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PSA: REPAYE Subsidy

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  • PSA: REPAYE Subsidy

    Recently WCI wrote in his newsletter the following:

    "3. Aggressively Paying Off Loans as a Resident

    I'm also seeing a lot of residents wanting to make extra loan payments while in REPAYE during training. However, nobody (including me) is really sure yet how that will affect the subsidy (i.e. if you pay more interest will the government pay less of it?) While I'm all for paying off loans early, I think I would advocate for a different tactic. If you are such a super saver that you're trying to pay off big chunks of your med school loans during residency, then you will probably retire with tons of money. That means Roth space will be particularly valuable to you. Residency is an excellent time to get a bunch of money into Roth IRAs and Roth 403(b)s. So if you are in REPAYE getting a decent subsidy, have not yet maxed out your personal (and if applicable your spousal) Roth IRA and your Roth 403(b) (hopefully your residency offers one), then I think I would recommend contributing any extra cash you have there instead of paying off your loans. If somehow due to a ridiculously high savings rate, moonlighting income, or spousal income you can still put something toward your loans, then you're probably not going to get much of a subsidy anyway. If you just want to make sure you don't miss out on any subsidy, you can even invest in a taxable "side fund" to throw at the loans as soon as you are no longer eligible for a subsidy. "

    I responded and hope it will spark some discussion or at least give information for others!

    "Dear Dr. Dahle,
    Regarding #3 on your list, and specifically "if you pay more interest will the government pay less of it?" -- I have been aggressively paying one of my loans (highest interest, lowest balance) while paying the minimum required of me based on the REPAYE program.  I am a dental specialist who started practicing in August 2015.  I did not get paid during residency (many dental specialty programs are tuition-based), so the income that was used to calculate my required payment was based on only 4 months of work.  This makes my required payments extremely low, allowing me to throw a lot toward that one loan.  I decided to go with this strategy to effectively lower my interest rate (I got terrible rates when pinging refi programs) and because I can afford it while still saving/contributing to Roth IRA. I will not hit a typical income for my specialty until maybe year 2 or 3, unless I decide to buy a practice at that point (my income may actually go down!).


    Each time the principle on that loan is hit, there is less interest each month.  Therefore, I have been getting a lower subsidy for that loan each month.  The other loans are growing because my monthly payments barely scratch the interest accumulated each month.  For those loans, I have been getting more subsidy each month.  I was able to easily see this through linking my accounts in mint.com


    I am not great with numbers (I would love for someone to help me figure out my effective rate with REPAYE - do any of your readers know of a calculator or how to figure it it?), but I believe that the big picture for what the government pays stays about the same."

  • #2
    I believe you are describing exactly what WCI was describing. As you pay extra on your highest interest loan, you say your subsidy is being reduced. WCI suggested in his newsletter that in order to avoid this, you might preferentially fund your Roth IRA/403B (and even taxable) instead of paying extra on that loan. By the sounds of it, you are giving up free money by paying the loan down faster.

    Calculating your effective interest rate is relatively simple. To use an example, say you had a $100,000 loan at 6%. It would generate $6,000 a year in interest (100000 x 0.06), or $500 per month.

    If your monthly payment is $0 under REPAYE, the math is simply. $500 – $0 monthly payment = $500 of interest not covered by monthly payment. Under REPAYE, the government pays 50% of this, so each month you are really only accruing $250 of interest per month ($3000 per year). On a $100,000 loan balance, this is an effective rate of 3.0%.

    If your monthly payment is $100 under REPAYE, the math changes. $500 – $100 monthly payment = $400 of interest not covered by monthly payment. Under REPAYE, the government pays 50% of this ($200), so each month you are really paying $100 plus accruing $200 of interest per month. $300x12 is $3600 per year. On a $100,000 loan balance, this is an effective rate of 3.6%.

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    • #3
      Is there a specific timeline where we should open up the IRA or 403b ROTH accounts by for those incoming residents? When do we have to max out the ROTH accounts by? By deadline for annual tax return filing? Do most people save up some cash reserve first before opening and investing at once? For example, the maximum cash amount for IRA ROTH per year is 5.5k. Do people put 5.5k at once when one is ready to open and invest? Or, do people open up the account when starting residency and put cash monthly?

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