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 horizon—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.
I’m in a dual physician household with high loan balances for each of us. I recently changed to REPAYE since my wife is still a fellow and with our combined debt it was cheaper. I’ll probably qualify for PSLF so don’t care about capitalizing interest. However, I’ve considered going back to IBR before she graduates. After adding in my wifes debt and income, the repayment calculator shows my last monthly payment under PAYE, IBR, and REPAYE all as greater than the standard (although my repayment under standard would be 30 years and not 10 on this calculator given the high amount of debt). I thought IBR and PAYE capped at the standard. What am I missing?
They do, but they always cap at the standard 10-year amount. Doesn’t matter if yours is actually a 30-year due to the consolidation. That would be a massive benefit/loophole to consolidation if they followed that.