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Repaye vs. refinancing

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  • Repaye vs. refinancing

    I'm a fourth year medical student about to start residency in July. Trying to decide on refinancing right away or going with repaye. Not looking to do pslf. I have 130k in loans at 5.86%. I'm married and will have two children at some point during pgy1. My wife works from home and will likely make around 20-40k this year.

    Ive researched this a lot and it seems like repays is this way to go with the 50% subsidy. Would that make my effective interest rate 5.86/2 = 2.93% or am I wrong?

    It seems like I won't get nearly that good of a rate by refinancing.

    Ive read that repaye is less ideal if your spouse works since they combine your income to determine your monthly payment. Is the only downside here that I would have a higher monthly payment?

    So as I see it I can do repaye and have a lower effective interest rate (maybe quite significantly) but have a higher monthly payment due to spouse income or I could refinance and have a higher effective interest rate than repaye but still lower than my current 5.8% but $0 or $100 monthly repayment? Am I missing anything?

    any other thoughts or advice would be grately appreciated.

  • #2
    I did just find this. "Perhaps the most compelling aspect of the new REPAYE plan for borrowers is that the government will pick up some or all of the unpaid interest on both subsidized and unsubsidized Direct loans. Like PAYE, under REPAYE the government will cover any unpaid interest on subsidized federal loans for three years if a borrower's monthly payment does not cover all of the accruing interest on the loan. REPAYE, however, expands this government subsidy to include unsubsidized federal loans. Under the new plan, the government will pay 50% of any unpaid interest that accrues on unsubsidized federal loans, as well as for subsidized loans beyond the three year mark. In this regard, REPAYE is particularly attractive to low-income borrowers whose 10% monthly payment cap will not cover their entire interest payment."

    So I guess the concern here is that my monthly payment would be higher than the accruing interest and I would not qualify for the subsidy?


    • #3
      Also a 4th year medstudent here, asking myself the same questions. As the RePAYE program is new it's hard to find a lot of information on it. My best understanding is that it is not as simple as just dividing your interest rate in half, since the 50% interest subsidy is based off the amount of interest that accrues in excess of your payment. In other words, if you have $100,000 in loans at 6%, they accrue $6000/year, or $500/month. If you monthly payment under RePAYE is $100 (and all of that is applied to interest), then $500-100=$400  $400/2=$200 interest subsidy.

      $200 x 12 months= $2400 interest subsidy

      $6000-2400= $3600

      $3600/100,000= 3.6% effective interest rate NOT simply .06/2=3%


      Thus, as your monthly payment increases, your effective interest rate will increase as well. At the income levels you are describing, you'd still have monthly payments that are low enough to see a big benefit from the program.  There is a repayment calculator on the website that allows you to estimate what your monthly payments would be under the different loan repayment programs (website is down currently though).

      As far as refinancing through private (as a matched M4 or intern), because our income is so low and debt-to-income so high, I've never heard of anyone getting a rate lower than 5%. I was planning on putting applications in to see what rates I can get with private lenders, but the more I read it doesn't seem like they can come close to the effective interest rate offered by the RePAYE program.


      • #4
        Thanks for your post. Very helpful. Repaye seems like the way to go at least for the first year. Your repaye monthly payment is recalculated each year from what I can find. I'm assuming they go off of your income for the previous year. My wife made only 20K this year and our monthly payment as estimated on the government website is $0-$10 monthly. So it would seem we would get the full 50% government subsidy on the interest. If this is the case then our effective interest rate would be much lower with repaye than the ~5% I would get refinancing. It seems like we might need to recalculate refinancing vs. repaye renewal every year and the year that the effect interest rate for refinancing is less that would be the year to do it.