Thoughts on student loans and the grace period

[pierre]

I was perusing some old blog posts and noticed that it was recommended that once graduating med school you should take full advantage of the 6 month grace period before making any payments on your student loans.

I would argue that it is some situations, particularly those going for PSLF, it is better to skip the 6 month grace period all together.

For most people on IBR/PAYE/REPAYE, as a full time student the prior year your income was probably $0. Even if you did make a few bucks (up to $15-20k-ish) your IBR payment is still $0. If you forgo the 6 month grace period you still get credit towards PSLF of 6/120 payments, even though you paid nothing. Ten years later when you have an attending salary, you are making max payments. If you took "advantage" of the 6 month grace period, now you still have 6 more months of max payments to make before your loans are forgiven. In my case, this would have been worth over $20k. Some will get more benefit, others less.

Did you use, or do you plan on using, the entire 6 month grace period?  Is this still the general recommendation?

Perhaps PSLF will blow up and this won't even matter.

 

[canadianoutlaw]

In my opinion, your reasoning is exactly right. If you pursue PSLF you want to get started ASAP. Unfortunately, the time it takes to consolidate, enter an IBR plan, process paperwork, deal with FedLoan, etc, which inevitably delays things so you can't be perfectly efficient. We moved as quickly as we could into PSLF after medical school without hesitation but it still took us several months until we were able to start getting credit for PSLF.

[jhwkr542]

I'm pretty sure you can't enter IBR/PAYE/REPAYE until the grace period is over unless you consolidate which, like canadianoutlaw said, takes time.  Hard to game the system this way.

[Daniel Wrenne]

I agree it's better to skip grace and begin IDR sooner for MOST med school grads.  But it's not as straightforward as I had hoped.  #studentloanssuck

Like you mention, for PSLFers, skipping all of grace should equate to around $15-30K in value (6 x 10 year standard payment).

Also because of grace, new grads are completing IDR applications AFTER starting residency.  The IDR app asks "Has your income significantly changed..." and the honest answers leads them to verifying using their full resident income.  So they start IDR based on $50K income (instead of $0).

Thanks to RePAYE, the grace damage isn't limited to PSLF candidates.  During grace period, you cannot avoid interest (for most loans).  However, with RePAYE you can.  The lower your RePAYE payment, the more interest you avoid.  It's not uncommon to see residents racking up interest at $1500/mo+. Under RePAYE at least half of unpaid interest is subsidized.  Based on this, avoiding grace to accelerate RePAYE would also save the non-PSLFers thousands.

But you can't skip grace by accelerating IDR.  However, you can consolidate.  And a new Direct Consolidation loan gives you the option to forfeit grace.

From Fed Student Aid (one of the circumstances that may change your grace period):

• Loan consolidation—If you consolidate your loans during your grace period, you will give up the remainder of your grace period and begin repayment after your Direct Consolidation Loan is disbursed (paid out).  Your first bill will be due approximately two months after the Direct Consolidation Loan is disbursed.  https://studentaid.ed.gov/sa/repay-loans/understand

However it takes two months to process...  that leaves 4 mos of potential "accelerated" grace.

The Direct Consolidation app makes you certify that...

C. All of the loans I have selected for consolidation are in a grace period or in repayment (“in repayment” includes loans in deferment or forbearance).

When is the soonest possible point where a med school grad could satisfy above?  I'm thinking at worst, the consolidation strategy would get you 2-3 more cheap PSLF payments.  Plus you can send up the IDR application BEFORE you start residency when you have NO income.  This would lock in $0/mo payments further adding to the PSLF and non-PSLF RePAYE value.

All that being said, I haven't yet seen an example where this was successfully executed.  Has anyone done this before?  I'm curious how the timeline worked out.

I recently spoke with our local med school's financial aid director and apparently everybody is "taking advantage" of grace.  Consolidation is not at all on the radar.

[canadianoutlaw]

Daniel Wrenne wrote:

This would lock in $0/mo payments further adding to the PSLF and non-PSLF RePAYE value.

Click to expand...

yes, you def want to try to get as much of those $0/mo payments as you can for PSLF

[The White Coat Investor]

pierre wrote:

I was perusing some old blog posts and noticed that it was recommended that once graduating med school you should take full advantage of the 6 month grace period before making any payments on your student loans.

I would argue that it is some situations, particularly those going for PSLF, it is better to skip the 6 month grace period all together.

For most people on IBR/PAYE/REPAYE, as a full time student the prior year your income was probably $0. Even if you did make a few bucks (up to $15-20k-ish) your IBR payment is still $0. If you forgo the 6 month grace period you still get credit towards PSLF of 6/120 payments, even though you paid nothing. Ten years later when you have an attending salary, you are making max payments. If you took “advantage” of the 6 month grace period, now you still have 6 more months of max payments to make before your loans are forgiven. In my case, this would have been worth over $20k. Some will get more benefit, others less.

Did you use, or do you plan on using, the entire 6 month grace period?  Is this still the general recommendation?

Perhaps PSLF will blow up and this won’t even matter.

 

Click to expand...

You'll like this post: https://www.whitecoatinvestor.com/how-to-enroll-in-repaye-early/

[East coast]

When is the soonest possible point where a med school grad could satisfy above?  I’m thinking at worst, the consolidation strategy would get you 2-3 more cheap PSLF payments.  Plus you can send up the IDR application BEFORE you start residency when you have NO income.  This would lock in $0/mo payments further adding to the PSLF and non-PSLF RePAYE value.

All that being said, I haven’t yet seen an example where this was successfully executed.  Has anyone done this before?  I’m curious how the timeline worked out.

I recently spoke with our local med school’s financial aid director and apparently everybody is “taking advantage” of grace.  Consolidation is not at all on the radar.

Click to expand...

https://www.whitecoatinvestor.com/forums/topic/idea-to-enter-repaye-early/

A number of folks here here have done what you are describing. Anecdotally, consolidation only took us about two week.

[mamead]

https://www.whitecoatinvestor.com/forums/topic/idea-to-enter-repaye-early/

This strategy has worked very well for me. I consolidated a few weeks after graduation and it worked well to skip grace period and enter REPAYE early to capture interest subsidy

[FutureDoc]

Myself, my wife, and half a dozen classmates and co-resident have taken advantage of that to enter repayment early.


I'm also the author of that post. So I'm slightly biased.

[Daniel Wrenne]

FutureDoc great article and strategy!  Couple questions...

Is it necessary to file a tax return for the prior year (for those without income)?

On the IDR application Item 13...  Has your income significantly changed since you filed your last federal income tax return?  

Wouldn't this answer do the job (for those without any income)?  We haven't filed a federal income tax return in the last two years - Skip to Item 15.

And then Item 15...  Do you currently have taxable income? 

No - You are not required to provide documentation of your income. Continue to Item 16.

Also, in the direct consolidation application, there is a section under the borrower understandings, certifications, and authorizations that reads...

C. All of the loans I have selected for consolidation are in a grace period or in repayment (“in repayment” includes loans in deferment or forbearance).

I would have thought a med student was technically not in grace or repayment until they graduated.  Or are med students technically in deferment on loans they've already taken out?

Appreciate the help!

[chansen]

Daniel, yes, that is fine to answer those questions in that manner. You need to make sure you answer item 15 before you start residency. Do not answer no to 15 if you started getting a salary. Best bet is to get this started before graduation by filing a zero tax return on time. If you realize it late, go ahead and file a late return and pay the $100 late filing fee.

You cannot apply for a consolidation loan until you have graduated. The problem I have run into is getting the schools to update the status of the graduates in a timely manner. They do not seem to understand why anybody would want to be listed as graduated as soon as possible.