Financial Aid Part 2

Sorry it took me so long to get the second post up but this has been a crazy week.

Once the med student graduates from med school you start on a sticky path of managing all of the debt accumulated up to this point. Residency is not considered school so the loans are no longer in "in-school" deferment. All Stafford loans have a 6 month grace period. This grace period does not start over each time that you put it back into deferment so if you wait the six months after school ends to apply for another type of payment suspension (deferment or forbearance) you don't get another six months once the loan goes back into repayment at a later date.

One of the most common questions is the difference between deferment and forbearance. With any type of deferment the subsidized loan does not accrue interest and no payment is due. It is as if the borrower is still in school. With forbearance the interest begins to accrue. Just like when the student is school they can choose to defer payment on the interest but it will accrue all the same and once the forbearance has ended the accrued interest will capitalize. Meaning that the interest accrued will then become principal. One misconception about forbearance is that it will hurt your credit score. A loan in forbearance will not show up on your credit negatively. The only time a loan will hurt your credit is when it has been defaulted on. Meaning the loan is in repayment status and not being repaid. A defaulted loan will SERIOUSLY affect your credit so this should be avoided at all costs. (This is one of the reasons it is SO important to keep track of all loans).

With regards to the resident's loans there are several options for repayment/deferment/forbearance that they may qualify for. Sometimes if you are on the lender's website it can be confusing to see Internship/Residency Deferment form. This option is only available for loans taken out prior to 1993 (which does not apply to most of us).

So then you have to decide do you a)try to not make any payments what so ever or b) try and make a small monthly payment.

If you decide that you want to not make any payments you have two options. The first is economic hardship. The College Cost and Reduction Access Act changed the requirements that helped qualify most residents for this option. Before this act they would look at what your monthly payment would be and what your discretionary income was and if the monthly payment exceeded 20% and your discretionary income was less than 2.2 times the poverty line for the family size you qualified. They eliminated this and in it's place added new repayment options. The qualifications now simply look at the borrower's income compared to the poverty line. We have a family of 5 and still don't qualify for economic hardship anymore. This is not an option that will apply to very many residents but still should be looked at first if you are trying to not make payments because it is the only one that will defer interest.

The only other option for residents to not make any payments is forbearance. Residency is an automatic qualification for forbearance. There is still a form that you have to complete and most likely have your department sign off on but you don't have to make a certain level of income to qualify you just have to prove that you are in a supervised program that is required for licensure. Just remember that your interest will accrue and eventually capitalize.

If you want to make payments while in residency (this also applies to your repayment plan once residency is complete) there are several repayment options. There is the standard, extended, graduated, income-contingent, income-sensitive, and income-based repayment plans.

Standard- Same monthly payment for up to 10 years with a minimum monthly payment of $50.

Extended- Similar to the standard repayment plan except extends repayment period to 12-30 years.

Graduated- Starts off with a lower monthly payment plan that gradually increases over the years. Loan term is 12-30 years. Monthly payment amount cannot be less than 50% of the payment with standard repayment and no more than 150% of the monthly payment of a standard plan.

Income-Contingent- Only available for direct loan borrowers. Based on borrower's income and debt levels. It is very important to not that all of the income based payment plans look at both the borrower and the borrower's spouse's income but only looks at the borrower's debt. Many claim that this is a marriage penalty. As the spouse this plan would never be an option b/c using my husband's income but not his loans would really hurt what my monthly payments would have to be. The amount you pay would change each year as your income and debt levels change. After 25 years of repayment the balance is forgiven.

Income-Sensitive- This is the FFELP version of income-contingent. The payment is a percentage of the monthly income ranging from 4% to 25%. The percent is determined by the borrower and must be equal to or greater than the monthly interest accruing. There is a limit of 10 years for the repayment option.

Income-Based- This is the new repayment plan that became available July 2009. This repayment plan determines your monthly payment the same way the old economic hardship deferment was determined. They look at 15% of your discretionary income, where discretionary income is the difference between your adjusted gross income and 150% of the federal poverty line that is matched up with your family size. There is no minimum so you may have a monthly payment of $0. Any balance that remains unpaid after 25 years of payments is dismissed. Also if your payments do not cover the interest that accrues, the government pays or waives the unpaid interest for the first three years.

So that in a nut shell is some brief information about deferments, forbearance, and repayment options. In the next post I will cover loan consolidation, residency/relocation loans, loan forgiveness programs, and any questions that this post may have generated. I hope that this information is helpful (and that you haven't fallen asleep yet).