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5 years in PAYE and no plans for PSLF what is best option now…

Home Student Loan Management 5 years in PAYE and no plans for PSLF what is best option now…

  • Avatar BobCratchit 
    Participant
    Status: Physician
    Posts: 3
    Joined: 08/15/2019

    First post so I apologize if any issues…

    I recently graduated my residency and am starting my 1 year fellowship which is in Canada. I have spent the last month trying to review and “tighten up” all my financial plans. I am ashamed to say I have made a big error on my loans for the last 2-3 years. When I originally started residency in 2014 REPAYE did not exist. I thought I was being smart and responsible when I started PAYE as I was the only resident in my program who did not defer their loans… I made my monthly payments ($O for the first couple years) and completed my PSLF paperwork just in case. I did get a full 5 years of credit from my residency towards PSLF. I thought I was in the best program and now realize I missed out on the ability to have my interest rate effectively cut in half under REPAYE for the last couple years. I am furious with my self for not paying more attention to the differences between the two programs when I received the daily WCI newsletters the last two years. I’m also really annoyed that when you look at the the Fedloan website it hardly mentions the difference in Interest Subsidy between the two. (I only found it when download the official loan info).

    At this point I currently have $135,000 in loan principle with $33,000 in outstanding Interest. Interest average is like 6.5%. The job I am likely going to take is private practice so I will not qualify for PSLF. I expected to make $500K my first year and should increase up to $650-$750 over years 2-4. My sign on bonus will come out of my first year salary but I can take up to $100,000.

    My plan for the last few months has been to take the 100,000 and basically apply 100% of it to my loans as I was able to sell my house and pocket 20,000 to cover living in Fellowship as I only make about 40,000 in US dollars. I now realize that 33,000 of that 100K will go towards interest when maybe if I was in REPAYE it would have been 22,000-25,000.

    Questions:

    – Are there any better options or ways to “totally redeem myself”

    – I’m going to pay $33,000 in loan interest in 2019 and I can only deductive 2,500??? Can that be rolled over to future years? Or is there an way to pay a part of the interest now and pay some to principle (ie if i was to make the interest payment in the beginning of the month and then send an additionally payment a few days later)

    – On the PAYE fine print it mentions that only 10% of the original loan balance can be capitalized so that means around 13,000 would be added to balance if I was to change from PAYE to REPAY today? What happens to the remaining $20,000 in my case?

    – Because my new salary is about 20-30% lower than what it was a month ago I had planned on resubmitted my payment document to lower my monthly payment down to effectively zero again before the Loan bonus would come through, any benefit to this?

    Thanks for any suggestions, please let me know if I should clarify anything.

    #239135 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016

    Another one I turned to our resident student loan advisor on. This is what Sim sent back:

    First of all, I think you need to take a *DEEP* breath! Like you said, you went on PAYE when many of your peers deferred. Early on, you set yourself up for PSLF even if you decided later not to pursue it. Also, in the future if you decide to go the IBR forgiveness route, you can do so after 20 years with PAYE v 25 years for REPAYE. Most importantly, PAYE does offer an interest subsidy even though it’s not as OP as REPAYE. If your minimum payment does not cover all of the interest that accrues on your subsidized loans, the government covers it for the first three years. That’s not nothing!

    One more point before I get to your questions. If you decide to apply your $100k bonus to your loans, please remember to set aside funds for taxes, since the bonus is coming out of your taxable salary.

    Are there any better options or ways to “totally redeem myself”-I am going to ignore the second part of that because I think you are being too hard on yourself. As for better options, this depends on your goals. If you want to payoff your loan as fast as possible, then I don’t object to you using the bonus as long as your basic living expenses are met. Some might add that you should also make sure you can afford to contribute up to the employer match in your retirement account. If you want to reach forgiveness outside of PSLF, you could stick with PAYE or switch to REPAYE.

    “ I’m going to pay $33,000 in loan interest in 2019 and I can only deductive 2,500??? Can that be rolled over to future years? Or is there an way to pay a part of the interest now and pay some to principle (ie if i was to make the interest payment in the beginning of the month and then send an additionally payment a few days later)”  I really hate to be the bearer of bad news on this one, but here goes. Not only can you not deduct more than $2,500 in a year, but after your residency is over, you won’t be able to at all. The income limit for single filers is $80k, and $165k for MFJ. There is no carry forward and no way to strategically make payments to get around this.

    “On the PAYE fine print it mentions that only 10% of the original loan balance can be capitalized so that means around 13,000 would be added to balance if I was to change from PAYE to REPAY today? What happens to the remaining $20,000 in my case?” The interest would not go away.

    Because my new salary is about 20-30% lower than what it was a month ago I had planned on resubmitted my payment document to lower my monthly payment down to effectively zero again before the Loan bonus would come through, any benefit to this?” Yes and no. While you are only required to recertify annually, you have the option to do so sooner, especially if you know the result will be advantageous to you. If this drop in salary was just for that month (rather than the whole year) I would not recertify. If this lower income is for the whole year, then I would not wait to recertify. But if your goal is to pay the loans off quickly, then this is irrelevant. Of course, some may enjoy the flexibility of directing cash flow to another goal for a month or two if the payment is $0.

    The last thing I want to end on, is that while the interest subsidy on REPAYE is amazing, something that a lot of people forget is that with the other forms of IDR (except ICR) , your payment can never be higher than what it would have been under 10 year Standard Repayment. No such cap exists with REPAYE.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #239210 Reply
    Avatar DCdoc 
    Participant
    Status: Physician
    Posts: 554
    Joined: 06/14/2016

    You have a small amount of loans (in a relative sense) and a huge salary. Your post screams “crisis” and I see no such thing. If you’re making 500k year 1 you’re clearly in a very high paying field, especially if you jump to $750k in 2-3 years. If you live like a resident/fellow you can have those loans paid back fairly easily in 2 years. Stop kicking yourself for past mistakes and refinance/pay off the loans!

    #239213 Reply
    legobikes legobikes 
    Participant
    Status: Physician
    Posts: 290
    Joined: 05/25/2017

    Dude. It’s not like your salary is 100k and your loans 500k. Get over it.

    #239214 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3032
    Joined: 09/18/2018

    SoFI and Laurel Road will refi resident/fellows and allow $100/mo payment. You can potentially lock in lower rates, pay $100/mo until you start as an attending.
    Use the links on the vendor pages, and get a rebate. Speak to them and make sure the loan payments and the right loan is chosen BEFORE you start.
    You can always refi again later. The good part, no fees.

    #239223 Reply
    SerrateAndDominate SerrateAndDominate 
    Participant
    Status: Physician
    Posts: 487
    Joined: 02/01/2018

    Yeah if you already have a private job lined up, run some numbers and refinance that bad boy. That will be a consolidation event, but I imagine your rate will be a good bit better and offset the new monthly interest from a higher loan principal

    If you hate your loan this much, then pay it off by end of your first year in practice

    Earn everything.

    #239291 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4529
    Joined: 05/13/2011

     

    https://www.whitecoatinvestor.com/ultimate-guide-to-student-loan-debt-management-for-doctors/

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #239335 Reply
    Avatar BobCratchit 
    Participant
    Status: Physician
    Posts: 3
    Joined: 08/15/2019

    Thanks for the link, looking forward to reviewing it.

    #239718 Reply
    Avatar BobCratchit 
    Participant
    Status: Physician
    Posts: 3
    Joined: 08/15/2019

    Another one I turned to our resident student loan advisor on. This is what Sim sent back:

    First of all, I think you need to take a *DEEP* breath! Like you said, you went on PAYE when many of your peers deferred. Early on, you set yourself up for PSLF even if you decided later not to pursue it. Also, in the future if you decide to go the IBR forgiveness route, you can do so after 20 years with PAYE v 25 years for REPAYE. Most importantly, PAYE does offer an interest subsidy even though it’s not as OP as REPAYE. If your minimum payment does not cover all of the interest that accrues on your subsidized loans, the government covers it for the first three years. That’s not nothing!

    One more point before I get to your questions. If you decide to apply your $100k bonus to your loans, please remember to set aside funds for taxes, since the bonus is coming out of your taxable salary.

    Are there any better options or ways to “totally redeem myself”-I am going to ignore the second part of that because I think you are being too hard on yourself. As for better options, this depends on your goals. If you want to payoff your loan as fast as possible, then I don’t object to you using the bonus as long as your basic living expenses are met. Some might add that you should also make sure you can afford to contribute up to the employer match in your retirement account. If you want to reach forgiveness outside of PSLF, you could stick with PAYE or switch to REPAYE.

    “ I’m going to pay $33,000 in loan interest in 2019 and I can only deductive 2,500??? Can that be rolled over to future years? Or is there an way to pay a part of the interest now and pay some to principle (ie if i was to make the interest payment in the beginning of the month and then send an additionally payment a few days later)”  I really hate to be the bearer of bad news on this one, but here goes. Not only can you not deduct more than $2,500 in a year, but after your residency is over, you won’t be able to at all. The income limit for single filers is $80k, and $165k for MFJ. There is no carry forward and no way to strategically make payments to get around this.

    “On the PAYE fine print it mentions that only 10% of the original loan balance can be capitalized so that means around 13,000 would be added to balance if I was to change from PAYE to REPAY today? What happens to the remaining $20,000 in my case?” The interest would not go away.

    Because my new salary is about 20-30% lower than what it was a month ago I had planned on resubmitted my payment document to lower my monthly payment down to effectively zero again before the Loan bonus would come through, any benefit to this?” Yes and no. While you are only required to recertify annually, you have the option to do so sooner, especially if you know the result will be advantageous to you. If this drop in salary was just for that month (rather than the whole year) I would not recertify. If this lower income is for the whole year, then I would not wait to recertify. But if your goal is to pay the loans off quickly, then this is irrelevant. Of course, some may enjoy the flexibility of directing cash flow to another goal for a month or two if the payment is $0.

    The last thing I want to end on, is that while the interest subsidy on REPAYE is amazing, something that a lot of people forget is that with the other forms of IDR (except ICR) , your payment can never be higher than what it would have been under 10 year Standard Repayment. No such cap exists with REPAYE.

    Click to expand…

    I sincerely appreciate you taking the time to answer all my questions. While some of my comments were meant to be taken in jest, I believe they may have been inferred differently. I can only assume my situation is not unique so hopefully my questions will bring value to others.

    Thanks Again

    #239719 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016
    I sincerely appreciate you taking the time to answer all my questions. While some of my comments were meant to be taken in jest, I believe they may have been inferred differently. I can only assume my situation is not unique so hopefully my questions will bring value to others.

    Click to expand…

    Understood. Sim is young and earnest, also not used to the (relaxed) WCI culture. She’s still learning not to take everything she reads seriously 😉. I’ve asked her to sign up as a forum member so she can answer these questions directly in the future.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #239794 Reply

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