By Dr. Bo Liu, Guest Writer
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 to REPAYE:
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. ]