By Dr. Bo Liu, Guest Writer
I Switched to REPAYE and I Like It
In my previous posts PSLF – Why REPAYE May NOT be the Best Plan and Pay as You Earn (PAYE) vs. Revised Pay as You Earn (REPAYE), I discussed the pros and cons of the REPAYE plan for repaying federal student loans. I had been on Income Based Repayment (IBR) since leaving medical school in 2013 and planned to stay on IBR following the introduction of REPAYE. However after some consideration, I decided to switch to REPAYE – it will allow me to keep more money in my pocket every month while keeping my debt growth at a similar rate. Here is why I did it…
Cons of REPAYE:
As a quick review, there are basically 2 cons of REPAYE:
- Removal of the payment cap – under all of the other income-driven repayment (IDR) plans, your payment will rise with your income, but never more than the amount you would have paid under the 10-yr standard repayment plan. There is NO cap on calculated payment amount under REPAYE.
- The “Working Spouse Penalty” – Spousal income now considered – NO MATTER WHAT! Under all of the other IDR plan, you can enjoy the benefits of filing taxes separately with your spouse, hence limiting the “income” portion of the Income Drive Repayment (IDR). Under REPAYE, your spouse’s income is now factored into calculating your payment – NO MATTER HOW you file your income tax returns!
Cons of Switching:
As someone on IBR, there were 2 roadblocks to me switching to REPAYE:
- Time and hassle – it takes about 10 weeks to switch over from IBR to REPAYE and you have to at least make 1 payment under the Standard Repayment Plan (or a reduced payment if you can’t afford the standard payment) before you can switch to REPAYE.
- Interest capitalization – any outstanding interest will be capitalized (added to your principal balance), resulting in a de-facto penalty for anyone trying to leave IBR for REPAYE.
Case Study (My Situation):
These were the considerations that led to my switch to REPAYE.
- I am in residency/fellowship for at least another 3 years, therefore there is no risk of my REPAYE payment ballooning based on my income.
- I don't see myself getting married in the near future, therefore no risk of incurring the REPAYE “Working Spouse Penalty.”
- Time and hassle – in the end I decided it was worth it for the long term savings. Luckily the government made it relatively easy to turn in the paperwork online.
- Interest capitalization – this was the toughest pill for me to swallow. I had about $10,000 of interest capitalize (added to my principal) by switching to REPAYE, which translates to an extra $625/year in interest. In the end, I decided over the long run it is worth it. Let’s look at the approximate numbers.
After 3 Years
After 3 years, it looks like this:
As you can see, switching to REPAYE caused my loan principal to increase significantly. However, because of the REPAYE interest subsidy, my monthly negative amortization (loan growth despite making payments) is not significantly different. What is significant however, is that I am getting an extra $184/month to do whatever I please – pay down debt, invest for the future, or save for a nice vacation. Of course, my personal situation is likely different from yours, but I hope my reasoning is applicable to your situation.
If you like the debt projection calculator, you can find it here.
What do you think? Are you weighing a switch to REPAYE? Will you do it? Why or why not? Comment below!
[Editor's Note: This is a guest post from Bo Liu, MD who blogs at FutureProofMD. We had a guest post on this subject recently, but it's a pretty hot topic this year so I thought another perspective on it was worthwhile. We have no financial relationship. If you are interested in refinancing student loans (and thus getting out of the federal programs discussed in this post) be sure to review the latest WCI-negotiated deals. ]
Looks like the switch should be a win for you, FPMD.
Is PSLF potentially in your future? Did that factor into your decision?
Yes that’s the plan currently. I want to teach medical students, residents and fellows. Luckily most of those jobs will qualify for PSLF.
Nice post. Best explanation I have seen to date. Clear and concise. Good charts and graphs. Best wishes for a successful future. I’d definitely use some of the savings for the vacation!
Thanks Dr. Mom! I’m going to China for a wedding this winter – should make for a great vacation! ?
Future Proof, I’d highly suggest filling out the forms to see how many qualified payments your student lender has you marked down for. Our experience is that the loan servicers are absolutely abysmal. My girlfriend’s loans moved over once she said she was going for PSLF, and she’s been paying on direct consolidation loans since 2012, and they had her down for 2 payments, with 118 to go. I think a lot of people are in for a rude awakening with their loan servicers who don’t verify that their records our correct. I don’t believe that they have good data systems and thus they have a ton of errors. These need to be corrected on the front end before you plan on filing for PSLF in several years.
I actually do my certification annually for PSLF. So far I’ve got every payment recorded. ??
I suggest changing the Google Doc at the end to ‘read only’ and they can make a copy for their own fiddling
Thank you Alex for that suggestion! I’ve made the changes.
Correct me if I’m wrong, but if you’re going for PSLF, which I realize can be somewhat uncertain as who knows exactly what sort of jobs you’ll be choosing from in a few years), does the capitalized interest added to the principal upon switching matter? That extra money owed would be ultimately forgiven when you get PSLF.
Hey Ben, you are correct – the capitalized interest doesn’t matter if I’m for sure going to get forgiveness. But it still hurts to see my loan balance balloon like that LOL. Must be all in my head.
With regard to the lack of a payment cap with REPAYE, note that REPAYE payments default to the 10 year standard repayment level if one doesn’t submit income verification docs. Furthermore, when I submitted my PSLF employment verification docs and had my loan servicer change to FedLoan it appeared to open a window where I could petition for the 10 year standard repayment plan once again.
With my previous servicer, EdFinancial, the word was once in REPAYE, always in REPAYE. They endorsed my REPAYE-with-no-income-verification plan. Needless to say/assumed in all of this is that I’m enough years into being an attending that I don’t get any break any more, so it’s just marching to 120 and counting those payments already made at this point.
Your previous servicer is wrong and will eventually figure it out. The knowledge base of any particular phone operator at these servicers is super variable.
You can switch out of REPAYE to any plan you are still eligible for. You could even switch back to IBR or PAYE so long as you still meet the partial financial hardship requirements to enter those plans (i.e. do it before you start working as an attending).
Hi FPMD, thanks very much for this post. I had a quick question regarding the REPAYE program. I’m currently enrolled in the payment program, and my wife and I are hoping to pay off our loans as quickly as possible. We’re planning on making extra payments over our minimum monthly required payments. I was wondering if you know whether our interest subsidy would be affected by these extra payments. Please let me know whenever you can. Thanks very much!
Hi Devin, I believe those extra payments will end up paying your loans ahead – meaning your next month’s bill will be reduced to as low as $0. See https://myfedloan.org/make-a-payment/paying-ahead.shtml
So yes your interest subsidy could be affected since you could possibly end up paying all of the interest accrued, in which case your interest subsidy would be $0. This is my interpretation based on the available literature. I have been unsuccessful in getting any legitimate answers from either Fedloans or Dept of Education. This is definitely an area that needs further clarification from either the servicers or Dept of Ed.
The REPAYE interest subsidy is based on your required payment, not your actual payment. This holds true until you begin to pay down the principal. Interest is calculated on the principal balance. And, as the principal balance decreases, interest accrual decreases.
Do you have a reliable source for that statement? I have yet to find one that specifically says that.
I have several contacts in the student loan servicing industry that have confirmed this treatment. Also, Betsy Mayotte, a contributor of U.S. New & World Report – Education, has confirmed this as well. She can be reached at [email protected].
Thank you SigmaFS. Would it be at all possible to get any type of official statement/document regarding this?
Here’s the regulatory language followed by a comment from my contact:
(iii) If the borrower’s monthly payment amount is not sufficient to pay the accrued interest on the borrower’s loan –
“(A) Except as provided in paragraph (c)(2)(iii)(B) of this section, for a Direct Subsidized Loan or the subsidized portion of a Direct Consolidation Loan, the Secretary does not charge the borrower the remaining accrued interest for a period not to exceed three consecutive years from the established repayment period start date on that loan under the REPAYE plan. Following this three-year period, the Secretary charges the borrower 50 percent of the remaining accrued interest on the Direct Subsidized Loan or the subsidized portion of a Direct Consolidation Loan.
(B) For a Direct Unsubsidized Loan, a Direct PLUS Loan made to a graduate or professional student, the unsubsidized portion of a Direct Consolidation Loan, or for a Direct Subsidized Loan or the subsidized portion of a Direct Consolidation Loan for which the borrower has become responsible for accruing interest in accordance with § 685.200(f)(3), the Secretary charges the borrower 50 percent of the remaining accrued interest.”
The important phrases here are “charge” and “monthly payment” – so in english this says that you won’t be charged any interest (or for unsub loans only 50 percent of) the interest not covered by your monthly payment as defined in these regs.
Also, I (Sigma) contacted two loan servicers yesterday that confirmed the REPAYE interest subsidy is on the amount due, not your actual payment.
Thank you all very much on your input!
A+. Thank you!
Thanks for doing that research. Very helpful.
Hey everyone, late to the party. I am switching from IBR to REPAYE. I was on IBR for 3 years and the government paid my interest on my subsidized loans for those 3 years. If I switch, will REPAYE pay my interest again for another 3 years? What happens after 3 years?
I don’t think so, but if it works out that way, I’d like to hear about it as it would be a whole new strategy my readers would want to know about.
I’ll let you know! Do you know what happens after the 3 years while on REPAYE? is there any interest subsidy?
I don’t think the REPAYE interest subsidy (50% of unpaid interest) has the three year limitation you have on a subsidized federal loan.