Starting residency with $200,000 in student loans and a $60,000 salary means you face a clear problem: you cannot afford rent, insurance premiums and board exam fees along with other loan payments. Hence, most residents either defer or forbear loans. Both are very different and choosing the wrong one means you end up paying extra thousands in interest. Let us explain deferment and forbearance clearly for residents and then explain which one is better and why another option usually works out better.
What Is Deferment?
Deferral means temporarily stopping repayment of federal student loans. During deferral there are no payments due. Whether or not interest accrues depends on type of loan.
For subsidized loans during deferment the government pays interest so loan balance does not increase. For most residents who have unsubsidized loans, however, interest accrues and then gets added to principal when deferment ends.
There are ways for residents to defer loans: through deferral while in school or hardship deferment when residency starts. Residents qualify for hardship deferment if they receive public assistance and work full time and earn less than poverty level (this is very unusual for most residents) or get aid from government or state programs.
A catch is that residents usually do not qualify for regular deferment due to low but still typically high salaries. For residency forbearance is much more common.
What Is Forbearance?
Forbearance also temporarily stops payments but unlike deferment, for all types of loans whether subsidized or unsubsidized, interest continues to accrue throughout forbearance and capitalizes when forbearance ends. This means the principal balance rises as you resume payments at higher amounts. There are two types of forbearance: mandatory and discretionary. Medical residents get mandatory forbearance through an internship or residency forbearance. Conditions for this type of forbearance are:
- You are enrolled in an internship or residency.
- Service period required before you can get a license.
- You are ineligible for deferment.
This kind of forbearance is mandatory and servicers must grant it if you request it; you must apply proactively and typically reapply annually.
The Key Difference: Interest Behavior
The main difference between deferment and forbearance is that subsidized loans defer interest and balance stays stable; with forbearance interest accrues and capitalizes and balance increases; unsubsidized deferment and forbearance both accrue interest and balance grows. Most loans residents receive are unsubsidized Direct loans or Grad PLUS loans and generally there is the same financial result for deferment and forbearance: interest accumulates and balance goes up during deferment. The difference matters most if you have unsubsidized undergrad loans remaining: deferment works better because the government subsidizes interest on those loans.
How Much Does Interest Capitalization Actually Cost?
Consider a doctor resident who has $250,000 in loans at 7.05% interest (the current Grad PLUS rate). Interest compounds to approximately $17,625 per year; in three years of residency that unpaid interest accumulates to $52,875 which is added to the principal. Now imagine a doctor starts out as an attending physician with $302,875 in loans instead of $250,000. This $52,875 does not just disappear but also accrues interest from the start. Over ten years of repayment at 7% interest on this higher principal balance, the true cost of interest that has been capitalized over those three years is much higher than just $52,875.
The Better Option Most Residents Miss: Income-Driven Repayment
Residents often do not realize this: there is no need to choose between forbearance and deferment. Programs like SAVE, PAYE and IBR let you pay very low monthly sums based on income rather than how much is owed. For someone who earns $62,000 for instance on the SAVE program the monthly payment range is from $300 to $500 depending on the family size and some families qualify for free monthly payments. SAVE is much better than forbearance for two main reasons: First, SAVE directly prevents owing more by covering the difference if you pay less than accrued interest each month. Forbearance never does this. Second, if you plan to apply for Public Service Loan Forgiveness during residency any payments made through IDR count toward 120 qualifying payments. So three years of residency means 36 qualifying payments marked off; but forbearance means you lose 36 qualifying payments and delay forgiveness by three years. For someone who hopes to get forgiveness this is a couple hundred thousand dollars they give up.
When Does Residency Forbearance Actually Make Sense?
Despite downsides forbearance is still right for some cases: as a resident nearing two years and planning to refinance and repay quickly as an attending physician PSLF is not relevant and benefits from forbearance in terms of saving interest are manageable. Facing short term financial difficulties from things such as a large emergency or crisis beyond regular resident stress allows a clean pause without red tape. If servicing is slow or midway through different programs and need a quick fix before switching to enrollment then forbearance can act faster for some programs compared to IDR enrollment. Also forbearance is good if you took only subsidized loans and graduate debt is small enough so as to save interest savings from those subsidized loans is important.
What to Do If You're Already in Forbearance
If you signed up for forbearance automatically when starting residency without thinking this is common for residents, you are not locked in. You can switch to IDR any time. Your servicer will help you through paperwork or you can use application at studentaid.gov. Particularly important if using PSLF that you do this promptly because each month you are in residency you do not make qualifying payments.
The Bottom Line
Forbearance is not inherently bad but it is usually better for residents to choose Income Driven Repayment (IDR) for almost all loans over $200, 000 in unsubsidized debt and for Public Service Loan Forgiveness (PSLF). IDR repayments are affordable and interest subsidy under SAVE usually keeps the balance from growing. IDR qualifying payments also count toward forgiveness and this benefit is worth many thousands of dollars in later years. Before putting student loans on forbearance for residency consider your numbers; the difference in total loan cost between three years of forbearance and three years of ID repayment tracking PSLF usually exceeds $100, 000. Ready to see for yourself how much ID versus forbearance actually costs for your specific loan balance and specialty? Use MedDebt calculator which side by side models both scenarios based on residency salary and loan balance so you see the real cost before making a choice. Data sources are requirements for forbearance and deferment from Federal Student Aid (studentaid.gov) and current federal interest rates from Department of Education and provisions of SAVE subsidy under SAVE Final Rule.
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