Medical school loans during residency: IBR/PAYE or forbearance?

There were several things about dealing with an unhealthy amount of student-loan debt during residency that I never learned in medical school. In fact, I’d venture that the vast majority of medical students have very little idea how to approach their loans. After all, it’s not on the boards (updated November 2016).

While this post has been updated, you’ll also want to read my posts on prompt federal student loan consolidation and the pros/cons of the REPAYE program to get started.

For starters, the AAMC has an excellent and concise debt fact card to introduce you to the topic. The numbers are sobering. But what’s missing are a couple of specific benefits of income-based repayment (IBR) as well as why most people should do it for at least the first year (if not two). As of May 2013, the federal government has off-loaded loans onto various servicers and changed the application process. As a result, the benefits of “free” money and $0 IBR payments for interns are gone (unless you consolidate promptly or wait and then want to be willfully and blatantly dishonest).


When you decide to enter IBR or PAYE instead of forbearance:

1. The government pays the interest on your subsidized loans for 3 years (however much is left over after your payments). Unfortunately, as of 2012, medical students won’t be getting any more of those (which was $8500 per year, meaning that another $34,000 of those loans will be unsubsidized/accruing interest at 6.8% during school than used to be the case). Even on a resident’s salary, most of this subsidy will be eaten up by IBR payments (which preferentially pay off subsidized interest first) now that IBR will require legitimate payments from day 1. 

2. All monthly payments during residency count towards the 120 monthly payments (10 years) needed for public service loan forgiveness (more on planning for PSLF here). PSLF itself is not worth entering academia if you otherwise want to be in private practice (the pay differential is way too high), but it’s a nice reward for those entering academic or county jobs and something to keep in mind if you are undecided. Even if you switch to forbearance later, the qualifying payments you make still count (they don’t have to be consecutive). Since your remaining loan balance after 120 payments will be forgiven, it is in your best interest to have these payments be as small as possible, so don’t waste your low-pay years as a resident unless you need to.

Let’s say you want to enter private practice and plan to make enough money that you just don’t care about your loan amount. You just want to maximize your lifestyle during residency when money is tight and that $400 a month will make a big difference. That’s fine too. Some private practice programs will even pay off your debt for you. Even so, there’s reason to do IBR for at least a year (when your payment is zero). (There’s still a reason to do it for a year if you consolidate; read more about it here)

3. During forbearance, interest does accrue on both subsidized and unsubsidized loans and is capitalized (gets added to the principal). This means the amount of money accruing interest does not remain stable (not simply the original loan amount) and adds significantly to the total cost of the loan. This calculator can determine how painful capitalization will be for you. While in IBR, interest never capitalizes until you’re an attending making enough money that you no longer have a “partial financial hardship.” 1 That 6.8% only grows from the original loan amount, it never compounds.

Also note, there is something called “deferment” which is similar to forbearance but has better terms (particularly when subsidized loans were still commonplace). Very few residents qualify for the economic hardship deferment anymore, so you might as well forget it exists.


Why the first year of IBR is excellent

Your monthly payment under IBR is calculated from the previous year’s tax return. So for your intern year, IBR monthly payments are calculated from the tax return reflecting the second half of third year and the first half of fourth year. If you barely made any money (a bit from tutoring, part-time work, work study, etc won’t matter), then your calculated IBR payment will be $0. Since there is no “minimum” payment for IBR, this $0 per month is a valid payment and contributes to the 120 required for PSLF. Therefore, for many interns (single people, married people who file separately, and married people where the spouse also didn’t work), the first year of IBR is free. So there’s really no reason not to do IBR for a year, as otherwise you lose out on free government money (for now). If you have the full $34,000 in subsidized loans, for example, then the subsidized portion accrues $2320 in interest over the course of one year, and the government pays all of it. Any dollar extra you put into the loan goes straight to the interest first, so it’s one less dollar you get from the government. If you have extra cash, save it or invest it and put it into your loans later (or enjoy it now, why not). The IBR application now generally requires an Alternate Documentation of Income (ADI), which requires you to state your new job and how much you earn. This income, instead of your empty tax return, will be used to calculate your IBR payments for your first year. Hence, IBR will no longer be free for the first year if you apply during residency. Instead, if you want the free money discussed in the strikeout text, you’ll need consolidate when you graduate and enter repayment promptly.

If you didn’t file your taxes because you didn’t make any money and didn’t think you had to, that’s okay. You can file them as late as October for no penalty (as long as you didn’t owe the government any money, which you probably didn’t).


Why the second year of IBR is still pretty good

The tax year used for your second year of IBR payments is the one made up of the second half of fourth year and the first half of intern year. During this tax year, you actually only made half of your intern salary (i.e. ~$25k, not the full $50k). Therefore, the calculated IBR payments will be in the neighborhood of $200 per month instead of $400. Not bad. It’s not clear how often servicers will require the ADI for the second year of IBR. Theoretically, payments could be low (see the strikeout text above). In all likelihood, the payments will remain accurate to your adjusted gross income.


The long-term plan

Once your payments supersede the yearly amount of subsidized loan interest or after three years, there is no more free money to be had from the government unless you’re in the new REPAYE program. At this point, there’s no harm in trying to pay off your loans as fast as possible. Except:

  • If you plan to do PSLF, then never put more than you have to. It’s less money to be forgiven. PSLF probably isn’t going anywhere in the short term, and you will not be taxed on the forgiven amount at the end (unlike if you made 25 years of IBR payments, which is the other way to earn loan forgiveness from the government [practically impossible for physicians]. When the government makes changes to the loan programs, they rarely retroactively do bad things, only good things. If you enter PSLF while the program is in effect, you’ll likely be grandfathered against any future cancellation.
  • If you want to do private practice and know where you might be doing it, ask around to see if loan forgiveness is typically part of the signing package. If the place you’re likely to work is going to pay it off for you, then there’s no reason to do so yourself. Keep in mind getting your loans paid for you sometimes involves some undesirable contract obligations.
  • If you’re not interested in PSLF, then you might consider trying to refinance your loans with a private company. I recommend reading the post (which is very detailed about pro/cons), but for example, Laurel Road currently has a resident-specific program that includes $100/month payments during residency and interest rates as low as 1.9% variable / 3.5% fixed. Even a 1% decrease in your loan amount may be worth thousands per year, and they offer a $300 bonus for refinancing via a referral link.
  • If neither of the above scenarios applies and you can’t refinance, then start paying down your loans. At 6.8%, that’s probably higher than your mortgage (if you have one) and probably higher than most investments you’ll be involved in, especially in the current economic climate. The exception to this statement is setting aside for 401k/403b/Roth-type retirement contributions, especially if your program will match your contributions up to a point. If your program offers you this free money, put as much away for retirement as it takes to maximize your employer contributions (if possible). A Roth IRA is also worth investing in, as a low-cost mutual fund will earn 7% per year (on average) and the first dollar invested will earn the most money.
  • You can always pay more down on your loan and still be in IBR. There’s no penalty for doing so. (In fact, you can always make payments while in forbearance too for that matter, which can help tamp down the interest). Keep in mind that the IBR payments during residency still often result in negative amortization: your payments reduce the amount of interest accruing, but the amount owed will continue to grow because the amount of interest accruing is higher than the payment amount. Without significant extra income from moonlighting, you will not make much progress on your loans if you’ve borrowed a large amount.


Keep in mind your reality

The debt fact cards and most AAMC materials always compare strict-IBR versus forbearance followed by standard repayment, which minimizes the long-term benefit of making payments during residency by following it up with the extended (lazy) repayment term of IBR and its consequent rise in interest payments. However, someone who is willing to put money down in residency is also someone who is likely to want to pay down their loans quickly. The bigger your salary, the higher your payment (until it reaches the size of the standard repayment). If you make additional payments as an attending (to make them the same size as the standard repayment), then you don’t lose any of the money you save by using IBR: making interest payments, getting government money, and avoiding capitalization. The longer your residency, the greater this difference is. Don’t be discouraged by looking at the official materials, the numbers are unlikely to reflect a physician’s IBR-in-residency total repayment plan.

In the end, IBR itself during a 3-4 year residency (without PSLF) may save you somewhere in realm of $30-60k if you have a commonly large loan burden, which is not negligible but may be a pittance compared to your long-term future income. If making payments will crush your lifestyle as a resident and you don’t plan on working for a non-profit after training, then forbearance (or even private refinancing) may be the right choice for you. You can use this accrued interest calculator to figure out roughly how much interest will accrue during forbearance.

  • The longer your residency/fellowship, the more money doing IBR/PSLF can save you and the more ridiculously your loans will balloon while in forbearance.
  • The more expensive your college and medical schools loans are, the more IBR/PSLF can save you and the more ridiculously your loans will balloon while in forbearance.
  • The higher you will be paid as an attending relative to as a resident, the less meaningful the money saved and the more significant the money spent during residency.
  • In the long run, money invested wisely in a retirement account (especially if matched) will earn more than the equivalent amount of money spent on loans (not taking capitalization into account). This is especially true if you are able to obtain a lower rate through private consolidation/refinancing.

You can read my further thoughts on PSLF and planning for it during residency here. More information about refinancing as a resident is available here and about refinancing in general here.


gina 02.24.13 Reply

But the caveat to your above mention of the advantages of IBR for the first two years of residency is that most people don’t apply in July of intern year. Also, if you didn’t file taxes in medical school and want to get the “IBR ball rolling quickly,” you use current pay stubs…And your payments during intern year will not be zero. I started residency in 2011, applied for IBR in Nov of intern year, and my application didn’t get processed until January of the following year (2012).I’ve been paying $400/month since starting residency. I supposed in an ideal world if we all filed taxes in med school and applied for IBR asap after starting residency…

Ben 02.25.13 Reply

Setting up IBR definitely takes some time and thought, but even after residency starts it’s not really too late. While your story is probably very common, it’s only partially accurate.

1) There is usually no need to use current pay stubs for your intern year IBR calculation (though it is an acceptable way). You can e-file your taxes as late as October 15 without any penalty as long you don’t owe the government money (the late filing fee is a percentage of the taxes you owe; if you don’t owe any taxes, there is no fee). After October 15, you can still file (on paper), but you forfeit any refund/tax credits owed to you. You also don’t have to earn any income in order to file taxes. So essentially everyone can use their tax return for IBR, even if you didn’t think of it until after residency begins. The pay stub method is used all the time but often secondary to poor advice, not necessity. For example, I filed my taxes in August, which were accepted within a day. My refund (thanks to the Earned Income Tax Credit) came within one week.

2) The bottle-neck for IBR applications is November, as this is when everyone’s grace period runs out and applies. If you apply earlier in the fall, the turnaround is around one month or less. Since the payments are low with this plan, it makes sense to apply as early as possible to maximize the number of zero/low payments made.

So ideally, yes, take care of everything in July. But it’s not a lost cause a couple of months into internship either.

Kathleen 07.04.13 Reply

Even if it is not too late to file a tax return reflecting no income in the previous year, how do you go about reporting $0 as income under income information (especially since after starting residency, this is no longer true)?

Ben 07.06.13 Reply

When you file taxes after you start residency, you are filing for the previous financial year (half of third year and half of fourth year). Once your taxes are approved, you then use this statement to apply from IBR.

IBR gives you the choice to derive your income from your taxes (which the IRS has on file and has previously vetted) or an income sheet (“Alternative Documentation of Income” or ADI). The default method (and the more straightforward of the two) is your taxes, but it’s your choice. The electronic application even uses a “IRS Data Retrieval Tool” to pull this information from your taxes automatically.

So, yes, you are correct that you are no longer making zero dollars per year. However, IBR is based on last year’s taxes and is adjusted annually. That’s the way it’s set up. The main reason to use the current income sheet is if you’re currently earning less than you did when you filed your taxes (e.g. spouse lost job in the move). If use of the ADI is requested of you, then yes, you’ll have to adjust your income and your payments will be higher. This has generally not been the case in the past. But if the ADI is now required for all first-time applications (which would make sense intuitively), then the pain-free first (and even cheaper second) year of IBR has gone away. Let me know if that is the case. The benefits of the government subsidized loan interest repayment are unfortunately nearly over as well.

The benefits of IBR as I’ve described above were originally inspired by information I received from GL Advisor, who came to speak to my residency program during my orientation, supplemented by a large amount of personal research. I’m not a certified financial planner or anything however, so you should definitely take everything I say with a grain of salt.

Kathleen 07.06.13 Reply

Thank you for the quick response!

I am consolidating my loans at the same time as I apply for IBR, so perhaps the two applications are different. But using the electronic application for consolidation/IBR, the IRS Data Retrieval Tool is not available. The applicant is now required to report current income, as well as provide information for an employer (they do not make this optional), though I am unsure how they go about checking this figure.

My other option is to complete a paper application, which a GL advisor I spoke to has recommended. He assures me that I am still able to “play the system” and provide a tax return as alternative documentation (ADI is now required for the first year of repayment). However, this still puts me in the position to have to report $0 as my income on the ADI, which I am not comfortable doing.

It seems that regardless of which method I choose to apply for consolidation/IBR, I will either have to report my income as $0 and hope that my previous year’s tax is sufficient evidence for this (as well as be subject to penalties for falsifying information), or just man up and report my current income.

Seems like they are catching on to the strategies used to minimize payments.

Ben 07.08.13 Reply

Thanks for the info! I’ve changed this post substantially, as the game has definitely changed.

I question that GL advisor’s advice as well. The ADI is a form entirely separate from your tax return. I’m confused by how the advisor thought it would be straightforward to do so, even on the paper application. Now that the form is truly mandatory, I personally would also find being blatantly dishonest a bit too troubling for the bother. Armed with that scenario, I’d man up as well.

It does mean now that for some residents with significant loans, IBR is no longer a no-brainer if the predominate goal is quality of life during residency. IBR is the still the best option to reduce runaway interest accumulation and qualify for PSLF, but it’s a more bitter pill to swallow, especially for those who would otherwise like to enjoy their first year making money instead of hemorrhaging it.

bone damage 11.19.13 Reply

Spot on with this write-up, I seriously feel this site needs a great deal more attention.
I’ll probably be returning to read more, thanks for the advice!

Coleen 04.02.14 Reply

If you apply to consolidate after graduation and before residency and submit the IBR paperwork at that time, you could honestly put $0. Does that still allow one to have the initial IBR payments start at $0?

Ben 04.07.14 Reply

The issue is that many loan servicers are now requiring the Alternative Documentation of Income (ADI) form. Because IBR processing takes time, I’m not sure it’s possible to apply prior to starting internship, especially if also consolidating (anyone with only DIRECT loans doesn’t need to consolidate and then the grace period is still intact). The servicer always has the right to request pay stubs.

first aid kit 08.19.14 Reply

Hello there! This blog post couldn’t be written much better!

Reading through this post reminds me of my previous roommate!
He constantly kept preaching abhout this. I am going to send this information to him.

Fairly certain he’s going to have a great read.
I appreciate you for sharing!

ehrica 07.14.15 Reply

Great Article. Thanks for the info. Does anyone know where I can find a blank “Economic Hardship Deferment Form” to fill out?

Ben 07.15.15 Reply

You request it from your servicer (e.g. Navient, Nelnet), most of which are now using online forms. If you haven’t already, you’ll eventually receive correspondence from your servicer asking you to set up your account. It’s that this point that you an choose your repayment option (including requesting deferment and forbearance). Except for those who are married to spouses with very high incomes or borrowed a relatively small amount of money, most residents easily qualify for forbearance. Very few would qualify for true deferment. This FinAid calculator may be helpful.

Ultimately, the main benefit of deferment was that the government would cover the interest on your subsidized loans (they never helped a dime with unsubsidized ones). Given that subsidized loans for grad students are gone, the degree of difference between deferment and forbearance has thus gone down for some (with college loans) and essentially gone away completely for others (those with only med school loans starting in 2012).

If you’re planning on deferring/forbearing, that also probably means you’re not planning on doing PSLF, because those payments during residency are what make that program valuable for physicians. In this case, I’d recommend you consider trying to refinance with DRB instead of forbearing if possible, as the lower interest rate would ultimately save a lot of money over the course of your residency and repayment. They have a $100/month program specifically for residents, which I’ve written about at length here.

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