rates are higher in forbearance than deferrment. Additionally, my understanding is that payments are not tax deductible during deferment or forebearance, only repayment, making it unlikely we'll ever have that option (given our salaries after residency).

 

[BCS_001]

Yes, you can negotiate lower payments with your loan companies...but keep in mind, the longer your repayment schedule, the more interest and total money you end up paying. If it is the only option, it's a great one, but be sure you understand up front.

First off, just because a loan holder offers deferment doesn't mean you will automatically get it. This can apply in both consolidation and non-consolidation situations. Usually what happens is they apply a formula looking at your salary and the total amount of federal loans that you have; if you took out loans from your school, those typically don't count into the formula, although you still have to pay them back at the same time. If you meet whatever arbitrary criteria they have, then you are eligible for deferment. If you don't, then you can apply for forbearance. A lot of residents I know only met criteria for deferment for their intern year, but not after that. However, pretty much anyone can get a forbearance, but as someone else mentioned, it messes up your interest rate.

Also, keep in mind that you can try to negotiate with your loan companies. They may send you an initial payment that looks outrageous on your resident salary. However, if you come back to them with your salary, the total amount of loans you have outstanding, and some estimate of cost of living in your area, you can probably get the payment reduced to something more manageable. They would rather have you pay some part, even if its miniscule, vs. defaulting on an amount that was unrealistic at that stage of life.

 

[lilycat]

Yes, you can negotiate lower payments with your loan companies...but keep in mind, the longer your repayment schedule, the more interest and total money you end up paying. If it is the only option, it's a great one, but be sure you understand up front.

This is true only if you assume that people will stick to the loan repayment schedule set by the loan holder/servicer. You could negotiate a new minimum payment during residency that would theoretically extend what was originally a 10-year repayment schedule to a 20-year repayment schedule. However, when you're out of residency, you can probably afford to increase your monthly repayment substantially, especially if you still budget your other expenses equivalent to what they were during your residency (modest dwelling, modest car, etc.). IF the loan holder does not have a penalty for early pay-off or monthly payment greater than the minimum, you could still have your loans paid off within the original 10-year time frame, or possibly earlier.

 

[pedicards]

Speaking of loans, how much debt do fellow 4th year students have? I'm starting to panic about my debt, and repayment as a pediatrician.

Also, when does interest capitalize on unsubsidized stafford loan? After graduation? At the end of the 6 month grace period? At some other time?

Thanks for your help.

 

[bigeyedfish]

When the lender evaluates you for economic hardship deferment during residency make sure they use the 10 year payment plan payments. Even if you are consolidated and are on a 30 year schedule they are required to use the 10 year payments. Sometimes they make this mistake. This could be the difference in not qualifying for deferment.

 

[miamidc]

Im looking at a little over 1/4 million $. I am very exited about the interest that will pile up as well. As long as Anesthesiology keeps paying, I'll figure it out. Debt really sucks though.

 

[gutonc]

When the lender evaluates you for economic hardship deferment during residency make sure they use the 10 year payment plan payments. Even if you are consolidated and are on a 30 year schedule they are required to use the 10 year payments. Sometimes they make this mistake. This could be the difference in not qualifying for deferment.

And another piece of advice along these lines from our group exit interview given by a Medloans counselor. If you are married and have filed jointly in the past, be sure that when you give them proof of income you use your contract letter from your residency, NOT your tax return. They're only supposed to use your income, not your spouses in determining economic hardship and, although they could very easily determine your salary (bupkiss) from your 1040 separate from your spouse's, they'll just take the last number (taxable income) and call it a day which may also cause you to not get economic hardship.

BE

 

[rxfudd]

I'm not sure why everyone seemed to miss this, but this is someone who just got accepted to med school and is choosing his lender, not a fourth year about to graduate.

OP, I'm pretty sure all lenders have policies for deferment, but I would make sure with a quick phone call before signing on with anyone. The deal breaker should be interest rate reductions (for both unconsolidate and consolidated loans) during repayment and zero-fee loans. My lender is T.H.E, and they've been outstanding.

As for residencies longer than three year, you would have no choice but to pay up or forbear. However, as lilycat pointed out, there are a lot of people who don't even qualify for deferement for all three years, so they would have to forebear anyway.

 

[Flopotomist]

I'm not sure why everyone seemed to miss this, but this is someone who just got accepted to med school and is choosing his lender, not a fourth year about to graduate.

OP, I'm pretty sure all lenders have policies for deferment, but I would make sure with a quick phone call before signing on with anyone. The deal breaker should be interest rate reductions (for both unconsolidate and consolidated loans) during repayment and zero-fee loans. My lender is T.H.E, and they've been outstanding.

As for residencies longer than three year, you would have no choice but to pay up or forbear. However, as lilycat pointed out, there are a lot of people who don't even qualify for deferement for all three years, so they would have to forebear anyway.

Thanks rx - yeah, I am just entering med school, so having to make these decisions now, and want to make sure I make the right choices now. I am leaning towards the THE loan because of the interest rate deductions, but the 3 year residency deferment is what I am concerned about. How does forbearance work?

 

[captaincrunch]

I think the trick is to find a good lender when you consolidate your loans. I agree with one of the above posters: T.H.E. has been an excellent lender. They offer graduated payment plans, whereby the initial payments are lower and increase over the years. This can allow repayment while in residency. They also don't have penalties for early payment, so if you ever come across a little extra money, all of it goes towards paying down the principle. They have an excellent reputation of working with people to get the best possible deal. One downside, I just consolidated my last year of loans which meant giving up the typical grace period after gradutation, which means I will enter repayment right after I graduate. Interest rates are projected to go up, so if you haven't, I would consolidate now.

Just an aside: the deferment is always 3 years and never varies from lender to lender. It is regulated by federal legislation. One drawback: to qualify for economic hardship, your payments must exceed 20% of your income, which is fairly high.

 

[Shah_Patel_PT]

Interesting point. But I personally think it is better to pay off interest so it doesn't capitalize (just another way banks screw you), after all interest payments are tax deductibles as long as you earn less that $65K (and once you're out of residency, I'd imagine all doctors earn more than that and therefore cannot use that deduction).

Then again tossing money into an IRA is also tax deductible.

Your best bet is probably paying off as much of the interest as possible while puting some money away (some sort of balance, if that is possible with a residency salary???).

Do you know what the limit is for tax deduction (for paying interest)?

 

[rxfudd]

Thanks rx - yeah, I am just entering med school, so having to make these decisions now, and want to make sure I make the right choices now. I am leaning towards the THE loan because of the interest rate deductions, but the 3 year residency deferment is what I am concerned about. How does forbearance work?

Forbearance is not as good as deferement, but it's not awful. In deferment, all of your subsidized federal loans and Perkins loans continue to be subsidized - the gov't pays the interest for you. Unsubsidized loans continue to be unsubsidized, and as such will accrue interest. If you have to forbear, all of your loans effectively become unsubsidized and the interest rate goes up (0.6%, IIRC). Not ideal, but it's not the end of the world.

And besides, there's really nothing you can do about it. Unless you get institutional loans or scholarships/grants, there's really no other option.

 

[Poety]

Just had my exit interview:

Flope, get as many perkins as you can - they don't accrue interest and they have a 9mos grace at the end of graduation.

Also, consolidate the loans that you can, leaving out any with high interest that will knock up your consolidation rate (its an average of all loans consolidated).

Try to get money elsewhere if you can - I have 250K and its painful.

During residency you use the economic hardship loan - I asked if moonlighting and making more money bumps you out of this - the response I got was "what you don't tell us, we don't know" so don't go and say to them "Oh, I made 100K this year with moonlighting", THEY ONLY REQUIRE YOU SEND IN A PAYSTUB FROM THE RESIDENCY PROGRAM.

Once you have used up the 3 years of economic hardship - thats when you flip to forbearance. Pay the interest as it accrues and by PGY4, you will hopefully be moonlighting and making enought to at lesat cover the interest payment. (I realize certain specialties just can't moonlight - in which case you need to decide how much liquid you need, you can also PAY THE INTEREST ONCE, AND THEN FLIP IT BACK TO ACCRUING IF THATS WHAT YOU WANT)

If you have perkins, you will most likely be covered for almost all 4 years - since you are in grace for 9, then you do economic hardship when those 9 are over, and cover the last 3 mos on forbearance.

Hope this makes sense - good luck everyone.

I owe, I owe, so off to work I go....

 

[bigeyedfish]

Just had my exit interview:

Flope, get as many perkins as you can - they don't accrue interest and they have a 9mos grace at the end of graduation.

To add to this good advice, don't consolodate the perkins loans or you lose this advantage.

 

[Poety]

To add to this good advice, don't consolodate the perkins loans or you lose this advantage.

Yes, I forgot to mention that thanks bigeyed!!!

 

[gutonc]

Also just a reminder that although the bastards got rid of deferments for residents, they are still available for fellows. So as soon as you start your fellowship, drop that economic hardship or forbearance stuff and get a full-on deferment and you're in business. This is also true of research fellowships.

I know this doesn't really address the OP's point but since lots of other folks are reading this I thought I'd chime in...again.

BE

 

[Methyldopa]

Additionally, my understanding is that payments are not tax deductible during deferment or forebearance, only repayment, making it unlikely we'll ever have that option (given our salaries after residency).

That is in fact incorrect. Per the IRS, tax deductible interest payments on student loans includes "Voluntary interests Payments. these are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status."