*By Andrew Weinberg, D.O*

About this time every year a new group of interns contemplates how to handle repayment or deferment of loans accumulated during four years of medical school. As an intern myself with a strong technical background, I appreciate the challenging task ahead of repaying student loans. I was a mechanical engineer who worked as a patent examiner at the U.S. Patent and Trademark Office prior to changing careers. Initially, I became interested in this topic to help myself and subsequently to share my research with others who may benefit. In February, 1999 I published a prior article on extending the lifetime learning tax credit into medical school.

Many students today borrow the full $8,500 subsidized Stafford and $30,000 unsubsidized Stafford loan each year of school. That can lead to a debt at graduation of nearly $180,000 including interest. In addition, residents as well as young attending physicians often are not aware that they may apply for deferment or forbearance for each individual loan and do not have to choose one option for all loans. The options for borrowing changed a few years ago. Health Education Assistance Loans (HEAL) ended for new borrowers and unsubsidized Staffords were expanded from $10,000 to $30,000 per year to replace them. Residents with outstanding Staffords disbursed prior to July 1, 1993 can still qualify for a residency deferment. This is unavailable to new borrowers. For new borrowers, a residency forbearance has been the normal tactic. However, borrowers in residency and some attending physicians have a seldom-used deferment option still available to them called the hardship deferment.

One way to minimize the growth of debt after graduation is to apply for a hardship deferment on all loans or hardship defer the subsidized Stafford loans and apply for a forbearance on the unsubsidized portions. What is the difference? Essentially the government pays the interest when subsidized Stafford loans are in deferment status. A person can apply for hardship deferment status for up to 36 cumulative months. Hardship deferment is per individual account, not per loan. Therefore there is no financial advantage or disadvantage for the unsubsidized loans to be in hardship deferment because the benefit will disappear for all loans after 36 months are consumed.

For most medical students in private medical schools, the subsidized portion of Stafford loans represents a small fraction of their total debt and using the deferment option saves significant interest accumulation. There is relatively little risk using a hardship deferment for subsidized Stafford loans since they are typically not the majority of a doctor’s debt. There are strict guidelines on whether you can qualify for hardship deferment, but because medical school is so expensive these days, more and more people can qualify. Below I have summarized criteria listed by Sallie Mae for processing deferment requests. An example which I created follows.

*AGI.* Many loan-servicing organizations will accept proof of AGI (adjusted gross income) based upon one month of pay stubs of the individual exclusive of marital status.

*Amount borrowed.* Includes Federal Stafford loans (subsidized and unsubsidized), Direct subsidized and unsubsidized loans , Federal Plus Loans, Federal SLS Loans, Federal Consolidation Loans, Direct Consolidation Loans, Federal Perkins Loans and National Direct Student Loans.

*Estimated monthly payment.* Equals the amount borrowed times the average interest rate factor. Use the monthly interest factor in parenthesis corresponding to highest interest rate of your loan to find out if you qualify for a hardship deferment. Sample rates and monthly interest factors are: 7.5% (.0118702), 7.75% (.0120011), 8.0% (.0121328), 8.25% (.0122653), 8.38% (.0123345), 8.5% (.0123986), 8.75% (.0125237), and 9.0% (.0126676).

Determine the following:

• Estimated Monthly payment is the monthly factor multiplied by amount borrowed.

• Annual payment is the monthly payment multiplied by 12 months

• Adjusted gross income (AGI)—yours only, excluding spouse’s since government loans are individual obligations). Many institutions accept W-2’s or one month of pay stubs to estimate AGI.

• Total of 0.2 multiplied by AGI.

*Question 1.* Is estimated annual payment greater than or equal to 0.2 times AGI? If yes, continue; if not, then you are ineligible for a hardship deferment.

*Question 2.* Is AGI minus annual payment less than or equal to the “Max allowable” for your state? If yes, you may qualify for a hardship deferment; otherwise you do not qualify for this particular year. Note: “Max allowable” criteria is $24,750 for all states and D.C. except Alaska ($30,932) and Hawaii ($28,446). If currently living outside U.S., use state of last residence.

Note: Each year you must reapply for the deferment based on the same criteria.

Here is a working example. An intern finishes medical school and approaches repayment with a $100,000 balance. His salary is $35,000 per year and his interest rate on his loans is 8.25%. We assume he took out the maximum $8,500 per year in subsidized Staffords for a total subsidized portion of $34,000. Per the rates above, his estimated payments are: ($100,000) multiplied by (.0122653) equals $1226.53 per month or $14,718 per year.

Question 1: Is estimated annual payment greater than 0.2 times AGI? (Is $14,718 greater than or equal to 20% of $35,000? $14,718 is greater than $7,000.) Yes. Go to Question 2.

Question 2: Is AGI minus Annual payment less than or equal to the “Max allowable” for your state? (Is $35,000 minus $14,718 less than or equal to $24,750? $35,000 minus $14,718 equals $20,282, which is less than $24,750.) Yes. Therefore, the intern can qualify for the hardship deferment.

How much will he or she save? If three years of hardship deferment are used during residency, the loan balance is still $34,000 at repayment ($8,500 times four years of medical school). Assume the current interest of 8.25%. Repayment equals $417 per month for ten years. If the interest accrues during a three-year residency, the balance at the end of three years is $43,727, which requires $536 per month for ten years.

The interest in a residency forbearance is capitalized only once per year, but during repayment it is capitalized once per quarter. The total savings over the ten-year repayment between the two cases is $9,727 interest during the residency and $4,589 additional interest payments during repayment. Thus, the total maximum savings for using three years of hardship deferment during residency is a significant $14,317. A person can qualify for a hardship deferment up to 36 months on each individual loan.

Keep in mind, it is not beneficial to apply for a hardship deferment to unsubsidized Stafford loans during residency because the government will not pay the interest for those loans. However, putting all loans in an economic hardship deferment status preserves forbearance time which may be needed in the future. It is simpler than applying for economic hardship deferment to subsidized loans and a forbearance on the unsubsidized loans. A hardship forbearance after residency does not cover the interest on subsidized loans, but it allows the payments to temporarily cease. A person has 60 months of forbearance time, much of which is typically consumed during residency.

As per above, at 8.25%, the $34,000 in hardship deferment will mandate approximately $417 per month during repayment. That could be reduced on a monthly basis through consolidation if it was later found to be too great a burden. If not consumed during residency, a hardship deferment can be used after residency. However, many people after residency will earn too much to qualify unless they are working part time.

Therefore, in the opinion of the author, the best time to apply for the hardship deferment is as soon as possible. That minimizes the risk of missing out on the interest savings.Young physicians often wait until after residency to start repayment of their loans. This is costly. Depending on one’s commitments during residency (family, and so on), at least a portion of the interest on one’s loans can be paid as it accrues to reduce one’s total repayment. If loans are ignored, after just four years of a residency at 8.25%, 37% more loan balance exists than at graduation. There are many residents who can save $14,317, but too few who are aware of this option.

*Andrew Weinberg D.O., is an Intern at Delaware County Memorial Hospital in Drexel Hill, Pa.*