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FIRST for Residents Mailbox Archive

December 2008: Important Message About Student Loan Interest and Tax Deductions

Although student loan payments cannot be claimed as a tax deduction, the amount of interest paid on student loans MAY be eligible. Thus, as this tax year draws to an end, this message from the FIRST for Residents Mailbox serves as a reminder that it is important to evaluate your financial situation and determine if you have maximized your available deductions. You can claim a deduction for paid interest if ALL of the following apply:

You paid interest on a qualified student loan in tax year 2008
Your filing status is not "married filing separately"
Your modified adjusted gross income is less than $70,000 (or less than $145,000 if "married filing jointly")
You and your spouse, if filing jointly, cannot be claimed as dependents on someone else's return [A qualified student loan is a loan you took out solely to pay qualified higher education expenses - See the instructions for Form 1040 to determine if your expenses qualify.]

If all requirements are met, in addition to the simple interest of the student loan being deducted, the following items may also be included as student loan interest:

the origination fees paid,
the amount of capitalized interest, and
voluntary interest payments made when no payment was required.

Note: A deduction for capitalized interest is not allowed in a year in which loan payments were not made. The maximum deduction for student loan interest is $2,500. Physicians typically qualify for this deduction while in medical school and/or residency when salaries are often lower. As Modified Adjusted Gross Income (MAGI) increases, the amount of the tax deduction is reduced or eliminated at certain income levels. To determine if you qualify for a student loan interest tax deduction, or for more details on this subject, please refer to IRS Publication 970, Tax Benefits for Education.

For further questions regarding tax deductions on student loans, contact the IRS at 1-800-829-1040 or consult a tax professional.

October 2008: Economic Hardship Deferment

This message from the FIRST for Residents Mailbox serves as a reminder to all residents: It may be time to apply for Economic Hardship Deferment on some or all of your federal student loans.

Be Advised

Do not allow the Grace period or your current Economic Hardship Deferment to expire without having another deferment in place. This may cause early capitalization - making the loans more expensive. Filing late for a deferment may also lead to required payments that you have not budgeted for. The best way to avoid this is to submit your application for Economic Hardship Deferment within 30-days prior to the date you will actually need it; this should allow for sufficient processing time by your lender(s). Continue reading for more details.

Is deferment going away?

As you may have heard, Economic Hardship Deferment eligibility criteria is currently scheduled to change on July 1, 2009, making it more difficult for medical residents to qualify. The key to obtaining another full year, prior to this change is to have an application in and processed by your lender(s) shortly before July 1, 2009; this will allow you to obtain another full (and final) year of Economic Hardship Deferment.

The following are possible steps to consider in order to maximize the availability of Economic Hardship Deferment:

Contact your servicer and ask how you might maximize your eligibility for Economic Hardship Deferment. Economic Hardship Deferments are typically granted in annual increments. However, depending on your servicer, you may be able to request that your current or next Economic Hardship Deferment period be shortened. It should be scheduled to end on or near June 1, 2009; this allows for sufficient time to process a final deferment request prior to the changes taking effect.
If your Economic Hardship Deferment is scheduled to end on or near June 1, 2009, then you must make sure to apply for another annual increment before that date to avoid any capitalization or monthly payments.
Follow-up with your servicer to ensure that that your application is received and processed.

Remember, in order to be eligible for another year, you must not only meet the financial qualifications, but you must also have your new application submitted to the lender prior to July 1, 2009. For specific questions about your loans, contact your lender(s) or servicer(s). They can advise you on the status of your loans, the application process and any eligibility questions you may have.

General questions can be submitted to FIRSTforResidents@aamcinfo.aamc.org

June 2008: Interest Rates Change

On July 1, 2008, the variable interest rates on federal student loans are scheduled to reset—lower by slightly more than 3 percentage points. This decline will impact only those loans that have not been consolidated and that were disbursed prior to July 1, 2006.

This rate change will not affect private student loans or fixed rate federal loans (such as consolidation loans, Grad PLUS loans and recent Stafford loans). Therefore, if all of your federal loans are already at a fixed rate, this rate change will not impact you as there is no way to "refinance" a fixed rate federal student loan into a lower interest rate.

Loans Possibly Affected:

Subsidized and Unsubsidized Stafford loans (disbursed prior to July 1, 2006)
Parent PLUS loans (disbursed prior to July 1, 2006)

Rate change:

Stafford loans—from 6.62% to 3.61% (In-school/Grace/Deferment periods)
Stafford loans—from 7.22% to 4.21% (Forbearance/Repayment periods)
Parent PLUS loans—from 8.02% to 5.01%

Should you consolidate?

To consolidate or not is a personal decision based on an individual's financial goals. In light of the impending rate drop, the primary reason to consolidate would be to protect variable rate loans from future rate hikes.

Some advice to consider before making a decision about consolidation includes:

Do not consolidate before July 1, 2008, as rates do not decline until this date.
Do not "re-consolidate" loans that have already been consolidated.
Additional consolidation of these loans will not reduce the rate, but may actually cause the interest rate to be increased.
Consider consolidating only variable rate loans and not including any fixed rate loans into the consolidation as the new fixed rate will be rounded up to the nearest 1/8th.The rates discussed above will be in effect July 1, 2008, thru June 30, 2009. You may want to consider waiting until 2009 to see the impact of next year's rate reset before deciding to consolidate.
Consolidation can increase the cost of the loan by lengthening the term of the loan. Be aware of the impact of consolidation and manage your repayment wisely.

Questions

Submit your general questions to the FIRST for Residents Mailbox.

For detailed questions, contact your lender or servicer to learn if/how this rate change will affect you and what your options are.