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Switching from REPAYE to PAYE

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  • Switching from REPAYE to PAYE

    I graduated grad school in 2017 with 290k in student loans. I entered REPAYE at that time bc it was the lowest monthly payment and I wanted to get settled and I always figured I would refinance and pay off fast in the near future. Initially I was making my 10 year payment amount anyways, which was 8x my REPAYE required payment and was making progress. I then moved states, bought a dental practice, stopped making anything more then minimum payments for the next 1.5 years and then COVID happened and loans got frozen. I have been out of school for 4.5 years, all on REPAYE. I currently have a balance of 275k principle and 15k unpaid interest. I would have 20.5 years to go till whatever balance remained is forgiven(and forgiveness taxed). What I cant seem to find an answer for is if I switched to PAYE, would I start over and have the standard 20 years left for a PAYE repayment plan, or would I have 15.5 years till I triggered the forgiveness? Hoping someone here has some experience with this or can shed some light on it for me. What I would like to do now is enter PAYE, save monthly for the tax bomb, and then have loans wiped out in 15 years.

    I was offered 15 years 2.45% refinance rate, but I think going the 15.5 years on PAYE, if I am able to switch, would cost me significantly less in total.

  • #2
    I haven't done this actual math in the recent past, nor do I plan on doing it - I'm sure your capable.

    But I am highly skeptical of two things - 1) do you qualify for financial hardship such that you can even switch plans? 2) is the forgiveness including the tax bomb seriously worth it? Having run somewhat similar numbers long ago, I just can't imagine unless you bought the worst practice ever, with no plan to grow said practice's income, that this would be a meaningfully worth while exercise without some really unique traits to your background/income. you really don't have that much debt in the scope of things and the only time this type of situation comes into question is when debt is like $750k.

    I mean - for example, even if your income is only $100k on average for the next 20 yrs as a single filer with 5% interest, you still end up paying $281k in total plus a tax bomb on $250k forgiven. that just doesn't make logical sense to me relative to refinancing and getting rid of it.

    To answer your direct question - Yes, I am fairly certain (though feel free to hire a lawyer to confirm) that payments under 1 IDR qualify for another IDR's timeline for 'normal' forgiveness.


    • #3
      First question - Yes, your payments in REPAYE would count towards PAYE and you'd only have about 15.5 years left until PAYE taxable forgiveness. But, your interest will capitalize by switching repayment plans.

      You'd need to run the numbers to figure out if you should refi or continue with PAYE. You're probably going to have paid your loans off in PAYE before you hit the 15.5 year forgiveness unless you have quite low income.
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