Switching from REPAYE to PAYE after residency

From a reader:

Incoming PGY1. Your posts are tremendously helpful! My question is, why aren’t all residents (or at least 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?

Both REPAYE and PAYE calculate payments based on 10% of your discretionary income. But because PAYE monthly payments are capped at the amount that would be due for the standard 10-year repayment, PAYE payments can be lower than REPAYE payments for high earners. PAYE also allows for the married-filing-separately loophole that REPAYE closes.

The first thing we do as human beings when considering any big important action is to look around and see what everyone else is doing. (One imagines that, overall, this is a helpful survival mechanism.)

The downside to this approach is when the crowd is wrong. Or, when the crowd is right, but you’re different in some critical way.

So, the first/main reason people aren’t all switching from REPAYE to PAYE? They haven’t had a chance to yet.

Reason 1: Too Fresh

The switch probably will be popular over the next few years, but REPAYE is still pretty much brand new and a lot of current residents who should be aren’t on it. It was released at the end of 2015 (which is mid-cycle for almost everyone’s annual recertification), so really only students graduating in 2016 (i.e. new PGY2s) even had the option to pick it when they first selected a repayment plan.

Reason 2: Too Mislead

Another reason is that even for the more industrious residents who considered switching when it came time for their annual recertification, it seems that a lot of servicers have been misleading borrowers about the ability to switch out. For example: Yes, you can switch back from REPAYE to IBR or PAYE or even Navient is still lying to borrowers despite lawsuit.

Reason 3:  Too Ignorant or Lazy

Most borrowers choose and set-it and forget-it strategy to student loans, which means that they don’t critically re-evaluate their decisions or maximize their strategies. I’d like to think most people fall into the reason #1 camp, but the reason #3 group is one of the reasons why I wrote a book about it. A lot of folks are just lost.

Reason 4: They Actually Don’t Need To

A final big reason is that many borrowers won’t benefit from switching to PAYE: 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:

And even for those PSLF-bound:
– 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 throughout their 10 years of qualifying payments, even with spousal income (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.

The real take home

As you approach the end of training, it’s time to sit down and make your real repayment plan. You may have been in REPAYE because it was the no-brainer choice while in training, but now—with a new job and a salary increase on the horizone—you’ll have the information you need to figure out if you should stay the course, switch to PAYE or IBR, or prepare to refinance privately.

My new book: Medical Student Loans

My second book, Medical Student Loans: A Comprehensive Guide, is now out. It’s a novella-length treatment of student loans specifically for physicians and written to cover the topic for all levels: premeds, medical students, residents, and attendings. It’s especially helpful for graduating MS4s and by its nature also covers important basic financial literacy in a hopefully non-threatening way.

In other words, I hope you like it.

Despite years of writing about student loans on this site, it was a ton of work to put this together and finally get it out to the world. To celebrate, I’ve made it completely free to download from Amazon until the end of Sunday, June 25.

MSL will also be part of the Kindle Unlimited program for the next three months. You can get a 30-day free trial if you need another way to read it for free.

Consider it your first few hours of CME.

Navient is still lying to borrowers despite lawsuit

Unsurprisingly, Navient is still lying to borrowers despite the ongoing lawsuit (for misleading borrowers) from the Consumer Finance Protection Bureau.

I was talking to a fellow resident last week. She has almost a half million dollars in student loans from medical school and has been repaying in IBR. She recently got married, and her husband, also a resident, thankfully doesn’t have any student loans himself. Unfortunately, this also means that next time she recertifies her income, her payments are going to basically double thanks to the addition of his additional income. Once he becomes an attending, they would go up even further.

Given the possibility (and desirability) of public service loan forgiveness for her given her long training and very high loan burden, which would result in more money forgiven than she borrowed in the first place (due to negative amortization during residency), her goal should thus be to minimize payments in advance of this goal. I recommended she switched to Pay As You Earn (PAYE) to reduce her payments now and file her taxes separately from her husband next year (they weren’t married for tax purposes this year).

And here comes the lie: she called Navient for guidance, and the customer service representative told her she was ineligible for PAYE because she held a loan from 2009.

Anyone who knows anything about federal repayment programs or has the capacity to do a simple Google search would know that the limitations for PAYE eligibility have nothing to do with the year 2009. They are the following:

To qualify for the PAYE Plan you must also be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You’re a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan when you received a Direct Loan or FFEL Program loan on or after Oct. 1, 2007.

So, nothing before 2007 and at least something after 2011. In other words, 2009 was a great vintage for PAYE. Full bodied and expensive with more than a hint of scut.

From the Consumerist:

The lawsuit alleges that for years Navient engaged in a series of illegal and deceptive practices, including providing borrowers with incorrect information, processing payments erroneously, and failing to address customers’ complaints.

Sounds familiar.

As always, it’s difficult to know if the servicer customer service reps are willfully ignorant or malicious, but they are routinely wrong (and seemingly proactively so).

My advice to anyone ever calling a servicer with a question is to already know the answer before you ask it. Find some official government verbiage to back up your interpretation. You should be looking for confirmation, not advice, and if the answer you receive isn’t the answer you’re expecting, find out exactly why. If the person you’re talking to doesn’t know, then get them to give you to somebody else.

DeVos Doubles Down: One Servicer to Rule Them All

After rolling back modest consumer protections last month, Education Secretary Best Devos’ tenure has released its biggest change yet.

In an example of doublespeak that would make Orwell proud, DeVos said this in the announcement:

From day one, my priority as Secretary of Education has been to put students’ needs first. This amended solicitation does just that. It maintains superior customer service and borrower protections while increasing oversight and protecting taxpayers.

With changes in the new amendment, we have simplified the process to ensure meaningful borrower protections while saving taxpayers more than $130 million over the next five years. Savings are expected to increase significantly over the life of the contract. Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times and an improved payment application method that will maximize the benefit of each payment the borrower makes. Our amendment makes no changes to repayment plan requirements.

But what the amendment actually does is consolidate the servicer program into one mega-contract in 2019 with no meaningful stipulations for accountability and no demand that the contractor work in the best interest of (or even be fair to) borrowers.1

Yes, the solution to a bad servicing situation is just to consolidate the program and give it to one private for-profit company, and the shortlist of three finalists includes Navient, universally considered the worst servicer, the one with the most complaints, the one with the most opaque and unusable website, the only one currently being sued by another government agency, and the one that despite that lawsuit continues to mislead borrowers.

Here is how Navient responded to being sued by the government for misleading borrowers:

There is no expectation that the servicer will “act in the interest of the consumer.” Courts therefore routinely hold that servicers and lenders “do not owe borrowers any specific fiduciary duties based upon their servicer/borrower relationship.”

From the Consumerist:

According to the CFPB’s April complaint snapshot, Navient was the most complained about student loan servicer, receiving an average of 1,400 complaints from Nov. 2016 to Jan. 2017, a 1,073% increase from the same three-month period the year before.

The Direct loan program tops $1 trillion. Navient already services over $300 billion in student loans and profited around $308 million from servicing those loans last year, down from $338 million in 2015 in part because of $17 million in extra legal expenses for basically being an awful company.

GreatNet, one of the other three finalists (the third is PHEAA aka FedLoan), is the combined venture of Great Lakes and Nelnet, two of the four largest servicers. Both companies have yet to be sued by the government and aren’t quite as hated, which for all I know may disqualify them from making a competitive bid in the current regime.

The budget savings of $130 million over five years is only a small fraction of total servicing expenses, but—more importantly—the increased cost of the Obama-era plan was to pay for genuine customer service to help reduce delinquency and default. Reduced default would likely generate more payments from borrowers, thus paying for some if not all the difference (Americans currently hold $137 billion in defaulted federal loans).

Lastly, the government profits from student loans. This is not a situation in which a budget shortfall affects uninvolved taxpayers; it’s a scenario in which a portion of the profits from student loans are reinvested into the same system to help American citizens who utilize it.

Servicers other than FedLoan don’t handle PSLF

I’ve heard a few stories of attendings calling their servicers after making years and years of payments to get started filing for PSLF and being laughed off the phone because of their high salaries.

To be clear, PSLF has no maximum salary.

The master promissory note you signed says this:

A Public Service Loan Forgiveness (PSLF) program is also available. Under this program, we will forgive the remaining balance due on your eligible Direct Loan Program loans after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed full-time in certain public service jobs. The required 120 payments do not have to be consecutive. Qualifying repayment plans include the REPAYE Plan, the PAYE Plan, the IBR Plan, the ICR Plan, and the Standard Repayment Plan with a 10-year repayment period.

PSLF is all about months of qualifying payments made for qualifying loans while working full-time at a qualified employer. As of now (and probably never for old/current borrowers), there is no “means test” to see if you still deserve to have your loans forgiven even though you’re a “rich doctor.”

Furthermore, the only servicer that handles PSLF is FedLoan. When you submit your first employment verification form (which the Feds recommend doing annually), you’ll be switched to FedLoan if you weren’t already with them by chance.

The other servicers—and probably especially Navient (currently being sued by the federal government for defrauding and misleading borrowers)—have a vested interest in keeping you on the rolls so that they can continue to make money off your payments. When you call the servicer, you’re getting some random employee who is probably making around twelve bucks an hour whose primary role is to provide customer service and troubleshooting with the website, not provide good financial advice. They are much much more likely to deal with somebody on the phone trying to get out of delinquency or default than they are to talk to somebody who is approaching 10 years of payments and is ready for public-service loan forgiveness. Despite the government stating that customer service is a priority, the servicers essentially have no fiduciary duty to work in your best interest.

Since the first loans won’t be forgiven until October 2017, no one can guarantee that there won’t be attempts to limit the damage from the somehow-unexpected popularity of this program, but that hasn’t happened yet and is likely to take some time to occur. Do not take your servicer seriously on this if you think you should otherwise qualify. Just get the paperwork filed out and submit it. Worst thing that happens? Your servicer is changed and you have to set up autopay again.