Some interesting information re: Repaye

[coug16]

Following the advice here https://www.whitecoatinvestor.com/forums/topic/idea-to-enter-repaye-early/. I consolidated my loans immediately upon graduating medical school and have been receiving the monthly subsidy from the government without any issue.  I decided to take the risk of losing the subsidy for a month and paid off all of my interest ($2239.63) on Dec 27th for the tax deduction. A couple of things to note as seen in the attachment. #1 I did receive the government subsidy 4 days after I made the payment. This didn't surprise me because I think my billing cycle ends in the middle of the month and the subsidy doesn't post until the last day of the month so I believe the payment was made after that billing cycle had already concluded. #2 After having paid off all of my interest the subsidy that applied four days later on the 31st of December actually applied $234.76 towards my principle, I received the full subsidy despite having zero interest. #3 Most surprisingly, I received the January 31st full subsidy despite having paid off all my interest during that same billing cycle.

I think this is good evidence that you can make as many payments as you want against your loan interest or principle and still receive the full subsidy for the entirety of the year as calculated annually when you submit your information at the beginning of each Repaye year. My effective interest rate is ~2.8% so not worth paying back loans for 2.8% alone but may be worth if for the tax deduction up to $2,500 each year. Don't know how exactly to calculate that benefit but it would also lower my AGI which would then in turn decrease my Repaye payment and increase the amount of subsidy that I receive for the following year.

 

[East coast]

Thanks for the data point - had read comments towards this, but seemed that it was always 'I heard so and so did it and it worked', so good to hear from a first person - very curious who your loan servicer is?  I can't for the life of me get any sort of official notice on statements or anything that actually shows a subsidy. The math works out, so I see it working, but would be helpful to just see those numbers like yours apparently shows.

[coug16]

Great Lakes

[DMFA]

...why did you pay the interest?  Are you just doing RePAYE as a temporizing measure until you have a high enough income to repay your debt, or are you planning on having it forgiven?  If it's the latter, there's no point in making a payment simply for the purpose of getting a tax deduction; you still lose money, just less.

Honestly, having applied an interest subsidy to principal almost seems like a clerical error on their part.  I wouldn't be surprised if that ends up getting adjusted out.  The interest subsidy is only supposed to apply to half the unpaid interest in a billing period.  It might just be a wash, though, since you made the payment anyway.  Watch to see if your interest subsidy the following statement is lower since you should accumulate less (since you would have paid off that period's interest up to the point of the payment).

[Partially incorrect statement removed by author]

I think you're making fairly broad leaps from an experiment with unclear mechanisms.

[coug16]

Definitely using repaye as a temporary measure as long as I can receive a subsidy before refinancing and paying it off as soon as possible. My wife also works and I'm afraid that the subsidy will be going downhill quickly for me as I work half this calendar year as an intern and all of next year as a PGY2. So the subsidy may be half next year what I get this year each month and possibly disappear the following year.

The subsidy applying to principle was an observation more than anything else. Not sure what I was expecting but was a pleasant surprise. Maybe a clerical error with my servicer. We'd need more data point from more servicers to know for sure.

The January 31 susidy that was applied is from the same statement in which I made the interest payment so I would assume that is the statement in which I would not receive the subsidy but I did. Which leads me to believe that once you get your estimated payment of $0/month at the beginning of the year you can then make payments and still receive the whole subsidy each month. I believe it's determined on a yearly basis as to how much subsidy you will receive each month rather than a monthly basis. I will have to watch for my February statement I guess to know for sure in case the payment affects the following statement rather than the statement during which the payment was actually made.

I was under the impression that the deductions would lower my AGI. Sound like I'm mistaken there.

[DMFA]

This is actually a lot more interesting than I thought.  So what you're saying is they will calculate the interest that will accrue each month, calculate your monthly payment as (AGI - 1.5poverty)/120, and give you half that each month as a credit regardless of what you actually pay?  The specific wording they use [link, p.24] is "the government will pay all or a portion of the remaining unpaid accrued interest that is due each month."  However, a few paragraphs down when it says how they'd do it: "If the monthly interest that accrues on your unsubsidized loans is $30, but your monthly REPAYE Plan payment covers only $20 of this amount, the government will pay $5 of the remaining $10 in interest during all periods."  So whether there's a check that occurs to see what the remaining interest is in each period - or it simply sets-and-forgets that it will pay $5 each period - is ambiguous.  Further, the variance between servicers and their poor transparency as to how it's done is even more ambiguous (and frustrating).

As for student loan interest paid, it is excluded from the AGI (hence an "above-the-line deduction" or adjustment, form 1040 line 33) if you can deduct it [link], so if you're single < $80,000 or MFJ < $160,000. Usually the only things that reduce your AGI are retirement savings (401k, 403b, trad IRA), business expenses, and self-employment tax.  The max you can deduct is $2,500, so that could reduce your payment by up to $20.83/month.

Good thinking, especially if you're going to be on the hook for the accrued interest (which will capitalize when you refinance) anyway.

[coug16]

DMFA wrote:

This is actually a lot more interesting than I thought.  So what you’re saying is they will calculate the interest that will accrue each month, calculate your monthly payment as (AGI – 1.5poverty)/120, and give you half that each month as a credit regardless of what you actually pay?  The specific wording they use [link, p.24] is “the government will pay all or a portion of the remaining unpaid accrued interest that is due each month.”  However, a few paragraphs down when it says how they’d do it: “If the monthly interest that accrues on your unsubsidized loans is $30, but your monthly REPAYE Plan payment covers only $20 of this amount, the government will pay $5 of the remaining $10 in interest during all periods.”  So whether there’s a check that occurs to see what the remaining interest is in each period – or it simply sets-and-forgets that it will pay $5 each period – is ambiguous.  Further, the variance between servicers and their poor transparency as to how it’s done is even more ambiguous (and frustrating).

As for student loan interest paid, it is excluded from the AGI (hence an “above-the-line deduction” or adjustment, form 1040 line 33) if you can deduct it [link], so if you’re single < $80,000 or MFJ < $160,000. Usually the only things that reduce your AGI are retirement savings (401k, 403b, trad IRA), business expenses, and self-employment tax.  The max you can deduct is $2,500, so that could reduce your payment by up to $20.83/month.

Good thinking, especially if you’re going to be on the hook for the accrued interest (which will capitalize when you refinance) anyway.

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Yes, that what I believe based on what has happened so far. I would say that if my February subsidy posts correctly that will confirm that at least those with great lakes loans can make payments on their loans without losing the subsidy.

[Sergio Estavillo]

Here's what I wrote on a REPAYE blog post:

Sigmafs | September 11, 2016 at 8:17 am

The REPAYE interest subsidy is based on your required payment, not your actual payment. This holds true until you begin to pay down the principal. Interest is calculated on the principal balance. And, as the principal balance decreases, interest accrual decreases.

I'll also add why not delay any non-required payments, if you're not paying down principal, until you're ready to exit REPAYE.  Put that money in an interest bearing account to generate some interest, albeit minimal.  Because interest does not capitalize while in REPAYE, no rush to pay (and assuming you're saving the money).

[DMFA]

Well, if you're going to pay the interest anyway to keep it from capitalizing when you quit RePAYE, might as well let it be eligible for the tax adjustment of your AGI is low enough (and lower your payment by $20), right? Not only is it helping reduce your debt, you're getting back 15-25% of it as well and preventing some future interest and increasing the subsidy (by lowering AGI).

But imo if your income is low enough to be able to take the deduction, you might have better use for $2,500.

[Travis @ Student Loan Planner]

Very few things actually reduce AGI, the primary one is contributing to a pre tax retirement account which is why I suggest that most folks doing REPAYE do that. Great Lakes in my experience is the least awful servicer its great to see this data point

[manticus]

Hello Coug16, thank you for the info. Any chance you can give us an update - are you still paying more than the minimum payment each month but receiving the full subsidy?

[coug16]

I made a payment of $1000 to greatlakes once my interest hit >$1000 3-4 days ago. I will try to report on 3/31 and 4/31 if I receive the subsidy. Since my first payment of the interest in December I have received every single subsidy.

My next experiment may be to try to pay down a small amount of the principle to see what happens but I don't have an excessive amount of money to put toward that anyway. I'd be happy to continue paying down the interest as much as I can.

[dezcowboyz]

Coug16, can I ask you a follow-up question? You mentioned by lowering your AGI you would in turn decrease your Repaye payment and increase the amount of subsidy that you receive for the following year. Did it work out that way? Do they use your previous year tax return or pay stubs. I ask because I'm in the first year of my residency so that would be different for the Repaye payment calculation. thanks!

 

[DMFA]

dezcowboyz wrote:

Coug16, can I ask you a follow-up question? You mentioned by lowering your AGI you would in turn decrease your Repaye payment and increase the amount of subsidy that you receive for the following year. Did it work out that way? Do they use your previous year tax return or pay stubs. I ask because I’m in the first year of my residency so that would be different for the Repaye payment calculation. thanks!

 

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You can use either or, according to the rules.  I'd use your tax return which will be zero your first year and half your income your second year.  The rules explicitly state this is allowed.  You only *have* to certify your income once annually; the only time it benefits you is if it significantly drops.  If your AGI is lower, then your payment will be lowered accordingly.

However, you're at a crossroads with this concept.  At your lower tax brackets, your money is best invested in Roth for future tax-free gains and you don't get much benefit from the tax deduction.  Also, anything you don't pay toward your loan, you're on the hook for eventually (unless you're PSLF); even though the accrued interest doesn't capitalize to the principal until you refinance, you still have to pay it at some point.

Say you make a full traditional IRA contribution of $5,500 and you're in the 15% bracket.  You've reduced your AGI by $5,500, also lowering your tax bill by $825.  You also lower your RePAYE payment by $550/yr or $45.83/mo, saving you a grand total of $1,375 in the year, or basically getting a 25% deduction.  However, you're going to owe taxes on the decades of growth on that $5,500 of IRA principal, unless you do a Roth conversion later (though likely at a higher bracket)...and you're still on the hook for the $550/yr you didn't pay (unless you're PSLF), although when you start making real payments on it, you'll be earning more and the amount will be relatively trivial.

So unless you're super up-against it with your month-to-month budgeting, it's *probably* not the best use of your money to contribute to pretax retirement if you have a Roth option, but again it isn't *wrong* to do so...and if you are needing that additional $45.83 a month to get by, then your problem is probably in your budgeting and cost-of-living.

[The White Coat Investor]

Great post!