I'm a Resident Physician: Is Mandatory Residency Forbearance Right for Me?
One of the reasons why student loan planning can be so confusing is that there are so many options to choose from. If you recently graduated from medical school, or find yourself in residency and struggling to make your student loan payments, you may be tempted to enter into a period of forbearance.
Although the idea of putting off making payments on your loans may be appealing, it’s quite possible that you might be making a big mistake.
What is mandatory residency forbearance?
In the glossary at studentaid.ed.gov, forbearance is defined as
A period during which your monthly loan payments are temporarily suspended or reduced. Your lender may grant you a forbearance if you are willing but unable to make loan payments due to certain types of financial hardships. During forbearance, principal payments are postponed but interest continues to accrue. Unpaid interest that accrues during the forbearance will be added to the principal balance (capitalized) of your loan(s), increasing the total amount you owe.
As a resident, you may qualify for mandatory residency forbearance. What makes it mandatory? It’s mandatory in the sense that the lender is obligated to grant it to you upon request.
The “good news” is that during this period, if money is tight, forbearance allows you to kick loan payments down the road. The “bad news” is that forbearance allows you to kick loan payments down the road.
No, that wasn’t a typo. The blessing of no payments during forbearance can also be a curse.
What do Income-Driven Repayment plans have to do with anything?
In Medical Student Loans: A Comprehensive Guide, Dr. Ben White says, “What many people don’t realize is that you don’t need to forbear your loans when you don’t make any money; you usually just need to recertify your income to reduce your income-driven repayment.”
These plans determine your loan repayment according to a calculation based on a percentage of your discretionary income. Discretionary income is affected by the state you live in, your adjusted gross income, as well as your family size.
In fact, depending on your circumstances, it’s possible to get income-driven repayments as low as $0 per month. The good news is that even with $0 scheduled monthly payments, these “payments” still count towards Public Service Loan Forgiveness (PSLF) so long as you meet the other requirements (such as being employed full-time at a qualifying employer). If you’re not making payments under forbearance, you obviously aren’t earning credit towards PSLF’s 120 required separate monthly payments (we’ll discuss PSLF in more detail in a future article).
But what if you’re not going for PSLF? In that case, it may still be in your interest to utilize income-driven repayment plans. As already discussed, it’s possible to get monthly payments all the way to $0. Also, through the income-driven repayment plan, Revised Pay As You Earn (REPAYE), borrowers benefit from a 50% subsidy on any monthly unpaid interest on unsubsidized loans. This is more favorable than the forbearance terms in which no payments are made, interest continues to accrue, and the entire amount of interest is ultimately added to the principal balance of your loan.
First it’s important to make sure you’re in the right income-driven repayment plan, if one is right for you. But in the event that REPAYE is right for you, you could save a bundle in forgiven interest by not forbearing during residency.
Should you forbear your student loans during residency?
That answer will depend on your unique circumstances. However, consider these thoughts offered by The White Coat Investor in his November 5, 2018 blog titled “Ultimate Guide to Student Loan Debt Management for Doctors.” He writes, “[m]any residents are tempted to put their student loans into deferment or forbearance during residency and/or fellowship. This is almost always a mistake. Nothing makes me cry more than to run into a doctor who should only be 2-3 years away from receiving PSLF who had their loans in forbearance during a lengthy training period.”
In Medical Student Loans: A Comprehensive Guide, Dr. Ben White isn’t any more enthusiastic about forbearance when he writes, “The longer your residency/fellowship, the more money doing IDR [income-driven repayment] with or without PSLF can save you and the more ridiculously your loans will balloon while in forbearance.”
Some final thoughts.
Individual circumstances always need to be taken into account, and the planning that makes sense for one borrower doesn’t necessarily make sense for another. Even with that being said, forbearance is likely not the right choice if an income-driven repayment plan allows you to make payments that fit within a reasonable budget.
These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for informational purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.