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 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.