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Starting residency soon, not sure whether to try and be aggressive with loans

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  • Starting residency soon, not sure whether to try and be aggressive with loans

    I am a graduating MS4 with 300k in student debt, all federal loans, some subsidized, most not. I’m married with 2 kids, combined income next year will be around 75k. I’m considering doing PAYE vs REPAYE. I’m most likely to enter private practice when done with residency, and aggressively pay my loans, but there is a chance I would stay in academics and try for PSLF. My question is, should I only pay the minimum payment each month? Or should I try and pay as much as possible. I don’t fully understand the interest subsidy of PAYE\REPAYE. Any advice. Thanks for the great resource this webpage is.

  • #2
    Repaye: your monthly payment is capped at 10% of your discretionary income. There are good calculators on the government website (studentloans.gov) that will estimate your payment. Most likely you will have a small payment that doesn't even cover the interest. The interest subsidy you refer to is where if your monthly payment isn't enough to cover the interest, the government will pay the rest (but only for the subsidized loans). So this may/may not help much depending on how much of your loans are subsidized.

    As for whether to pay down quicker - you definitely have a large loan burden that works in your favor if you are trying for PSLF, but I think a lot of that depends on what specialty you are going into. If you are going to be a surgical subspecialist you may not get much out of PSLF (and you end up paying a lot more in interest), but if you are going into primary care it may be to your benefit. Again, the studentloans.gov website will estimate all of that for you and lay out all of your options. I would start there.

     

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    • #3
      After doing a little more research it seems that with Repaye the government may pay some of the unsubsidized interest...  Can't really find any good information on this online. The government's own websites don't seem to directly state what interest is paid by the government and the only info I can find is from secondary resources. Perhaps someone else can steer in the right direction.

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      • #4
        My understanding is that the government pays the full interest (except your monthly payment) on subsidized loans for three years, after which it pays half of the interest (except your monthly payment). On unsubsidized loans it pays half of the interest the whole time (except your monthly payment).

         

        So, if you have all UNsubsidized, and owe $1000 in interest per month and have a $200 monthly payment based on discretionary income, you would pay $200 toward interest upfront, $400 would accrue on your loans, and $400 would be covered by the government.

         

        Check out this PDF: http://members.aamc.org/eweb/upload/15-394FIRSTExitEDMWEBFinalwithlinks.pdf

        for more information, specifically pg 29 of the PDF re: the Repaye program which states:

        In 2015, a version of the PAYE plan called Revised Pay As You Earn (REPAYE) was made available for federal student loan borrowers. The purpose of REPAYE is to provide more student loan borrowers access to the affordable terms of the income-driven plans. REPAYE accomplishes this by providing lenient terms: • There are no income requirements. • A Partial Financial Hardship (PFH) is not needed to enter the plan. • The loan disbursement dates do not affect the borrower’s eligibility. REPAYE allows borrowers who do not qualify for PAYE or IBR to make affordable monthly payments (equal to 10 percent of their discretionary income). REPAYE payments will be adjusted annually.

        Borrowers do not have to pay the accrued interest (interest that’s not covered by the regular monthly payment amount) on subsidized loans for the first three consecutive years of repayment. After the three-year period, borrowers have to pay only 50% of the accrued interest on the subsidized loan that’s not covered by their regular monthly payment amount. For unsubsidized loans, the policy is slightly different; for the entire REPAYE payment period, borrowers have to pay only 50% of the accrued interest that’s not covered by their regular monthly payment amount.

        REPAYE payments qualify for Public Service Loan Forgiveness (PSLF), and loan forgiveness is available for graduate-level students after 25 years of payments (rather than 20 years with PAYE). Currently, the amount forgiven is taxable. Best option for borrowers who are seeking lower required monthly payments and/or some type of loan forgiveness.

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        • #5
          Under RePAYE, which statement is true?

           

          1) 50% subsidy of (monthly interest accrued - monthly required payment)

          2) 50% subsidy of (monthly interest accrued - (monthly required payment+any extra monthly payment))

           

           

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          • #6
            (Inadvertent double post)

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            • #7
              #2 is true. You can't pay down student loan principal with extra payments, all your money always goes to interest first. So any extra money you spend cuts into your subsidy (which means the incentive to pay down faster only happens when your required payment approaches your accruing interest; at this point, one should consider refinancing and then being aggressive).

              For the OP, the bigger your loans and the lower your income, the more money the feds will pay off in REPAYE. REPAYE is perfect for residents in your situation. With 75k a year and a family, you won't be able to even put a dent in the interest. Minimum payments are the way to go. If you can, you could always save the money you would have spent on interest payments and put it in a low risk investment and then use that to pay it down when the time is right or for down payment on a house etc.

              I wrote about the pros and cons of repaye at length here: http://www.benwhite.com/finance/the-pros-and-cons-of-repaye/ I think it answers your questions.

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              • #8




                #2 is true. You can’t pay down student loan principal with extra payments, all your money always goes to interest first. So any extra money you spend cuts into your subsidy (which means the incentive to pay down faster only happens when your required payment approaches your accruing interest; at this point, one should consider refinancing and then being aggressive).

                For the OP, the bigger your loans and the lower your income, the more money the feds will pay off in REPAYE. REPAYE is perfect for residents in your situation. With 75k a year and a family, you won’t be able to even put a dent in the interest. Minimum payments are the way to go. If you can, you could always save the money you would have spent on interest payments and put it in a low risk investment and then use that to pay it down when the time is right or for down payment on a house etc.

                I wrote about the pros and cons of repaye at length here: http://www.benwhite.com/finance/the-pros-and-cons-of-repaye/ I think it answers your questions.
                Click to expand...






                Under RePAYE, which statement is true?

                 

                1) 50% subsidy of (monthly interest accrued – monthly required payment)

                2) 50% subsidy of (monthly interest accrued – (monthly required payment+any extra monthly payment))

                 

                 
                Click to expand...


                I'd like a little further clarification on this topic, if you don't mind. I understand that anything more than the minimal payment will not go toward the principal, but 50% of the interest is still accruing. Couldn't extra payments still go towards interest in this situation without decreasing the amount of the subsidy? Or is that just plain not how this plan is set up?

                For example:

                1200/mo interest accrual

                200 payment/mo

                Making the minimum payment means 500 is forgiven and 500 accrues. So, if you up this to 300/mo payments, you're saying 450 forgiven and 450 accrual is how it will work vs. 500 forgiven and 400 accrual. Is that the correct way of looking at this?

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                • #9
                  My current understanding is #1 statement is true. What is your loan lender? Mine is fedloan servicing. My plan after I will be on REPAYE is that I will sign up for the Direct Debit which gives me 0.25% interest rate off on every Direct loans I have (I have multiple Direct loans at various interest rates). I will let them take out only the minimum required monthly payment. After they process the payment with subsidy applied monthly, then I will pay extra using the 'specific loan payment' tool on my fedloan servicing website where I can choose the specific loans I want to pay toward outstanding interest amount. You won't make any dent unless you pay all of the outstanding interest amount, of course.

                  Only question I am not sure until I actually make payment under REPAYE is, if you pay extra+minimum required payment at the same time, I am not entirely sure how your lender will calculate the subsidy with extra amount. My assumption is still #1 statement holds true and any extra should go toward outstanding interest amounts. But, my plan is to pay separately between minimum amount and extra amount to see if my plan works. Nobody has a legitimate answer since REPAYE is relatively recent program...unless you are currently on REPAYE and has experience with paying extra amount and see what happened to the subsidy effect.

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