Federal Interest Subsidy - Recently Married

[MDHubby]

Hello fellow WCI's!

As my name alludes to, my wife is an MD; specifically a PGY1 in a Family Medicine program. We were married in May, situated nicely in-between Med school graduation and the beginning of residency. Ahhh, those were the days...

Anyways, we are sitting in our grace period for her loans, which will kick in come November. Her residency program has provided us with a financial adviser free of charge (which is cool), but I've met with him once and he's already pushing things like cash value life insurance (which is less cool). I decided to educate myself on our situation to understand what our best options were.

Here's the stats: I make around $95k/year, with no school loans. We purchased a house via Doctor Loan near her residency with ~$1000/mo mortgage (taxes & insurance included). Her resident salary is around $54k, but as she is only working July-December it will be approx. 25k this year. Last year she reported about $15k income from a research grant. She currently has "only" about $126k in Direct unsubsidized loans at about a 6.3% weighte average rate. We have no intention of any form of loan forgiveness; I want these loans gone in the next 6 years. After her 3 years in residency I anticipate a $160-200k income for her (not nearly as high as some of the other Drs here, but more than enough given our debt situation).

Our adviser suggested taking advantage of the federal interest subsidy with RePAYE, as they only take into account the previous year's tax returns when determining AGI. Since we were not married in 2016 and her income was below the poverty line, this should amount to a $0 monthly payment. If I'm reading things right, this will only be recalculated after 1 year (meaning November 2018) in which case we may want to change to PAYE or refinance. So instead of making payments on the loans between now and Nov 2018, our adviser suggested using my ally savings to dump what we would be paying, and then make a large payment before refinancing or switching to PAYE.

 

Does this sound like the correct strategy? We also could just bite the bullet and stay one RePAYE to avoid the capitalization, even though both of our incomes will be taken into account.

Thanks for the input!

[lilsnappa]

My wife & I were in a very similar position 2 years ago (she is now a PGY3). Those 'advisors' are there to gain clients and make commission selling products, plain & simple. Be wary of them. Finding this website & researching as much as you can will much better prepare you financially than that advisor can, bc you have your best interests in mind. I did all of the analysis you are going through, and I ultimately decided to keep things simple and straightforward. You may save a few extra dollars with the approach you're taking with Repaye, but not as much as just being completely done with the debt by paying it off asap.

What we decided to do was refinance through SOFI as soon as the grace period ended, and we both committed to paying the loans off (~$130k) asap. We refi'd to a 5 year fixed and have been dumping as much as we can into it, with the goal of being done in less than 5 years. Tactically, we live of my income and use her entire residency income (not counting HSA/401k investments) to pay down the loans. We budget it that way and it has worked well for us so far. You will need to run the numbers so see if that could work for your family, maybe a 10 year refi would make things easier?

[nate1025]

Do the Excel thing and run the numbers but I have two comments.

 

1. Are you actually going to get any interest subsidy? Quick back of the napkin math suggests her interest is probably accruing at 600-700/month - your REPAYE based payments are likely to be around that depending on how your AGI works out with tax deferred savings etc. could be more in which case you receive no subsidy.

2. Her loan amounts are so low (Can't believe I just typed that) that regardless of what kind of job she goes into she would never have any forgiven so deferring payments has no other advantage than giving you more money in the budget during residency.

If you can make the budget work I'd consider starting to pay on a 5 year term now in which case it doesn't matter what payment plan you are on (in fact I think making principle payments is more of a hassle if you are on an IDR plan). You can look into refinancing but from my research and her likely interest rates it might no be beneficial unless you wait until she is PGY-3 and can go through SOFI or the like - there are very limited lenders willing to refi residents and the rates aren't much better if at all then what she has now.

[lilsnappa]

nate1025 wrote:

You can look into refinancing but from my research and her likely interest rates it might no be beneficial unless you wait until she is PGY-3 and can go through SOFI or the like – there are very limited lenders willing to refi residents and the rates aren’t much better if at all then what she has now.

Click to expand...

With your combined income (~$145K), you should be able to refi through SOFI now. We did when my wife was a PGY1 and we for 3.5% of a 5 yr fixed.

Note: the risk you are taking is that the debt now is both of your names, but for what you will save in interest (I calculated around ~$70k compared to the traditional fed loan for us) it may be worth the risk.

Full disclosure: Our combined income at the time was (~$200k/yr) and my credit score was 780+, with no other debt.

[treesrock]

 

Our adviser suggested taking advantage of the federal interest subsidy with RePAYE, as they only take into account the previous year’s tax returns when determining AGI. Since we were not married in 2016 and her income was below the poverty line, this should amount to a $0 monthly payment. If I’m reading things right, this will only be recalculated after 1 year (meaning November 2018) in which case we may want to change to PAYE or refinance. So instead of making payments on the loans between now and Nov 2018, our adviser suggested using my ally savings to dump what we would be paying, and then make a large payment before refinancing or switching to PAYE.

 

Click to expand...

This is true as far as I know, and the same happened to me.  During my intern year, I submitted my previous year tax returns (which showed no income), and my payments for the entire first year were $0 a month.  The next year, I submitted my tax returns from my first year of internship (which was only half the year as you mentioned), and my payments were minimal.

But for you guys the situation is more complicated, as you are married and your combined AGI will be higher.  You'll have to take that into account, and decide whether or not filing taxes separately makes sense in order to take advantage of her lower income.  There are a lot of downsides to this however.

Also, remember that the federal interest subsidy covers only 50% of the interest accrued on UN-subsidized loans.  So considering your low loan burden (which is all un-subsidized, why is this exactly?!?), reasonable combined income, and your self-serving "get rid of this debt" mentality, it may make sense for you to just refinance as others have indicated above.  But you need to run the numbers for yourself to make that decision.

[MDHubby]

Thank you both for your quick responses. I'll fill in my thoughts below:

lilsnappa wrote:

My wife & I were in a very similar position 2 years ago (she is now a PGY3). Those ‘advisors’ are there to gain clients and make commission selling products, plain & simple. Be wary of them. Finding this website & researching as much as you can will much better prepare you financially than that advisor can, bc you have your best interests in mind. I did all of the analysis you are going through, and I ultimately decided to keep things simple and straightforward. You may save a few extra dollars with the approach you’re taking with Repaye, but not as much as just being completely done with the debt by paying it off asap.

What we decided to do was refinance through SOFI as soon as the grace period ended, and we both committed to paying the loans off (~$130k) asap. We refi’d to a 5 year fixed and have been dumping as much as we can into it, with the goal of being done in less than 5 years. Tactically, we live of my income and use her entire residency income (not counting HSA/401k investments) to pay down the loans. We budget it that way and it has worked well for us so far. You will need to run the numbers so see if that could work for your family, maybe a 10 year refi would make things easier?

Click to expand...

I agree with your adviser sentiment. I think he genuinely knows what he's doing, but is ultimately trying to "get 'em while they're young" so to speak. I have a meeting again with him next week to discuss our loan payment strategy, hence the hardcore research.

In terms of refinancing, will places like SOFI refinance people so young into residency? Will the rate be so close (i.e. ~6%) That it really doesn't matter if we simply consolidate or refinance? According to my budget we could afford about a $2500/mo loan payment if we live well below our means (effectively using her after retirement & tax income, as suggested).

nate1025 wrote:

Do the Excel thing and run the numbers but I have two comments.

 

1. Are you actually going to get any interest subsidy? Quick back of the napkin math suggests her interest is probably accruing at 600-700/month – your REPAYE based payments are likely to be around that depending on how your AGI works out with tax deferred savings etc. could be more in which case you receive no subsidy.

2. Her loan amounts are so low (Can’t believe I just typed that) that regardless of what kind of job she goes into she would never have any forgiven so deferring payments has no other advantage than giving you more money in the budget during residency.

If you can make the budget work I’d consider starting to pay on a 5 year term now in which case it doesn’t matter what payment plan you are on (in fact I think making principle payments is more of a hassle if you are on an IDR plan). You can look into refinancing but from my research and her likely interest rates it might no be beneficial unless you wait until she is PGY-3 and can go through SOFI or the like – there are very limited lenders willing to refi residents and the rates aren’t much better if at all then what she has now.

Click to expand...

1) If we use her AGI from 2016's tax returns, then yes definitely. That was $15,000, which is well below 150% of the poverty line. Since we were not married at that point I think they won't take my income into account when the grace period ends. But this may be a risk.

2) That's kind of where I'm at. The adviser made it sound like "if you can get the government to pay half your interest for a year, then why not take it?" But I'd rather that interest not accrue in the first place, if at all possible.

 

One question I have is regarding interest capitalization. Does the interest we've accrued before beginning payments always get capitalized when the grace period ends? If we used one of the IDR's, does the interest not capitalize? Or is it only the negative amortized interest that accrues during payments? If it is the former, then it seems like there is still value in using an IDR. Also it gives us "breathing room" if we have a month where the minimum payment is uncomfortably high.

 

Thanks again for responses!

[MDHubby]

treesrock wrote:

 

Our adviser suggested taking advantage of the federal interest subsidy with RePAYE, as they only take into account the previous year’s tax returns when determining AGI. Since we were not married in 2016 and her income was below the poverty line, this should amount to a $0 monthly payment. If I’m reading things right, this will only be recalculated after 1 year (meaning November 2018) in which case we may want to change to PAYE or refinance. So instead of making payments on the loans between now and Nov 2018, our adviser suggested using my ally savings to dump what we would be paying, and then make a large payment before refinancing or switching to PAYE.

 

Click to expand…

This is true as far as I know, and the same happened to me.  During my intern year, I submitted my previous year tax returns (which showed no income), and my payments for the entire first year were $0 a month.  The next year, I submitted my tax returns from my first year of internship (which was only half the year as you mentioned), and my payments were minimal.

But for you guys the situation is more complicated, as you are married and your combined AGI will be higher.  You’ll have to take that into account, and decide whether or not filing taxes separately makes sense in order to take advantage of her lower income.  There are a lot of downsides to this however.

Also, remember that the federal interest subsidy covers only 50% of the interest accrued on UN-subsidized loans.  So considering your low loan burden (which is all un-subsidized, why is this exactly?!?), reasonable combined income, and your self-serving “get rid of this debt” mentality, it may make sense for you to just refinance as others have indicated above.  But you need to run the numbers for yourself to make that decision.

Good question on the unsubsidized loans. She technically has one subsidized loan for about $1,100 from undergrad. The rest of her loans were from living expenses while in med school. She had no med school tuition.

I think we will be applying to some refi's to see the rates we can get. Our credit is good-ish (mine's like 720, hers is like 770), and I think we could handle like a 7 year variable, which would get us a decent rate. I think she would prefer just to throw money at it rather than try to dip and duck and get the little scraps the government gives out.

[MDHubby]

treesrock wrote:

 

Our adviser suggested taking advantage of the federal interest subsidy with RePAYE, as they only take into account the previous year’s tax returns when determining AGI. Since we were not married in 2016 and her income was below the poverty line, this should amount to a $0 monthly payment. If I’m reading things right, this will only be recalculated after 1 year (meaning November 2018) in which case we may want to change to PAYE or refinance. So instead of making payments on the loans between now and Nov 2018, our adviser suggested using my ally savings to dump what we would be paying, and then make a large payment before refinancing or switching to PAYE.

 

Click to expand…

This is true as far as I know, and the same happened to me.  During my intern year, I submitted my previous year tax returns (which showed no income), and my payments for the entire first year were $0 a month.  The next year, I submitted my tax returns from my first year of internship (which was only half the year as you mentioned), and my payments were minimal.

But for you guys the situation is more complicated, as you are married and your combined AGI will be higher.  You’ll have to take that into account, and decide whether or not filing taxes separately makes sense in order to take advantage of her lower income.  There are a lot of downsides to this however.

Also, remember that the federal interest subsidy covers only 50% of the interest accrued on UN-subsidized loans.  So considering your low loan burden (which is all un-subsidized, why is this exactly?!?), reasonable combined income, and your self-serving “get rid of this debt” mentality, it may make sense for you to just refinance as others have indicated above.  But you need to run the numbers for yourself to make that decision.

Click to expand...

I believe with RePAYE both of our incomes are taken into account regardless if we file jointly or separately. That is the only IDR with the interest subsidy on unsubsidized loans.

[nate1025]

This is true - She might be able to use PAYE which would allow you to file separately and only have her income considered but only if she began borrowing after 2007. If she borrowed before 2007 then she could use IBR which is 15% of income instead of 10% but has no interest subsidy so you will be negatively amortizing during residency.

[adventure]

MDHubby wrote:

In terms of refinancing, will places like SOFI refinance people so young into residency?

Click to expand...

Yes. And, there are no "closing" costs for moving to one of these lenders. So, when your credit goes up, your debt to income ration improves, etc, rates fall, you can simply refi again (and get another bonus).

We refi'd during residency.

[lilsnappa]

MDHubby wrote:

In terms of refinancing, will places like SOFI refinance people so young into residency? Will the rate be so close (i.e. ~6%) That it really doesn’t matter if we simply consolidate or refinance? According to my budget we could afford about a $2500/mo loan payment if we live well below our means (effectively using her after retirement & tax income, as suggested).

Click to expand...

1) Yes. We refi'd during my wife's intern year.

2) The rates should be much better than federal loans (6.8%). We're at 3.5%...so it is significant.

3) Our payments are right around $2500/mo, which is almost all of my wife's take home (after HSA & 401k contributions). If you can live off of one salary, it can be done.

[MDHubby]

lilsnappa wrote:

MDHubby wrote:

In terms of refinancing, will places like SOFI refinance people so young into residency? Will the rate be so close (i.e. ~6%) That it really doesn’t matter if we simply consolidate or refinance? According to my budget we could afford about a $2500/mo loan payment if we live well below our means (effectively using her after retirement & tax income, as suggested).

Click to expand…

1) Yes. We refi’d during my wife’s intern year.

2) The rates should be much better than federal loans (6.8%). We’re at 3.5%…so it is significant.

3) Our payments are right around $2500/mo, which is almost all of my wife’s take home (after HSA & 401k contributions). If you can live off of one salary, it can be done.

Click to expand...

Thanks for the follow up. After reading some of your other posts, I see we're in a pretty similar situation, except you're a couple years ahead of me. I think we will apply for a refinance soon at a number of recommended places and see how the numbers come out. We may do something like a 7 year variable and then refinance once she reaches attendinghood. (She's 50/50 on a fellowship). This would put our payment around $1,600 a month which is manageable, and we can always pay more if we feel comfortable.

/tangent: I noticed you're also considering a home purchase. Did you decide on that route? We went through the doctor loan program with fifth third, and while I don't recommend the bank, the loan itself was pretty solid. We did little down, got 3.75% on a 7 year ARM. We will most likely be out of the house by then, so we took the low interest rate. I think it's a good option to focus on killing loans an taking on more of a mortgage rather than putting 20% down. The big benefit of the 20% is the no PMI, which you already get with the doctor loan.

[lilsnappa]

Re: /tangent

We were trying to decide whether we should focus on build up a downpayment for a house in 1-2 years, or continue to dump as much as we can into the student loan. After some great responses from posters on this site, we decided to continue paying down the debt and take advantage of a physician mortgage program when the time comes for us to buy. The reasoning that stuck with me the most is: Home Debt > Student loan debt, so if you must choose, go with more home debt and eliminate the student loan debt.

[MDHubby]

Just as a follow up (since WCI featured this thread in his monthly newsletter) we got a decent rate of 3.5% quoted from ELFI for a 10 year variable that puts our payments around ~$1300 a month, which is palatable for us considering our income, emphasis on retirement, and other obligations. We are building up our "emergency fund" after my savings got depleted from the wedding and honeymoon, so once that's at a comfortable point we'll start attacking these loans.

We are planning on maxing my Roth 401k, and opening her a Roth IRA (no roth option offered through her work). The numbers look pretty good, and I ran her through some "conservative" growth scenarios considering our retirement contributions, to see where we'd be at later in life. Since she's only 27, she has a ton of time for that nest egg to grow, as long as we can find tax-safe places to put it early in her attending career.