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Benefit of Consolidation after CARES Act

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  • Benefit of Consolidation after CARES Act

    I'm a graduating M4 with about $200,000 in subsidized ($16K) and unsubsidized direct loans. I'm also about to graduate early in the next 2 weeks from med school due to the current COVID-19 situation, with no obligation to start working. Because of this, I know if I want to consolidate, I must do it fairly soon but I am debating the benefits of consolidation now that the CARES Act has been passed. I'm planning on doing REPAYE and then switching to PAYE when I get married in the next year or two. I'm also keeping my PSLF options open.

    With the 0% interest until Sept 31st and early graduation, it seems like the benefit of saved interest from consolidating and foregoing my grace period will be minimal. Maybe 1 month of interest accrued that will capitalize. That being said, it seems like there remains 2 major benefits to consolidation:

    1. Starting REPAYE early and counting several months of $0 payments towards the 120 required for PSLF.
    2. Certifying my income as $0 so I can make 1 full year of $0 payments. (If I start REPAYE after the grace period, I believe I have to report my actual income at that time, correct?)

    That being said, do these 2 benefits outweigh not consolidating and paying down my higher interest loans first?




  • #2
    I have a similar situation to you except I’m not doing PSLF. From my understanding (you touched on this in your post), you have to report your income when you consolidate your loans. Your income on September, 31st will be around 30k so your REPAYE payments will not be 0. Whereas if you consolidate right after graduation you'll have 0$ payments for 12 months.

    For that reason I was going to consolidate right after graduation. Curious to hear what others think.

    Comment


    • #3
      Here's my best guess of the options...

      Grace period is 6 months - you can apply (in fact, they suggest) for IDR at least two months in advance of grace period ending (if you do it earlier, they will likely ask you to do it all over again closer to end of grace period). Assuming you filed a tax return most recently of $0 - that return should be the 'verification' and the only additional question to answer is "has your income decreased". in this scenario, it appears that you could do that and then start your $0 qualifying payments in September. Seems to be best choice if you've got that $0 tax filing.

      In contrast, if you didn't file a $0, that "has your income decreased" question becomes "Do you have taxable income?" followed by a warning that you must 'answer this truthfully!'. If you take that route, you'll have income at the time and have to back that up with a paystub. So if this is your scenario, then it appears best to do the consolidation/forego grace period right away.

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      • #4
        Originally posted by East coast View Post
        Here's my best guess of the options...

        Grace period is 6 months - you can apply (in fact, they suggest) for IDR at least two months in advance of grace period ending (if you do it earlier, they will likely ask you to do it all over again closer to end of grace period). Assuming you filed a tax return most recently of $0 - that return should be the 'verification' and the only additional question to answer is "has your income decreased". in this scenario, it appears that you could do that and then start your $0 qualifying payments in September. Seems to be best choice if you've got that $0 tax filing.

        In contrast, if you didn't file a $0, that "has your income decreased" question becomes "Do you have taxable income?" followed by a warning that you must 'answer this truthfully!'. If you take that route, you'll have income at the time and have to back that up with a paystub. So if this is your scenario, then it appears best to do the consolidation/forego grace period right away.
        I filed 0$ income for 2019 (I'm assuming the OP will as well). What difference would it make if we consolidate & start REPAYE right after graduation versus wait 6 months then start REPAYE after the grace period? Our REPAYE payments will be 0$ and no interest will grow till 9/30/2020 anyways.

        Comment


        • #5
          There's a number of factors that could affect it, so everyone's individual situation matters, but:

          6 months of zero interest (while in grace period) + 12 months of $0 payments at 50% interest
          vs.
          12 months of $0 payments - half of which would be zero interest and half at 50%

          Assuming you are a saver - that's a lot more money to load up your 401k/IRA/Taxable with coming at a zero percent loan. I don't believe you'd be paying much less of the course of forgiveness because all you'd be doing is pushing back the payments you'd be paying 6 months. But in theory, assuming you are a saver, you'd come out ahead mathematically with the 18 month scenario than the 12 month one. Also, if you decide not to PSLF down the road, you have less interest because you're getting a greater subsidy (at month 13, you still get the full 50% subsidy vs. a smaller effective subsidy if you consolidate right away).

          could be splitting hairs - IDK, i'm not going to model it out in excel myself, but i'd imagine that loading up savings when you otherwise wouldnt have been able to could be a big deal in the long run.

          Comment


          • #6
            Originally posted by East coast View Post
            There's a number of factors that could affect it, so everyone's individual situation matters, but:

            6 months of zero interest (while in grace period) + 12 months of $0 payments at 50% interest
            vs.
            12 months of $0 payments - half of which would be zero interest and half at 50%

            Assuming you are a saver - that's a lot more money to load up your 401k/IRA/Taxable with coming at a zero percent loan. I don't believe you'd be paying much less of the course of forgiveness because all you'd be doing is pushing back the payments you'd be paying 6 months. But in theory, assuming you are a saver, you'd come out ahead mathematically with the 18 month scenario than the 12 month one. Also, if you decide not to PSLF down the road, you have less interest because you're getting a greater subsidy (at month 13, you still get the full 50% subsidy vs. a smaller effective subsidy if you consolidate right away).

            could be splitting hairs - IDK, i'm not going to model it out in excel myself, but i'd imagine that loading up savings when you otherwise wouldnt have been able to could be a big deal in the long run.
            I'm very new to this and having trouble understanding. Would you be able to explain to me how one would go about getting that 18 month scenario?

            Comment


            • #7
              The 18 month scenario is actually the “default” way to go about it. The only difference is the stimulus bill changes full interest to zero interest during the grace period - this scenario is only relevant for graduating seniors this year.

              When u graduate, you are auto placed in a grace period (6 months where no payments are owed, but interest accrues at the full rate - tho interest is now on hold, so it’s zero at the moment). Just before that period is up, you would apply for an income driven payment - ideally using last years tax return - which would set your qualifying payment at $0 for a 12 month period before you recertify with the following year’s tax return.

              I’m making a number of assumptions in this (for example, are all med schools graduating classes immediately, thus being able to take advantage of this right away?) but the general theory should hold true unless anyone can poke holes in my thought process.

              Comment


              • #8
                Originally posted by East coast View Post
                The 18 month scenario is actually the “default” way to go about it. The only difference is the stimulus bill changes full interest to zero interest during the grace period - this scenario is only relevant for graduating seniors this year.

                When u graduate, you are auto placed in a grace period (6 months where no payments are owed, but interest accrues at the full rate - tho interest is now on hold, so it’s zero at the moment). Just before that period is up, you would apply for an income driven payment - ideally using last years tax return - which would set your qualifying payment at $0 for a 12 month period before you recertify with the following year’s tax return.

                I’m making a number of assumptions in this (for example, are all med schools graduating classes immediately, thus being able to take advantage of this right away?) but the general theory should hold true unless anyone can poke holes in my thought process.
                Your scenario makes sense. Basically we are comparing consolidating right after graduation and getting 12 months of 0$ payments VERSUS 6 months grace + consolidation after that to get 12 payments of 0$ payments. Thus, you get 6 extra 0$ payments.

                However, how sure are you that after the grace period when we consolidate the loans they go based off the tax return? You mentioned that they only ask if your income has decreased (which we should check no). But, our income would increase significantly and I would like to 100% know if they ask that or not.

                Comment


                • #9
                  Originally posted by rocky4x4 View Post

                  Your scenario makes sense. Basically we are comparing consolidating right after graduation and getting 12 months of 0$ payments VERSUS 6 months grace + consolidation after that to get 12 payments of 0$ payments. Thus, you get 6 extra 0$ payments.

                  However, how sure are you that after the grace period when we consolidate the loans they go based off the tax return? You mentioned that they only ask if your income has decreased (which we should check no). But, our income would increase significantly and I would like to 100% know if they ask that or not.
                  Just to clarify, pretend this covid-19 stuff wasn't a thing. Normally, people consolidate immediately after graduation and enable REPAYE (when??)...so they are able to begin payment immediately at a subsidized rate? Anything I'm missing there? (I feel like I am).

                  In this case, we should graduate...do nothing. Then just as Sept. 30 is approaching, consolidate and activate REPAYE?

                  What happens in the scenario if the interest is kept at 0% is extended??

                  Comment


                  • #10
                    Originally posted by rocky4x4 View Post
                    However, how sure are you that after the grace period when we consolidate the loans they go based off the tax return?.
                    I took those straight from the source - I’ve answered the questions myself having gone through the process before (albeit under different terms), but those are the literal questions from the application. Anyone can play with it through the ‘start demo’ here - https://studentaid.gov/app/ibrInstructions.action

                    also I want to make one clarification here as well - you don’t have to consolidate after the grace period if you don’t want to. You just can apply for an IDR. Consolidation is only recommended up front because that’s what allows you to forgo the grace period (otherwise the rules don’t allow you to say no thanks to grace period).

                    Comment


                    • #11
                      I realize that I might be getting really deep in the weeds about PSLF, so apologies if I’m confusing anyone. We’re talking PhD level coursework on what likely is minute details - there is nothing wrong with just going ahead and consolidating immediately upon graduation allowing you to forgo grace period and enter REPAYE once consolidation is approved.

                      Comment


                      • #12
                        Originally posted by East coast View Post

                        I took those straight from the source - I’ve answered the questions myself having gone through the process before (albeit under different terms), but those are the literal questions from the application. Anyone can play with it through the ‘start demo’ here - https://studentaid.gov/app/ibrInstructions.action

                        also I want to make one clarification here as well - you don’t have to consolidate after the grace period if you don’t want to. You just can apply for an IDR. Consolidation is only recommended up front because that’s what allows you to forgo the grace period (otherwise the rules don’t allow you to say no thanks to grace period).
                        So if I understood you correctly, to save the most money in the long-term (from somebody not interested in PSLF)...wait until the 0% interest period ends, but be sure to enroll in REPAYE just prior...this then would result in an 12 months, $0 payment required, 50% interest paid for by government subsidy? Therefore, no consolidation is required as it really doesn't serve a use anymore if all your loans are from the same servicer?

                        Comment


                        • #13
                          "to save the most money in the long-term (from somebody not interested in PSLF)" - This answer would be 'depends!' of course and it's impossible to solve without modeling your entire life out in a spread sheet, but assuming you are putting money that otherwise would go making loan payments and rerouting that into a retirement account, i have little doubt that the answer is 'yep!'.

                          On the other hand, if someone is to spend that money on a nicer apartment in residency instead, then my answer changes and so does the math.

                          Comment


                          • #14
                            Originally posted by asdfgghk View Post

                            So if I understood you correctly, to save the most money in the long-term (from somebody not interested in PSLF)...wait until the 0% interest period ends, but be sure to enroll in REPAYE just prior...this then would result in an 12 months, $0 payment required, 50% interest paid for by government subsidy? Therefore, no consolidation is required as it really doesn't serve a use anymore if all your loans are from the same servicer?
                            This is what I am planning on doing. However, if you enter REPAYE after the grace period I was concerned that they might ask your resident salary. I'd like for them to go based off the 2019 tax returns (Since we both likely filed 0$ income). I checked with the studentloans website and the question regarding income is this:

                            Has your income significantly decreased since you filed your last federal income tax return? For example, have you lost your job, or experienced a drop in income?

                            In that case, our income will be substantially higher in October, so we would check no. The next prompt asks what our 2019 tax income would be (Which is 0$). This would then lock us in to REPAYE for 0$ payments (after the 6 months of grace we received of 0$ payments). This makes more sense then to consolidate right after graduation and enter REPAYE.

                            Comment


                            • #15
                              Are residents getting 0% interest on their loans right now? Also, does anyone know if you have to consolidate to enroll in REPAYE?
                              Last edited by moattoat; 04-03-2020, 09:34 PM.

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