My take on Forbearance vs IBR during residency

[thesauce]

Two things:

1) The government stopped allowing deferment in residency a few years ago.

http://m.amednews.com/apps/pbcs.dll/article?aid=/20080616/profession/306169961&template=mobile_art

They now allow a "mandatory" forbearance, meaning you pick up the tab for the subsidized interest.

2) I apologize for not being clear, but not all medical graduates are single with zero salary. As I am married, my payments would start out high. So I'd pay an average of $400 a month on IBR for 5 years, or 24k to prevent my loans from accruing an additional 27k in interest. As in, the three years of subsidized interest on 30k-ish loans on IBR doesn't benefit me that much.

Either way sucks, but as most students these days don't qualify for pay as you earn (IE, have loans before 2007) it's an IBR vs Forbearance decision.

The big benefit to IBR is having your residency count toward loan forgiveness. You probably won't make a significant impact on the balance during residency.

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[The White Coat Investor]

Can somebody tell me whether my logic here is legitimate?

I have 200k+ in direct federal (and a small portion private) loans. The prevailing advice seems to be to make payments on the interest using the income-based repayment structure, to prevent the total debt from increasing considerably.

I believe that going into forbearance on these loans for my anticipated SIX years of residency and fellowship is a better idea than coughing up 10-15 percent of my income each year as a resident or fellow. Even though I'll end up adding many thousands of dollars to my current debt, my opinion is that the TOTAL EFFORT required to repay the loans would ultimately be less by going into forbearance.

Surely it's easier to to pay a thousand dollars more per month as an interventional cardiologist or GI guy than it is to part with $400 per month as a resident. Plus, the idea of making my life as a resident so much more difficult to make payments WITHOUT even touching the principle drives me nuts. I'd rather acquire some more debt and then pay it back aggressively as an attending.

I guess I'd like to hear that someone else has this philosophy, and that it's not an insane idea. I've heard of plenty using forbearance for 3-4yr residencies....anyone done it for 6-7 years?

I don't claim to have read every post on this thread. I just wanted to post a little info.

First, the main reason to do IBR is to get loan forgiveness either through the IBR (or the newer ICR-A version) at 20 years or through PSLF at 10 years, not to pay down the interest. In fact, it's unlikely that most IBR payments actually cover the interest. Since the loan is based on your income, and not the amount of the loan or the interest rate, it has no relationship at all to the interest that is accruing. Some current residents (and even some students) still have some subsidized loans, but there are no new subsidized loans. The government is paying the interest on those while you're making IBR payments. I don't think that's the case with forebearance. So if you have subsidized loans, you absolutely want to be doing IBR instead of forebearance.

Second, you don't pay 10-15% of your income toward the loans. You pay 10% of what the government considers disposable income, which is dramatically less than your gross income. A typical resident is paying $100-500 a month in IBR payments. Do the math and you'll see. This calculator is a great resource:
http://studentaid.ed.gov/repay-loans/understand/plans/income-contingent/calculator
Put in $500K in direct loans at 6.8% (yea, I know you can't get that much at 6.8%, play along please) and an income of $45K. If you're single, your payments are $558.50 a month. If you're married with 2 kids, your payments are $357.50. If you're married and your spouse is also a resident making $45K (without loans), then you'll pay $1241.50 a month if you file jointly and only $558.50 a month if you file separately. (Notice that little strategy).

Third, while you might not be making a huge dent in your loans as a resident/fellow, I don't think ignoring them is a great idea. Student loan interest rates are really high, and at an average rate of 7.5%, you'll owe twice as much money after 10 years of compounding.

Fourth, you won't get to deduct student loan interest as an attending because you make too much. You get this deduction without itemizing, so it's pretty valuable as a resident. So you want to make sure you pay at least a couple hundred bucks in interest a month so you can maximize that deduction. (Plus getting the deduction further lowers your income and your required IBR payments.)

 

[The White Coat Investor]

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[Lesley]

http://studentaid.ed.gov/repay-loans/understand/plans/income-contingent/calculator

Very nice. It is an excellent calculator! It should be very helpful to a lot of borrowers. Thanks.

http://studentaid.ed.gov/repay-loans/understand/plans/income-contingent/calculator

 

[elektroshok]

Fourth, you won't get to deduct student loan interest as an attending because you make too much. You get this deduction without itemizing, so it's pretty valuable as a resident. So you want to make sure you pay at least a couple hundred bucks in interest a month so you can maximize that deduction. (Plus getting the deduction further lowers your income and your required IBR payments.)

Sorry for my naivety, but when you say 'pay a couple hundred buck in interest a month' is this separate from the set rate that you would pay with IBR? In other words, do you have to pay, lets say, $200/month in interest which then would lower your AGI by 2.4k/yr which would then lower your IBR monthly payments?

Thanks.

 

[badasshairday]

I don't claim to have read every post on this thread. I just wanted to post a little info.

First, the main reason to do IBR is to get loan forgiveness either through the IBR (or the newer ICR-A version) at 20 years or through PSLF at 10 years, not to pay down the interest. In fact, it's unlikely that most IBR payments actually cover the interest. Since the loan is based on your income, and not the amount of the loan or the interest rate, it has no relationship at all to the interest that is accruing. Some current residents (and even some students) still have some subsidized loans, but there are no new subsidized loans. The government is paying the interest on those while you're making IBR payments. I don't think that's the case with forebearance. So if you have subsidized loans, you absolutely want to be doing IBR instead of forebearance.

Second, you don't pay 10-15% of your income toward the loans. You pay 10% of what the government considers disposable income, which is dramatically less than your gross income. A typical resident is paying $100-500 a month in IBR payments. Do the math and you'll see. This calculator is a great resource:
http://studentaid.ed.gov/repay-loans/understand/plans/income-contingent/calculator
Put in $500K in direct loans at 6.8% (yea, I know you can't get that much at 6.8%, play along please) and an income of $45K. If you're single, your payments are $558.50 a month. If you're married with 2 kids, your payments are $357.50. If you're married and your spouse is also a resident making $45K (without loans), then you'll pay $1241.50 a month if you file jointly and only $558.50 a month if you file separately. (Notice that little strategy).

Third, while you might not be making a huge dent in your loans as a resident/fellow, I don't think ignoring them is a great idea. Student loan interest rates are really high, and at an average rate of 7.5%, you'll owe twice as much money after 10 years of compounding.

Fourth, you won't get to deduct student loan interest as an attending because you make too much. You get this deduction without itemizing, so it's pretty valuable as a resident. So you want to make sure you pay at least a couple hundred bucks in interest a month so you can maximize that deduction. (Plus getting the deduction further lowers your income and your required IBR payments.)

Great points. I would also like to add that while you are doing IBR, the interest never capitalizes. If you forebear, the interest capitalizes every year that you request forbearance. For just that reason alone, IBR is better than forbearing. You can cough up a few hundred bucks a month as a resident somehow. 50K isn't that much money, but it isn't chump change either.

 

[Scorcher31]

As the white coat investor and others have said forbearance is a bad option. The capitalization alone is going to hurt you. Plus if you are in some repayment plan you usually get some sort of interest rate deduction as a borrower's benefit. If you are banking on Loan forgiveness or need the smallest payments possible go with IBR.

If you are trying to pay off your loans make the minimum payments to all loans under IBR and focus all your extra money (leftover, tax rebates, extra paychecks, bonuses) on your highest interest rate loan provided it's higher than about 6%. If you are really counting on loan forgiveness I guess I would just pay the minimum on everything under IBR, but for me that is way too risky.

 

[badasshairday]

As the white coat investor and others have said forbearance is a bad option. The capitalization alone is going to hurt you. Plus if you are in some repayment plan you usually get some sort of interest rate deduction as a borrower's benefit. If you are banking on Loan forgiveness or need the smallest payments possible go with IBR.

If you are trying to pay off your loans make the minimum payments to all loans under IBR and focus all your extra money (leftover, tax rebates, extra paychecks, bonuses) on your highest interest rate loan provided it's higher than about 6%. If you are really counting on loan forgiveness I guess I would just pay the minimum on everything under IBR, but for me that is way too risky.

You mentioned doing either:

1. Doing IBR payments alone and banking on loan forgiveness.

2. IBR payments then additional cash to pay down your loans.

In addition to that I would say a nice third option would be to do just IBR payments alone during residency. This is much better than forbearing during residency. So even though your IBR payments won't pay down your loan, at least your interest doesn't capitalize. So when you are an attending and able to pay down loans more aggressively without causing financial hardship on yourself; you will be much better off if you did IBR instead of forbearing during residency.

 

[Postictal Raiden]

You mentioned doing either:

1. Doing IBR payments alone and banking on loan forgiveness.

2. IBR payments then additional cash to pay down your loans.

In addition to that I would say a nice third option would be to do just IBR payments alone during residency. This is much better than forbearing during residency. So even though your IBR payments won't pay down your loan, at least your interest doesn't capitalize. So when you are an attending and able to pay down loans more aggressively without causing financial hardship on yourself; you will be much better off if you did IBR instead of forbearing during residency.

Also, from my understanding, once you switch to the standard repayment, you are only responsible for the amount at which you entered IBR. In other words, for some graduated from med school with 300K and did minimum IBR payments during a five-year residency (accruing ~20K/year of unpaid interests), the amount to be repaid when switching to the standard repayment option will still be 300K not 400K.

It seems to me, IBR is just another version of the deferrement option physicians utilized while they were in residency. The difference is that during the deferrement, one is not required to make payments.

 

[RangerBob]

I know that while you're doing IBR interest doesn't capitalize (which is reason enough to do IBR/PAYE), but does anyone know if the interest accrued during medical school/grace period is capitalized at the start of IBR/end of grace period? I know it would be if I put my loans in forbearance, but would all that interest be capitalized if I begin payments through IBR right after my grace period ends?

I'm trying to decide whether or not to defer payments for six months in addition to my grace period so I have a little bit of savings (nothing grand, just a little bit for a rainy day), but obviously wouldn't want to do that if beginning repayment right away would mean no capitalization.

 

[Scorcher31]

I know that while you're doing IBR interest doesn't capitalize (which is reason enough to do IBR/PAYE), but does anyone know if the interest accrued during medical school/grace period is capitalized at the start of IBR/end of grace period? I know it would be if I put my loans in forbearance, but would all that interest be capitalized if I begin payments through IBR right after my grace period ends?

I'm trying to decide whether or not to defer payments for six months in addition to my grace period so I have a little bit of savings (nothing grand, just a little bit for a rainy day), but obviously wouldn't want to do that if beginning repayment right away would mean no capitalization.

I initially did a graduated interest only repayment. When I did this my loans capitalized once. I assume it would be the same with IBR although I don't know for sure.

 

[thesauce]

I believe they capitalize anytime you change payment plans

 

[Dr. USMLE]

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[RangerBob]

Not sure what you guys are going on about...interest is definitely capitalized during IBR. Only the interest on subsidized loans is covered. Subsidized loans are generally much less than unsubsidized loans, i.e., 8k versus 35k. So the amount covered on a subsidized loan of 8k at 6.55% interest is only about $500 for the entire year. The overwhelming majority of the interest is not covered and does capitalize even under IBR. Assuming 150k of unsubsidized loans, that's $10,000 per year in interest.

You're referring to the interest subsidy, but as far as interest capitalization, that does not occur:

"Under IBR, unpaid interest is capitalized (added to your loan principal balance) only if you are determined to no longer have a “partial financial hardship,” or if you choose to leave the IBR Plan."

From: http://studentaid.ed.gov/sites/default/files/income-based-repayment-common-questions.pdf

 

[Dr. USMLE]

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[Scorcher31]

To my understanding switching between plans can trigger capitalization, depending on your lender. If you switch to IBR, and leave it like that until your loans are done I would assume it only capitalizes the first time going into IBR.

I know the graduated and standard repayment works that way. I have been In graduated for about 4 years and it only capitalized going from grace period to graduated. If you go forbearance it's going to happen at least twice (once going into forbearance and once going on to a real payment plan after residency). It may happen on an annual basis as well, but this could be lender specific.

 

[dpmd]

Good to know! because interest just capitalized on one of my loans under IBR. It may be because it's the start of a new year and they temporarily suspended IBR status, but still doesn't make sense. Thanks...I will definitely be looking into this.

Just to make sure you are using the right terms, capitalization is when accrued interest gets applied to the principal of the loan making the overall loan more. Interest still accrues (accumulates) while under IBR (or in forbearance and with other payment plans and on some loans while in some deferements) but it isn't supposed to get added to the principal until you change repayment plans. The benefit of this is more pronounced for bigger loans with higher interest rates since you end up avoiding paying interest on interest. A good strategy would be to try to pay off as much interest as you can before your income kicks you out of IBR, assuming you end up getting paid enough to no longer qualify for it.

 

[dpmd]

I know that while you're doing IBR interest doesn't capitalize (which is reason enough to do IBR/PAYE), but does anyone know if the interest accrued during medical school/grace period is capitalized at the start of IBR/end of grace period? I know it would be if I put my loans in forbearance, but would all that interest be capitalized if I begin payments through IBR right after my grace period ends?

I'm trying to decide whether or not to defer payments for six months in addition to my grace period so I have a little bit of savings (nothing grand, just a little bit for a rainy day), but obviously wouldn't want to do that if beginning repayment right away would mean no capitalization.

I think accrued interest will capitalize at the start of IBR just like it would for a forbearance other repayment plan. However, if you delay entering IBR then you will have interest capitalize again when you start IBR. Why not just apply for IBR to begin with. If you are coming out of medical school I can't imagine you will have much income so your payments will probably end up being zero or very low anyway. Then you only have your interest capitalize once.

 

[RangerBob]

I think accrued interest will capitalize at the start of IBR just like it would for a forbearance other repayment plan. However, if you delay entering IBR then you will have interest capitalize again when you start IBR. Why not just apply for IBR to begin with. If you are coming out of medical school I can't imagine you will have much income so your payments will probably end up being zero or very low anyway. Then you only have your interest capitalize once.

I think you're right, and that is probably what I'll do, but as a new applicant to IBR (and I'd be honest on the IBR form when it asks if my $2,000 AGI from 2012 reflects my current situation) I'd have to report my current income, so I'd be paying approx $450-500/year (unless they consider that I'm only employed for half the year). If that's the case and I did put my loans in forbearance, it'd save me ~$3,000 (enough for a rainy day). If interest capitalizes twice, I don't think the six months of interest being capitalized would be that significant. But it's not nothing either.

Still, I'd prefer to be in the habit of repaying my loans... Good habits start now, right? So I'll probably start repayment. I just wanted to explore all the options.

 

[dpmd]

I think you're right, and that is probably what I'll do, but as a new applicant to IBR (and I'd be honest on the IBR form when it asks if my $2,000 AGI from 2012 reflects my current situation) I'd have to report my current income, so I'd be paying approx $450-500/year (unless they consider that I'm only employed for half the year). If that's the case and I did put my loans in forbearance, it'd save me ~$3,000 (enough for a rainy day). If interest capitalizes twice, I don't think the six months of interest being capitalized would be that significant. But it's not nothing either.

Still, I'd prefer to be in the habit of repaying my loans... Good habits start now, right? So I'll probably start repayment. I just wanted to explore all the options.

Using your pay stubs to estimate your AGI will end up just as inaccurate for this year (assuming you are an intern) as using last years AGI. The difference is that if you use last year's AGI, you can submit you new AGI as soon as you you file taxes next year and correct things, then be on track to just send in your new AGI each year after doing your taxes (which is precisely how the program seems to be laid out to want). The other option would have you submitting your pay stubs now, then your AGI after you do taxes, then your pay stubs when your salary increases as you move up to being a second year, etc. Is it more honest? Sort of, but it doesn't really seem to fit with what the program is asking for.

Regardless, I think getting into the habit of paying is really important, as it is really easy to get into the habit of spending what you earn at whatever salary you make. Make it work now and you have a good chance of paying off your loans more quickly in the future.

 

[rockstar2013]

Has anyone had any success with $0 payments with IBR?