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Student Loan Refinance vs new REPAYE program

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  • Student Loan Refinance vs new REPAYE program

    I have been looking at REPAYE: https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment-q-and-a.pdf

     

    Basically, it looks like interest is still going to make its way onto the principal since only half of the unpaid interest is forgiven. I feel that this is still a crappy program, and it works out smarter in the long run to pay off interest each month on a good refi and not allow any interest to be added to the principal. Does that sound right? I want to make sure I'm not missing some benefit to the REPAYE, because it doesn't seem that good if $$$ is still gonna be added onto the principal. The government still wants to make money off of us by making us feel good about paying a low rate during residency and still letting our loans balloon.

  • #2
    Most residents can't afford to cover the interest on their loans in any program.

    The benefit of REPAYE is (probably) a lower effective interest rate than you can get refinancing and you're still eligible for PSLF (although if you are going for that, you'll want to be in IBR or PAYE after residency. I'm still trying to figure out if switching is allowed at that point.)

    The benefit of refinancing is a lower payment during residency.

    Either way, you can refinance (again if necessary) at the end of residency if not going for PSLF.
    Helping those who wear the white coat get a fair shake on Wall Street since 2011

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    • #3
      I am still not understanding why I would want PAYE instead of REPAYE. I will admit though, that I have run the numbers and do think that I will stay in REPAYE unless I can get a much better interest rate from one of the loan financers.

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      • #4
        If I understand the plans correctly, the advantage of PAYE over REPAYE is that there's a cap on payment amount, whereas with REPAYE there's no cap.  Also, with PAYE, spouse's income won't count if you file separately, but with REPAYE spouse's income always counts.  Also, forgiveness after 20 years vs 25 with REPAYE.  The advantage of REPAYE is that half of interest is forgiven if there's negative amortization.  That's why sometimes starting in REPAYE and switching to PAYE would be ideal, although when you switch the unpaid interest capitalizes, so you have to add that to the calculations.

        Since you pay interest at 6.8%, it's more or less a wash vs. paying off the loans early and investing at an estimated 7%, but the forgiveness at the end, less taxes owed, lower your effective interest rate with the repayment plans, and refinancing lowers the rate on paying them off.  You should run the numbers yourself, in which you compare the effective interest rate on the various repayment plans vs. the rate you can get refinancing.

        The lower your income, and the more dependents you have, the more attractive the repayment plans become.

         

         

         

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        • #5
          I'm going to be the guinea pig for switching out of REPAYE this August. I'm shooting for PSLF but last year's taxes will finally reflect a full year's attending salary. Therefore I think switching to (PSLF-eligible) 10 year standard repayment is in the cards. We shall see if some REPAYE arcana prevents that... and if so then I'll just refinance.

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          • #6
            To answer WCI's statement/question, it appears that you can switch from REPAYE to PAYE/IBR currently as long as you qualify for the financial hardship. This is what I was told from a fairly knowledgeable Fedloan representative. I was also told that you can submit a power of attorney and have your spouse be able to take care of all the loans which I am sure my wife will be happy about. I'm just annoyed because once I thought I had everything straightened out, I now should probably make the change from PAYE to REPAYE for a few years...

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            • #7
              ArkyDore, how would one qualify for a financial hardship after residency/fellowship making attending-level salary in order to switch back from REPAYE to IBR/PAYE?

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              • #8




                To answer WCI’s statement/question, it appears that you can switch from REPAYE to PAYE/IBR currently as long as you qualify for the financial hardship. This is what I was told from a fairly knowledgeable Fedloan representative. I was also told that you can submit a power of attorney and have your spouse be able to take care of all the loans which I am sure my wife will be happy about. I’m just annoyed because once I thought I had everything straightened out, I now should probably make the change from PAYE to REPAYE for a few years…
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                Could be worse. You could have refinanced and now realize you want to be in REPAYE instead.
                Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                • #9
                  You could switch the calendar year during your last half of residency. You could switch the year prior if you thought your pay would be too high the last year of your residency. Not really a problem though. If you don't qualify for IBR/PAYE after residency, you are probably going to need to pay the standard 10 year payment anyways.

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