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Student Loans While in Residency: Forbearance vs. Income Based Repayment

For medical residents, decisions you make today will be the most important you will make in your career.

Not only because how you perform in your residency can impact you for the rest of your life, but also because making a wrong decision with your student loans at this time can end up costing you hundreds of thousands of dollars.

The average student graduated medical school in 2017 with $191,000 in debt. With an interest rate of 7% and a payment period of 20 years, without any income based repayment plans those loans will ultimately cost the student nearly $1,500 per month, for a total cost of more than $355,000 over the course of the loan!

Worse yet for many graduates, these payments begin to come due as you enter residency and are making a small salary.

But there are many options available to help ease your student loan burden while in residency. Here is how you should proceed:

What’s in this article? (Click a section to jump ahead, or scroll down to start reading from the beginning)

1)      Student Loans in Residency – What Should You Do?

2)      Federal (Public) Student Loans in Residency

a.       Income Based Repayment Plan While in Residency

b.      Public Student Loan Forgiveness

c.       Forbearance of Federal Student Loan Debt in Residency

d.       Consolidating Federal Student Loans While in Residency

3)      Private Student Loans While in Residency

a.       Refinancing Private Student Loans in Residency

b.       Forbearance and Private Student Loan Debt

 

Student Loans in Residency – What Should You Do?

The options to tackle your student loan debt seem daunting. Should you defer your payments? Enter forbearance? Eat only instant ramen in order to be able to afford to make payments through residency? Apply for a different repayment plan? Consolidate loans? Refinance?

Even more confusing, since your student loans likely consist of a combination of public and private loans, there is no universal answer you will find on google for your best course to repay. Private student loan lenders may charge different interest rates, have different forbearance terms, and offer different repayment plans depending on your specific lender.

That means that most medical residents will have not just one decision to make on with your student loans, but two. One on what to do with their federal student loans, and another with their private loans.

First, let's look at your federal loans:

Federal (Public) Student Loans in Residency

The terms for the portion of your loans that are offered by the federal government are typically all very similar.

And for most, there is room to significantly reduce your minimum monthly student loan payment during residency. Here's the first option you should try:

Income Based Repayment Plan While in Residency

One option for your federal student loans is to set up an income based repayment plan while you are in residency. In residency, your income is low, but with an income based repayment plan your student loan payments can also be low. Depending on your salary, family size, and other tax deductions, your monthly income based repayment may even be $0!

There are several payment plans available to adjust your required student loan payment based on your income:

Income Based Repayment Plan (IBR)

With an IBR repayment plan, your monthly student loan payments while in residency will be limited to 10% or 15% of your discretionary income (depending on the date you took out the loan), which will usually amount to between $0 and $500 per month depending on your debt, salary, family size, state of residence, and other tax deductions.

How much can an Income Based Repayment Plan reduce your monthly payments?

The exact number is dependent on many variables, as you will see in our examples below. But just to give you an estimate on the potential savings available with the Income Based Repayment option:

For a single person in Iowa with no children, with $100,000 in direct subsidized federal student loans with a 7% interest rate, and an adjusted gross income (AGI) of $35,000:

Under a standard repayment plan, you would owe about $1,160 per month.

With an IBR, your monthly payment could be as low as $140!

 

Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAY) Payment Plans for Medical Residents

Depending on the type of student loans you have (direct, Stafford, or FFEL for example) several other payment options may exist. For new borrowers since 2014, IBR, PAYE, and REPAY may often result in similar monthly payment options:

monthly payment comparison student loans.png

 

For borrowers prior to 2014, or with other types of loans, differences will exist in these payment amounts.

 

Public Student Loan Forgiveness With IBR

Even better than a reduced monthly payment, those who complete their residency and remain at an eligible employer for 10 years while making on time qualified payments can see their remaining student loan balance completely forgiven.

Under a program known as Public Service Loan Forgiveness (PSLF), residents and doctors who work for non-profit or public health facilities may be entitled to have the remaining balance on the student loans forgiven after 10 years.

The amount forgiven under the public service loan forgiveness program has no tax implications, like other forgiven debt may have.

How much can public service loan forgiveness potentially save you? Consider again our example resident above, who has $100,000 in debt with 7% interest and has an adjusted gross income of $35,000 that rises 5% per year. If this resident applies for an income based repayment plan at the start of residency, and remains at an eligible employer, they will be eligible for more than $170,000 in loan (and interest) forgiveness!

monthly payment comparison student loans2.png

 

 

Filing for an income driven repayment plan can take as little as 10 minutes and potentially save you hundreds of thousands of dollars.

10minutes.jpg

 

Need help figuring out your student loans while in residency? Don’t wait! The earlier you act the better, and we are here to help.

 

 

Forbearance of Federal Student Loan Debt in Residency

When you enter a status of forbearance in your loans, you are not required to make payments. Sounds great for while you are making little money while in residency, right? Not so fast…

 

Should you apply for Forbearance of Student Loan Debt While in Residency?

Because of student’s large debt loads when entering residency, many choose to enter forbearance because they feel that they are unable to afford their student loan payments.

Entering medical or dental residency will allow you to enter your Direct and FFEL student loans into a forbearance status. No other qualification is necessary. Simply fill out a request through the department of education:

forbearance_request.png

 

For most federal student loans (Perkins Loans are the exception here), that means that you make no payments on your loans, but the interest “capitalizes” back into your loans, or in other words, is added to the principal balance of your loans.

Although the temporary reprieve of not paying student loans may seem nice, the total balance of your student loans will begin to grow higher and higher.

You can apply for up to 12 months of forbearance and you may request as many extensions as needed, depending on your type of student loans.

How much does it ultimately cost you in the long run to go into forbearance for 4 years with your student loans while in residency?

Assuming the same numbers as our previous example; A single student in the state of Iowa with $100,000 in Consolidated Direct Unsubsidized Federal Loans with a 7% interest:

  • A standard repayment plan would have a total cost of $239,000.

 

  • Entering forbearance for these loans for 4 years and then entering a standard repayment plan would have a total cost of $306,500.

 

In this simplified case, forbearing your $100,000 in student loan debt during residency would cost you more than $66,000. Have more than $100,000 in debt? Then that number will be even higher!

How much will forbearance add to the total cost of your loans? You can use our Student Loan Forbearance Cost Calculator to find out.

Here's a screenshot of the calculator in action:

Click the image above to go to the calculator where you can enter your specific student loan information in to determine the true cost of forbearance of your student loans.

 

Forbearance and Public Student Loan Forgiveness

Another huge drawback to forbearing your student loans is that you do not make any payments that qualify towards public service student loan forgiveness.

If you forbear your loans for 4 years, you could have been nearly half way to 100% loan forgiveness if you had been able to find a plan that makes qualifying payments!

 

Instead of Entering Forbearance, This is Likely Your Best Option

Hopefully it is obvious by now that forbearance should be your last option.

For most (not all, as we have seen there are a ton of variables with student loans!) getting on an income based repayment plan with dramatically lower monthly payments is your best option. These payments will qualify towards public service student loan forgiveness and will be affordable.

This may sound easy, but a lot has to happen to make this work. You may need to consolidate your loans into ones that are eligible for certain payment plans or student loan forgiveness. You need to file paperwork with the Department of Education

Because so many student loan plans are so different, the best way to find the right plan for you is to contact a professional who can look at your unique circumstances to find the best option for you. We work with medical residence to find a student loan repayment plan that is the right fit for them. Our comprehensive financial plans will help you find the best possible student loan repayment plan, while taking advantage of retirement savings options that residents have for only short periods of time. If you are struggling with balancing your student loan payments, saving, buying a house, and more - reach out to us today for a free consultation.

 

 

Consolidating Federal Student Loans While in Residency

Consolidating your student loans prior to residency is a very good move for most residents.  This may allow you to group certain individual loans that by themselves would not be eligible for income based repayment plans or public service loan forgiveness into a loan that is eligible.

 

Should you Consolidate Federal Student Loans While in Residency?

If you are able, consolidate all public loans into a loan that is eligible for an income based repayment plan and PSLF. This will allow you to make a single payment of no more than 10% or 15% of your discretionary income towards all of your public student loans.

Be very careful before consolidating public loans with a private lender. This should only be done under very few circumstances! If you know you will be entering a private practice immediately, consolidating public loans to a private lender may make sense, but usually otherwise it does not.

Consolidating your federal student loans will not change your average interest rate or result in any additional costs as long as you remain on the same repayment period. So be on guard if a company offers to consolidate your federal student loans for a large fee! You can likely do it yourself.

 

 

Private Student Loans in Residency

Because the terms of private student loans can differ significantly, it is much harder to give general advice for private student loans. But there are still a few things to keep in mind.

 

Refinancing and Consolidating Private Student Loans in Medical Residency

When a student enters residency, they may be able to find private lenders that will offer lower interest rates specifically for medical residents. This is because lenders recognize that; 1) You are unlikely to be able to afford higher monthly payments for the next few years, and 2) You have the potential for very high income in the future.

Typically, finding lower interest on private loans is one of the quickest and easiest ways to unlock savings. Private student loans typically lack the benefits of flexible payment plans and loan forgiveness that is present in federal loans, and shopping for loans based on their interest rates becomes the most important.

As we discussed earlier, this is not true for public loans. Very rarely should a federal public loan be refinanced into a private loan.

But every lender is different. It is important to understand what potential benefits you may be giving up by refinancing your private student loans in residency.

The decision on consolidating private student loans falls under the same criteria. If it can lower your total monthly payments, or adds additional benefits and payment flexibility, it is likely worth your time to consolidate.

 

Entering Forbearance of Private Student Loans in Residency

The option to enter forbearance will depend on your lender. Not all private student loans will be eligible.

If you are able to delay payment on your private student loans, you will face the same issues we discussed above with federal loans. Interest will continue to accrue on your loans, and you will end up paying much more in the end.

 

Because of the differences in private lenders, the only way to determine the best course of action for you is to look at your specific loans and compare the terms to other options available.

The first meeting with us is always free, so contact us today and see how we can help you

 

In Summary

As a medical resident, your income is going to be low (hopefully not for long!). But this time period actually gives you tremendous opportunities to qualify for lower student loan payments and increase your retirement savings.

However, all too many residents squander this opportunity and end up costing themselves tens or even hundreds of thousands of dollars in the long run by inadequately managing their student loans.

Your residency is challenging enough without having to juggle the complex student loan landscape. Leave the trouble to us and focus on what you do best. We offer free consultations, so you can determine our value before signing on.

 

Still looking to read more on student loans?

We have a 3 part guide on student loans, most of which (part 3 especially) is directly applicable to medical residents.

Matt Hylland