Loan repayment may seem too far away to even think about. However, the more you know now, the better prepared you will be when repayment begins. Once you graduate and enter your residency program you will receive a salary and your financial profile will change significantly.
You will finally be earning an income! However, your responsibilities to your lenders, who have a claim to some of this new income, will also increase.
Types of Repayment Plans
A repayment plan is a schedule that outlines the total principal and interest due, a monthly payment amount and the number of payments required to repay the loan in full. It also restates the interest rate for the loan(s), any schedule for interest rate changes if the rate is variable, the due date of the first payment and the frequency of payments. Repayment plan options include:
Standard Repayment: A fixed payment that remains the same during the repayment period of 10 years for Stafford loans. Consolidation loans are typically longer. If you do not request an option, your loan servicer will automatically give you the standard repayment option, which allows you to pay the least amount of interest.
Extended Repayment: New borrowers with an outstanding loan balance of more than $30,000 in FFELP or DL loans may extend their repayment term for up to 25 years.
Graduated Repayment: Smaller loan repayments in the early years with larger payments over time. The assumption is that your income increases over time.
Income-sensitive Repayment (for FFEL borrowers only): Repayments that change with your income, so that your repayment installments fluctuate as your income rises and falls.
Income-contingent Repayment (for DL borrowers only): Payments are adjusted annually based on your household income, family size and total loan debt. This option is not available to PLUS loan payments. The repayment period is a maximum of 25 years.
Income-based Repayment (IBR): Loan payments are capped at 15 percent of your income that exceeds 150 percent of the federal poverty guideline for your family size. You can choose to participate in this payment plan for up to 25 years.
Service-connected Loan Repayment Programs: To help debt-burdened physicians and improve care in medically underserved areas, the federal government and most states have developed service-connected loan repayment programs. The programs generally require you to practice primary care or a needed specialty in a designated underserved area. Through these programs, the government will pay a predetermined amount of your student loan debt for each year you meet specified conditions.
Consolidation: Allows you to combine several loans into a single new loan with a more manageable repayment schedule. Some consolidation programs will let you include your spouse’s educational loans. These loan repayments may be extended beyond the normal 10-year period, depending on the amount borrowed. Additional loans can be added to a federal consolidation loan within 180 days after making the consolidation loan.
Incentives: Loan servicers may lower your interest rate if you make a certain number of payments on time. They may offer an additional interest rate reduction if you have your loan payment automatically deducted from a checking or savings account.
Budgeting for loan payments requires a detailed review of your payment schedule to determine the amount of your monthly payments. Since some of your loans will have variable interest rates, select an average rate for your calculations. You can estimate your monthly loan payment(s) by using these student loan calculators:
- Mapping Your Future – Nonprofit organization committed to helping students, families, and schools navigate the higher education and student loan processes through trusted career, college, and financial aid counseling and resources.
- FinAid Calculator – FinAid's custom calculators can help you figure out how much school will cost, how much you need to save and how much aid you'll need.
- IBRinfo – An independent, non-profit source of information about new federal student loan payment and forgiveness programs.
EXAMPLE: Roughly 30 percent of your gross pay is deducted for federal, state and social security taxes. If you are earning $46,000 annually, you would be taking home about $2,683 per month [$46,000 (less 30% taxes)/12]. If you borrowed $100,000 at an average interest rate of 6.8 percent for 10 years of repayment, your monthly payments would be almost $1,151 per month. That leaves you only $1,532 per month to live on, which is about the same as your school budget permits while you are in medical school.
Under NO circumstance should you ignore your financial problems. Open mail and return calls from your loan servicer to avoid defaulting on your student loans. Default will result in legal actions that will have severe consequences for many years, both professionally and personally.
The key is to maintain contact with the holders, or servicers, of your loans. By keeping your lenders informed of your status, and particularly of any financial problems you may have, you can take advantage of one or more of the following options to help you survive your residency years:
Postponement of a loan repayment. It begins on the day a student borrower ceases to be enrolled at least half-time (or full-time as required by the individual school), and extends through the time the loan repayment is postponed, per the original agreement. Grace periods are automatic (you do not have to apply for them) and can last from three to nine months, depending on the original terms of the loan. Repayment begins on the day the grace period ends.
A specified and limited period of time during which payments on principal and interest are postponed while the loan is in good standing. Deferments, in some cases, can be granted for residency and further study. Deferments are not automatic. You must apply for them, and the lender must formally approve them.
If you are willing but financially unable to make the required payments on a federal Stafford loan, you may request the lender to grant forbearance. Forbearance allows you to stop making payments temporarily. You may also request forbearance as an extension of time for making payments, or to make smaller payments than were previously scheduled. The lender may grant forbearance of principal, interest or both.
Upon written request, lenders are required to grant forbearance to medical residents, renewable at 12-month intervals for the duration of residency. Interest accrues during forbearance, and you are responsible for paying all accrued interest.
Your lifestyle as a student and the amount of money you borrow will have a tremendous impact on your professional and personal life for many years.
Entrance & Exit Counseling
All borrowers need to fully understand the commitment they are making before accepting a loan.
If you will receive federal Stafford loan funds, you must participate in entrance counseling before any loan proceeds are applied to your tuition account. You are required to complete online counseling that covers these topics:
- Loan Terms
- Borrower Rights and Responsibilities
- Deferment Options
- Consequences of Failure to Repay Loans
The Financial Aid Office is required by law to conduct exit interviews for all Direct Loan and alternative loan borrowers before they graduate. Exit interviews are in March. The purpose is to ascertain and assure your understanding of your responsibilities as the in-school period of the loan draws to a close. The school must alert lenders that you have left school and provide certain information (e.g., address) for future communication between you and the lender.