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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 or 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 not in a position to enter active repayment.

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 Stafford Loans are usually six months, but grace periods on other loans vary considerably and can range from a few months to three years. 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 Timeline.

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 Loans 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. 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. Contact your loan servicer for details.

As noted, borrowers do not have to apply for grace periods as 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)
Stafford Loans have a 6 month grace period
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
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

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 that borrowers must apply for deferments on an annual basis, and regardless of type, deferments are good for one year at a time.

Of particular note, the Graduate Fellowship Deferment is available to borrowers attending an eligible fellowship program. However, both the borrower and the program must meet certain requirements in order for the borrower to qualify. Borrowers applying for the fellowship deferment must complete the Education Related Deferment Request form and submit it to the designated official at their fellowship program. Borrowers still in their residency program are not eligible for this deferment, even if their residency program refers to them as "fellows." Residents who need payment relief during residency can use forbearance.

A comprehensive list of deferments can be found in the Education Debt Manager. Check your servicers' Web site to download appropriate deferment forms for Stafford Loans.

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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

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 six months or one year 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, if a Standard (Level) Repayment plan of 10 years is selected when repayment begins but the borrower previously used two years of forbearance, the ten year repayment period is not reduced by two years.

Medical students with Stafford Loans, both subsidized and unsubsidized, are eligible for "Mandatory Medical Internship/Residency Forbearance". Simply put, the law states that loan servicers must grant borrowers, who request it, mandatory forbearance throughout the duration of their residency on their Stafford Loans. Please note that forbearance provisions may differ on other loans, including the 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 (see reference to the Graduate Fellowship Deferment 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 .6% when borrowers move from grace or deferment into forbearance.
Second, subsidized loans accrue interest in forbearance.
Third, it's possible that interest will capitalize at the end of each forbearance period (check with your loan servicer for details).

Forbearance Key Points

most always a more 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)
although borrowers must apply, 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 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
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.

The good news, however, is that physicians 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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