To defer or not to defer, that is a question?

[rajvosa]

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So guys, if I defer I lose all the interest deductions on my tax return. After residency my salary will be over the limit for this interest deduction, so I would lose this benefit.

However, if I defer I will not be getting any interest added during 3 years of residency. Also I will have more money in my pocket (the payment would be about $500/month).

So what would you do and why ? (give me the reasoning behind)

Another question: can we defer for another 3 years since I plan to do a cardiology fellowship?

 

[mpp]

I think I would rather take the 'no-interest option' over 'loosing' (sic) a tax deduction any day of the week and twice on Sunday. You can't take a deduction on interest that has not been paid so you will be paying regardless of whether you defer or not. What type of loans do you have that would not accrue interest during residency anway? Only Perkins Loans and Subsidized Stafford loans work that way.

As far as deferring during cardiology fellowship, it can't happen as deferment is only 3 years maximum. You may be eligible for forbearance depending on your income and the amount of your loan payment. But regardless of your loan type (unless you have some mysterious student loans that I have never heard of), it will accrue interest during forbearance.

 

[rajvosa]

Thanks for your reply. Well I thought unsubsidized federal loans do not accrue interest during deferement period. I do have only $34,000 in subsidized loans and $140,000 in unsubsidized ones (all federal).

So then it will not be good idea to defer since I would be slapped with interest on the biggest portion of my loan.

 

[mpp]

Defer, not defer, it doesn't matter. You will be charged interest on the unsubsidized loans while in school, during your grace period, during repayment, during deferment, during forbearance...unsubsidized loans are always accruing interest.

 

[rajvosa]

So why can't we deduct that interest on our tax even if we do not enter repayment?

 

[vitaminj]

By no means an expert on this subject but after reading the info and talking to the financial aid people here's my impression...

When you consolidate and and apply for economic hardship deferment you would not incrue interest on the subsidized stafford or perkins loan but would on unsubsidized staff. Now you are not required to make interest payments at this point but the benefit would be to keep your principal amount stable and to deduct up to $2500 on your income tax, in effect having Uncle Sam "pay" part of your interest for you.

Many people do not qualify for economic hardship deferrment for all their years of residency as you have to fill out the paper work on annual basis however even if it is one year, it may be worth it. As for fellowship there is a fellowship deferment that can be utilized for up to three years. In talking to the finaid people at my school it is possible that you could qualify for economic and fellowship deferrment thruout all of your post-graduate training there by saving on the subsidized interest portion.

The only other thing I will relay is that it was brought to my attention that for some lenders the Perkins loan will cause an overall rate adjustment that may increase your consolidated loan payment over the term of the loan. The perkins being a relatively low interest loan (~5%) and often not very large may not be worth consolidating with the rest of your loans.

As I stated above I am just relaying what I have read and been instructed, by now means take this as gospel truth. If anything use some of this information as a springboard to ask for question. Its sometimes confusing and stormy ride in the sea of educational debt!

 

[DOStudentWife]

I just double-checked on the irs.gov website. Look at Publication 970 (pages 23+24) for details but you can deduct the interest on deferred loans if you make voluntary interest-only payments on the loan while they are in deferment.

 

[Dubin]

Paying down the interest on your loans sounds like a great idea, but you've got to understand you'll only get a portion of what you pay back, likely 28% (the tax bracket for most of us next year)-and there are limits to your deductions. I would argue that if you have enough money to budget this you're better off throwing it in your 401/403, especially if your hospital matches you. This will no doubt offset the extra compounding on your student loans.

 

[Seaglass]

That's an important point Dubin makes - the tax benefits are a deduction on your gross income, not a tax credit that directly reduces the amount of taxes you have to pay. For example, I have a wife and child so deducting voluntary interest payments is not likely to save me much on my taxes since having a household of 3 on one salary already puts me in a lower tax bracket.

C

 

[mpp]

So why can't we deduct that interest on our tax even if we do not enter repayment?

You have to pay interest to deduct. You don't just deduct interest that is earned, only interest that is paid.

 

[Keberson]

defer!!!!!!!