The Pain of Forbearance

Penny wise, pound foolish.

People often chase sales and discounts on basically piddling amounts of money while letting their loans fester at high rates for inappropriate lengths of time. It’s silly to clip coupons and then ignore your loans. While your life circumstances may ultimately force your hand, forbearance is probably the worst financial decision you can make during residency.

Capitalized loan amounts at 6% after years of forbearance
Loan amount 1 2 3 4 5
$100,000 $106,000 $112,000 $118,000 $124,000 $130,000
$150,000 $159,000 $168,000 $177,000 $186,000 $195,000
$200,000 $212,000 $224,000 $236,000 $248,000 $260,000
$250,000 $265,000 $280,000 $295,000 $310,000 $325,000
$300,000 $318,000 $336,000 $354,000 $372,000 $390,000
$350,000 $371,000 $392,000 $413,000 $434,000 $455,000
$400,000 $424,000 $448,000 $472,000 $496,000 $520,000
$450,000 $477,000 $504,000 $531,000 $558,000 $585,000
$500,000 $530,000 $560,000 $590,000 $620,000 $650,000

The good of forbearance:

You get to temporarily not make payments on your loans, at least for the duration of your training.

The bad of forbearance:

Interest continues to accumulate on all loans (subsidies and unsubsidized). You get no IDR-derived interest subsidy and you get no autopay rate reduction. Then, at the end of the forbearance period, the interest capitalizes. In other words, the longer you forbear, the worse things get. PSLF for doctors is a much better deal when you take the low payments of residency into account, so forbearance can ruin that too:

Making three extra years of standard repayment-sized payments (due to a forbearance) in order to achieve PSLF on a $200,000 loan could result in spending an extra $80,000.


You usually don’t need to forbear

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. If you are currently earning zero dollars a month, then your income-based payment will be zero dollars a month. That is substantially better than forbearing because you’re then still eligible for the benefits of an IDR plan: For example, you’ll still get half the accrued interest forgiveness part of the REPAYE plan. When you start making money again, the interest that has accrued will not capitalize onto the principal, because you were not forbearing. You were simply making smaller (zero dollar) payments. When it comes to recertifying your income, you should consider recertifying if your income drops (e.g. if a spouse stops working or gets a pay cut, because your residency salary is unlikely to change meaningfully unless you are on medical leave). However, if your income rises, you should wait until you receive the annual demand to do so, because recertifying early will simply raise your payments earlier.

Scenario: you and your spouse are both fully employed and diligently paying off your student loans to the extent you can. One of you gets pregnant and decides to take a year off from work to raise the baby. Money is now tighter, and your income-based payment is going to be a stretch. You consider forbearing. But you may not have to: your new lower calculated payment based on one income may be affordable.

Of course, it’s possible that even a payment derived from only one income is too much to handle. So be it, life happens. Just be aware that forbearance should be your last option.

Needing to forbear as a resident is also a scenario where it’s worth evaluating a no-cost private refinance. The monthly payments with a resident-friendly company during training are between $0-100, likely substantially less than your IDR payments. A worthwhile refinance will reduce your interest rate, and a 1% rate difference for a $200k loan is $2,000 per year.

Definitely don’t forbear your intern year

As we discussed in the chapter on Direct Consolidation, many people should be able to swing $0 payments for intern year. This means that IDR costs no more than forbearance but has all the perks. So: forbearing unnecessarily during your intern year can easily cost thousands.


IDR Instead

When you decide to enter IBR/PAYE/REPAYE instead of forbearance:

  1. The government pays the unpaid interest on your subsidized loans for 3 years (if you have any). In REPAYE, the feds also waive half of the unpaid interest on your unsubsidized loans, effectively reducing your interest rate.
  2. All monthly payments during residency count towards the 120 monthly payments (10 years) needed for public service loan forgiveness. 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. This same logic applies to long-term IDR loan forgiveness as well.


The Counterargument

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 (congrats to you for your high-paying specialty choice; just don’t blow it all on your BMW and summer home). You just want to maximize your lifestyle during residency when money is tight and that $250-400 a month will make a big difference. Maybe you have kids to feed and/or daycares to pay for. That’s fine too. It happens. If after considering all of your options, you simply can’t afford to pay off your loans or have some private practice job lined up with a big student loan bonus, etc.—that’s okay. At least you’ll have a better idea of the pros/cons/consequences of the choice.

If the plan is to forbear, again, you should really consider IDR for a year (or two).

If forbearance is a sure thing, it’s pretty unlikely you’re bound for PSLF. In this case, it behooves you to look into private refinancing. While most companies don’t offer plans that will work for a resident’s depressing financial picture, there are a few that do, and—as we covered earlier—even relatively modest rate decreases can add up significantly over time. But before you do anything, make sure the money saved makes it worthwhile compared with staying with your federal loans (even while forbearing). It’s a one-way street. If forgiveness is even a remote possibility, think long and hard before pulling the trigger.


Deferment is not forbearance

Some people use deferment and forbearance interchangeably, particularly older physicians who used to qualify for deferment during residency, but they’re different. While both allow you “defer” making payments, the government pays the interest on any subsidized loans during a deferment (but not during forbearance).

This matters less now that graduate students don’t receive subsidized loans anymore.

Residents used to meet criteria for the “economic hardship deferment” but no longer. Other deferments are the in-school deferment, military service, military post-active duty, unemployment, rehabilitation training, graduate fellowship, and the post-enrollment deferment (to automatically delay PLUS loans by 6-months, since they technically have no grace period).


Keep in mind your reality

The debt fact cards and most AAMC materials always compare strict-IDR 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 IDR and its higher amount of interest payments. However, someone who is willing to put money down in residency is also someone who is likely to want to pay down his or her loans quickly. The bigger your salary, the higher your payment (until the cap in IBR/PAYE). If you were to stay in IDR but be aggressive and make additional payments as an attending, then you don’t magically lose any of the money you save by using IDR as a resident: 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 proactive physician’s capabilities.

In the end, how much you save by choosing IDR over forbearance depends on how much you borrowed and if PSLF is in your future.

For PSLF, every year of forbearance during training results in another year of attending size payments. For a $200k borrower, a 4-year forbearance could cost around $100,000 in extra payments.

For the DIY-er, the extra expenses can add up. The same $200k loan at 6% with a three-year residency/forbearance would result in extra unpaid interest of about $36k (including around $12k of which that could have been waived via REPAYE) followed by $2k/yr extra due to capitalized interest. 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.

Note, you can always make voluntary payments during a period of forbearance. Wanting to put money toward your loans does not preclude you from forbearing, and making a payment during forbearance does not obligate you to start making more payments.


Final thoughts

The longer your residency/fellowship, the more money doing IDR with or without PSLF can save you and the more ridiculously your loans will balloon while in forbearance.

Forbearance is clearly the “wrong” choice financially and should be avoided if possible. But if making payments will crush you as a resident and you don’t plan on working for a non-profit after training, then forbearance (or even private refinancing), at least during part of your training, could be the “right” choice for you.

But probably not.


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Next: Public Service Loan Forgiveness