by Richard B. Willner
Repayment of student loans is a problem plaguing physicians throughout the country. Recent changes to the types of loans available and the repayment options have created enormous financial burdens. Before you can choose the best loan type for you, it is important to understand the basic types of loans and their caveats.
There are four primary types of loans available to medical students pursing an advanced degree. These include the federal Stafford loans, federal grad PLUS loans, federal Perkins loans, and private institution education loans. President Obama’s 2010 budget proposal, and the subsequent passage of H.R. 3221, ended the Family Federal Education Loan (FFEL) program, which was the second largest higher education loan program. This program subsidized private lenders for federally-insured (“guaranteed”) student loans. Private lenders, such as Sallie Mae, used their own capital to finance loans and were then subsidized by the government. This allowed the lenders to maintain low interest rates and cover expenses associated with collection and default. In addition, the government would insure the lender in case of default. After July 10, 2010, no subsequent loans were permitted under this program, and now the only available loans are direct federal loans.
Stafford loans can be considered the “base” loan of any medical student receiving financial aid. These federal loans are the first to be taken out due to their low interest rate. Lenders and guaranty agencies are not involved in the process. Stafford loans can be further subdivided into two categories: subsidized and unsubsidized. Prior to July 2006, Stafford loans had a variable interest rate, which would fluctuate based on the current rates. Currently the interest rates are fixed and the government sets the maximum interest rate that can be charged.
Subsidized Stafford loans are the best loans to take out, because they have a low interest rate of 6.8%. This interest will begin to accrue only AFTER graduation from medical school. Therefore, you are not paying interest during medical training, and upon graduating the interest rate is fairly low. The government pays the interest for you during your training, grace period after graduation, and also in periods of deferment. These loans are awarded on the basis of financial need, and the maximum yearly amount is capped at $8,500. The actual amount you receive is slightly less than this, because you will be charged a fee of 1%.
Unsubsidized Stafford loans currently have an interest rate of 6.8% as well, but this interest begins accruing from day one. Interest will be added throughout your medical training through capitalization. Capitalization is when you do not make interest payments while in medical school, and upon graduation, the total interest is then added to the principal loan amount. If possible, it is extremely advantageous to make monthly payments towards the interest to avoid this capitalization. The maximum yearly amount for these loans is capped at $32,000 a year, minus the 1% fee.
As a medical student, it is imperative to budget your money, and these two loans should be all that is necessary in ordinary circumstances. The maximum lifetime amount of Stafford loans is capped at $224,000, which could present a problem to those who took out undergraduate loans as well.
Once you have reached the maximum limit on Stafford loans, your next option would be the Grad PLUS loans, which are also federally sponsored. This type of loan has a higher interest rate, currently 7.9%, and also has a higher origination fee of up to 4%. These loans have an advantage over private educational loans because they can be consolidated, sometimes deferred, and are eligible for income based repayment after graduation. There is no fixed limit on these loans, but you cannot borrow more than the cost of medical school (provided by the individual school) minus any other loans.
Perkins loans are federal loans available to students with exceptional financial need. These loans are financed by the government and given to individual institutions to disburse. Each school receives a certain amount of funds each year and are typically first come, first serve. These are low interest loans (5%) with no origination fees and a grace period of 9 months before repayment.
The final type of loans which should only be considered as a last resort would be private educational loans. These loans are available from private lenders, but typically have high interest rates which begin accruing immediately and high associated fees. The interest rates are usually variable based on the current rates. They cannot be consolidated or deferred, and you must begin repayment after graduation. These loans are ineligible for income based repayment.