The Pros and Cons of REPAYE (and what residents should do)

This post is pretty long, but this is an important development on the federal student loan front that’s worth the lengthy discussion. The bottom line is that the new REPAYE program has a lot to offer people currently not just in IBR but also PAYE. I highly recommend putting some numbers into this calculator to see how the repayment options look to you currently as well as how they might change with your career over the near future. Many residents should be doing REPAYE.

First, what is REPAYE?

REPAYE (or “revised pay as you earn”) is the newest federal government student loan payback plan, designed to give older borrowers from the (pre-PAYE) IBR regime a chance to benefit from some features of the newer PAYE plan (10% cap of your discretionary income instead of 15%) while also closing some of its “loopholes.” As a general rule, the feds don’t change current programs; they create new ones and “grandfather” people in the old ones. Rather than extending PAYE to more people (those with loans prior to October 1st, 2007 or without new loans since October 1st, 2011), they made REPAYE.

Here are the main features of the REPAYE program (contrasted with PAYE and IBR as applicable) and how it may affect switching:

Good: 10% AGI payments

Monthly payments are calculated at 10% of discretionary income (adjusted gross income minus the poverty line). If you’re currently under IBR, this effectively cuts your monthly payment by 33%, saving you a good chunk per month and potentially saving you a lot over the course of the 10-year PSLF mark. If you’re in PAYE, the monthly payment will be the same (with some exceptions outlined below).

Good: The 50% unpaid-interest subsidy

Subsidized Stafford loans for medical students are a thing of the past, but the new REPAYE program has actually added back a much more robust interest subsidy. In fact, the subsidy is that one thing that makes staying with federal loans during residency a reasonable alternative to private refinancing if you’re otherwise not planning on trying to achieve PSLF.

The deal is this: half of the interest you don’t pay with the 10% payment is waived and does not accrue. This is a huge perk of the program and should cause even residents currently in PAYE to run some numbers, as it effectively reduces your interest rate while in training (potentially to an effective rate lower than what private companies are able to match).

An example:

Loan: $200,000 at 6.8%
REPAYE payment as a resident making $50,000: $270/month
Annual interest accrued: $13,600
Annual interest paid: $3,240
Annual interest unpaid: $10,360
Amount forgiven: $5,180
Effective interest rate: 4.2%

The more you make, the higher your payment and thus the less interest unpaid and forgiven. In this example, once your monthly payment hits $1133, you’re breaking even with interest and nothing is forgiven (for a single physician, this corresponds to an annual income of around $153,500, so very much in the realm of some academic jobs). Ultimately, this makes REPAYE a viable alternative to private refinancing for non-PSLF-bound residents. For residents (and obviously most attendings) with average debt and a household income above $150k not attempting PSLF, private refinancing will likely supply a better rate and more savings. Obviously, the more you owe, the more interest accrues, and the higher you have to earn before you break even on monthly interest. As I said, you really need to run your numbers! Private college + medical school and suddenly that subsidy could be good for a really long time. Of course, like IBR and PAYE, the unpaid interest you have on any subsidized loans (from college) is still completely covered for 3 years.

Bad: The Married-filing-separately “loophole” is Closed

REPAYE closes the married-filing-separately loophole. Under PAYE and IBR, if your spouse made big bucks, you could file taxes separately, thus calculating your loan payments for your debt based solely on your (lower) income. This was particularly helpful for doctors with high earning spouses who didn’t have big student loans themselves, especially low-earning residents. If you rely on separating the income disparity between you and your spouse to make income-driven repayment work for you, then you don’t want to switch to REPAYE. That said, if you and your spouse both have loans and similar income (i.e. were both medical students around the same time and finishing residency around the same time), this isn’t much of an issue. If you file together despite higher loan payments due to other tax benefits, you aren’t using the loophole anyway. For example, you can only deduct student loan interest (capped at $2500 and only for households earning less than $160,000 in 2015) if you file jointly. 1 You’ll have to do the math with the calculator; it’s possible that it’s still in your favor to switch.

Bad: The Pay Cap is Gone

REPAYE did away with the monthly payment cap. IBR payments are calculated at 15% of your discretionary income and PAYE payments are 10%, but both are capped at the monthly amount calculated by the standard 10-year repayment when you first entered repayment. So even if your salary as an attending is huge, your monthly payments could only rise so much (often referred to as the “Doctor’s Loophole” due to the big salary jump at attendinghood with only a subdued concomitant rise in loan payments). There is no payment cap with REPAYE; your monthly payments keep scaling with income. For some, the IBR/PAYE cap is critical to potentially achieving PSLF, as if your income grows high enough fast enough you could “overpay” quickly and whittle down the forgiven amount. Practically, this change may be less important than it seems. It’s all about the ratio of your loan amount to your income. The bigger your loan and the smaller your income, the less relevant this becomes. Here’s a calculator to run your numbers.

As a quick rule, you definitely need to make more per year than you owed at repayment for this to matter at all. So if you borrowed $200k and are making $150k doing primary care: potentially irrelevant (depending your spouse’s income). You’ll have to do your own numbers, but here’s an example:

Loan amount: $200,000
Loan rate: 6.8%
Payments with annual income: $50,000

  • IBR: $404
  • PAYE: $270
  • REPAYE: $270
  • Standard: $2302

Payments with annual income: $250,000

  • IBR: Capped at standard, $2302
  • PAYE: $1936
  • REPAYE: $1936
  • Standard: $2302

Payments with annual income: $300,000

  • IBR: Capped at standard, $2302
  • PAYE: Capped at standard, $2302
  • REPAYE: $2352
  • Standard: $2302

As you can see, in this example it takes an income of nearly $300,000 for the uncapped REPAYE to finally cost more per month. So for the average single doc, the cap-removal is potentially not a huge deal, and even many married physicians needn’t worry, especially if you can “lower” your income or switch back (see below).

Since loan payments are calculated based on your “adjusted” gross income, which takes into account deductions. If your income jumps, you can potentially “reduce” it by contributing to pretax accounts, such as your (non-Roth) 401(k)/403(b), 457, HSA, or 529 plans.

The switch-back loophole?

Lastly, it is still possible to switch back from REPAYE to IBR (or PAYE if eligible), so in this context, if it looks like your uncapped 10% is finally going to be too big, you could theoretically go back down to your “lower” capped 15% IBR (or 10% PAYE payments) while you still qualify (have a partial financial hardship). So you have to anticipate this and make the switch back before your salary is so high that you no longer qualify, but this would still allow you the training years of lower payments and subsidized interest. Talk with your servicer if this seems relevant to you, as in this context, the only downside of switching from IBR to REPAYE is interest capitalization (which usually eventually happens anyway at high income due to loss of your “partial financial hardship”) and being forced to make either 1) make one big standard repayment and have the month counts towards PSLF or 2) make a reduced payment (like $5), but the month won’t count and you’ll be delaying filing for PSLF by a month. Note this only happens when switching out of IBR. There is no mandatory delay for switching out of either PAYE or REPAYE (some servicers may put you in an administrative forbearance for a month because they are slow and annoying). Unpaid interest will capitalize again when switching out of REPAYE (which would be irrelevant if going for PSLF).

For whom this generally matters:

Group 1: People in IBR who want PSLF

All of this is most relevant for people trying to minimize monthly payments for eventual forgiveness under the Public Service Loan Forgiveness program. The goal for income-driven repayment and PSLF is to pay the absolute minimum possible per month for 120 payments (10 years) in order to maximize the currently unlimited (but untested) tax-free loan forgiveness. This plan starts in residency when income is low, continues throughout training (the longer the better), and ends up with as few years as possible at the higher-earning attending level to eat away at your potential forgiveness. 10% AGI payments under REPAYE will be lower than 15% payments (with the exception being if you were relying on the married-filing-separately loophole to exclude your spouse’s income or you make a lot of money). The downside to switching is interest capitalization, but not only is this mitigated by the interest subsidy, it’s irrelevant if your loans are forgiven (consider the subsidy to be hedging your bets against PSLF). Residents in IBR should mostly be residents in REPAYE.

Group 2: People who can’t afford IBR payments

People forbearing because they can’t afford IBR payments could potentially enter REPAYE in order to lower their monthly payments by 30% and start making some payments. This is a big benefit versus forbearance because of the half-interest forgiveness aspect, which really slows down interest accumulation. The caveat here is that if you have high income but high spending, you still might not be able to afford the payments. If 10% is still not affordable, then you should probably try to refinance privately, as a couple companies have plans for residents that require between $0-$100/month during training with lower interest rates.  Forbeared loans are helping no one and growing fast.

Group 3: People in PAYE who are currently accruing a lot of interest

While your monthly payments won’t change, the amount of unpaid interest accumulating will be cut in half. This could be a big deal, particularly if you have a fair amount of residency left. See take home points below.

 

A word on non-PSLF long-term forgiveness

Basically no one should really be going for the 20-25 year forgiveness unless you went to private college and med school, racked up an incredible amount of debt, but then went to go on earning peanuts for a non-PSLF eligible job. But if that describes your plan, PAYE is 20 years. REPAYE is 25 years (just like IBR) if you have graduate loans (which you do). So definitely worth switching from IBR to REPAYE; definitely worth not switching if you’re already in PAYE. Unlike PSLF, this forgiven amount is taxed as income for all income-driven repayment plans (the more you get forgiven, the more you owe the IRS as a big tax bomb). If you’re not minimizing payments to get the most out of PSLF, you should instead be maximizing them to get rid of this high-interest debt.

 

Take home points

REPAYE is a big deal with two big draws: Compared with IBR, it’s lower monthly payments. Compared with both IBR and PAYE, there’s the new unpaid interest subsidy. Some “loopholes” are closed (no married filing separately loophole and no monthly payment cap), but these may not be relevant to your situation. Residents need to consider REPAYE seriously.

  • If you’re doing IBR, you owe it to yourself to run some numbers to see if REPAYE is for you. The main immediate downside will be interest capitalization and potentially losing one month/one PSLF-qualifying payment during the switch. The main long-term downside could be if your future salary breaks through the cap. As above, this may not be a realistic problem for you, and even if it is, you may able to preempt this by switching back to IBR while you still qualify.
  • If you’re doing PAYE, you won’t save any money on your monthly payment, but if you have a high debt/income ratio (and many of you do), then you can potentially save a lot of money due to the new unpaid interest subsidy. If you’re married, this will depend on your spouse’s income and debt burden as well.
  • If you’re not going for PSLF, then it makes sense as a resident to apply to DRB and LinkCapital to see what the private industry can offer you. If the rates they offer are lower than your effective REPAYE rate, then refinance. Alternatively, if you need the even lower payments ($75 or $100/month) those banks offer, then refinance. Both offer $300 bonuses for signing up via those links. If you’re scared about the future and want to lock in a relatively lower interest rate now instead of temporarily using REPAYE, then refinance (though you may leave some money on the table). If you’re not sure about doing PSLF, then REPAYE in many cases will keep your qualifying payments at the lowest possible amount while also limiting the growth of painfully accruing interest: a healthy middle ground.

Oh, and I’m not a tax or student-loan professional (whatever that is). This isn’t actually advice. You could always consult with a professional or your servicer to help you determine which plan is right for you.

30 Comments

  1. Excellent post that really covers a lot of important info. Question: Who actually are the professionals that I would talk to regarding this? Are accountants well versed in professional student loans? Who would know the ins and outs best.

    Reply
    • The hard but best answer is yourself. Educating yourself and doing it yourself is really the best option. If and when you have specific questions, your servicer can answer/confirm things for free. If the answers don’t make sense, call back and talk to someone else and see if the answers stay the same.

      Your average accountant is not typically well versed. There are “student loan consultants” and advisors though (who can be found via google). They’ll probably have a big excel spreadsheet that will spit out different options like a more robust version of the calculator above. If your question is about IBR/PAYE/REPAYE/private refinance, they should be able to help. All of these answers do require so assumptions about your future income, and you could do this yourself as well.

      The other choice is a financial planner. Many financial planners aren’t great either and have an incomplete handle on loans, but some are tailored to physicians and know their stuff (and some are tailored to fleecing physicians). In this case, you want a CFP (someone with real credentials) that charges a simple fee or hourly rate. Many of these people are often also salesmen who make commissions on insurance products and investments etc, so you need to make sure you know how they get paid before getting involved.

      Generally, being wary of financial professionals will serve you well. As one example, one of the biggest companies catering to financial planning and student loan management for residents until recently was GL Advisor. The company was shut down by the feds and its CEO charged with fraud. While the stakes seem high, I’d still strongly recommend doing it yourself if you can.

      Reply
  2. Thanks for this great post and the easy to follow-along examples.

    I’ll be starting residency with the following loans:
    Federal student loans: ~$340,000 @ 6.24%
    Private student loans: ~$68,000 @ 7.49%

    At the start of residency, would I be able to enter the Federal loans into REPAYE and refinance the Private loans (eg, with DRB or a similar company), with the intention to consolidate/refinance the Federal loans (with my private DRB loans) at the completion of residency?

    Reply
    • Yes, that plan is definitely feasible. Both federal and private loans are eligible for private refinancing (such as with DRB and LinkCapital). Given your private loan rate at almost 7.5%, you’re right that you should try to reduce that as soon as possible.

      To me, that proposed plan is probably the safest to control interest during residency. The only thing to double-confirm with yourself is to make sure you don’t want to refinance all of your loans together now? Assuming you’ve considered household/spousal income and they don’t apply, the simple way as I mentioned above is to compare the private rate with the effective REPAYE rate. (Also keep in mind that subsidized loans if you have any get all of their interest paid for three years). I’d guess that the effective rate will be significantly better, particularly as your federal loan load is high (people with smaller loans get much less accrued interested waived of course).

      If interest rates rise, you may not be able to get a great rate at the end of residency. That’s the one downside. That being said, trying to predict interest rates is like trying to predict the stock market: a terrible idea. Deferring the risk of not being able to consolidate down as well in the future as you can today isn’t a bad idea. If rates are high when you make good money, it’ll just mean you’ll need to focus more on paying them down faster when the time comes.

      Reply
  3. Hello Ben,

    Thanks for the great post! I want to ask for your advise and tips if you have one on my situation.

    I will soon graduate from medical student in May and start the medical internship this July for a year before I will do radiology residency training next year (4 yrs of radiology residency + 1 yr of fellowship).

    I only have fed loans, no private loans (4 Direct unsub, 2 Direct Plus Grad and 2 Federal Perkins at different interest rates).

    Current principle amount is ~ 229,000 ($206,400+interest amount accrued as of today) with average interest rate of 6.1%. Monthly interest accrual is $1150 ($13,800/year). I am a single, not married without children. My lender: Fedloan servicing.

    Here is my projected PGY incomes with rough estimates (I included moonlight salary as well):

    PGY1: AGI = $50,000; Required monthly payment = $268; 50% subsidy = $441; interest rate = 3.72%
    PGY2: AGI = $72,126; Required monthly payment = $453; 50% subsidy = $349; interest rate = 4.20%
    PGY3: AGI = $74,000; Required monthly payment = $468; 50% subsidy = $341; interest rate = 4.24%
    PGY4: AGI = $83,000; Required monthly payment = $543; 50% subsidy = $304; interest rate = 4.43%
    PGY5: AGI = $92,000; Required monthly payment = $618; 50% subsidy = $266; interest rate = 4.63%
    PGY6: AGI = $94,000; Required monthly payment = $635; 50% subsidy = $258; interest rate = 4.67%

    So, my current plans are below:
    1) RePAYE/PSLF for 6 yrs of training then refinance thereafter
    – As you can see, under REPAYE, effective interest rate is less than 5%. DRB bank can offer a fixed 4.5-6.5% interest rate for 10 yrs term to residents which means RePAYE option is still viable to stay during residency training (unless DRB offers below 4.5%) – my application is currently under processing with DRB at the moment
    – With RePAYE, I will likely have cash flow, so I will invest those to IRA Roth and 403b during residency.
    – After investment and if I still have extra funds, then I will go ahead and use that to student loan to prevent interest amount accrued. As of right now with my current understanding, any extra amount you pay on top of minimum required monthly payment will go toward outstanding unpaid interest. You can always target your extra payment to specific loans either highest interest rate one or highest principle amount of loan. So, my plan is to sign up for the Direct Debit which will reduce the interest rate of 0.25% on each loan I have and let fedloan taking out minimum monthly payment. Then, as soon as they process my payment, I will pay extra payment to prevent leftover amount after subsidy to be accrued. If I do this each month, then, I may pay off quicker on the specific loan and possibly make a dent on principle amount of highest interest rate loan one even during residency.

    2) RePAYE/PSLF for full 10 yrs to have leftover loan amount forgivable
    – This option is less likely for me. Radiology practices are dominantly hired by private groups even at academic settings sometimes. With fair amount of radiology salary, it may be better off to pay off on my own rather than depending on PSLF option. What do you think on this?

    3) Refinance now and re-refinance whenever I can get a lower interest rate anytime
    – Unless DRB bank offers me below 4.5% interest rate, I won’t do refinance now option. I will rather be on RePAYE to get the benefit of subsidy amount just during my residency. If DRB can offer a good deal, then it is smart to refinance if you know for sure about not pursuing PSLF. DRB requires only 100/month during residency and up to 6 months after training is over, FYI. There is other bank LinkCapital who can refinance residents, but they don’t lend currently.

    Reply
    • Except for your PGY1 and maybe PGY2 years when you may need to use paystubs, you’ll use last year’s tax returns each year to calculate your REPAYE payments. So you’re payments and relative interest rate increases won’t go up quite so fast.
      1) Confirm with your servicer that they’ll honor you “timing” the subsidy that way. Please do let me know if you what they say. Also, I’d guess you are pretty unlikely to have much leftover cash at least at first.
      2) Doing REPAYE allows you to hedge your bet for PSLF without much risk if it ends up working out for you. Nothing wrong with this. In this case, you obviously want to be making the smallest payments possible during residency. If you have extra cash in this situation, you might put it into a low-risk investment or CD etc and use the money toward the loans when you know it won’t be wasted.
      3) If you really think PSLF is not a good option for you, then you should refinance if the rate is lower than the effective rate for you with REPAYE. This allows you to pay it down as fast as possible without games and protects you from increasing income effects. The only reason to refinance now if the deal is above/near your effective REPAYE rate is if you’re concerned about future interest rate rises (i.e. locking in “today’s low rates”). Rates currently are already a bit higher than they were last year, so this idea is not without merit. Again, you could always refinance again if rates were to drop further.

      Reply
      • From my understanding and talking with fedloan servicer, 50% subsidy amount will be taken care of monthly based on the amount difference between the monthly interest accrued and the monthly payment calculated under REPAYE. I will set up the Direct Debit only to my minimum monthly payment under REPAYE. Then, on the Fedloan servicing website after you log in with your account, there is a tool for me to select a specific loan I want to pay online. So, if I want to pay extra on that loan, then this extra will go toward the outstanding. In the end, I will still get the subsidy benefit and if I am able to pay extra, I can do that online targeting the specific loan. This is my current plan if I will be on REPAYE during residency.

        Do you think it will be worthwhile to pursue in PSLF with radiology or other decent pay specialties? Hypothetically, if I will become an attending at 503(c)1 place for 4 more years under REPAYE after 6 yrs of training, since there is no cap under REPAYE, I will pay a lot per month and end up with not much leftover amount to be forgiven after 120 months payment. So, I am not leaning toward PSLF pathway. What is your take on this?

        My application is still currently in processing with DRB and if they can offer the rate at 4.5 fixed rate, would you be on refinance with DRB vs REPAYE? Obviously, I will have much lower effective rate under REPAYE for the first three years of PGYs.

      • 1) Interesting.

        2) PSLF is viable, assuming you trust the program itself. You can determine the salary you need using the payment tool. Your first year out in practice, you’ll still basically be using your fellowship pay. After that, if your payments outstrip the standard 10-year, then switch to PAYE (or IBR if necessary). If you were making no extra payments, you’d probably finish fellowship with still 200+ in loans. In this case, making three years of attending-level pay (years 8, 9, 10) would still result in large savings. Even a new radiologist making 300k a year for a few years isn’t going to make that big of a dent in the total amount making the minimum REPAYE payments (put that AGI into the calculator and you’ll see).

        3) The reason to hurry to refinance is fear of future rate increases. If you’re not that scared, then wait. If you’re scared and don’t plan on PSLF, then do it now. You can’t predict interest rates, you just need to follow your risk tolerance: either minimize now with REPAYE or refinance now to ensure long-term reasonable rates.

      • For others reading, when I talked to my servicer, they told me they applied the subsidy on a quarterly basis and it was not possible to “time” it. It tends to even be hard to see the subsidy on your actual statements (something I remember from my days receiving the subsidized loan subsidy; they would say “you can’t see it but we promise it’s there”).

        I honestly don’t know who is right or if any of this is done consistently either within or across servicers. I did read the actual legislation and it does not specify. Given how bad servicers are at applying extra payments and whatnot appropriately, I personally would be very hesitant to attempt this. If talking to my servicer was reassuring and I had the money to try it, I would definitely do so for only a couple months and make sure it was working the way I wanted.

    • WaterDragon – I am also a current intern in a very similar situation – 200k in debt, anesthesiology and and I want to aggressively pay back my loans. I think your option #1 is the way to go. I have been putting large amounts (1-2k/mo)toward my loans. I am just now learning the detail of REPAYE and its subsidy for 50% of interest accrued. This makes me want to enroll in REPAYE and focus no putting this extra money towards a ROTH IRA to take better advantage of this subsidy.

      I am trying to calculate the effective interest rate like you did in years 1-6, but I am having trouble. Would you mind sharing a calculator or spreadsheet that you used?

      Reply
      • For each year, use the federal estimator with the relevant/estimated income. That will give you the monthly payment. Multiple by 12 to get the annual amount paid. Mutliply your loans by your current interest rate (take into account the automatic deduction) to get your annual interest. Subtract the two and you’ll get the amount of unpaid interest. Dividing that by two gives you the subsidy amount and the residual unpaid interest. Take the annual interest subtracted by the subsidy amount and this is your new interest annual interest amount. Divide that by your loan amount to get your effective rate.

        In the above example:
        Loan: $200,000 at 6.8%
        REPAYE payment as a resident making $50,000: $270/month
        Annual interest accrued: $13,600 (200,000*.068)
        Annual interest paid: $3,240 (270*12)
        Annual interest unpaid: $10,360 (accrued – paid)
        Amount forgiven: $5,180 (half of unpaid)
        Effective interest rate: 4.2% ([accrued-subsidy]/loan amount), so (13,600-5180)/200,000

      • Excellent thanks Ben – So after crunching my numbers (190k ave interest 6.3%, AGI 40-90k) I get an effective interest of 4% even after pgy-5. So I’ve settled on changing over to REPAYE, taking advantage of the subsidy (making minimum payments), and instead of putting 1k/mo into my loans, I’ll pretty much max out the wife’s and my Roth IRA. At the end of 5 years (7%return IRA) , I come out 30k better off vy doing it this way.
        Thanks for your help!

      • A lot of folks are in your shoes and will save doing exactly what you’ve decided on

  4. Using the repayment calculator, AGI greater than 300k won’t let you transfer from REPAYE to PAYE/IBR route. So, you will be stuck with REPAYE/PSLF plan. Plus, if you marry during residency later with a partner with her/his income, you are likely to pay beyond the cap monthly amount under REPAYE/PSLF. So, during the 3 yrs of attending salary to finish the full 120 payments for the sake of PSLF benefit, you won’t have much amount leftover to be forgiven if you continue to stay on REPAYE/PSLF. So, only other option will be give up on PSLF and refinance to pay off on your own OR switch to Standard payment route if you still want to pursue PSLF. This is my current thought on this regarding the PSLF route.

    Reply
    • 1) Don’t forget, you’re going to get your next job before your training ends. You won’t be switching from a 300k salary to something; you’ll be switching in anticipation of that bigger job. There is a lag between any life change and the effect on your loans. Also note that since REPAYE is a 10% payment unlike IBR, a lot attendings in many specialities aren’t going to push past the cap unless their spouse makes considerable income. And it’s not that easy to push past the cap in a crippling way. An extra 100k in income becoming an extra 10k in payments times three years doesn’t wipe away 200k in debt.
      2) That’s all actually mostly beside the point in your example. Even in your example, switching to Standard repayment for 3 three years, paying ~30k a year. 230k on REPAYE for 6 years (the original loan balance has still been growing for a part of that time, let’s say probably 250k, but we can ignore that). A lot of that payment is going to interest, at the end of 3 years, you’d still near 200 forgiven. Even if magically your interest rate was dropped to 0% and you were simply paying down dollar for dollar, those three years would take you only down to 140k for forgiveness. I’d still call that a large amount to be forgiven. Even overpaying on the cap like you’re concerned with doesn’t change things by that much, even with salaries over 300k. Three years can only do so much.

      Reply
  5. My loan servicer, FedLoan, warned me against switching to REPAYE at this time. Even though it would lower my payment for a while, the payment would eventually increase with salary and I would not be eligible to switch back to my current 15% IBR plan and would not be eligible to switch to standard repayment at that time either. I am planning on PSLF.

    Reply
    • Your payment will go up with salary regardless. Whether or not that higher payment at 10% uncapped is more than it will be at capped 15% on IBR depends on how much money you make. There is no single right answer. If you see the illustrations above, a lot of doctors just out of training don’t make enough per year to actually lose money on REPAYE (and keep in mind that all the years of lower payments under REPAYE aren’t spontaneously washed away once REPAYE costs more per month than IBR). Obviously subspecialist surgeons have this problem more than pediatricians. And of course there’s the potentially deal-breaking issue of spousal income.

      As far as I know, you can switch back to IBR in advance *before* you you start making big attending money. Did your servicer say you could never switch out of REPAYE ever no matter what? Because that would be big news. This Q&A from the government states that “If you choose to leave [REPAYE], you may change to any other repayment plan for which you are eligible” (page 6). The issue that your servicer was likely referring to is that most attendings no longer have a partial financial hardship and thus no longer qualify for IBR. If you did this at the end of your training, there should be no issue. I’ve confirmed this with my servicer Nelnet.

      In fact, you only have to enter the standard or reduced repayment for a month going from IBR to REPAYE but not on the way back.

      Reply
  6. Incoming PGY1 here with $320k in loans. My wife’s AGI is $52k, so while my first and second years of residency would have manageable REPAYE payments at $166 and $372 (using the fsaid calculator), since I would have zero 2016 AGI and 6mos of 2017 AGI to contribute to the equation, the payments then take off to $586 and higher. I understand the tax benefits of filing jointly and the REPAYE interest subsidy. I would also like to start a Roth IRA and get as close to maxing it out as I can afford. REPAYE would have me pay $32k over the course of my 5 year residency, whereas PAYE (and thus filing separately) would have me pay under $11k with monthly payments reaching $235/month during PGY5, at the expense of accruing $100k. Since my wife and I plan on having a couple kids throughout residency, the lower monthly payments seem more appealing so that things don’t get too tight during those years (and allow me to max out a backdoor Roth IRA and also build an emergency fund to cover 3 months). However, REPAYE keeps that $100k of accrued interest away, which is nice. Since I’m not relying on paying towards PSLF, I’m having trouble deciding between the pros and cons of REPAYE vs PAYE. Part of me thinks the added cash flow and lower monthly payments during residency would make it worth hammering away extra interest once I start practicing, however I know that no matter how high my compensation could be, paying more gov’t interest is never a “good” idea. Any advice?

    Reply
    • You can start with REPAYE filing together then switch to PAYE filing separately if you need the cashflow. The interest capitalization after a year or two of low payments and a big subsidy isn’t going to make much of a difference. If you’re not PSLF bound, you could also consider refinancing once your income increases and REPAYE stops giving you a good subsidy. The resident-friendly refinancing companies require 100 bucks a month or less, which will also give you more flexibility if your life costs balloon.

      Reply
  7. Hey Ben,

    Incoming PGY1. Your posts are tremendously helpful! My question is, why aren’t all residents (or atleast the majority) doing REPAYE and then switching to PAYE at the end of their training? I feel like I am missing a key pitfall or something. Is it a pain in the ass to switch? Are new residents scared they will not be able to switch? Or is this just information not everyone has? I understand some people are not eligible, have a large spousal income, have private loans, etc etc… But just wondering why this isn’t a more ‘popular’ way to go about it.

    You’re awesome. Thank you!

    Reply
    • One reason is that it probably will be popular in the future, but REPAYE is still pretty much brand new and lot of current residents aren’t on it. It was released at the end of 2015 (which is mid-cycle for almost everyone), so really only students graduating in 2016 (i.e. current interns) even had the option to pick it when they first selected a repayment plan.

      Another is that even for more industrious residents, it seems a lot of servicers have been misleading borrowers about the ability to switch out. See: http://www.benwhite.com/finance/yes-you-can-switch-back-from-repaye-to-ibr-or-paye/.

      Another is that it depends on what happens after training. Switching only makes sense if you’re trying to minimize payments for PSLF. Otherwise, having smaller payments just means paying more over the life of the loan. Additionally, the accrued interest will capitalize, which is not relevant for PSLF but is for everyone else. For PSLF purposes:
      – A lot of people don’t need to. It isn’t that easy to break past the pay cap for a lot of docs. Thus, if you’re single, have a non-working spouse, or have a spouse with a similar debt to income ratio, PAYE isn’t going to make a big difference unless you are in a high paying specialty. There are definitely attendings who will continue to earn a REPAYE interest subsidy, particularly heavy borrowers.
      – Similarly, depending on their spouse, many won’t gain enough in lower payments by filing separately to offset the tax penalty of switching to PAYE in order to file taxes separately worth it.

      Reply
  8. I have asked a few people about this and haven’t been able to get a straight answer:

    For REPAYE, do payments made during the 6 month grace period count against the unpaid-interest subsidy?

    I don’t plan on aiming for PSLF, thus I want to minimize my effective interest rate throughout residency by making the smallest payments and achieving maximal government subsidies. But, if I can get rid of some of my higher interest loans prior to those payments counting against me, that would be a win win. Thanks for anyone with the info!

    Reply

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