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pre/overpay REPAYE

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  • Avatar EDORMD 
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    Joined: 06/16/2017

    I have been unable to determine how Navient adjusts or calculates the interest rate subsidy on my REPAYE payment plan and how that would be affected by overpaying or prepaying.

    Scenario is:

    About 185K in federal loans, almost all unsubsidized Grad Plus at 5.4-6.1%. Current payment is $77 month, lower than predicted given less than full 1yr income on last year’s taxes which I used to certify for REPAYE. Typical resident salary of about 55k, one year from graduating to community doc. Partnered but not yet married, partly for financial benefit of REPAYE, her salary 100K and her loans are done.

    Currently we both max Roth IRA, she maxes 401K. I put in ~12K yearly to ROTH 403B (no match). Fully funded large E-fund/future moving expenses @~1%

    Have several extra hundred dollars per month that we are trying to determine how best to allocate.

    I have been putting ~$500-700 per month towards pretax 403B thinking that it reduces my future REPAYE, might be better directed here than the adjusted rate on my student loans. Thought about saving for house downpayment but we are few years from purchasing and would rather tackle loans first. Likely will refinance student loans as attending and aggressively pay off over 2-3 years.

    Should I being funneling money to the loans now or does this effectively worsen the REPAYE benefit and I’m better off directing towards savings? max 403B ROTH or direct some towards pretax 403B?

    Thanks

     

    Thanks

     

    #51075 Reply
    Travis @ Student Loan Planner Travis @ Student Loan Planner 
    Participant
    Status: Other Professional
    Posts: 45
    Joined: 02/21/2017

    Doing a 0 downpayment doc loan will always win on a math basis compared to saving for a downpayment when you’ve got student debt.

    Mortgage debt is tax deductible and student loan interest is basically not. So a 5% student loan is like a 8% to 10% mortgage rate depending on tax bracket.

    If you’re really looking forward to being debt free, then prepay the student loans. Shouldn’t affect the interest subsidy besides having lower debt next year. If you prefer to build retirement savings, then pre tax 403b. If you REALLY want to build retirement savings, then save the same amt but use ROTH.

    Founder, Student Loan Planner, LLC
    Contact: [email protected]
    Flat Fee, Low Cost Student Loan Consultations

    #51076 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2138
    Joined: 06/24/2016

    I have been unable to determine how Navient adjusts or calculates the interest rate subsidy on my REPAYE payment plan and how that would be affected by overpaying or prepaying.

    Scenario is:

    About 185K in federal loans, almost all unsubsidized Grad Plus at 5.4-6.1%. Current payment is $77 month, lower than predicted given less than full 1yr income on last year’s taxes which I used to certify for REPAYE. Typical resident salary of about 55k, one year from graduating to community doc. Partnered but not yet married, partly for financial benefit of REPAYE, her salary 100K and her loans are done.

    Currently we both max Roth IRA, she maxes 401K. I put in ~12K yearly to ROTH 403B (no match). Fully funded large E-fund/future moving expenses @~1%

    Have several extra hundred dollars per month that we are trying to determine how best to allocate.

    I have been putting ~$500-700 per month towards pretax 403B thinking that it reduces my future REPAYE, might be better directed here than the adjusted rate on my student loans. Thought about saving for house downpayment but we are few years from purchasing and would rather tackle loans first. Likely will refinance student loans as attending and aggressively pay off over 2-3 years.

    Should I being funneling money to the loans now or does this effectively worsen the REPAYE benefit and I’m better off directing towards savings? max 403B ROTH or direct some towards pretax 403B?

    Thanks

     

    Thanks

     

    Click to expand…

    RePAYE subsidy is based on calculated payment, not actual payment.  You should still get the subsidy either as a monthly credit or as that portion of interest simply not accruing.

    If you have to choose to have debt, then mortgage debt is the one you “want.”  Its rate is lower than most student debts and is tax-deductible, meaning if you have a 3.6% in the 33% bracket, it comes out to 2.4% simple; not much more than inflation.  Even based on that alone, mortgage debt is preferable to student debt (but obv zero debt is better)…but a mortgage over 15-30 years serves as a hedge against said inflation and shares liability on your house with the bank.

    Depends on what you really want.  You would probably end up with a more positive net worth by investing since your gains would *probably* be more than your interest paid.  If you have other factors that would encourage you to be debt free, anything from needing a better debt-to-income ratio for credit or simply your own psychology, then pay your loan early.  It’s never really *wrong* to pay a debt as opposed to investing even if your gains would likely be greater the other way.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #51122 Reply
    Avatar pierre 
    Participant
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    Joined: 02/01/2016
    medical school scholarship sponsor

    Likely will refinance student loans as attending and aggressively pay off over 2-3 years.

     

    Click to expand…

    If you are worried about your future REPAYE benefit, this is the worst thing you could do, since you will no longer get a REPAYE benefit.

    If you want to get out of debt, it’s the best thing you can do.

    What you do with your extra cash for the next 1 year won’t make much difference, as long as your not spending it frivolously, but rather developing/reinforcing good money management habits. Guaranteed 5.4-6.1% does sound pretty nice though.

    #51168 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2138
    Joined: 06/24/2016

    Likely will refinance student loans as attending and aggressively pay off over 2-3 years.

     

    Click to expand…

    If you are worried about your future REPAYE benefit, this is the worst thing you could do, since you will no longer get a REPAYE benefit.

    If you want to get out of debt, it’s the best thing you can do.

    What you do with your extra cash for the next 1 year won’t make much difference, as long as your not spending it frivolously, but rather developing/reinforcing good money management habits. Guaranteed 5.4-6.1% does sound pretty nice though.

    Click to expand…

    I don’t think you’re looking at this properly.  He/she mentioned “as an attending.”  The likelihood that there would be any RePAYE benefit, i.e. if the calculated monthly payment would be less than the accrued interest every month, is very unlikely as an attending physician unless he/she makes a very low amount for an attending, especially with that relatively low debt figure.  Chances are he/she will be on the hook for the debt (i.e. not PSLF), meaning the amount of interest paid over the life of the loan should be minimized by refinancing to the lowest possible rate for the shortest affordable term.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #51183 Reply
    Travis @ Student Loan Planner Travis @ Student Loan Planner 
    Participant
    Status: Other Professional
    Posts: 45
    Joined: 02/21/2017

    Likely will refinance student loans as attending and aggressively pay off over 2-3 years.

     

    Click to expand…

    If you are worried about your future REPAYE benefit, this is the worst thing you could do, since you will no longer get a REPAYE benefit.

    If you want to get out of debt, it’s the best thing you can do.

    What you do with your extra cash for the next 1 year won’t make much difference, as long as your not spending it frivolously, but rather developing/reinforcing good money management habits. Guaranteed 5.4-6.1% does sound pretty nice though.

    Click to expand…

    I don’t think you’re looking at this properly.  He/she mentioned “as an attending.”  The likelihood that there would be any RePAYE benefit, i.e. if the calculated monthly payment would be less than the accrued interest every month, is very unlikely as an attending physician unless he/she makes a very low amount for an attending, especially with that relatively low debt figure.  Chances are he/she will be on the hook for the debt (i.e. not PSLF), meaning the amount of interest paid over the life of the loan should be minimized by refinancing to the lowest possible rate for the shortest affordable term.

    Click to expand…

    One point would be that since most loan servicers calculate the payment based on prior year’s tax return, in the first year as an attending the calculated payment should be based on the residency income. In the second year as an attending, the payment would be based on the income tax return showing half year resident, half year attending income. So it’s certainly possible that they could get some REPAYE interest subsidy for the first couple years as an attending, even if their actual income was significantly higher. Of course after that the subsidy would disappear as mentioned.

    Founder, Student Loan Planner, LLC
    Contact: [email protected]
    Flat Fee, Low Cost Student Loan Consultations

    #51193 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2138
    Joined: 06/24/2016

    Given P = 185000, r = .0575/12 (assuming equal proportion of rates), monthly interest is $886.46. So if your monthly payment is more than that, you get no benefit from RePAYE. Even if it’s less than that, the interest subsidy will only reduce the effective rate slightly, and on average of 5.75%, assuming you’re on the hook for the loan and can afford payments (an attending def should), even a full subsidy with zero payment can only get the interest down to 2.875%. 5-year variables are lower than that (2.615% SoFi), and fixed are 3.35% with SoFi.

    If single, say AGI is $55k half the year and $250k the rest (idk what specialty, just shot in the dark), then annual income is $305k /2 = use $150k for simplicity. RePAYE for that if single is (150000 – 1.5*12060) ÷ 120 = $1099.25…no benefit, and a very high interest rate.

    In that year in which your income is half-resident and half-attending, if you keep paying the low RePAYE amount, your debt is still going in the wrong direction: it’s growing in accrued interest which, fortunately, is not compounding/capitalizing (no interest-on-interest), but it will capitalize when you refinance (they have to buy the whole debt). If you are not doing PSLF, you are on the hook for this debt, and you should minimize the amount lost to finance charges within reason.

    The only reason to stick to the low RePAYE payments is if you can’t get a better rate than your effective rate with RePAYE, or if you can’t afford the payments…in which case you can refi to a 10-year variable, then just two to a 5-year whenever you can afford the payment. Refinancing student loans shouldn’t cost anything…actually they should pay you $300 each time you do it. No kidding.

    To calculate your effective rate, say your payment is $77. Your monthly accrual at 5.75% APR simple is $886.46, you pay $77 of it, hence the unpaid is $809.46, and you get $404.98 subsidized. Hence you only really had to deal with $481.48 accruing each month, meaning an effective rate of (481.48 * 12) ÷ 185,000 = 3.12%, and your loan is growing at the rate of (404.98 * 12) ÷ 185,000 = 2.63%.

    Long story short: if you’re actually paying the loan back (not PSLF), and you can afford the payments, refinance to a rate lower than your effective RePAYE rate.

    I can do more complex math to show you the difference in the amount paid over the total life of the loan to show you how much you’ll save by refinancing, and to compare that to what you would have to earn in investments to beat making minimum payments on a favorable amortization schedule (for 3.35% over 5 years, it’s only about 1.7%), but I feel like I’ve thrust enough numbers at you for the time being.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #51205 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2138
    Joined: 06/24/2016
    Guaranteed 5.4-6.1% does sound pretty nice though.

    Click to expand…

    Of course it does, doesn’t it? But it’s not a “guaranteed 5.4-6.1%” gain. That’s bad math. The only “gain” you get from paying a loan ahead of its amortization schedule is the avoidance of finance charges on a principal that is steadily declining over its life.

    First of all, there is absolutely no reason to leave it at that rate. In its current state it is “losing” 3.12% of simple interest per year with zero paid into the principal. When he no longer gets any benefit of RePAYE, it should be refinanced immediately to a favorable schedule, say, 7-yr fixed at 4% (I chose it for its round APR). Assuming he goes another year with 2.63% unpaid accrued interest, its principal would be $189,860, and total finance charges over its amortization schedule are $28,133.40, or total paid being 1.1482 of principal, annualized over seven years (7th root) is 1.0199, hence p much half of the nominal APR (2%). So any amount he would invest instead of paying toward the principal on top of the minimum, if it beats 2% return after tax and expenses, would have been superior to paying extra on the loan.

    So, paying an X% simple amortizing loan is not a “guaranteed X% gain.” It is guaranteed, but it’s more like half of the nominal APR compared to compound investment gains.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #51206 Reply
    fevrdoc fevrdoc 
    Participant
    Status: Resident
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    Joined: 06/17/2017

    From my understanding based off of what Navient told me:  The subsidy that the govt provides through REPAYE occurs quarterly, but is based off of the monthly interest that you accrue.  If you overpay your monthly 10% IBR payment, the govt will not provide the subsidy.  Thus it would make sense for you to channel funds elsewhere to ensure that you continue to receive the govt benefit, or pay in a lump sum just after the govt provides you with the subsidy (eg: govt pays you on July1 and you pay a lump sum towards the loan on July 2).  Let me know if I am incorrect in any way.

    #51217 Reply
    Avatar Panscan 
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    Joined: 03/18/2017

    can anyone else confirm this is how the subsidy works?

    #52097 Reply
    Avatar Beesee 
    Participant
    Status: Resident
    Posts: 4
    Joined: 12/01/2016

    This is not how it works for me with Nelnet.  When I first entered REPAYE I asked them where the subsidy shows up on my account or statement and they said it doesn’t show up at all, because each month Nelnet processes my payment and send to the gov’t who then tells Nelnet “this is the balance for next month.” The next statement balance from Nelnet shows the new total which reflects that the accrued interest is X amount, which is correct based on only having accrued half of the unpaid interest.

    In other words, my monthly REPAYE payment is $300 short of the accrued interest each month, but my statement balance goes up by only $150 each month. There is no notation of this anywhere on my Nelnet statement. But it works!

    #52229 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2138
    Joined: 06/24/2016

    It varies by servicer.  FedLoan includes it on their statements as an itemized credit as though it were a payment, and does so based on calculated (not actual) payment.

    There is absolutely no reason why this should not be standardized.  Ridiculous system, imo.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #52273 Reply

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