$270k debt,PSLF/IBR/PAYE/Consolidating etc...am I planning correctly?

[GoBlue87]

Long time reader, first time poster hoping to fully understand my situation.  I just matched and will begin my intern year here in a few months.  Fortunately, my passions have led me into one of the higher paying specialties, and I'm not sure if future earning potential/expectations should or should not have any influence in my current decisions (my thinking is "no," be smart regardless of what I expect to earn in the future).

I have $242k in med school debt with another $29k from grad school.  The loan breakdown is as follows:

Grad:

• Direct Sub: $17k, 6.8%


• Direct UnSub: $12k, 6.8%

Med:

• Direct UnSub: $176k, avg rate of 5.69%


• Direct Grad PLUS: $54k, avg 6.69%


• AMA-ERF: $3k, 7% with one year grace and 3 year deferment during which no interest accrues


• Institutional car loan: $9k, 6%

I'll spend 5yrs in residency with a 6th yr in fellowship.  Some general advice I have been given is to consolidate all of the loans once I graduate this May, and sign up for PSLF (and thus IBR) and forego the grace period to get as many certified $0/mo payments as possible.  However, since my fellowship yr and/or first several practicing years might not be at a 501c, I might lose eligibility at that time.

However, couldn't I still do this route (just in case I end up at a 501c for 6 years of training + 4 years of practice, and then forgiven) in order to still be on IBR during my residency years, and then if I fall out of eligibility, just refinance and aggressively pay them down over 2-3yrs?

Question 2: I'm having difficulty truly understanding if consolidating is a good move for my situation or not, can anyone shed some light on this and give a recommendation?

Question 3: Let's say I don't sign up for PSLF at all, which would be the better decision between IBR, PAYE, RePAYE, or forbearance (this screams "bad decision" to me, but the devil on my shoulder is saying "you'll make plenty of money after training, don't stress about payments during residency.  But the thought of adding another $100k in interest makes me want to vomit because I'm frugal anyway).  From what I gather, PAYE seems to be the best since my spouse's income is not taken into consideration (vs REPAYE) and capitalized interest is capped (vs uncapped IBR).

 

Worth noting: my non-medical spouse makes $45k pretax and has no undergrad/grad student loans.  We have one child.

 

I'm leaning towards taking the advice of consolidating everything to make it concise and in one spot, while signing up for PSLF (just in case I stay at a 501c long enough), and then refinancing and aggressively paying them down if I leave a 501c.  I'm just hoping my understanding of all of this is correct.

Many thanks in advance to any and all those who help, not only on my question but every question in the forums.  This site is an absolute savior.

 

[Ben]

Brief version:

1. Consolidating is a good for your situation


2. PSLF is more something you work toward not sign up for. Submitting work verification every year is a book-keeping insurance policy but not a binding decision. You work toward PSLF by making on-time payments in an IDR plan (IBR, PAYE, REPAYE).


3. REPAYE is often the best deal for residents. Whether or not it's better than PAYE largely depends on the degree of the interest subsidy you get and thus what your effective interest rate is under the plan. I wrote about that here. In your case, REPAYE wins.


4. Even if PSLF is not definitely in your future, picking an IDR plan (particularly REPAYE) is usually a way to hedge your bets. If you take a job after training that doesn't qualify, then you can try to refinance, get a lower rate, and pound them away.

[DMFA]

IBR is rubbish (the pre-2014 version, at least). Do not conflate IBR (a specific plan with payments 15% of monthly discretionary income defined as AGI minus 1.5x poverty line) with all income-driven plans (RePAYE, etc).

Do RePAYE. Assuming 2016 AGI $0 (or less than 1.5x poverty), your payment will be zero, and your accruing interest will be cut in half. Plus, once you certify your employer, those $0 payments are eligible for PSLF. Triple win. RePAYE always includes spouse, but assuming AGI 45k, poverty for family of 3 is $20,420, so (45,000 - 1.5*20,420) ÷ 120 = $119.75, while the gov't picks up half the remaining unpaid interest.

When you finish training, decide if you want to stick with PSLF and keep paying minimum possible or refi with private lender to lowest rate/shortest term.

Read https://www.whitecoatinvestor.com/what-should-i-do-with-my-student-loans/ if you haven't already.

[GoBlue87]

This was tremendously helpful.  Thank you both for the input!

 

One follow up question: If I were to start out with RePAYE, wouldn't I lose out on the $0 payments since it includes spouse income, and I would therefore begin at $120/month, and then transition to [(45k+54k)-1.5*20,420] / 120 = $569.75/month once my salary gets included since RePAYE scales up with increasing household income?  If I'm thinking about this correctly, in this case it seems like I would chose the steady low payments with PAYE (by filing separately) versus the interest subsidy of RePAYE.

[DMFA]

GoBlue87 wrote:

This was tremendously helpful.  Thank you both for the input!

 

One follow up question: If I were to start out with RePAYE, wouldn’t I lose out on the $0 payments since it includes spouse income, and I would therefore begin at $120/month, and then transition to [(45k+54k)-1.5*20,420] / 120 = $569.75/month once my salary gets included since RePAYE scales up with increasing household income?  If I’m thinking about this correctly, in this case it seems like I would chose the steady low payments with PAYE (by filing separately) versus the interest subsidy of RePAYE.

Click to expand...

You start to certify with your prior AGI from your tax return, in this case 2016.

One year from then (you have to recertify your income annually), you'll use your 2017 income, which will be half of your annual salary since you're only working 6 months, so $27k, meaning payment would calculate to $345/mo in 2018.

Yes, you could do the MFS/PAYE stack to further reduce your payments and save you $1,440 in cash flow ($0 instead of $120 over 12 months), but that creates the following issues:

• Lose the student loan interest deduction of $2,500/yr, which would not only give you back $625 at tax time (assuming 25% bracket) but would also reduce your RePAYE payment an additional $20/month since it reduces AGI ("above-the-line" deduction), which overall would basically reduce the payment $71/month (I can show my work, or you can trust me)


• Higher tax on the higher income since the MFS brackets are p much the MFJ brackets halved.
  
  
  
  • MFJ: 15% is $18,651-$76,900, so $1865 + (.15[(45,000 her + 27,000 you - 2,500 int ded - 12,700 std) - 18,650 bracket]) = 1865 + .15(56800-18650) = $7,587.50 tax due
  
  
  • MFS: 15% is $9,326-$37,950 and 25% is up to $76,550; so you: $932.50 + .15(27,000 - 6,350 std - 9,325 bracket) = $2,631.25 for you; her: $5,226.25 + .25(47,000 - 6,350 std - 37,950 bracket) = $5,901.25 for her = $8,523.50 tax due
  
  
  
  


• Lose several other credits and deductions not allowed by MFS, thereby relatively improving the tax bill for MFJ


• Lose ability to contribute directly to a Roth IRA; could still back-door, but meh


• More interest is accruing, since the payment is lower and there is no 50% unpaid subsidy like RePAYE


• If you don't do PSLF, you're still on the hook for all that accrued interest, as well as having paid less anyway

So, that reduced payment of $1,440 over 12 months also cost you about $1,000 in taxes, the reduction in your payment another $240, plus whatever interest wouldn't have accrued if the government had subsidized it with RePAYE.

If you can afford those few hundred dollars every month to do RePAYE, you should...and if you can't, then you need to look more at your monthly budgeting/spending.

Unless you're completely 100% committed to PSLF and have faith that the program will not change to exclude you from the untaxed forgiveness...in which case, pay as little as possible now and over the life of the loan with the MFS/PAYE/PSLF stack, and change to MFJ once your income caps the PAYE payment at the original 10-yr standard rate (since there's no longer any benefit to reducing the payment with MFS).  That reduces your future options (less-than-full time work, non-employee work, more possible places to work than just non-profits) and increases your future tax burden as well, but with your overall picture, might still be an acceptable option.