Mandatory Forbearance During Medical Residency?

Deciding whether or not to choose mandatory forbearance during residency is a tougher decision than it may appear on its face.  When comparing a slew of repayment options with complicated rules versus “mandatory” forbearance allowed to interns, residents, and fellows, it’s understandable why one would choose the latter.  Heck, it almost sounds like it’s mandatory to choose forbearance, right?  (The “mandatory” applies to your loan servicer in this case).  Before you do though, let’s look at some of those options in simplified terms:

Discharge

To have your loans discharged would be the ultimate option, however, it’s extremely rare.  Loans that qualify for discharge are usually related to schools that have closed prior to being able to graduate, or used deceptive tactics to get students to enroll.  It’s also true that loans are discharged upon total disability and death, but let’s not count on those scenarios.

Standard Repayment

The default option is to pay your loans down over a ten year period.  You can also opt for extended repayment for up to thirty years, or graduated payments where payments start low and gradually increase.  So if you have $200,000 in loans at a 6% rate, you would pay $2,220 per month for ten years.  If you have a salary of $50,000, that’s half your monthly gross income!  Next option, please.

Mandatory Forbearance

Ah, forbearance.  Residents are granted a special form of mandatory forbearance that obligates your loan servicer to allow it as long as you are still in training.  No payments are due so you don’t have to worry about it until you are an attending and can better afford it.  Sounds great, right?  We’ll come back to this.

Deferment

Deferment is almost exactly the same as forbearance, except the Department of Education pays the interest on your subsidized loans.  Unfortunately, qualifying for deferment is also unlikely and limited in how long you can stay in deferment.

Income-Driven Repayment (IDR)

In a word association game, if someone throws out “income-driven repayment”, I’d respond with “convoluted”.  We have Income contingent repayment (ICR), income-based repayment (IBR), new IBR, pay as you earn (PAYE), and revised pay as you earn (REPAYE), each with their own subtle differences.  I’ll try to spare you from the nuance, but you pay either 10% or 15% of your discretionary income (The difference between your AGI and 150% of the federal poverty level) and your debt is forgiven after either 20 or 25 years.

So let’s say you have a salary of $50,000 and are married with one child.  For simplicity’s sake, let’s also say your spouse doesn’t have an income and you don’t use any “above the line” deductions.  The poverty level for this scenario is $20,161, which we multiply by 150% to get $30,240.  Now we can get your discretionary income by subtracting $30,240 from $50,000, which comes out to $19,760.  Depending on which IDR plan you use, you would multiply that by either 10% or 15% to get your annual payment, then divide by 12 to get your monthly payments of either $165 or $247.

Deciding the Best Option

Knowing the amounts you would need to pay during residency is the first step.  Next, you need to consider the consequences.  Your current cash flow may be insufficient to tackle six figure debt, yet the future interest burden is huge.  It’s hard to balance your best interest today against your future’s.  Let me propose a systematic way of determining the best option for your situation.

forbearance-decision

The first thing you want to ask yourself, as unlikely as it may be, is if your loans qualify for discharge.  Check out the student aid website to see the detailed criteria.  It will only cost you a few minutes of your time, but wouldn’t you be kicking yourself if you just assumed your loans didn’t qualify only to find out later that they did?

The next best thing to consider is loan forgiveness.  Public Service Loan Forgiveness (PSLF) is the fastest way there.  The Department of Education will forgive all of your loans and accumulated interest, tax-free after 120 qualified payments.  Beware, there are very strict rules to making qualified payments.  Again, check out the student aid website detailing these rules.  If you’re willing to work at a qualified employer (for probably less pay) and aim for PSLF, forbearance is a bad option because you won’t be accumulating qualified payment credits.  It would be better to make income driven payments like in the previous examples, or even less.  If your AGI is low enough, your IDR payment can be $0 and still counts as a qualified payment.

If working in a public or nonprofit setting to get PSLF doesn’t appeal to you, forgiveness may still be an option.  This strategy works when the debt to income ratio is very high.  Because attendings are high earners, it takes a much larger amount of debt to make this strategy work.  When aiming for forgiveness, you may ask “why not just use forbearance?  The amount of debt actually forgiven becomes arbitrary, right?”  Not exactly.  IDR forgiveness comes with an income tax bill in the year of forgiveness.  Using forbearance will allow this debt to accumulate for however many years you’re in training, resulting in a significantly larger tax burden down the road.  On top of the extra time in accumulation, capitalization occurs annually while in forbearance.  This is when the accumulated interest gets added to the principal and interest is charged on interest.  This is not the case when making IDR payments.  Making IDR payments while in residency also lowers the cumulative amount you pay because your AGI is lower during that time.  Between cumulative payments and the tax burden associated with forgiveness, forbearance will end up costing you more than you may realize.

What if you have an additional stream of income and can afford standard repayment?  It’s still likely to hurt, but the sooner you rid yourself of debt, the more effectively you make the time value of money work for you.  This potentially works in two ways.  First, it relieves you of compounding interest over time, and Second, you can reallocate your resources to investing for future financial goals and leverage the time value of money in your favor.  While there are many consumer protections afforded only to federal loans, if you’re going to pay down your debt quickly, it makes sense to refinance with a private lender and secure a lower interest rate.

Finally, what if you’re in a position where you can’t afford to make IDR payments?  Maybe you have a large family and/or other debts.  This is where forbearance becomes a necessity.  That’s why it’s there.  It’s a safety net to get you through lean times and should be used as such.  Debt is an awful burden and should be avoided when possible.  As residents, you have “mandatory” forbearance in your back pockets for the whole of your training.  If you need to use it, it’s there, but I hope you take some time to evaluate all of your options before reaching for it.