Questions about additional payments in REPAYE plan

[fc_pty]

I'm a PGY1 in a 4 year EM program. Currently have about 186k of unsubsidized loans from 5.4-6.8% interest which come out to about $970/month in interest. My loans are currently in their grace period as I try to sort out what to do with them. I plan to graduate and go into private practice so I can conservatively expect to start at around 250k/yr and want to pay them off quickly after graduating.

Based on my research I think I'm going to apply to the REPAYE plan so I can make low monthly payments and take advantage of the subsidized interest. With the subsidy, my effective interest rate is about 4.02%  My cost of living is relatively low so I expect to have $200-400 extra each month (assuming a monthly payment of about $300).

My questions are:

1. Should I use this extra money to make additional student loan payments? Obviously I don't want to do this monthly as it minimizes my subsidy, but I can make a lump sum payment every 3, 6, or 12 months, that way I only lose the subsidy for that one month. Additionally, I have not consolidated my loans, so I technically get 8 individual subsidies. I could target the additional payments to the highest interest loan, and only lose the subsidy on that one loan when I make additional payments.

2. If I don't use the extra money to pay off the loans, what should I do with it? I've read some about taking advantage of Roth's during residency, but am not too clear about it.

 

[DMFA]

1. I wouldn't, unless your overall contentment in life is bouyed more by knowing you'll spend a tiny bit less overall over the life of your loans than by taking a nice vacation every now and then or drinking something nicer than Keystone during those four soul-crushing years.  The accrued interest, while it's still accruing, isn't capitalizing at least.

2. Yeah, it would great to do a Roth IRA, but the best retirement savings option would probably be a matching employer-sponsored plan if you have one.

Best thing for you will *probably* be federal direct consol now, RePAYE in residency, then on graduating, private refi and kill the beast in <5 years.

 

[Joy Sorensen Navarre Navigate]

You are practical, DMFA! I agree: keep the big picture in mind. I'd add to #1: get started on your disability insurance and life insurance planning. The sooner a person starts, the lower the premiums. Plus, I've seen two clients need the disability insurance during residency. Thankfully, they both had it.

[Sergio Estavillo]

Obviously I don’t want to do this monthly as it minimizes my subsidy, but I can make a lump sum payment every 3, 6, or 12 months, that way I only lose the subsidy for that one month.

• The subsidy is based on the required payment, not the actual payment.


• Because accruing interest does not capitalize while in REPAYE, save that money in an interest bearing account (Ally) and remit payment if and when you decided to exit REPAYE.

[fc_pty]

Sergio Estavillo wrote:

Obviously I don’t want to do this monthly as it minimizes my subsidy, but I can make a lump sum payment every 3, 6, or 12 months, that way I only lose the subsidy for that one month.

• The subsidy is based on the required payment, not the actual payment.


• Because accruing interest does not capitalize while in REPAYE, save that money in an interest bearing account (Ally) and remit payment if and when you decided to exit REPAYE.

Click to expand...

Thank's for the help! If you don't mind me asking, where did you find that the subsidy is based on the required payment, not the actual payment? The Navient representative I spoke to told me it was based on actual payment.

[Sergio Estavillo]

fc_pty wrote:

Sergio Estavillo wrote:

Obviously I don’t want to do this monthly as it minimizes my subsidy, but I can make a lump sum payment every 3, 6, or 12 months, that way I only lose the subsidy for that one month.

• The subsidy is based on the required payment, not the actual payment.


• Because accruing interest does not capitalize while in REPAYE, save that money in an interest bearing account (Ally) and remit payment if and when you decided to exit REPAYE.

Click to expand…

Thank’s for the help! If you don’t mind me asking, where did you find that the subsidy is based on the required payment, not the actual payment? The Navient representative I spoke to told me it was based on actual payment.

Click to expand...

I only have client screenshots showing their transactions.  Make any additional payment after the REPAYE subsidy has applied to see if it decreases any future subsidy.  The month to month subsidy should be the same within the annual cycle.  It's my understanding that the subsidy will only decrease if you're paying down the principal.

[Dmarigs]

Hello Sergio,
I was wondering if there are any updates on the REPAYE additional payments after subsidy has been applied?

[Sergio Estavillo]

Hi Dmarigs,

The application of the REPAYE interest subsidy remains as I previously described:

• The subsidy is based on the required payment, not the actual payment.


• My understanding is that the subsidy will only decrease if you’re paying down the principal balance.

Given your comments on another thread, your actual payments are paying down the principal.  Maybe consider refinancing now as you're reducing the REPAYE subsidy.  We experiencing interest rate increases, so delaying a refi could have adverse consequences.

[Joy Sorensen Navarre Navigate]

Regarding the REPAYE interest subsidy, the U.S. Department of Education pays half of the accrued, unpaid interest each month.

The rule: "If your monthly payment doesn’t cover the... full amount of interest that accrues, the government pays half of the difference on your unsubsidized loans during all periods." (from Income-Driven Repayment Plans: Questions and Answers, studentaid.gov)

In our experience loan servicing companies differ in their application of the rule for REPAYE interest subsidy.

For example, Navient reports the amount of interest-paid monthly, yet receives payments quarterly for the interest subsidy from the U.S. Dept of Ed. Navient applies the payment to the borrower's account on Jan 1, April 1, July 1, Oct 1.

[Dmarigs]

Thank you Sergio,
Our tentative plan is to check how much refinancing would be relative to RePAYE.

If the private refinance rates are significantly less, then we go with that and aggressively pay down.

If the rates and equivocal or even slightly less, then we go with REPAYE, pay our minimum payments, but save our additional money in an interest bearing account. Then once we are attendings in 5-6 years we use the saved up money to pay down the accrued interest and hopefully some principal, and refinance at that time.

 

[Sergio Estavillo]

Dmarigs wrote:

Thank you Sergio,
Our tentative plan is to check how much refinancing would be relative to RePAYE.

If the private refinance rates are significantly less, then we go with that and aggressively pay down.

If the rates and equivocal or even slightly less, then we go with REPAYE, pay our minimum payments, but save our additional money in an interest bearing account. Then once we are attendings in 5-6 years we use the saved up money to pay down the accrued interest and hopefully some principal, and refinance at that time.

 

Click to expand...

I noticed you mentioned "our and we."  RePAYE may not be in your best financial interest if your spouse has no federal student loans and significant income.  But, if you're both entering residencies, it's likely you're both carrying debt.

Also, if you're graduating in May/June, I recommend consolidating immediately after graduation and before you start your residency.

[Dmarigs]

Sergio,
Would love if you took a look at our specific scenario, I posted it as a topic thread.

Link Below
https://www.whitecoatinvestor.com/forums/topic/refinance-vs-idr-plan-medical-school-couple-beginning-residency/