As we’ve discussed, there are multiple loan repayment programs available, but the vast majority of borrowers are eligible for and will choose an IDR plan during residency. Those with lower loan amounts and no partial financial hardship should instead go with the standard plan, which will spread out your complete repayment over 10 years, or refinance privately. Outside of loan forgiveness, never forget that you can and often should pay your loans off faster than the plan will schedule if you can afford it.
For practical purposes, the other plans mentioned in the last chapter can be safely ignored: for typical residents who easily have a partial financial hardship, it’s overall better to pick one of the main three IDR plans (IBR, PAYE, or REPAYE) and make extra payments than it is to pick the extended or graduated plans, which have no associated benefits.
Traditional loan repayment is based on a length of time. IDR is based on a percentage of income (hence “income-driven”). It’s important to realize that IDR is designed to make your loan payments affordable and NOT to “save you money.” Setting and forgetting an IDR plan will not generate payments that reflect how much money you could really afford to pay on your loans, particularly as your income increases, and thus will not pay down your loans in the timeliest (and thus cheapest) way possible.
If you’re trying to get your loans forgiven, then minimizing payments will save you money (no point spending dollars toward something you ultimately won’t be accountable for). But if you need to actually pay off your loans, which applies to a lot of people, making lower payments can mean taking longer to pay off your loans and more money wasted on interest (we’ll discuss how the REPAYE interest subsidy temporarily changes that for many residents in the REPAYE chapter).
General considerations for all IDR plans
The oft-reported “downside” of income-driven repayment plans is that you will “pay more interest” over the inevitably longer term length. This is a bit misleading, because you are always free to send in more money to pay off your loan faster. The longer it takes you to pay your loans down, the more money you waste on interest. But it doesn’t mean that an IDR plan isn’t the right selection.
IDR plans allow you the flexibility to not need to make big payments and to qualify for loan forgiveness in the future; they don’t prevent you from taking prudent measures to pay down your debt.
It’s helpful to know what your break-even rate is, which is the rate at which your calculated IDR payments match interest accrual. You’re making no progress, but your debt isn’t growing either. Determine your monthly interest: loan amount multiplied by interest rate divided by 12. That’s basically your accruing monthly interest (technically that would be the daily interest rate times the number of days in the month, but you get the idea).
Then, go the calculator and adjust the AGI field until the first monthly payment under your plan of choice is the same thing. This is basically the salary you’ll need to contain negative amortization. It’s probably more than you’ll ever make as a resident.
Here’s an illustrative breakdown of the break-even AGI for different loan amounts at 6%:
|Salary Needed to Match Accruing Interest in IDR|
|Loan amount||Annual interest (6%)||Monthly||PAYE/REPAYE AGI||IBR AGI|
These rounded rough estimates illustrate three important things. One, it takes a pretty solid income for a lot of folks to just break even on an IDR plan. While IBR and PAYE max out at the standard repayment, even many attendings will never hit that cap.
Second, large borrowers could easily drown without programs like PSLF. Someone who owes $400,000 would need a salary of over $250k just to have their calculated monthly payments match the rate of interest accumulation. While they could certainly pay more money and make some progress, it’s not a heartening prospect.
Lastly, the break-even salary is also the salary at which all accruing interest is paid and thus there are no unpaid interest subsidies. The effective rate equals the real rate. We’ll talk more about this in a minute.
Overpayment can be a good thing
The technical downside of picking a plan with the lowest monthly payments is that, if followed, you will pay your loan over a longer period of time and thus pay more interest over the terms of your loan. You’ll see this on every chart and table, but it’s a bit of an artificial construct for doctors, whose income is likely to change significantly over the course of repayment. Picking a plan with low payments does not mean you’re obligated to only pay at that lower amount forever. For example, a resident may pick a low payment during residency and then step up and blast their debt as an attending. This often discussed “downside” of IDR only applies to picking a plan beneath what you can really afford and then never reevaluating. Once you can afford more, you can pay more.
PSLF changes everything
Keep in mind the plus/minus of different plans depends very much on whether or not we’re trying to minimize the total amount of money it takes you to pay off your loans (a generally good idea) or if we’re trying to minimize payments in order to not waste money before achieving loan forgiveness (also a good idea). We’ll discuss PSLF in depth in a bit.
While it’s technically correct to generally pay down your highest interest rate debt first, this does not apply to people who are considering public service loan forgiveness. Even if your car payment has a lower interest rate than your student loans, you may be better off investing for your retirement (tax savings and PSLF implications are great) or paying down a car note (thus improving monthly cash flow), because extra loan payments will just reduce the windfall you’ll receive if you achieve PSLF. Paying off smaller debts like cars also ties into the “debt snowball” method, where you tackle your smallest debt amounts first instead of your highest interest, which enables you to reduce the number of different things you owe money on and psychologically feels awesome.
Double income + double federal loans are treated essentially like a single income single loan when it comes to calculating IDR. The total loans are grouped, and your income is pooled. The total amount owed is calculated and each person pays an amount to their loans weighted to their individual contribution to the total loan amount. As in, if one spouse owes $200k and one owes $100k and the calculated payment is $999, then one spouse will pay $666 and the other $333.
There is a “married filing separately” loophole in IBR and PAYE: if you file your taxes separately from your spouse, you can shield their income from the IDR calculation. Each spouse is then treated as if they were a single unmarried individual with their individual debt and individual income. Trying to file separately to reduce payments can be helpful if you’re going for forgiveness or have cash flow problems and need the money to spend. The classic scenario to file separately is one graduating medical student with tons of debt and one high-earning spouse with none. Note that REPAYE closed this loophole, so if this trick is critical to your plans, you’ll need to switch out of the plan or not pick it in the first place. See the chapter on maximizing PSLF for further discussion on married couple filing status.
There are tax consequences to filing separately, and you lose out on some deductions. You can calculate your taxes both ways using tax software (or with your accountant) to see how much it’ll cost you and if the savings in IDR payments are worth it. If both spouses are going for PSLF, most needn’t bother filing separately. And if you’re not going for PSLF at all then filing separately is just another way to lower payments but consequently prolong the agony.
Lastly, if one spouse refinances privately, their loans are no longer eligible for IDR. Thus, for REPAYE (or for IBR/PAYE when you file taxes jointly), the remaining party with federal loans will see a big payment increase, because suddenly the household income is unchanged but the “total” loan amount will be reduced. In the above example, imagine the $100k spouse refinances. Now that same $999 payment calculated from their joint income is due just for the $200k loan. Meanwhile, the refinanced $100k loan still has its own payment. Outside of loan forgiveness, you don’t lose money this way, but you do end up spending more per month.
Annual income certification
Borrowers generally certify their income by submitting their most recent tax return. What that means in practice is that you’re actually using last year’s income to calculate the coming year’s payments.
As in, when you certify your income in 2017 to make payments for 2017-18, you’ll use your 2016 tax return. There is a built-in lag between any income changes and when they have an effect on your payments. That is, of course, unless you check the little box on the form saying that your income has decreased substantially compared with what’s reflected in your tax returns (it used to say “changed,” but this was clarified in 2019).
Don’t certify early most years, as it will generally only increase your payments faster (because your resident income goes up a bit every year). But if your income goes down or your family size is going up, consider recertifying immediately. Just be aware that you’ll often be asked for evidence of your current income (i.e. pay stubs) as opposed to your previously filed adjusted gross income. If you utilize retirement contributions or other tax deductions, it’s possible that you can actually raise payments this way because even though your income has gone down, it may still be higher than your AGI was after all was said and done.
If your adjusted gross income is going to increase a lot and you want to change plans before it’s reflected in your new tax returns, you can try to recertify early and change plans before it’s too late.
Also note that you should account for unborn children in your family size, so if you recertify in July and your first child is due in December, your family size is three instead of two.
If you are late in submitting your annual certification, it will cause an automatic interest capitalization. Don’t be late. The servicer generally will but is not obligated to contact you, so put it on your calendar.
If you lose your PFH at certification time, your interest will capitalize in IBR and PAYE, but you will never be kicked out of the plan. If you receive a confusing letter in the mail saying you “no longer qualify,” it’s just a poorly-worded letter. Once in IBR, always in IBR. Once in PAYE, always in PAYE.
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