Advice- best loan repayment options (refinance vs. REPAYE) for NHSC participant

[lk599]

Hi! I would love some advice on my current situation:

At this time, I am a newly graduated physician with $265,000 worth of debt (accrued interest included, majority Stafford loans with some grad PLUS). I will completing my residency in Pediatrics in the SF Bay Area and living at home rent free. I will also be participating in the National Health Service Corp Student to Service Program in which I will receive total of $120,000 during residency ($30,000 for 4 years) in exchange for 3 years working primary care with underserved. My career goals will most likely consist of general outpatient pediatrics/public health service.

My conundrum is whether to 1) pay off my loans as fast as possible since I will be saving a significant amount of money upfront with the NHSC scholarship as well as living at home. This makes refinancing my loans an attractive option but would disqualify me from REPAYE or 2) knowing my career goals will most likely have me complete at least 10 years at a non-profit institution and therefore qualify for Income-based repayment (REPAYE) programs. Option 3 would be a combination of the first two- pay off as much as I can in the beginning without refinancing and then taking advantage of programs like REPAYE since I will not be bringing in a specialists salary.

Any thoughts/guidance is most appreciated!

[DMFA]

It's unfortunate that you've stacked the deck against yourself by being in the lowest-paying specialty in the highest-cost of living area in the country. Your parents are ding you a massive favor. I remember making fun of a fellow resident who was living with his parents until I realized how much he wasn't spending by doing so. I think I could handle an awkward dating life in exchange for thousands of dollars per month...

...your peds residency is 4 years? What's up with that?

Is the NHSC money taxed?

If you were certain of doing nonprofit work and PSLF anyway, you don't need any repayment money or additional service commitments since you're not taking on the hook for the debt anyway...but here you are.

You will likely have less interest accrue with RePAYE than you would with a private refinance, esp if your 2016 AGI was $0 like most med students, and your interest rate would be cut in half from the RePAYE interest subsidy. You could make that massive payment with the NHSC money while your monthly payment due is zero and still have that benefit.

If you're actually on the hook for the debt, usually the best thing to do is RePAYE in training to minimize interest accrued with manageable monthly payments, then refi down to 5-yr variable rate in the low 2% range and eliminate them that way. You've kinda got one foot on either side of the fence, but I'd probably still do that.

[lk599]

Thanks for your advice!

My thought process in apply was NHSC was that I was going to be doing similar work anyways in my career and I might as well get help with my loans while I'm doing it. They pay over 4 years, no matter what your speciality is, so I will be receiving the last installment my first year of working (or if I am doing a chief year). The money is not taxed and isn't counted towards my income in the RePAYE calculation (I'm pretty sure).

I was under the impression that refinancing disqualified you from RePAYE as all of your loans need to be "federal" and not private. So when you say, refi after residency, what does that mean for the 50% forgiven interest of the RePAYE loans?

 

[DMFA]

The interest subsidized by RePAYE (accrual, minus calc'd payment, div by 2) didn't accrue. It's as though it was paid for you. It's based on the calculated payment, not the actual payment, so you get it even if you pay over the minimum. That's very useful in your situation; you're practically cutting your interest by more than half by further reducing your principal with those large NHSC payments.

You're still in the hook for the accrued simple interest which will be added to the principal when you leave RePAYE and/or refinance. That's called capitalization. There is no capitalization, and hence no interest-on-interest compounding, whilst in RePAYE.

However, once your income is higher, your calculated payment will be higher, and your subsidy will therefore be less (if any). At that point, which is usually when you finish training, the high federal interest (prob like 6.8%, right) is no longer worth it...and if you can afford a higher payment, then you should minimize your losses both by getting the lowest rate at the shortest term.

This is almost always a 5-year variable; you want the rate lowest when the principal is highest (at the beginning), and the interest rate risk over that short a term is minimal anyway, and even less so if you pay it off more aggressively. Even if the rate does rise above the initially offered fixed rate for the term (usually at least a full percent higher), it's on a lower principal since you've already paid down so much, and that's unlikely to be a fast process...

This also gives you the option to work for private groups, less than full time, etc since you prob won't be doing PSLF since it might not end up being worth it for you with all that repayment money, your income being somewhat higher by then, and having to stay at the high interest rate.

If you give me your numbers of what you'll make in residency, what you'll make in the NHSC job, and your loan interest rate, I can give you actual calculations.

[lk599]

My resident salary is $55,000, the average pediatrician working at a typical NHSC job would make $150,000 to start, my loan interest rates average to ~6%. Let me know if you need any more numbers.

I input all of my numbers into a Income-Based repayment calculator, and it was saying that with RePAYE and PSLF I could only be responsible for paying ~30,000 over 10 years, which is much below the amount I am getting with the NHSC. I am just concerned that is PSLF doesn't pan out, I'm going to regret not paying more aggressively now when I can.

Thanks again for your help!

[Hank]

Save at least 20% of gross income ($30K+ per year) towards retirement. Over and above this amount, put money into taxable as if you were paying off your student loans.

If PSLF goes away, you still can pay off your loans. If PSLF doesn't go away, then the money is yours to keep.