REPAYE Case Studies

[Editor's Note: This is a guest post from “Dr. Wise Money“, a PGY2 who has guest posted here before about how she paid off her student loans as a PGY1. She is a resident on the fast track to financial independence, recently purchasing her second home and maxing out retirement accounts anticipating financial independence sometime in 2023. She has spent a great deal of time and effort delving into the details of the new REPAYE program and here presents several case studies to help those trying to decide whether or not to use it.We have no financial relationship. ]

Revised Pay as You Earn (REPAYE) is the new kid on the block of government income driven repayment plans. In this article, I summarize the principles and then review eight different case studies illustrating them.

3 Main Differences Between REPAYE and its Friends, IBR and PAYE.

1. If your monthly payment doesn’t cover the interest that accrued, the government pays
   1. 100% of the difference on subsidized loans for first 3 yrs, then 50% of the difference thereafter
   2. 50% of the difference on unsubsidized loans indefinitely
2. You pay payments equal to 10% of your household discretionary income (counts your spousal income no matter how you file taxes)
3. No payment cap (especially important after residency completion as it can erase potential PSLF)

Questions

When deciding about REPAYE, you need to know the answers to the following questions.

1. What is my TRUE REPAYE interest rate after the subsidy?
2. What are my interest rate/term offers for refinancing?
3. Do I plan on pursuing PSLF?
4. Do I plan on pursuing (taxable) forgiveness through IBR, PAYE, or REPAYE after 20-25 years of payments?
5. Am I married to a spouse making a similar income or more?

REPAYE Case Studies

First we'll look at six “flow chart” case studies, and then consider two reader case scenarios with step by step evaluation of REPAYE. Assumptions for the flow chart case studies are as follows:

1. Class of 2016
2. 200K total federal student loans
3. 6.1% weighted interest
4. Monthly accrued interest: $1017
5. REPAYE mo. payment requirement calculated with repayment estimator @ https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action#view-repayment-plans
6. Flow chart case studies include the following:
   • Single with med school & moonlighting income
   • Single without med school or moonlighting income
   • Married, household of 5, with some spousal income
   • Married, household of 2, with some spousal income
   • Married, household of 5, with high spousal income
   • Married residents, household of 2, with some moonlighting income

Case Study #1 and #2 The Single Docs

In Case Study 1 (Left) a single PGY1 with med school income (25k) & moonlighting income (35k). His PGY1 REPAYE payments are based on his 2015 tax return which had 25k AGI; his PGY3 REPAYE is based on his 2017 tax return which has 100k income. With increasing AGI from tax returns 2015 to 2017, his REPAYE payment and effective REPAYE interest rate both increased.

In Case Study 2 (Right) a single PGY1 had no income in medical school but did do some moonlighting in residency. His PGY1 REPAYE payments are based on his 2015 tax return which had $0 AGI; his PGY3 REPAYE is based on his 2017 tax return which shows 100k income. His REPAYE payments and effective interest rate were lower than in Case Study 1, but also increased over time as his income increased. His initial effective interest rate is exactly half of his weighted interest rate.

[Editor's Note: It took me a while to figure out that EIA is somehow an abbreviation for Effective Annual Interest Rate.]

Case Studies #3, 4, and 5 Married With Children

In Case Study 3, we have a married PGY1 with spousal income since medical school (30k) & moonlighting income (15k). His PGY1 REPAYE is based on his 2015 tax return which had 30k AGI; his PGY3 REPAYE is based on his 2017 tax return which has 110k income. With increasing AGI from tax returns 2015 to 2017, his REPAYE payment and effective REPAYE interest rate both increased.

In Case Study 4 (middle), we see what happens with fewer family members and somewhat higher income. This is a married PGY1 with spousal income since medical school (50k) & moonlighting income (15k). His PGY1 REPAYE is based on his 2015 tax return which had 50k AGI; his PGY3 REPAYE is based on his 2017 tax return which has 130k income. With increasing AGI from tax returns 2015 to 2017, his REPAYE payment and effective REPAYE interest rate both increased. Note how much higher his initial payment and effective interest rate is than the doc in Case Study 3.

Case Study 5 (right) demonstrates what happens when you're married to a high income professional. This married PGY1 has had a high spousal income since medical school (150k) & moonlighting income (15k). His PGY1 REPAYE is based on his 2015 tax return which had 150k AGI; his PGY3 REPAYE is based on his 2017 tax return which has 230k income. Note how by the end of residency his REPAYE payment exceeds his monthly accrued interest, and his effective interest rate is 6.1% (he receives $0 of interest subsidy.)

Case Study #6 Married Residents

In case study six, we have two docs, a married PGY1-PGY1 couple with $0 medical school income & a little moonlighting income in residency (15k each). Their PGY1 REPAYE payment is based on their 2015 tax return which had $0 AGI; their PGY3 REPAYE is based on his 2017 tax return which has 130k income. Note the jump in effective interest rate as they start moonlighting.

 

Case Study # 7 Married To an Attending and In IBR

“I have 150k student loan principle, 50k interest, all at 7%. My spouse makes 200k as an attending. We are a family of 6. I make 60k as a PGY3/6. Should I switch to REPAYE?”

First, calculate your monthly REPAYE payment. Is it affordable? Using this calculator, you can see that your REPAYE monthly payment is $1,759/month.

You currently have 200k total debt (all consolidated): 150k principle, 50k interest. Your current IBR monthly interest is calculated on the 150k principle. But when you leave IBR to go REPAYE, your 50k interest will capitalize, and your new principle will be 200k.

Your REPAYE monthly interest is calculated on the new 200k principle:

200k*7%= 14k annual interest without subsidy. Divide that by 12 to get your monthly interest of $1167. Since your monthly payment is greater than the monthly interest you accrue, REPAYE will NOT subsidize you. This means, your interest rate is still 7%. So you should not switch to REPAYE since it ONLY works against you by capitalizing your current interest without any interest reduction.

If you stick with IBR, your current interest won’t capitalize until you no longer qualify for IBR or when you leave IBR voluntarily.

Another option to consider is refinancing. If you refinance, you will likely get a 7 year 4.5-5% interest rate with one time capitalization when the loan company buys your loan from the feds. This will give you 200k*4.5% = 9k in annual interest v.s. your current 150k*7% = 10.5k interest. Not a whole lot of savings, but you may also benefit from a lower $0-100 payment. Obviously refinancing ensures you will not receive PSLF.

[Editor's Note: Some docs in this situation, especially if going for PSLF, may wish to file their taxes Married Filing Separately and use either the PAYE (if you qualify) or IBR programs.]

Case Study # 8 Married to a Spouse With No Income and In IBR

“I have 150k student loan principle, 50k interest at 7%. My spouse stays at home. We are a family of 5. I make 60k as a PGY2/6. Should I switch to REPAYE?”

Per the calculator, your REPAYE monthly payment is $145/month. This means you will enjoy some interest savings by going on to REPAYE. To switch from REPAYE to IBR, there's one middle step. They will put you on Standard 10 year repayment where you need to make at least 1 payment before you can select REPAYE. If the standard 10 year payment is too high, you can apply to make a reduced payment. Another factor to consider is that when you leave IBR (with the goal of going to REPAYE), your interest will capitalize.

You currently have 200k total debt (all consolidated): 150k principle, 50k interest. Your current IBR monthly interest is calculated on the 150k principle. But when you leave IBR to go REPAYE, your 50k interest will capitalize, and your new principle will be 200k.

Your REPAYE monthly interest is calculated on the new 200k principle, so 200k*7%= 14k annually or $1,167 monthly not counting the REPAYE subsidy. Subtract your monthly payment from your monthly interest = $1167 -$145 = $1022. REPAYE will pay 50% of $1022 = $ 511. Your net annual interest after subsidy will be 12 x ($1167 monthly interest -$ 511 monthly subsidy) = $7872

Thus, your effective interest rate will be 7,872/200,000= 3.94%. Your total interest saved will be $6,132/year on annual simple interest; (Technically there will be a little more savings since the feds calculate interest daily, not annually.)

You could also compare this to refinancing during residency. Let's say you can refinance into a 7 year loan with a 4.5% rate [Fat chance. Residents are doing well to refinance into 6% loans lately, but not when this post was submitted to me.-ed]  Obviously 4.5% is more than 3.94%, so you'll end up paying more in interest if you refinance, about $45 more each month.  That may change as you progress through residency, however, so if you're not going for PSLF, you may wish to recalculate your effective interest rate each year and compare to what you can refinance to.

Two Caveats

Remember that consolidating your loans will RESET your PSLF 120 payment clock. If you have already consolidated your loans or all your loans are PSLF eligible (don’t need consolidation), you don't need to worry about this.

Also remember that while under current law you can switch from REPAYE back to IBR upon residency graduation, (to avoid the potentially higher payments under REPAYE since those payments aren't capped like IBR and PAYE payments are) but that law could change.

[Editor's Note: If not going for PSLF, strongly consider refinancing your student loans at a lower rate upon residency graduation using these affiliate links that help support this site:

 

Student Loan Refinancing Disclosures

 

Summary

Compared to IBR or PAYE, REPAYE helps those with little household income and a large debt because the interest subsidy only exists on the gap between your accrued interest and your payment. The more you pay, the smaller the gap between your monthly payment and the monthly accrued interest, so the less interest subsidy you get. When you pay exactly your interest accrued monthly or above, you get no subsidy at all.

What do you think? Have you switched from IBR or PAYE to REPAYE? Why or why not? Comment below!