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Update 10/26/2016: I'm updating this post to let everyone know that early consolidation and applying for REPAYE works well. I am now 3 statements in with $0/month payments and the government interest subsidy is posting on 1st of the month. The 0.25% interest deduction for automatic payment works also. After consolidation, my interest rate was 6%. With 0.25% automatic payment deduction, it is 5.75%, and with government subsidy, my effective rate is 2.87%.
Original Post:
I'm a 4th year med student, graduating in 2 weeks with about $210,000 in federal loans. $187,000 of this is principle and $23,000 is accrued (uncapitalized) interest. The loans have various rates between 5.41-6.8%. The weighted average rate is 5.99% I've posted a few times on here about REPAYE and continue to be surprised about how few people know about it. In short, under the REPAYE program, monthly payments are set to "10% of your disposable income" based off the prior year's tax return. As a 4th year medical student, I made $3000 last year. Using the studentloans.gov repayment calculator, this makes my REPAYE payments $0/month for the first year.
The reason for making this post is to point out the benefit of entering REPAYE as soon as possible after graduation. This is because interest capitalization is triggered by specific events:
See more at: http://askheatherjarvis.com/blog/what-triggers-student-loan-interest-capitalization#sthash.6Ajj3MK6.dpuf
When you graduate medical school you enter a 6 month grace period during which your interest is not capitalized. It continues to accrue at the same rate as while you were in medical school and then consolidates when you enter repayment (if you graduate in May, then this is in November/December). From May-November, my $187,000 in principle accrues $5610 in interest. My loan then enters repayment and 23,000 + 5610 is capitalized into my 187,000, to make $215,000. $215,000 @ 6% kicks out $12,900 in interest per year, or $1075 per month.
REPAYE: $1075 - $0 monthly payment = $1075 of interest not covered by monthly payment. Under REPAYE, the government pays 50% of this, so each month I am really only accruing $537 of interest per month ($6450 per year). On a $215,000 loan balance, this is an effective rate of 3.0%.
So, wouldn't it be great to enter REPAYE as early as possible? Not so easy says the government. This is because you cannot skip your 6 month grace period. Your loans do not begin repayment until after your grace period. This is not to say you can't make voluntary payments during this time, but your loans are technically not in repayment, so you cannot enroll early in REPAYE. I have spoken with a Nelnet representative who has confirmed this. What this means is that we are stuck with waiting 6 months (while loans are accruing at 6% instead of 3%)
However, consolidation of your loans does trigger repayment (you forfeit your grace period when you consolidate). Thus, by consolidating loans as soon as possible after graduation, you can enter REPAYE. And since your payments will likely be $0 anyways, what is the point of a grace period? This is what I plan to do.
Another benefit of this scheme is that the interest generating from May-November doesn't get added to the principle. Remember that $5610 I mentioned? Instead, if I consolidate in May, my principle for the life of the loan (until I refinance as an attending) is only $210,000 ($187,000 + 23,000). This makes a very small difference in the grand scheme of things ($215,000 vs $210,000 loan principle), but hey.
Let me know if anyone else has thought of this or if you can think of any thing I am overlooking.
Original Post:
I'm a 4th year med student, graduating in 2 weeks with about $210,000 in federal loans. $187,000 of this is principle and $23,000 is accrued (uncapitalized) interest. The loans have various rates between 5.41-6.8%. The weighted average rate is 5.99% I've posted a few times on here about REPAYE and continue to be surprised about how few people know about it. In short, under the REPAYE program, monthly payments are set to "10% of your disposable income" based off the prior year's tax return. As a 4th year medical student, I made $3000 last year. Using the studentloans.gov repayment calculator, this makes my REPAYE payments $0/month for the first year.
The reason for making this post is to point out the benefit of entering REPAYE as soon as possible after graduation. This is because interest capitalization is triggered by specific events:
1. When the loan enters repayment.
2. When a deferment ends.
3. When forbearance ends.
4. When the loan defaults
5. A change in repayment plan
6. Loan consolidation.
See more at: http://askheatherjarvis.com/blog/what-triggers-student-loan-interest-capitalization#sthash.6Ajj3MK6.dpuf
When you graduate medical school you enter a 6 month grace period during which your interest is not capitalized. It continues to accrue at the same rate as while you were in medical school and then consolidates when you enter repayment (if you graduate in May, then this is in November/December). From May-November, my $187,000 in principle accrues $5610 in interest. My loan then enters repayment and 23,000 + 5610 is capitalized into my 187,000, to make $215,000. $215,000 @ 6% kicks out $12,900 in interest per year, or $1075 per month.
REPAYE: $1075 - $0 monthly payment = $1075 of interest not covered by monthly payment. Under REPAYE, the government pays 50% of this, so each month I am really only accruing $537 of interest per month ($6450 per year). On a $215,000 loan balance, this is an effective rate of 3.0%.
So, wouldn't it be great to enter REPAYE as early as possible? Not so easy says the government. This is because you cannot skip your 6 month grace period. Your loans do not begin repayment until after your grace period. This is not to say you can't make voluntary payments during this time, but your loans are technically not in repayment, so you cannot enroll early in REPAYE. I have spoken with a Nelnet representative who has confirmed this. What this means is that we are stuck with waiting 6 months (while loans are accruing at 6% instead of 3%)
However, consolidation of your loans does trigger repayment (you forfeit your grace period when you consolidate). Thus, by consolidating loans as soon as possible after graduation, you can enter REPAYE. And since your payments will likely be $0 anyways, what is the point of a grace period? This is what I plan to do.
Another benefit of this scheme is that the interest generating from May-November doesn't get added to the principle. Remember that $5610 I mentioned? Instead, if I consolidate in May, my principle for the life of the loan (until I refinance as an attending) is only $210,000 ($187,000 + 23,000). This makes a very small difference in the grand scheme of things ($215,000 vs $210,000 loan principle), but hey.
Let me know if anyone else has thought of this or if you can think of any thing I am overlooking.
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