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Loan Management Question -- REPAYE vs refinancing

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  • Loan Management Question -- REPAYE vs refinancing

    Hi all,

    First of all, I'm sorry in advance for the long(ish) post and I really appreciate your advice!

    I'm a first year EM resident and my fiancé is a 4th year medical student also applying to EM. I've managed to graduate with no loans (combination of having some savings from working before medical school plus living frugally during and then about halfway through starting to receive some trust money that I've put entirely toward my education and frugal living so far), but my fiancé will be graduating with about 200k. I don't think that she'll be doing a fellowship or working at a 501c organization after graduation (not that many where I think we'll end up), so I doubt she'll actually be able to go through PSLF. Her loans are all direct stafford loans and mostly have interest rates between 5.4-6.8%; about $8,000 (divided between two) are subsidized while the rest are unsubsidized.

    I currently have enough coming through from the trust that I'm living pretty frugally on that while applying almost my entire yearly salary towards retirement accounts (I'm at a UC program so we have a solid 403b, 457b, DCP (7.5% pretax toward pretax in place of SS), and the ability to contribute aftertax to the DCP and then immediately roll over to a Roth IRA plus my standard Roth IRA contribution). I know how very fortunate I am to be able to do that, and I'm trying to take advantage of it rather than squander it away on the Tesla I really want

    That said, we're now trying to figure out the best way to go about paying off her loans and using REPAYE vs refinancing. On the one hand, we'd still qualify for REPAYE if she uses the same all-into-retirement-accounts plan that I'm using now (AGI is about $1,000 monthly after all the pre-tax reductions), and I think if she matches close by (here's hoping), our household expenses wouldn't increase so much that we'd need to spend more than my current spending...minus the loans, of course. We would probably occasionally have more income anyway to put toward her loans on top of the base monthly payment of REPAYE (especially after I start moonlighting during my third year), which leads to one of my first questions -- is it possible to direct that extra payment towards principal specifically, or would it primarily go toward the extra accumulating interest? I've found a bunch of conflicting articles about this so I'm not entirely sure. Similarly, is it possible to direct the extra payments toward her UNsubsidized loans only since the few remaining subsidized ones will continue to have interest paid by the government during REPAYE as will half of the unsubsidized ones? Does the interest forgiveness happen right away or only at the end of the 10 or 20 years? 

    Are there circumstances where you think using a loan refinancing option like DRB or SoFi would be better? I was leaning toward REPAYE because she does still have some that are subsidized and would therefore not accrue interest during residency (right? unless that has changed and I didn't realize it), but since she's not doing PSLF, do you think DRB or SoFI or another would be a better option since it could lower the interest rates? If so, is it possible with these companies to direct extra loan payments specifically toward principal rather than interest?

    And lastly, would there be a strong argument for reducing the amount of money we're planning to put toward retirement accounts in order to pay off loans earlier instead? That's certainly an option, but I have to admit that I love seeing my retirement fund grow each year and knowing how long it has to compound since we're both still pretty young and have a long road ahead of us.

    Thank you for reading through and for any advice you might have. I've been doing a lot of research into it but keep going back and forth, and I really appreciate your taking the time to help.

     

  • #2
    And now I'm semi-answering my own question but would love some input on whether or not I'm calculating this right....

    Under the REPAYE plan:

    Last 6 months of this year (depending on whether or not it's possible to ditch the grace period so that the government can start covering some of the interest): $0 monthly payments (last year her income was $0 and we aren't yet married); Government pays ~50% of interest. $200,000x 6.5% (average across loans) / 2= $6500 total, or $3750 interest accrued (which we'll pay off whenever there's a little extra money lying around plus any principal with extra money).

    Next year (2017): We'll be married then, so if we both contribute all that we can into pre-tax accounts like I've been doing, AGI = $13,000 (mine after taking out all the pre-tax stuff) + $0 (hers...she'll fund as much as possible of her 403b/457b for this year from her first 6 months of residency pay). If AGI = $13,000 then monthly payments = 13000/12months x 10% = $110/month. Meanwhile, interest each month is about $1,100, so $1000 goes unpaid and half of that is paid to the government. $500 each month of interest accrued goes into the loan, effective rate is $7,200 (which is $600x12) / 200,000 or 3.6%. $6,000 extra interest accrued unless we pay it off as we go (which I expect we would hopefully plus some principal).

    2018: AGI = $30,000 total (2 x residency salary in 2017 minus as much pre-tax as we can fit), monthly payments = $250. $850 unpaid interest/2 = 425 paid by government. Effective rate = 4.05% (8,100/200,000). ~5,100 into the account unless we pay it off.

    2019: AGI = about the same (expect a bump in tax-deferred contribution limits to equal our pay bump, who knows)....so the 2018 numbers still apply.

    2020: This is where it gets a little complicated since I'll have an attending salary for the second half of 2019....could even get complicated earlier with moonlighting, not sure, but if so I'd be filling up a solo401k as much as I could and still trying to reduce our AGI to the full extent possible. Preferably we'd just pay off her loans by the end of this year, since we'll likely be paying down the principal whenever possible throughout residency as well (didn't include that above since I don't know exactly when/how it would happen yet).

     

    Do those numbers make sense? And, if so, REPAYE should be the right option, right? Thanks!

     

    EDIT: After further investigation, I realized that "discretionary income" is actually less than AGI (Discretionary income is the amount by which a borrower's AGI exceeds 150% of the federal poverty rate for the family size, right?) so our required monthly payments would be lower and therefore the interest covered by the government higher, I think. Sorry!

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    • #3
      Saw the error you made in estimating your RePAYE payments then saw your EDIT as well. There is a calculator on the studentloans.gov website that you can enter in your loan info and AGI and it will spit out what your estimated monthly payment would be under the various different repayment options. You can play with your AGI and loan balances to find out how that changes your estimated payments.

      I don't think you will be able to get a private loan as a resident for rates below 5%. (Please someone chime in if they have ever hear head of someone getting rates below this). Once you can provide proof of an attending contract, maybe that could change but from your story you are a few years from that.

      As far as some of your other questions go, RePAYE has only been around for a few months, and there are Reddit threads where people discuss having applied way back in December and still have not been officially enrolled in the new program. I don't think anyone quite knows yet how the interest subsidy will work in practice.

      For your questions about applying excess payments towards accrued unsub vs subsidized, you would be best to contact your loan provider directly and ask them. I'm almost certain the answer is yes. I know you can selectively apply excess payments towards higher interest loans, so seems like you could pick the subsidized vs subsidized as well.

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      • #4
        My head hurts so I'm not going to try to answer all your questions. But...

        It is NOT possible to apply extra payments towards principal instead of accruing interest. All your excess payments will go FIRST to any outstanding payments due, plus any fees, then to accrued interest, and then to principal. Also, keep in mind that on the loans she took out first year, she has lots of accrued interest that has to be paid off before you can start to touch the principal. If you enroll in IBR/PAYE/REPAYE, then that interest will not be capitalized. If you enroll in another plan, it may be, in which case you have less interest before you start paying off principal, but a higher principal that is gaining interest.

        However, it IS possible to tag your payments towards a specific loan. If all her loans are with one servicer, you will have to ask for them to be unbundled, and then specifically indicate in writing where you want the money in excess of the monthly payment to go.

        And, finally, based on my experience with PAYE, the interest forgiveness is done at least annually. There's lots of extra payments on my account as well, so it might be monthly, but I'm fairly certain it is annually. But who knows how REPAYE is going to work.

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