Income Based Repayment Student Loans Series Part 2
As previously noted in my post on student loans, the financial situation for medical students is getting much worse. There are a couple of bright spots visible in the changes of the last few years. This post will deal with one of them, the income based repayment (IBR) plan.
IBR is a way to keep your payments low. It also has a provision to completely forgive existing student debt after 25 years. Most doctors can get at least a little benefit out of this program. There is a relatively complicated formula that helps you determine what your maximum payment would be, but this chart from ibrinfo.org gives the general idea:
So a resident with two kids would have his student loan payments limited to 2.4% of income, or, on an income of $40K/year, about $80 a month. It doesn’t matter how much he owes. Of course, interest above and beyond this amount isn’t forgiven, it’s just added on to the debt. A negatively amortizing loan obviously isn’t a good idea for the long run so the government gives one more benefit. For the first three years in the program (the total length of many residencies) the government will pick up any interest above and beyond that required payment but only for subsidized loans, which as you know from my previous post, are going away. If you’re in med school or residency now, this benefit could still be significant for you, but a pre-med shouldn’t anticipate getting it.
Even after becoming an attending, you may still qualify for IBR. For example, if you have $300,000 in student loans at 6.8% and an income of $200,000, your student loan payment should be $2290 of which $590 goes toward the principle. But under the IBR program, your payment would be $2080 (again, assuming non-working spouse and two kids.) That just means you’re paying less of the principle and it’ll take a few more years to pay off the loans. It’s kind of like a partial deferment. Maximizing this benefit might even get you to the magic 25 years at which point the rest of your loans would be forgiven. But the truth of the matter is that you would have spent far more in extra interest dragging payments out at 6.8% for 25 years than you’d ever have left to be forgiven at year 25. If you’d like to run your numbers through a calculator, try this one.
All in all, this is a program that you might use for a short period of time to provide some relief in your budget. But as a general rule, NOT paying off high interest debt (such as student loans at 6 or 7%) when you have the means to do so isn’t a very wise move financially. But it would be pretty hard to make payments of $2000+ a month as a resident, so there’s definitely some utility in the program. In the next post in this series, we’ll discuss the Public Service Loan Forgiveness program.
i dont see this as that helpful to most med students but of course there will be some exceptions.
Do you have any thoughts on the recently announced changes to student loans and IBR? I believe those who consolidate federal loans after 2012 are eligible for a 0.5% interest rate reduction. Furthermore, IBR will be limited to 10%, not 15%, of discretionary income. Does it make sense to continue paying 15% (or more, if able), or is it a drop in the bucket either way?
Here’s a link to some of the changes you’re talking about: http://www.finaid.org/calculators/ibr10.phtml
I like the idea of rate reduction. I think 6-7% is an unfair rate in our current very lower interest rate environment. The change in IBR from 15% to 10% isn’t huge. As far as deciding what to do, I think you need to decide which of two good routes you want to take.
1) The traditional smart thing to do- Pay off your loans ASAP. Take out as few loans as possible, get the lowest interest rates possible, and pay them off as fast as you can. A guaranteed 6 or 7% investment is awfully good.
2) The new possibly smart thing to do (more on this with the next post in this series)- Get as much of your loans forgiven as possible. Take out tons of loans. Live it up and invest the proceeds. Work for a Public Service Loan Forgiveness eligible employer as a resident, fellow, and attending. Take maximum advantage of IBR to reduce payments. Get remainder of loan forgiven after 10 years through PSLF. Hope the program doesn’t change between now and then.
Personally, I think a better solution is to keep the price of education down and lower interest rates rather than introducing programs such as IBR and PSLF, but now that the programs are here, I can’t blame those trying to slip through the (entirely legal) loopholes.
yea but that 2nd plan requires they dont later change the rules which i wouldnt count on. as soon as it becomes more widely known there is a loophole, the less likely it will persist. its not like you can easily defend people trying to get as much as possible forgiven.
I agree that this loophole is unlikely to persist, especially for the ten years plus that current pre-meds would need it to persist in order for it to work out. But in the meantime I bet there are a few docs who get a serious windfall out of the PSLF.
Quick question. I’m a resident with thankfully no student loans about to marry a 4th-year medical student entering residency in 2012 with about $200,000 in standard U.S. medical school loans (I still have to see her statement for details). When we get married, I will make about $60,000/year with moonlighting and she will make about $45,000. Does it make sense for us to file taxes jointly and pay IBR based on $105,000 or does it make sense to file separately and solely pay the IBR based upon her income (a much lower payment)? If we do that, can I still use my finances to pay off more of her loans incrementally?
I calculate her monthly payment would be about $370 if she filed separately. If you filed jointly, her payment would be $1110.
Interest at 6.8% (don’t know what yours is) would be 1133 a month, so either way, you wouldn’t be paying any principle. Any interest you don’t pay is waived for 3 years, so basically you could save $740 a month by filing separately. If your taxes aren’t that much higher (and they almost surely aren’t) as a result of filing separately, it sounds like you should file separately at least during residency. Remember after 3 years you’re just piling that interest on top, so you might as well get busy paying it.
Money is fungible and the loan folks don’t care where they get their money from. They’ll gladly accept money from your salary to pay her loans and that shouldn’t cause you any issues.
Question
This program forgives your ballence after 25 years. Or 300 payments
If they set your first year at a low number like ten dollars a month couldn’t you just make 300 ten dollar payments and be done with it?
Thanks in advance
Marc-
I’m confident they’re not that stupid! Go ahead and try it and let us know how it goes. Maybe there is a loophole there you can exploit. It’ll only cost you $150 in stamps to find out!
Seriously though, I think there is a specified minimum payment.
Here’s what I found:
Q11 What are the specific loan repayment requirements for loan forgiveness under the PSLF Program?
A11 You must have made 120 separate monthly payments (beginning after October 1, 2007) on the Direct Loan Program loans for which you are requesting forgiveness. Each of the monthly payments must have been made for the full scheduled installment amount within 15 days of the due date for the payment. (February 3, 2010)
Here’s the source: http://studentaid.ed.gov/students/attachments/siteresources/PSLF_QAs_final_02%2012%2010.pdf
It sounds to me like you can only do one payment a month and it must be for the full scheduled installment amount.
My wife is a medical resident and I am a consultant. My last years income was 64k and my wife’s partial income was 27k. I am graduating grad school in July and have about 80-100k in loans my wife has about 130k in medical loans. If she files this year seperate I think she does not need to pay anything but I pay 410 a month if I file together I end up paying 310. Next year willbe an issue since my new job I will make 73k and her full salary of 50k …. I was thinking of putting a lot away in 401k and starting to use other tax shelters is that wise? Should I file seperate or together it loos like IBR is what we will both be using for student loans since we can’t use the standard and live on for now ….
Hard to give much advice without more information. If you’re worried about your taxes being married to a resident, wait until you’re married to an attending. As a general rule, married people should file joint unless they have a really good reason not to. If you use tax software, it’s pretty easy to run the numbers both ways. Using IBR to lower payments is probably a good idea for most residents, but given your income you might start paying. You’re probably not going to end up with much forgiven via the IBR program.
It’s a miracle that I stumbled upon this website! So i’m facing what i’m assuming the majority of graduating medical students are facing– figuring out a loan repayment plan to manage the debt. Half my loans are FFEL and half are Direct with over 380K (that’s just the loans itself, not including capitalized interest) in medical school loan debt (ONLY MEDICAL SCHOOL!!!- I didn’t have any other debt before this)– my options are: 1) Do IBR and then try to tackle/pay off the high interest loans first while moonlighting or as a new attending in 4 years (which are mostly the FFEL loans)…and not even consider the IBR forgiveness of 25 years. OR 2)consolidate all of my FFEL loans and then try to do PSLF, without a guarantee that the program will still be around in 10 years, also not sure if i’ll be working in a non-profit hospital..and if i’m not, then the consolidated loans end up accumulating MUCH MORE interest than if I didn’t consolidate. 3) any other ideas that I have not yet explored…I just don’t see a way out of this massive debt! Any ideas would be very much appreciated- I would be SO GRATEFUL for any help on this loan situation!
I hear that a lot “It’s a miracle I found you.” Apparently all that search engine optimization I do doesn’t count for anything! 🙂
The way out of your debt is really two-fold. First, you need to earn a lot of money. Half-time pediatrician isn’t going to cut it. Second, you need to live like a resident for a few years. $380K+ is a TON of educational debt and it is becoming more and more common, but it’s still far above average. Don’t kid yourself that it isn’t that much just because lots of your classmates have similar loan burdens.
The good news is you are exactly the type of person for whom IBR and PSLF are designed. You very well may be able to get a bunch of those loans forgiven.
I’d probably start with the debts that can’t be forgiven if I were you, even if they were a little lower interest. Then, a few years from now when you figure out if you’re likely going to get some PSLF or not, you can adjust your plans.
Thank you so much for your kind response! I know it’s ultimately my own decision, but would you recommend that I consolidate all of the FFEL loans into Federal Direct Loans and try to bank on the PSLF with IBR (and in the meantime, try and contribute to the consolidated loan repayments)? Or should I keep it all separate and then just try to tackle the FFEL loans by themselves when I can? Most likely, I won’t be able to make a large dent in the FFEL loans until after residency (in 4 years)- and i’m going into Emergency Medicine (so not sure if my AGI will even make IBR worth it in a 10 year repayment)?
I’m not sure I understand the point of consolidating anything. Unless your consolidation turns a loan that wasn’t eligible for IBR or forgiveness into one that is, there doesn’t seem to be a point to consolidating any more. They just use the weighted average of your loans, and actually round it UP to the nearest 1/8%. Seems like a lot of work just to make fewer payments each month (that can all be set up on auto-pay anyway.)
EM doesn’t lend itself well to PSLF. It’s only a 3 year residency (remember PSLF only forgives the difference between your regular payments and the IBR payments you made- it’s much better for those with 5-6 years of training)) and many non-profit employers contract with a for-profit group that employees the doc, so the employer doesn’t count as a 501c.
I cannot thank you enough! For those in a similar position, the reason I would only consolidate my FFEL loans would be to make them direct loans so that I could qualify those specific loans for PSLF (this is what I was going back and forth on, since some of my loans are in lower interest rates and some higher…the consolidation would end up costing me MORE in interest over a longer period of time)– but it sounds as though with a career in EM I wouldn’t qualify for PSLF to begin with after Residency…so I guess my only option would be to just try and tackle the higher interest loans first and then work towards paying off all of my enormous loans and not bank on PSLF.
I think a lot of people think about this stuff a little too early. Just keep the doors open for PSLF by doing IBR throughout training. You’ll know whether you want to or can do it by the time you get out of residency. It can be a great deal and things can change in the future. More and more emergency docs are becoming hospital employees all the time, and if the hospital is a non-profit….voila….PSLF time.
Hello and thank you for your wonderful words of wisdom. I am hoping you could give your advice on my particular situation. I will be starting my residency in July (so $51k income) and my wife will be starter her law job at $125k. I have $270k in loans from med school and undergrad ($220k federal, $50k in institutional loans) plus $40k that I need to pay back to my dad without interest (and is not too time-sensitive). My residency and fellowship will be 6 yrs.
Does IBR make sense for us? I think if we filed jointly the monthly payment would be very large, but I believe we would pay more in taxes if we filed separately. What about doing IBR and filing separately just during residency/fellowship and then switch to standard and file jointly once I become an attending? I don’t know what to do because of the disparity in our incomes. I do plan on working in academics so perhaps the PSLF?
Any advice or help you could give me would be very very much appreciated! Thank you!
Because of your wife’s high income combined with your lower income, your IBR payments won’t be much lower than your regular payments. Doesn’t mean you shouldn’t do it, just that you won’t have as much of an advantage as a resident married to a stay at home mom. Remember that PSLF basically only allows you to forgive the difference between your IBR payments and the regular payments. Since the difference won’t be that great for you, PSLF won’t be a huge windfall for you. If you did married filing separately, the difference between IBR and regular payments would be much larger, allowing you to make smaller payments. This would also cause there to be a larger amount for PSLF to forgive. However, you’d probably be paying higher taxes for 6 years to get those lower payments. You’d have to run the numbers to know which comes out ahead in the end.
Of course, since you’re living on over $175K, more than many single-earner physician families, perhaps you ought to just get started paying those loans back. $310K isn’t that much on a salary of $175K. I assume that after 6 more year of training the two of you will be making half a million together. Those loans won’t last long against that.
Married filing joint I calculate your monthly payments at $1991/month.
Married filing separately I calculate your IBR payments at $428/month.
I calculate your regular payments at $2531/month.
So MFS the difference is ($2531-$428)*12*6=$151,416. That’s the amount that would be eligible for PSLF. MFJ would be $38,880. You’d have to estimate the additional tax cost for MFS, but I suspect that if you really do get PSLF, you’re probably better off doing MFS and IBR. If you don’t get PSLF, then you should probably file joint and get started on paying off those loans ASAP whether you’re under the IBR system or not. A 6.8% guaranteed investment doesn’t come along every day.
Good luck with your decision. I got my figures from this calculator. You probably ought to run your numbers yourself since I made a few assumptions that might not be right:
http://studentaid.ed.gov/repay-loans/understand/plans/income-based/calculator
6 years later – have you gone this route? I have been planning to use an income based repayment pan during training, and switch to the standard 10 year plan for the 2-3 years after training. I remember reading documents saying this plan should work. however now I have heard that switching repayment plans, ie switching from an IBR plan to 10-year “standard plan” , renders those payments ineligible for PSLF.
see page: https://www.financialrounds.com/thinking-about-switching-from-repaye-while-in-pslf-think-again/
now I can’t find documents to support my prior claim that switching repayment plans, as long as those plans both are eligible for PSLF, allows all payments under either plan to be eligible for one’s PSLF.
anyone know if this is true?
Why would you use IBR over PAYE (or especially REPAYE) these days?
But yes, all of those payments count.
thanks for your reply.
because I started medical school in 2007. did mdphd, 8 years, took out extra money.
after reading further, I think I have found that IBR has a built-in rule that its payments are capped at the 10 Year Standard plan rate.
however, in discussing this with a friend, he is using repaye, which after a quick read – looks like this program does not have a ceiling cap, and payments go up with income without limit. thus, this person would want to switch to the 10year plan after making attending salary. however, based on the link I pasted above, switching would not allow payments under both plans eligible for PSLF.
That’s correct. It’s possible that you don’t want to use REPAYE, but there is little reason to use IBR over PAYE if you qualify for PAYE. You may want to use REPAYE in training then switch to PAYE afterward. Why do you have much debt after an MD/PhD?
I guess I didn’t start reading your site soon enough.
You know that article you wrote about living like a resident after training? I chose to live like an attending before training.
Hi WCI,
Thanks for all your hard work getting this information out. I’ve read many of your articles but this is my first post. I’ll be attending an $80k/year medical school in the fall and expect to have about $200k in debt after I’m finished. This past year I’ve managed to save up about 10k and I’m really interested in starting a Roth IRA based on your advice on this blog. My question is can I afford to make one or two investments with this money, or will it be better used towards paying for food/incidental expenses here and there over the next four years? If I expect to use IBR and PSLF to get my loans forgiven, then shouldn’t I keep this 10k to myself to do with as I please? It could be used to prevent me from taking out 10k in 7% loans, but if I were to get these loans forgiven anyway then it wouldn’t matter. In your opinion what do you think would be a good use of this money?
SP
You may or may not qualify for PSLF in the future, so I’d use the $10K to avoid loans. Residents should start investing a little. Pre-meds and med students are really in the “debt minimization” game.
Just an FYI that 25 year mark of forgiveness will a TAXABLE event. Basically, if you’re planning for the forgiveness you need have enough money sitting outside with complete liquidity to pay the surprise tax bill. You’re all likely high income earners so having $300,000 extra dollars forgiven is great, but it is basically a balloon payment in the form of a large tax bill. The 1099-C (I believe) is a scary thing.
A quick example ignoring above the line deductions, exemptions, and anything below the line.
MD has AGI of 407,000, and has 300,000 dollars of student debt forgiven. If filing single you would start in the 39.6 bracket and all of that forgiveness would generate income tax of $118,800 dollars. This also ignores the increase in additional medicare tax, the net investment income tax (which you would already be subject to), and increased capital gains.
I really wish exit counselors did a better job of preparing students for the debt on the back end.
Also this is not specific tax advice, and other fun disclosure’s.
While nothing you say is false, the vast majority of doctors making IBR payments will have their loans paid off before the 20-25 year mark, thus there will be nothing left to forgive, and thus, no forgiveness to pay tax on. PSLF, unlike IBR/PAYE forgiveness, is tax-free (at least under current law.)
Thank you for the wonderful information on your website! I also recently bought your book and thought it was very useful.
I hope you can give your advice on IBR payments. I will be graduating in May with $179,000 in student loans. My salary for intern year is $49,900. My husband is also a graduate student with ~$200k in loans. He works but only makes $7-8k/yr. According to the calculators online, my estimated payment under IBR will be $434/mo. After living expenses and savings (maxing employer 401k match and Roth IRA), I will have an extra couple hundred bucks per month. Are there any benefits to making a larger payment than what is required by IBR? I could technically pay up to $600/mo. I plan to aggressively pay off my loans, since I don’t think I will qualify for PSLF after residency since my future plan is to join a private practice (ophtho). Thank you!
I forgot to mention the alternative would be putting the extra money per month into absorbing some of my husband’s living expenses (mostly just his half of the rent). This would lower the amount of Grad Plus loan he has to take out by 2-3k. Unfortunately, our rent is high, so he would still have to take out loans to help me out with living expenses.
Well, the first thing I would suggest is reading a book like the millionaire next door. You guys will be making $57K+ and yet need to take out loans to live. I’ve found that people don’t like to be told they’re living beyond their means, but by definition that’s what you’re doing. You make it sound as though $57K is some terrible income. It’s more than the median household income in this country. While some cities have a relatively high cost of living, I find it hard to believe that a young married couple cannot live on $57K a year in any city in this country. It reminds me of a resident who recently emailed me. He had 4 or 5 kids in private school as a resident and wondered why he had to take out loans to meet his living expenses. I don’t know where all your money is going (you mention rent) but I assure you there is someone in your city paying less in rent than you are and living on much less than $57K. Go find out where they live and live like they do so you don’t have to take out more loans. You’re not rich. In fact, you’re much worse than broke (nearly $400K worse). You’re not entitled to live in a nice house in a “safe neighborhood with great schools”, drive a nice car, eat fancy meals, send your kids to private school, go on expensive vacations etc just because you have an MD after your name. Don’t act rich until you are. I suggest you live like you have $400K in moderate to high interest debt. Will you be able to pay it off as an ophthalmologist? Sure. But you won’t even really start for 4 more years. It may be ten before you can get rid of that debt unless you live very frugally.
Now, as far as your question, once you’ve avoided taking on more debt, and paid off any high interest debt, I think there are two good choices for extra income as a resident. The first is to fund a Roth IRA. The second is to pay down your loans. Since you won’t be getting any forgiveness, you might as well get started on them. But paying off current loans and avoiding future loans are really the same thing.
You are correct, we shouldn’t have to borrow money to live on our future income. I redid some calculations, and it completely doable for us to take out loans to cover only his tuition. We definitely try to follow your advice to live frugally: own a 15-year old car, no extravagant vacations outside of seeing our family on holiday breaks, etc. Thank you again for your comments!
Awesome! I think that’s a much better idea. Habits matter, even if you’ll make enough later to make up for a lot of mistakes now.
I will be graduating residency in 1 year and just signed with a group. They are giving me a pre-tax signing bonus (so I will have to still pay taxes on it). I would like to put as much of the signing bonus towards my student loans (I am currently paying appx $200 a month using IBR. What percentage of this bonus should I contribute towards my loans, and what percentage should I hold onto for taxes? Of note, I also have a solo 401-k available that I can contribute pre-tax income to.
I’m not sure if the signing bonus counts as earned income or not. I believe so, since most bonuses are. That means you could contribute to the retirement plan for that particular employer. If you’re self-employed, that could be a Solo 401(k). But if you are an employee, you can’t take W-2 money and put it in a Solo 401(k) (but remember money is fungible of course.)
If you don’t put any of it in a 401(k), and you cannot pay the taxes from elsewhere (see the post about the docs who paid off their loans in 5 months from residency graduation), then I’d plan on 15-30% of that money going to the tax man. It depends on your state, your marriage, what year you took the bonus in (if half the year is resident income your tax bracket should be lower) etc. According to this: http://www.irs.gov/publications/p15/ar02.html#en_US_2014_publink1000202352 you also owe payroll taxes on a signing bonus:
Hi, I’m glad I found this website and have read with some interest about refinancing (DRB) vs IBR. I wanted to get some more personal insight on my loans.
I graduated with about 120-121k debt in 2014. Last year in intern year I was able to live at home and was on the 10 year standard repayment. For my advanced program I had to move and am now feeling the effects of having to pay bills/rent. I went from TX to CA and my monthly income is also now less, thanks to state income tax, etc. FWIW, I live fairly frugally.
As of right now, I still have about 113k in debt, and am paying over 1,400 a month. I am considering the IBR/Pay As You Go (the calculators are giving me really good estimates of ~500/month with projected loan forgiveness of 244k). Would it really matter which one I chose between these two (the calculator is giving me the exact same estimates for both)? Should I consider refinancing instead?
The estimates should not be the same. Choose PAYE when given the choice. It’s better.
If you plan on paying off your loans, then refinance them instead. If you plan on getting forgiveness, then get into PAYE ASAP. But with just $113K in loans…I’d probably just refinance and then pay them off the first year or so out of residency.
Hey Jim
I am about to finish Ortho fellowship and start an attg job in September. I’m on track to have my loans forgiven in approx. 4 years with PSLF.
My question is concerning my wife’s loans. She has approx $250k in loans that she’s been in the REPAYE program for approx 6 years. She works PT for a for profit school for special needs kids so does not qualify for PSLF. I had applied to all the loan refinance companies on your website and saw that we would have the best rates with First Republic since we live in their area.
I was ready to pull the trigger with refinancing next month in preparation for my jump in income until one of my colleagues put a thought in my head which I never considered. So our plan was always that my wife would stop working when we had our first kid (maybe in the next couple of years) since she wants to raise them herself and her salary is probably just a bit more than what we have to pay for childcare in NYC.
Finally my question: Can my wife be on IBR (and we file taxes married filing separately so my income doesn’t affect her payments like REPAYE) and she is unemployed for the next 20 years and have her loans forgiven? Or if she has an income from just doing online surveys?
Just wondering what your thoughts on this possible loophole (I couldn’t find anything on the IBR website on unemployment) before I pull the trigger on refinancing. Or it’s too good to be true.
Thanks again.
Yes, but you might pay more in taxes over those 20 years than you’d save. You’d have to do the math. And live with yourself. 🙂
Bear in mind you also would have to pay taxes on the amount forgiven. Between that and the higher taxes, I’d be surprised if you really came out ahead, but perhaps you would if you considered the time value of money.