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REPAYE Example

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  • REPAYE Example

    Let's assume 170k debt all unsubsidized @ average rate 6 %, income of 50k

    REPAYE payment will be ~ 300ish/month , so 3600ish/yr

    Interest the first year will be ~ 10k, which gov't pays 5k of under REPAYE, right? This is what I'm confused about. Do they pay 50 % of capitalized interest or total interest?

    So after year 1, principal is 171,400? I understand this is a gross oversimplification in terms of interest compounding, rounding of math, but just making sure I understand.

    I think I'm misunderstanding the program and they are just paying 50 % of capitalization but just wanted to double check

    I apologize if this has been already covered, I searched the site for examples with actual numbers but didn't find anything.

  • #2
    Interest doesn't capitalize in RePAYE. It accrues, but it doesn't add onto principal, such is what capitalization means. Your principal will remain the same, while a separate pile of accrued interest doesn't accrue interest of its own.

    The government subsidizes each month half of the difference between calculated payment and monthly accrued interest. You accrue (.06/12)*170,000 = $850 of interest each month. If your calculated monthly payment is $300, then the servicer gives (850-300)/2 = $275, and $275 of interest accrues each month.

    After the end of a year, your principal will still be the same ($170,000), but there will be $3,300 of accrued interest you also owe.

    If you leave RePAYE, your accrued interest will capitalize...but while you're in it, you don't pay interest on interest.


    • #3
      Thanks! Makes sense.