Economic Hardship Deferment

Important information for Medical School Graduates
As you leave medical school and enter your residency, it is important to keep in mind all of your options regarding your student loan payments while in residency. One option that is important to consider is the consolidation of your student loans, which can enable you to lock in a fixed interest rate (currently at a historic low), as well as lower your monthly payments by over 54%. For more information on student loan consolidation, please visit: www.ama-studentloans.com or call 1-866-737-2979. All federal student loans have a grace period—the period after graduation before you start repayment (typically six months). During the grace period, borrowers should discuss their consolidation options with a personal loan counselor, but should also consider all options for a deferment of payments on their current education loans for certain reasons, including economic hardship. For information on deferments, borrowers should talk with the current servicers of their education loans.

What is the Economic Hardship Deferment?
Economic Hardship Deferment is an option that allows borrowers to defer payment on their federal student loans for up to three years if they meet certain eligibility requirements. During the deferment, the federal government continues to pay the interest on the subsidized portion of the resident's loan portfolio. Interest on the unsubsidized portion of the borrower's portfolio continues to accrue during this time.

Am I Eligible?
Eligibility for the Economic Hardship Deferment is based on an individual debt-to-income ratio. To qualify, a borrower must be employed full-time, the borrower's federal education debt burden (defined as the required monthly payment) must be equal to or greater than 20 percent of the borrower's monthly income, and the borrower's income minus the education debt burden must be less than 220 percent of the greater of the minimum wage rate or the federal poverty line for a family of two. For a medical resident making the average first-year resident stipend of $37,383, and with interest rates at the current level, the borrower would need approximately $92,000 in federal education debt to qualify for this deferment. (If the maximum interest rate is used, a borrower would need approximately $73,000 in debt to qualify.) The borrower must reapply for the deferment each year, for a maximum of three years. The borrower should call the servicer of the education loans to discuss their eligibility for the economic hardship deferment.

Medical residents whose eligibility for the Economic Hardship Deferment has expired (either through no longer qualifying under the debt-to-income ratio or having used all three years) have the option of beginning to repay their loans, or going into forbearance. Under forbearance, no payments are required; however, interest continues to accrue and the federal government no longer pays interest on the subsidized portion of a borrower's loans. In addition, interest may be capitalized under forbearance, making this an expensive option for borrowers. Under a special provision passed in 1993 (when the 2-year internship residency deferment was eliminated) borrowers are able to forbear their federal loans throughout the duration of their ACGME-accredited residency program, regardless of the length of the program.

Citations:
Higher Education Act: Title IV, Sec. 435(o)

Code of Federal Regulations:
34 CFR 682.210(s)(6) (FFEL)
34 CFR 685.204(b)(3) (DL)