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).
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 Laurel Road and SoFi 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. If this is all overwhelming or the stakes are high and you want a second opinion, then you may actually benefit from professional advice. The only person I recommend is my internet-friend, Travis Hornsby, the Student Loan Planner.