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Step 3: Know Your Grace Periods, Deferment Options, and Forbearance Options

Step 1: Know what you borrowed, from whom you borrowed, and who services the loans.

Step 2: Know the "relative cost" of your student loans.

Step 3: Know your grace periods, deferment options, and forbearance options.

Step 4: Know your "decision points" and keep a calendar.

Step 5: Run the numbers before choosing a repayment option of consolidating your student loans.

Step 6: Commit to keeping good records.

Step 7: Keep a budget and know when you need the help of a financial professional.

Step 8: Know and use your support systems.

These are the tools that will help you manage your loans throughout residency. They will likely vary by loan type, and may even vary depending on when you borrowed and from which loan program or lender you borrowed.

Usually grace, deferment, and forbearance are used in this order. In most cases, when you graduate, you move into a grace period, followed by a deferment, if you apply and qualify. Sometimes deferment is followed by forbearance for borrowers who are still not in a position to enter active repayment. Please note that the HEAL program is an exception to this, as the grace period actually follows deferment in the HEAL program. In addition, Federal Perkins Loans carry a "post deferment" 6 month grace period in addition to their 9 month grace period following school.

Grace

A grace period is a span of time when a borrower is not required to make payment on his or her loan(s). No application is needed - grace is automatic on loans that have a grace period. In general, grace periods are what we call loan specific, meaning one of two things.

First, the length of the grace period is tied to the terms in the promissory note for the individual loan. For example, grace periods on Federal Stafford Loans are usually six months, but grace periods on other loans vary considerably and can range from a few months to three years. Federal Perkins Loans carry a 9 month grace period, then another 6 month "post deferment" grace period for borrowers who qualify for deferment on their Perkins Loans. Grace periods are reflected in the Loan Repayment Timetable.

Second, once you use up a grace period, you lose the grace period for that particular loan. However, a word of caution: if you have all your Stafford Loan serviced by one loan servicer, and you've already used up a grace period(s) on Stafford Loans taken out before medical school, you may need to ask your loan servicer for an "alignment forbearance" unless you want to pay interest on your premed Stafford loans for 6 months. In either case, this should help you line up or "align" your premed and medical school Stafford loans so you can file for deferment on them at the same time. Contact your loan servicer for details. Even if your premed Stafford loans no longer have a grace period and are serviced by a loan servicer other than the servicer for your medical school Staffords, you may still want to forbear your premed Staffords for 6 months or pay interest for 6 months so you can file for deferment on all of them at the same time. Once again, contact your loan servicer(s) for details. Important note: you have to use up the entire 6 month grace period to lose it. For example, if you graduated in May from undergraduate school, then enrolled in medical school in the fall of the same year, you only used up a few months of your grace period on your premed Staffords, so you get the entire grace period again.

As noted, borrowers do not have to apply for grace periods, and with the exception of HEAL loans, the grace period for most loans begins immediately following graduation.

It is important to remember that although there is no cost to the borrower during grace periods for subsidized loans, interest continues to accrue on unsubsidized loans during grace and, depending on the lender's policy, may be capitalized at the end of the grace period.

Grace Key Points

length of grace period depends on the type of loan (look in the promissory note)
Federal Stafford Loans have a 6 month grace period
Federal Perkins Loans have a 9 month grace period, plus another 6 month grace period following deferment (if the borrower qualifies for deferment)
PCL and LDS loans have a 12 month grace period
HEAL loans have a 9 month grace period which follows deferment
you do not have to apply for grace
grace usually begins immediately following graduation
subsidized loans are interest free to borrowers during grace
unsubsidized loans accrue interest during grace

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Deferment

Deferments are similar to grace periods in that they are a period of time during which borrowers are not required to make payment on their loan(s). However, deferments differ from grace in at least two important ways. First, borrowers must apply for deferments on an annual basis, and regardless of type, deferments are good for one year at a time. Second, deferments can be both loan specific and borrower specific.

First, loan specific deferments are similar to loan specific grace periods, simply meaning that both the length and type of deferment depends on the terms disclosed in the borrower's promissory note. One example of a loan specific deferment involves HEAL loans (these are no longer made, but some residents still have HEAL loans). HEAL loans have a three to four year residency deferment (depending on the length of the borrower's residency) plus up to an additional three years of deferment should the borrower practice in one of the generalist specialties (family practice, general pediatrics, or general internal medicine). However, these deferment provisions are specific to the HEAL program only, hence they are what we call "loan specific" deferments.

Second, borrower specific deferments get a bit more complicated. Just think along the lines of the borrower actually getting the deferment, and not the individual loans. It may sound like semantics, but it really isn't, as referenced below.

A comprehensive list of deferments can be found at FIRST Tools. However, in general, the Economic Hardship and Graduate Fellowship deferments are the two most commonly used by residents. Check your servicers' Web site to download deferment forms for Stafford Loans borrowed through FFELP or visit the Direct Loan Servicer Web site for deferment forms for Stafford Loans borrowed through the Direct Loan Program.

Economic Hardship Deferment

In general, the Economic Hardship Deferment (EHD or hardship deferment) is available to any borrower whose first Stafford Loan was disbursed on or after July 1, 1993 and who meets the eligibility requirements. These borrowers are referred to as "new" Stafford borrowers (see our Glossary for more details).

Medical residents eligibility for hardship deferment is determined by looking at a ratio of the borrower's federal education loans that are in repayment as compared with their income. Hardship deferment is available for up to three years, one year at a time.

Details on the EHD can be found in an AAMC publication called Economic Hardship Deferment Frequently Asked Questions (PDF, -- pages). However, here are a few things about the hardship deferment that may be helpful.

First, hardship eligibility is good for up to three years, as long as a borrower meets the eligibility criteria, and these three years may be taken at any time. For example, some residents may qualify for hardship deferment their first year following grace, then may find they do not qualify should their income go up substantially in a subsequent year because of moonlighting. However, they still have two years of eligibility remaining.
Second, borrowers who just barely missed qualifying for hardship when they first applied may find that once any accrued and unpaid interest capitalizes on their loans, their loan balance may be high enough over the next few months that they will qualify. Just remember, you can apply for the EHD at any time.
Third, in general, borrowers with approximately $76,000 or higher in federal education loans in repayment with a stipend (or income) of approximately $44,500 may qualify for the hardship deferment. However, please note these figures are given simply as estimated thresholds, your loan servicer will ultimately determine if you qualify or not.
Finally, loan servicers should be able to help borrowers determine if they will qualify.

Our worksheet (PDF, -- pages) may help you determine if you qualify for the EHD. Once again, borrowers with questions about the Economic Hardship Deferment (including how spousal income is treated) may want to reference the Economic Hardship Deferment FAQs (PDF, -- pages). Contact your loan servicer if you have more questions.

Economic Hardship Deferment Key Points

available for "new" Stafford borrowers (those whose first loan was disbursed on or after July 1, 1993)
available for Federal Perkins Loans
maximum deferment of 3 years, one year at a time
based, in part, on a ratio of the borrower's federal education loans in repayment to borrower income

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Graduate Fellowship Deferment

The Graduate Fellowship Deferment (also called the fellowship deferment) is available to borrowers attending an eligible fellowship program. Please note that both the borrower and the program must meet certain requirements in order for the borrower to qualify.

Borrowers applying for the fellowship deferment should complete the Education Related Deferment Request form. They will need to sign the form and take it to the designated official at their fellowship program.

Borrowers who are still in their residency program are not eligible for the Graduate Fellowship Deferment, even if their residency program refers to them as "fellows". The United States Department of Education has issued guidance in this regard indicating that residents are to use the IRD or the EHD, and forbearance if needed, to help them get through residency on their Stafford Loans.

Graduate Fellowship Deferment Key Points

both borrower and program must meet certain requirements
not applicable for Stafford or HEAL loans if borrower is still in residency
unlimited for Stafford Loans if requirements met
maximum two years for HEAL loans if requirements met

General Deferment Key Points

you must apply for deferments on an annual basis
interest is subsidized during deferment for subsidized loan
interest accrues during deferment for unsubsidized loans
deferments are both loan specific and borrower specific

Forbearance

Borrowers will eventually use up any grace and deferment periods on their loans for which they are eligible, and will face a decision to either request forbearance or enter active repayment on their loans.

Forbearance allows a borrower to either completely forego payment on their loans, or to reduce the scheduled payment for a designated period of time, usually no more than one year at a time, and often six months at a time. Borrowers must request forbearance from their lender.

Forbearance is a legitimate way for borrowers to avoid delinquency and default, discussed later in the Guide. In this regard, forbearance can be viewed as a cash management tool for those with cash flow problems or other cash flow needs. Forbearance does not reflect adversely on a borrower's credit and it is not counted as part of the time period designated in a borrower's repayment plan. For instance, should a borrower select a Standard (Level) Repayment plan of 10 years when repayment begins but previously have used two years of forbearance, the ten year repayment period is not reduced by two years.

Medical students with Federal Stafford Loans, both subsidized and unsubsidized, are now eligible for what is called "Mandatory Medical Internship/Residency Forbearance". Simply put, the law now states that although borrowers must still request it, loan servicers must grant borrowers mandatory forbearance throughout the duration of their residency on their Stafford Loans (again, in 6- or 12-month increments) as long as they remain in a residency program. Please note that forbearance provisions may differ on other loans, including the Federal Perkins, which requires the borrower to pay at least some interest during forbearance. Also note that mandatory forbearance for medical residents does not apply to fellowship programs (borrowers may want to apply for the Graduate Fellowship Deferment referenced above).

Although forbearance is a very legitimate way for borrowers to get help with their loans during residency, in general, forbearance can be a costly option for borrowers in at least three ways:

First, the interest rate on variable rate Stafford Loans goes up 60 basis points (.6%) when borrowers move from grace or deferment into forbearance.
Second, subsidized loans accrue interest in forbearance.
Third, interest will likely capitalize at the end of each forbearance period (check with your loan servicer for details).

Forbearance Key Points

most always a costly option to the borrower
allows borrowers to either put off their payments or reduce their payments for a designated period of time (depending on the loans)
borrowers must apply, but lenders are required to grant mandatory forbearance to residents throughout the duration of their residency, if needed, for Stafford Loans. Does not adversely affect credit
is usually not counted as part of the student's repayment period
forbearance options will likely vary by loan type
mandatory forbearance for medical residents does not apply to fellowship programs

Delinquency

Delinquency means that a borrower is late making scheduled payments on a financial obligation, including student loans. Delinquency is reported on a borrower's credit report and may remain there for an extended period. Delinquency can lead to default, and can also adversely impact a borrower's future borrowing ability.

Delinquency Key Points

late making scheduled payments on a student loan
adversely affects credit

Default

Default normally occurs when a borrower is 270 days delinquent on a scheduled payment (check your promissory note for details). Default on a student loan will also be reflected on a credit report for up to seven years, and is a serious detriment to future borrowing of any kind. Defaulted student loans are usually not be written off for bankruptcy. The consequences of default are serious, and may include:

garnishment of wages
claiming of any tax refund monies due the borrower by the IRS
reducing Medicare payments to physicians who are in default status
publishing the names of HEAL defaulters in the Federal Register (which is then made available to the local papers for publication), and in some cases,
withholding or removing licensure (this varies by state). In addition, institutions are at risk for future participation in federal loan programs when the default rate of borrowers who attended their institution reaches certain levels.

Physicians, however, have a great history of timely repayment.

Default Key Points

270 days late on a scheduled student loan payment
adversely affects credit and future borrowing potential
may not be written off in bankruptcy

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