IBR w/ heavy debt, switch to REPAYE?? Help!!

[PMR_Res]

Hello all,

I just found out about REPAYE. I have been digging deep into all the posts and trying to crunch the numbers, I would like your advice please!

I am currently a PGY-3 in IBR since internship started; first year was $0 payments and now $100 payments, all PSLF eligible, I am due for re-certification in November. Current fed loan debt is $290,000 at 6.75% interest with $30k accrued interest so far ($44k of that is subsidized, so that portion has not accrued interest yet). I have additional private student loans of $40k at 2-3% interest and another $32k at 6.25% interest (not eligible for the income based plans obviously). So now I face the dilemma... do I switch to REPAYE and have my interest capitalize for a new principle of $320k?

I just got married, last years income tax was still single. My spouse makes $70k gross and will continue to have that salary. My PM&R residency is 4 years, and maybe 1 additional year of fellowship (haven't decided yet). Attending salary will be around $200-250k from what I hear. Not sure if I will go for PSLF 50/50 at this point, or maybe slightly leaning towards heading to the private sector. I would jump at a low interest refinance option.

I have not put any money toward retirement yet. I recently started reading like crazy about finance, investing, student loan management, student loan refinancing, etc. Love this blog I am a huge fan, I really like how everyone is helping each other out on this blog. I purchased a copy of the WCI book and just ordered Bernstein's Investor's Manifestor. Also really liked Denniston's Taxes Made Simple/  I plan to start a Roth IRA and go with the "Default Portfolio".

So my specific questions, is it beneficial for me to switch from IBR to REPAYE?? How aggressive should I be with loans vs putting towards a Roth IRA?? Go for student loan refinancing?? I was also very intrigued by Dr. Wise Money's method of leveraging debt by utilizing a 0% APR credit card balance transfer, I am weighing that as an option to save a bit on interest too. I would highly appreciate any advice! If anyone can run some numbers on a spreadsheet I would be eternally grateful! Thanks again.

[DMFA]

I don't understand why people choose IBR over PAYE.  It's 1.5x higher payment and follows very similar parameters.  This seems to happen pretty often.

As for RePAYE, it always includes spouse's income, so your monthly payment on RePAYE might be the similar to your current payment on IBR.  Your principal (and therefore monthly interest accrual) would increase by 10% (given $30k capitalizing on $290k), but your effective interest rate might possibly significantly less given the 50% monthly unpaid interest subsidy.  It depends on what your monthly payment is.

To give you a true calculation, one would need to know your current and future personal and spousal income to calculate the payment and total accrual at re-fi time or if PSLF would be more beneficial.  Here are the usual best situations for people:

• If you can afford the monthly payment with spousal income is included, RePAYE is usually the best blend of low monthly payment, less interest accrual, and PSLF eligibility.


• If you need the absolute lowest monthly payment possible (e.g. committing to PSLF), filing taxes separately and doing PAYE is good, but you face higher interest accrual just in case you don't do PSLF or it gets cut off.


• If you decide you don't want PSLF, then do a private refi ASAP (usually upon graduating training) with the lowest interest rate and shortest term possible.

[DMFA]

And as for student loans vs investing, that's both a mathematical and psychological argument.  How much does being in debt bother you?

The interest you will gain from your retirement investments over 3+ decades will *probably* be greater than the interest you save using that same amount for loans (including compounding your loan savings over that same time), especially considering your average gains can be estimated around at least 4-6% (post-tax and adjusted for inflation) and your loan debt will be refinanced way below your current horrendous rate of 6.75% (probably in the 3s-4s).

I'm not totally certain that you would be able to transfer a student loan balance to a credit card...but that would be a good way to eliminate some interest as long as you're able to pay off the balance within the required period.  Some balance transfers are only interest-free for 6 or 12 months.

However, eliminating all negative cash flow factors, like debt payments, and achieving financial independence as early as possible is a major priority for some people (cue the chorus from Foo Fighters' "I'll Stick Around").

As for choosing retirement plans, a good first priority is employer matched contributions to a 401k/403b, since their match is basically free money (if you'll still be employed by them long enough to be vested).  After that, unmatched employer-sponsored accounts and IRAs (probably Roth at this stage) are usually the next priority, depending on many factors (W-2 vs 1099, current and expected retirement brackets, possible need to withdraw early).  If you are eligible for an HSA, it can function as an additional TIRA if not used for healthcare.

When choosing portfolios for the long term, a buy-and-hold strategy of indexed funds offers the best balance of cost, risk, and gains.  This is the mantra you'll hear mostly on this site and is endorsed by people with way more knowledge and experience than me (like Warren Buffett).  You should achieve diversification across asset classes - mostly stocks, less bonds, consider real-estate or commodities - and across markets (US and Int'l).  Funds like major investment banks' total stock index, total int'l index, and total bond index can form the backbone of your portfolio (see the WCI article of 150 Portfolios Better than Yours).  You don't have to follow to a T; they simple serve to demonstrate that you can obtain different tilts/exposures to asset classes and markets and still do well in the long-term.  Additionally, you can use a "robo-advisor" which allocates for you based on the preferences you input, though this is usually associated with a fee.

Ultimately, you should find a flat-fee financial advisor who has extensive experience with physicians, sit down, run all your numbers (including monthly spending habits), and include your spouse in the discussion prior to pulling the trigger on any plan.

There are a lot of people with way more experience and knowledge about personal finance than me who post here, and you can get some great information from them, but it's always a good idea - especially at the beginning - to discuss any strategy with a professional.  There are several who advertise on this site and post on this forum who fit that bill.  After learning the ins and outs of your own situation from them, learn how to use Excel's financial functions (notably PV, FV, PMT, CUMIPMT, NPER, etc) to create your own budgets, plans, and outlooks.

[PMR_Res]

Thanks for the reply! I had a loan in college in 2006 which unfortunately disqualified me from PAYE (only new loan borrowers as of 2007 eligible) which is why I am in IBR. I am still working out the numbers but it looks like I am in favor of switching to REPAYE. Now I have some money in savings that I was considering making a bulk payment (was thinking about a bulk payment of ~$20k). However, I am thinking maybe just pay the minimum to maximize the interest subsidy from REPAYE, and then when I finish residency if I do not end up getting a job with a PSLF-qualified employer then make a giant bulk payment to lower the principle and refinance for a lower interest rate; otherwise if I get a job at a PSLF qualified employer I just continue the minimum payments and in the meantime my payments count. In the meantime I would start and max out a Roth IRA. What do you think about this strategy?

My understanding is that while I stay in REPAYE interest will never capitalize (unless I leave REPAYE, like if I refinance), but there is no "partial financial hardship" that is considered, is that right??

Also when I switch out of IBR I will have to make a 1 time 10 year standard payment but I can do a temporary forbearance instead (minimum $5 payment) without any additional fee, is that right?

 

[DMFA]

The math probably favors putting the $20,000 toward other things than the debt, like for IRA contributions ($11,000 this year for you and your wife combined).   Again, if getting out of debt as quickly as possible regardless of the math (which is OK if that's what you want), it is fine to put it toward the debt.  Depending on your total loan term and amount owed, you could do the math to see how much you'd save/spend either way.

Whether or not to save the remainder as an emergency fund is a separate argument - whether you think it's best to have every dollar you have "work" for you instead of sitting as cash, versus being fully prepared to take on any given emergency (emergency credit is fairly easy to obtain).  Again, the math and the psychology are not always the same.

Are the IBR payments you've already made and are currently making counting toward PSLF?  They probably are, and if they're not currently counting for it, you can apply to get them retroactively to count toward your 120 PSLF payments.  Otherwise, you'll be making 9 years of high payments (capped at 10-yr std amount of initial principal at time of entering repayment) at that high interest rate until forgiveness; even with being forgiven, you'd save more by refinancing to a lower rate, even if you had a similar monthly payment.

RePAYE now, private refinance on graduation is *probably* the best way forward.

[PMR_Res]

So I have been trying to run all the numbers in Excel for REPAYE vs. IBR MFJ vs. IBR MFS and here is what I have... if my numbers are right then REPAYE seems to be in favor of IBR whether it is MFS or MFJ.

If I do not do fellowship, REPAYE vs IBR MFJ: I would make $6k less in payments, and my total balance would be $2k lower, for a "net" benefit of almost ~$9k.

Now with REPAYE vs IBR MFS, although I would make $4k more in payments, but my balance would be ~$13k lower, for a "net" benefit of almost $9k.

Does this make sense? It seems even though I have this nasty amount capitalizing if I switch from IBR to REPAYE I would still benefit quite a bit. Then following graduation I like the idea of refinance.

I did these numbers based on the following

PGY3 AGI ~$50k; PGY4/5/Attending year 1 AGI $120k (my 50k + my wifes 70k)

Yes all my payments have counted for PSLF so far, I submit the form every year. And the $20k that I was considering making a bulk payment with now is in addition to having an emergency fund I have.

I have a screen shot of the spreadsheet how can I post it here?

 

[PMR_Res]

	PGY3
	IBR	REPAYE	IBR MFS
Annual interest	$16,725.17	$10,957.93	$16,725.17
Monthly payment	$397.48	$264.98	$397.48
Annual payment	$4,769.70	$3,179.80	$4,769.70
Loan balance	$333,523.39	$329,346.05	$333,523.39
	PGY4
	IBR	REPAYE	IBR MFS
Annual interest	$18,735.86	$15,652.92	$18,735.86
Monthly payment	$1,199.63	$799.75	$320.00
Annual payment	$14,395.50	$9,597.00	$3,840.00
Loan balance	$337,863.75	$335,401.97	$348,419.25		No Fellowship
						REPAYE v IBR MFJ	REPAYE v MFS
TOTAL PAYM	$19,165.20	$12,776.80	$8,609.70		Payment diff	$6,388.40	-$4,167.10
					Balance diff	$2,461.79	$13,017.29
	ATT1/PGY5				Net	$8,850.19	$8,850.19
	IBR	REPAYE	IBR MFS
Annual interest	$18,735.86	$15,652.92	$18,735.86
Monthly payment	$1,199.63	$799.75	$320.00
Annual payment	$14,395.50	$9,597.00	$3,840.00
Loan balance	$342,204.12	$341,457.89	$363,315.12
					Yes Fellowship
TOTAL PAYM	$33,560.70	$22,373.80	$12,449.70		Payment diff	$11,186.90	-$9,924.10
					Balance diff	$746.23	$21,857.23
					Net	$11,933.13	$11,933.13

[PMR_Res]

These calculations are based on the loan balance of

Fedloans		Unpaid Interest	Total	Total Balance
Unsub	$247,780.31	$29,788.04	$277,568.35	$321,567.92
Sub	$43,625.00	$374.57	$43,999.57
Int 6.75%

My interest goes up in my PGY4 year since the 3 year subsidy of the Subsidized loans finishes.

How would I run the numbers to see if a private refinance would be better than PSLF?

I was considering doing a one time consult with a "student loan expert," he was recommended by my medical school (for a fee of $300), do you think that's worth it? I just want to make sure I'm not missing anything here with my calculations

[PMR_Res]

DMFA, how do you calculate that even if I do pursue PSLF that I would still pay less with a private refinance? If I put my end of residency without fellowship calculated balance with REPAYE of $336k and i use an amortization calculator to calculate 6 years (since my 4 years of residency were qualified PSLF payments) of a fixed 3-4% interest rates I get monthly payments for ~$5k to $5300 which is way more than if I continue REPAYE or IBR with a AGI of $270-320k. I don't know if I am missing something, I am new to making these calculations so I was just wondering. I really appreciate your posts !

[DMFA]

Did you include your spouse's income in your RePAYE calculations?  RePAYE always includes spouse, even if you're MFS.

Running your numbers, if you've made 24 PSLF payments prior to this year, then you should have 8 more years of payments.  If your wife's income stays at about $70,000, and assuming then you would make $200,000 out of residency and have an average 4% annual income increase, here's what you'd make.

At that high rate of interest, you'd benefit most from RePAYE+PSLF, paying only $184,346 more over the life of the loan and having $287,849 forgiven after the 10-year mark.

If you continue in IBR (my calculator is set up for PAYE, so I just multiplied by 1.5), you'd pay $279,332 over the life of the loan at 10 years.

If you do RePAYE now and refi to 3.5% and 5 years when you're an attending, you'd pay $380,922.

So yes, RePAYE + PSLF seems like, for you, the best way to go.  An additional year of fellowship further makes it seem like you'd benefit even more from PSLF.  And, if for some reason, PSLF is taken away from us, then that would minimize the amount of interest that accrues to keep your principal lower.

 

[PMR_Res]

Looks like I will file for the switch from IBR to REPAYE, I really appreciate your time and help

[PMR_Res]

Well I did it, I just submitted my application to switch to REPAYE. DMFA thanks again for everything

[yspower]

Myfedloan counselor told me that REPAYE is only effective for the first three years for the unsubsidized fed loans with 50% interest subsidy benefit. After 3 yrs, they were adamant that there is no interest benefit...counselor was pretty positive about it. I thought this plan will stay until Gov removes this plan.

[PMR_Res]

Yspower, according to Studentloans.gov that is not true, this is directly copy & pasted from the website:

"

• On subsidized loans, you do not have to pay the difference between your monthly payment amount and the remaining interest that accrues for your first 3 consecutive years of repayment under the plan.


• On subsidized loans after the first consecutive 3 years and on unsubsidized loans during all periods, you are only responsible for paying half of the difference between your monthly payment amount and the remaining interest that accrues."

[Joy Sorensen Navarre Navigate]

DMFA,

I too am surprised that many borrowers, eligible for both IBR and PAYE, chose IBR over PAYE. Recently I saw an early federal fact sheet on PSLF stating that for most borrowers IBR would be the best plan. I guess people followed that out-dated advice Thankfully the new materials are updated to reflect better advice.

Regarding advice. PMR_Res, I strongly recommend you (and all borrowers with significant med ed debt) consult an expert. The fee is minimal compared to the risk of missing a detail. When I review physicians' plans, most of the time we encounter gaps or room for improvement. About one in ten borrowers have maximized their savings with the federal repayment plans.

I track the additional savings. So far we've saved borrowers an additional $40k to $400k on their student loans. w

I'm happy to announce that my new agreement with WCI includes a 25% discount for his readers. Check out the WCI Recommendations page.

All the best,

--Joy