[Editor's Note: This guest post was submitted by first-year resident and regular reader Wynton Overcast. Many of you have had the same question and now thanks to the persistence of Wynton, no longer have to guess at the outcome of prepaying your loan under RePAYE. It turns out the answer is not what I expected or hoped. Wynton and I have no financial relationship.]
An Unanswered Question: Can I Keep the RePAYE Interest Subsidy if I Prepay My Loan?
After hunting around the internet, WCI forum, Reddit and previous WCI posts, I finally reached out to Dr. Dahle and the WCI Team with an unanswered question: Can I pre-pay my student loans while still trying to take advantage of the RePAYE 50% Interest Subsidy? Always the teacher, Dr. Dahle gave me the answer to the best of his knowledge but then advised me to test it out myself and “send me a guest post about it!”
Setting the Stage
Let’s set the stage a little bit. I am a first year resident with ~$150k of student loans at an interest rate of 5.5% and my loan provider is FedLoan Servicing. I entered the RePAYE plan this summer and thanks to my student status and my wife's relatively lower income last year, our expected payments for the next year under this plan are $0….which means that I will be getting the full 50% interest subsidy from the government and an effective interest rate of 2.75%.
(Important Note: we will NOT be going for PSLF in the future, so we are going to have to get rid of this debt at some point on our own. If you are going for PSLF it makes sense to make as many small payments as possible for the 120 required payments and you shouldn't even think about prepayments.)
So why even fuss about making early payments to the loan with such a low effective interest rate? Neither my wife nor I have 401k/403b matching available this year and we are not doing an HSA with my intern year benefits as we will be moving to my categorical program next. We are likely going to be able to max out both of our Roth IRAs this year and expect to have money to invest beyond this. So where should we pour our money next? It seems our decision is between 401k/403b contributions without matching vs starting to pay off the loan. Perhaps I should just proceed with 401k contributions and not worry about prepaying my loan. But there are a few reasons I would want to prepay my loan rather than do 401k contributions (family gifts earmarked for education, beliefs about market returns over the next 5-10 years). Regardless, this discussion is more about CAN I prepay and keep the subsidy rather than SHOULD I prepay. So let’s begin the joyful journey of communicating with a loan servicing provider.
Wynton and Sydney Overcast
Communicating With FedLoan Servicing
I tried to get a clear answer from FedLoan Servicing via a couple phone calls and emails without much success (actually had to teach a couple of the help center employees about how the 50% subsidy for unsubsidized loans was different than the 3 year deal for subsidized loans). One of the more clear email exchanges I had is below:
My question:
“Is the government interest subsidy that I will receive based on my expected/calculated monthly payments (currently $0) or based on the amount that I actually choose to pay per month (possibly paying more than my $0 requirement)?”
Their response was:
“The interest subsidy for the Revised Pay As You Earn (REPAYE) plan only applies to unpaid interest. If you make any payment to the interest it will reduce the contribution made by the government.”
More Answers From FedLoan Servicing
- The interest subsidy occurs the first day of each month and is automatically deducted from my growing interest. There is no documentation on my online account of this deduction but I can request documentation of the deduction and receive paperwork in 10-20 business days.
- Any payments I make early will go towards the growing interest. So when I make a payment in a given month, that payment reduces or completely eliminates the interest that would be targeted by the subsidy that month. Meaning, I would not see any (or would see a reduced) interest subsidy on the first day of the following month.
- She did not have any official FedLoan Servicing document with this information or an explanation of their policy.
My Prepayment Test
Now all this information did not line up with what others on the WCI Forum seemed to believe about prepaying loans under RePAYE. So, I put prepaying to the test:
- Current Principal: $149,734
- Interest at Beginning of Test: $1,864
- Daily Interest Accrual at 5.5%: $22.56
- Monthly Interest Accrual at 5.5%: $676.88 (30 days)
- Monthly Interest Accrual at 2.75%: $338.44 (30 days)
Based on my daily interest accrual and the information provided by the FedLoan Servicing employee, I paid $30 (to guarantee I was above the interest accrual on any given day) at three different points in the monthly loan cycle.
Test 1:
I paid $30 on a random day to see if the whole $30 would go towards the principal, if $22 would go towards the interest from that day and $8 would go to the principal, or if all $30 would go toward the interest.
Result 1:
It all went toward the interest.
Test 2:
I paid $30 on the day that the interest subsidy was awarded, the first day of the month. The logic here was if FedLoan Servicing was applying the interest subsidy the first of every month, then perhaps my account would be at $0 of interest accrued that month and all of my payment would go towards the principal.
Result 2:
It all went towards the interest
Test 3:
I paid $30 on the day immediately after my actual scheduled payment due date. Remember that my required monthly payments each month are $0, so my thought process was that perhaps FedLoan Servicing would process my $0 payment and that would be the date when the monthly accrual of interest reset to $0 allowing me to pay off the principal.
Result 3:
It all went towards the interest.
So How Did These Prepayments Affect My 50% Interest Subsidy?
Well on Day 1 of this experiment I had $149,734 of Principal and $1,864 of interest. On Day 20 I had $149,734 of Principal and $1,763 in interest. So essentially a net negative of $101 in interest. Huh? How did that happen? I paid $90, all towards the interest and I would have expected $428.64 of interest to accrue at the 5.5% rate or $214.32 at the 2.75% rate. Meaning, the best I would have hoped for was a net positive of $124.32 in my interest ($214.32 at the 2.75% rate minus the $90 I paid).
When I broke things down day by day I found that the $428.64 dollars of interest at the 5.5% accrued as expected and my three $30 payments posted within a couple days of when scheduled (interest net positive $338.64). The confusion came about because I appeared to receive a full month of the subsidy deduction on the first day of October for $338 (interest net $0) but then also received a subsidy deduction 11 days later for $101.56 (the equivalent of 9 days of 50% interest), suggesting that two of my three days of $30 payments took away two of my days of the 50% interest subsidy. Which leaves me to assume that the third day of $30 payments will be taken away from my next lump of 50% interest subsidy. (FedLoan Servicing does not provide documentation of when the subsidy payments or interest accruals are credited to the account. I was only able to sort this out because I took pictures of my account details on different days through this process).
Don't Overpay Loans Under RePAYE
So why all this work? Now I know that if I overpay my loans under RePAYE:
1) The overpayment will go towards interest and not towards the principal.
2) Any extra payments will take away my subsidy benefit in some capacity based on that payment.
Through this process, I also learned that there does not appear to be a way to direct any payment specifically towards the principal when paying ahead or over your minimum balance. Such payment will go directly toward the interest accrued.
Hopefully, this saves someone the time and hassle of having to communicate with FedLoan Servicing on their own time and clarifies what happens when overpaying/prepaying in the RePAYE program.
[Editor's Note: Thanks to Wynton for running an experiment that I was not capable of running on my own. I think it sucks that this is the way it works, but at least now we all know. So what should you do if you want to maximize the benefit of REPAYE but still pay down your loans because you're not going f0r PSLF? Just like for those going for PSLF, the answer comes down to a “side fund.” Simply make the extra principal payments into an investing account rather than sending them to the lender. You can invest it conservatively (You'll only make 2-2.5% right now in a high yield savings or money market fund but when you count the value of the REPAYE subsidy you're still coming out ahead) or aggressively, depending on how much risk you want to take with this loan pay-off money. Honestly what I'd probably do is just put it into retirement accounts, invest it aggressively, and then pay off the loan my first year or two as an attending. Of course, it is always worth running the numbers to see if the rate you can refinance to is less than your effective rate after the REPAYE subsidy. If you're not going for PSLF and the refinanced rate is lower, just refinance that sucker. Remember that right now the only two lenders on this list refinancing residents without an attending contract are SoFi and Laurel Road.]
What do you think? Do you think it's fair that those doing the right thing get penalized in this way? What are the consequences of incentivizing people to not pay off their federal loans? Have you made this mistake? Comment below!
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[Spammy comment removed after reader complaints. Links on previous comments removed. Future comments from this poster to be held for manual moderation rather than automatically approved. Comments must add to the discussion less the signal to noise ratio on the site be reduced.]
Just watch the accounts like a hawk, even in the little spare time you have as a resident. Long before REPAYE and PSLF I had a GSL loan, no interest accruing during education and residency training back in those glory days, from federal subsidies for all govt loans like mine, and once I was an attending with extra money I sent in an extra digit above my payment- eg $1,367 instead of $367 for a clean drop in principal of $1000 (hadn’t even considered the financial and mathematical abomination of prepaying interest- learned about that with my first mortgage). Yep, you guessed it, checking my account someone left off the 1 and I had to provide a copy of my check etc to get that fixed. After that snafu I opted to pay it all off before I left the country for duty in Germany (back when with Army paid tuition I only started with $30K in GSL loans from undergrad and for med school living expenses).
Well, I learned something on this one. I had read previously of people having success with receiving the full subsidy even with additional payments, and thought that maybe it dependended on who the servicer was?
This appears to not be the case based on this post, which was really well done! I bet the guest poster felt like a bit of an undercover spy (or researcher, though that sounds less interesting)!
TPP
Hey there.
It is unfortunate that we have to dig deep to understand something that we are paying for. This is my third year on the RePAYE program and it has take hours on the phone with different representatives to discover exactly what is going on. I graduated 2016 from Dental school and have my loans through Greatlakes.
Here are some pointers I have learned.
1. Have your automatic payments on 1st of the month. My subsidy posts at the end of the month, so I want my payment to post after.
2. The subsidy is calculated on the interested accumulated THAT month. Any NET interest that was accumulated, is NOT used in the subsidy calculation.
3. If you have any outstanding interest from previous months, I would pay that down then you can see the payment hit principle every month. I would call them the 1st to get the correct number.
4. On my account, I can direct a payment to a certain “Token” or loan if I want to pay that down first. Payment will always go towards interest first.
Best
I agree with MC. I think most of the messy math happening here is because the author had $1,864 of accrued interest and is making payments at different points in the month and that’s impacting the subsidy. Also you can’t trust any statements from FedLoan representatives. There’s no such thing as the REPAYE dept, so if the rep presented his or herself as being part of that then that alone would tell me their advice would be worthless. Very interesting study though. I think the way the author analyzed the payments is great. I’ve seen so many errors and different ways of accounting for loans among different servicers and have not had anyone tell me they’re missing the subsidy that’s been making prepayments. I’d want to see at least a few dozen more proof points before being convinced it’s happening this way.
Maybe a few of you with loans who are reading this can run the experiment yourself and post back here in a month or two. But as far as I know, this is the only doc who’s ever looked at this carefully since RePAYE began.
It makes sense. The subsidy is there to help those who cannot afford their loan payments and help keep them from going way to far underwater. If you can afford to make your payments and pay extra then why would you need the subsidy? The answer is of course that you do not need it but we would want it all the same.
It is good to know the rules so you can play the game as efficiently as possible. I agree with WCI that if you happen upon extra money in residency make sure you are minding your tax advantage accounts first. If you are loaded with cash (windfall/high earning spouse) then refinance and pay down the loans. These are all good choices and sounds like the poster is on the right track early. Great job with the experiment!
I have my dental loans through great lakes and they have been deducting my interest subsidy every month regardless of overpayment.
just FYI
There’s no mention of whether the OP targeted a specific loan for prepayment. I’d like to know what would happen in that case, as you would presumably be able to pay off the accumulated interest and start hitting at the principle (if your payment was big enough)
This is what I was thinking. Unless he consolidated, just pay down one at a time and there will he negligible interest. I have 1-2 loans per semester so each accrues a negligible amount of interest monthly.
My loans are serviced by Navient, and last year I did a similar experiment to what you are suggesting. I paid off the interest for just one of my loans, and tracked the interest accumulated on the other loans. The other loans still received the subsidy despite the overpayment. I believe this means the subsidy is calculated per loan, not based on total loan amount.
I’ve been using the same strategy since then, to overpay on only one loan at a time where the overpayments would be applied to the principal. I let the scheduled monthly REPAYE payments post as normal. I haven’t recalculated recently, but I’m assuming (hoping/praying) that it’s still the same.
Do us a favor and calculate it and report back would you?
Here you go:
With Navient, I am able to see the total amount of interest accumulated on each loan as of the current day, so I’ve logged the interest accumulating on each loan over the last 2 days. The calculated interest for each loan is accumulating at:
Loan A – 4.79%
Loan B – 4.02%,
Loan C – 4.01%
Loan D – 4.42%
vs the “official” interest rates of:
Loan A – 6.55%
Loan B – 5.16%
Loan C – 5.16%
Loan D – 5.96%
My loans overall accumulate approx $800-900/mo in interest, my monthly income-based payment is $465, and my last overpayment was $1500 earlier this month to Loan A. My understanding of the REPAYE is that the government will subsidize half of the interest not covered by your income-based payment. If you look at the above numbers it seems that they are doing just that.
After this experiment/calculation though, I’m not sure if paying specifically to one loan at a time vs. making a blanket payment would have any impact on the subsidy for me, since Loan A is still getting an interest subsidy despite the overpayment. I’ll keep paying one loan anyway so that I can chip away at principle.
After reading some more comments though, I agree that it may be servicer dependent in how the subsidy is applied. Through Navient, my interest accrues daily based on the subsidized rate (if my above reasoning is correct), it’s not applied as a dollar amount every month (which sounds like might be the case for some commentors?). I guess that’s why I never thought to time my overpayments, and also why I’ve never had a subsidy applied to my principle.
Hope this helps somebody!
I was still skeptical about the Loan A subsidy, so I made other calculations:
Interest that ACTUALLY accrued each day (same the last two days) = $6.49
Interest that WILL accrue in 30 days (assumption) = $6.49 x 30 = $194.70**
Total interest that SHOULD accrue in 30 days based on principle bal and unsubsidized 6.55% = $262.54
Actual income-based payment made this month = $125.23
Difference between unsubsidized interest and income-based pmnt = $262.54 – $125.23 = $137.31
SUBSIDY is half of that Difference = $137.31/2 = $68.66
Total interest that SHOULD accrue – SUBSIDY = $262.54 – $68.66 = $193.89**
I’d say that the two “**” amounts are close enough to conclude I’m still getting the subsidy, even after I made an overpayment to the loan earlier this month.
¯\_(ツ)_/¯
Thanks for sharing. I think you’re right that this is servicer dependent.
I just saw this article and comments. I actually did the same experiment with Navient throughout last year and I followed my daily accrual with large overpayment amounts during the year. I took screenshots and calculated the daily interest accrual over months. My finding was that overpayment did not affect the 50% subsidy.
Thanks for sharing your experience.
Any advantage to paying large chunk sums periodically instead of trying to overpay every month?
No. It’s about the same. When you pay the extra principal, interest stops being calculated on it.
It actually depends on how your servicer treats the subsidy. FedLoans apparently gives you no subsidy (charges full interest) if you overpay enough to affect principal. So you may come out ahead by waiting and paying in larger chunks.
Thanks.
This is my thinking. if the subsidy is affected by overpayment (will have to test this when repayment starts) I wonder if it might be better to save/invest the money instead (as suggested in the article) and make large lump sum payments since the interest doesn’t compound. but investments do. so with a 3%ish interest rate that isn’t compounding, it seems like your money would grow faster in the stock market than it would pay off the debt. It seems smarter to invest the money and make minimum payments on the REPAYE loan until you can knock it out in one lump sum.
Hi Joanna,
Can you break down exactly how you did these calculations? I’m very new to this and not that great at financial calculations, and I’m trying to figure this out for myself.
Thank you!
I’m not sure this is good enough evidence for me based on the “experiment”. The lack of transparency with your account at FedLoan Servicing is abhorrent and their customer service is some of the worse I’ve encountered in any industry. I, too, have called many times trying to actually figure out how the subsidy is calculated and they cannot provide any documentation at all how it is applied to your account. I was just simply told over the phone that I’m receiving the subsidy. I did a calculation of my interest over an entire year under the REPAYE system (with overpayments) and it did seem that I was receiving the full subsidy regardless. My interest rate was ~6.2% and with REPAYE the effective interest rate was ~4.2%. By my calculations the effective interest rate of ~4.2% was accurate over that year of payments. So my longer term calculations differ from your conclusion, but certainly I could have made an error.
That being said I’ve refi’d with Sofi and Commonbond last month, and now I’m much happier with service so far. Plus them WCI bonuses!
Here’s something I posted several years ago on WCI:
Sigmafs | September 11, 2016 at 8:17 am MST
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.
But, keep in mind, interest does not capitalize while in REPAYE. Given this, your optimal strategy is to save/invest that additional payment amount in an interesting bearing vehicle. Remit the amount saved/invested at point you leave REPAYE. This accomplishes; 1. interest growth on your savings, and 2) delays the same payment into the future.
Via email:
The recent article posted on REPAYE I believe has some false information. It states that he could only pay on his interest, but in fact you can choose to pay towards certain loans to pay down principle. I have the same loan provider and I also have a $0 payment but I pick which loans I want to pay each month and just pay towards the principle.
Great article. Would make a great addition to the complication of WCI Blog Posts on my “Intern Financial Survival Guide” 🙂
https://www.whitecoatinvestor.com/intern-financial-survival-guide-from-one-intern-to-another/
I’m a second year pediatrics resident and have been enrolled in REPAYE since my fourth year of medical school. My loan servicer is Great Lakes and I pay an overpayment or $500-1,000 monthly to my highest interest loan monthly on auto pay. I receive the same interest subsidy no matter how much I pay. In Great Lakes it’s very easy to see what percentage of the payments go to interest and which to subsidy. In fact, with the loan I target the interest remaining is so low that the government interest subsidy actually pays part of the principle!
Interesting. I wonder if it is servicer dependent. Maybe Fedloans is hosing people and Great Lakes isn’t. Time for another experiment!
I don’t know what to make of the subsidy paying Principal though. That sounds wacky.
Does this still seem to be the case? To clarify, you did not consolidate your loans??
Interesting and well-thought out article. I am a third year resident and also enrolled in the RePAYE program and have had a very difficult time getting meaningful information out of the Fed Loan employees as they all give me different answers to this question. That being said, it is possible to pay down your principle even while enrolled in this program. I have 5 separate loans with Fed Loans. Roughly a year ago (not long after I first changed to RePAYE and therefore all of my interest to that point had capitalized) I had an extra $5000 that I decided to put towards my loans. I directed the payment towards the loan with the highest interest rate. The first ~$300 went towards the interest that had accumulated at that point and the remaining ~$4700 went towards reducing my principle. Given the lack of transparency of Fed Loans, I have been unable to determine if I kept my subsidy for that month or not as there is nowhere that this information is readily available.
Combining this experience with the excellent research performed in the post above, my thought would be that if you only have a small amount of money to put towards your loans (eg less than the interest that already exists on any of your loans), it doesn’t make sense to pay it as there is a real chance that this money will essentially be wasted in the form of not receiving the full subsidy for that month. However, if you have enough that you can make a real dent in the principle of one of the loans, it may be worth losing the subsidy for one month to reduce your principle.
Exactly! If interest accrual in a loan is $100/mo with $0 required, the subsidy will be worth $50 and $50 will remain as accrued interest.
Let’s say you’ve got $100 extra per month, it’d be unwise to pay toward the loan every month. You’d pay the normal $50 plus the $50 normally covered by the subsidy. If instead you save that $100 for 1 month and pay $200 in month 2, you’ll take off $50 of principle ($100 of interest in month 2 without a subsidy plus $50 accrued from month 1 = $150 toward interest)
I wonder at what point would it be worth it to make that lump payment? By saving for a number of months, you make a bigger dent in principle and then enjoy less accumulating interest after.
Well, that actually depends on the servicer as discussed in this post and its comments.
would be curious if you’ve figured out an answer to your question. I’ve been thinking about this and finally stumbled across this article. I’m thinking just like you were. my solution was to invest everything but the minimum payment until I could pay off an entire loan with a lump sum payment.
I’m also an intern enrolled in the RePAYE program and have conducted a similar experiment after all too many unhelpful phone calls with a FedLoan servicer who wasn’t able to provide answers as to how this program works. I too, had the same result that my payments went toward the interest and the subsidy payment decreased as a result regardless of the time of month when I made the payment. I’ve read multiple comments from others who state that they are able to choose which loan to put their payment towards. I’m now wondering if this is only a problem for those that consolidated their loans (like myself), so there isn’t an option to choose a specific loan to target the payment towards.
Thanks for sharing your experience.
I think so. Just as with all repayments, money first goes to interest (what’s accumulated that month and from previous months.
Thanks so much for this informative article! I’m an attorney with approx. $110K of student loans. I’ve paid off all of my other debt, so I’m trying to determine whether it makes sense to now direct all my extra income towards reducing my student loans, or invest it and just stick to my minimum payment amount under REPAYE. I was wondering how the interest subsidy worked, as I haven’t been able to find any clear information about it. I’m less than 2 years into REPAYE, so I still qualify for the full interest subsidy for another 17 months.
It’s helpful to know that the interest subsidy gets applied the first of the month every month. As I understand it, if I decided to pay $10,000 towards my loans in one large chunk, I would only lose the interest subsidy for the month I made that large payment?
I have read that interest is capitalized when you leave the REPAYE program, so I’m wondering if all of the interest that was subsidized by the govt. is added on at the end if I pay off my loans early. Anyone have any idea about that?
That is my same question about the lump sum payment. Did you ever find out if it worked? (Taking advantage of the subsidy 11/12 months of the year and then making a lump payment?)
Ever find an answer to this?
No. I consolidated my loans to end the grace period early last year so I don’t have the option of paying toward my highest loan. I paid $2,500 last year in December (to take advantage of the student loan interest tax) and my interest subsidy went down by $50 for a month and then back up. Ultimately, it’s hard for me to tell if that was just variation or not. Currently, I am just putting extra money in a taxable account in etfs and plan on taking it out during the first half of my last year of residency (before December of my last year of residency) if it looks reasonable and just making one lump sum payment before refinancing. If in the taxable account it’s at a loss or bear market we will just leave the money in the taxable account and save aggressively and pay it off in the first year or two as attendings. The annoying thing is just having the debt and knowing no matter how aggressively we save we can’t pay it off until we are attendings.
That’s the way it is for most and is part of the price of becoming a doc.
So I guess what I’m saying is because I consolidated the lump sum would be beneficial if I could bring down my principal. Instead of doing a lump sum, I’m just planning to do the $2,500 each year, hope the market gives me a better return, and then one big lump at the end of residency. If my loans weren’t consolidated, I would choose to make extra payments toward my highest interest loan.
Ultimately there are pros and cons of consolidating so if I was graduating this year I might not have because the interest rate is 0%. So this year if it were me, I probably would choose to not consolidate, pay the accrued interest during the last few months of the grace period, enter REPAYE, and then attack my highest interest loan in residency. Again, if your servicer doesn’t take away the subsidy which seems to be servicer dependent. I have Great Lakes and they let you overpay without taking away the subsidy. Hope that was helpful.
I’m looking to refinance my REPAYE loans this summer as I start my job as an attending and PSLF doesn’t make financial sense for me after running the numbers. When will the interest subsidy for REPAYE be applied? I don’t want to refinance and miss out on this subsidy. My interest on 220k has been gradually growing without being capitalized throughout residency, currently it’s at 16.4k of interest. Should I be expecting 8k of that to disappear? Thanks for the help. People at Fedloan have been unable to clarify this issue for me.
I believe it is applied every month, no? So no, I wouldn’t expect half that $16K to disappear. That’s probably what is left after the subsidy.
Roughly 33k on 220k principle over 3 years with the principle NOT being added to capital seems a bit steep. That’s nearly 15% and if interest is not capitalizing won’t get compounding interest. I don’t think it has been applied yet.
33k over 3 years is 11k per year which is 5% per year of your 220k principle. That sounds about right on. 16.4k would be less than 2.5% interest. Student loan rates aren’t that low.
Maybe my math is off. But I’ve got similar loan numbers and my weighted rate is 5.3%. So yours seemed right.
Once you enter repayment, all of the total capitalized interest will be added to your loan balance to get a new loan total. From that new loan total, your monthly payment will be created, and from there the REPAYE subsidy will come into play.
Ok, this all makes sense to me.
But what about people who have Graduate Plus Loans (to students)? From what I understand they are NOT covered with the interest subsidy (I am trying to find where I read this). So, could I make an extra payment directly to them? Especially since their interest tends to be higher? I wouldn’t lose out on an interest subsidy if I understand correctly.
It works for Grad Plus Loans as well. I currently am paying back some Grad Plus, and I do receive a subsidy to them as well. My Grad Plus loans are all clumped under one tab in Great Lakes. They all have the highest interest rates out of my other loans. I put more towards that clump of loans than my others, since they are at the highest interest.
Oh, nice! I guess I was misinformed. I am entering repayment this year, so I haven’t actually seen it play out.
Does this still appear to be the case for REPAYE?
With 0% interest until Sept 30th…I’m wondering if I should NOT consolidate. That way, if I understand correctly, I can pay minimum payments to my unsubisdized stafford (and get max subsidy from REPAYE) and periodically apply large sums of money towards Grad PLUS to chip at the principle and only lose that months subsidy?
Thank you for the advice and I hope to hear back from you!!!
I think so. You may be able to consolidate those into direct loans too as I recall.
So from reading all the comments, it looks like (at-least for Great Lakes) that the REPAY subsidy will apply regardless of overpayment (especially if applying overpayment to specific loan tokens ) since the subsidy is just based on the minum payment.
I am trying to do a 10-year repayment plan, but believe that I will benefit from REPAY b/c of the subsidy. So my goal is to overpay every month and also get the subsidy. Given that:
1 – Any reason to consolidate all the individual loan tokens into one?
2- I also have HPSL – that has the lowest interest at 5%, should I consolidate that as well, or leave as is
3- being that I am in a 1 year residency, should I apply for forbearance/deferment while in residency and continue to make payments as planned just as if I am in grace period? This way interest isn’t capitalized?
4- lastly, and this sort of ties everything together, is avoiding the interest capitalization cost always greater than the benefit of the interest subsidy from REPAYE?
1) No. Keep then separate so that you can smash one loan at a time
2) Leave it. But with the effective interest rates in REPAYE being 50% of the stated rate, that will probably be your highest interest loan and thus your first target
3) Capitalization occurs with any change in status. So it will capitalize when entering forbearance. And then again when you enter repayment. So no, do not do forbearance.
4) The benefit of the interest subsidy is almost ALWAYS greater than any other benefit.
This is all according to my understanding and could be wrong. Other input is welcome.
Thanks for the reply!
1) Agreed
2) Wouldnt it make sense to consolidate so that it also gets the 50% subsidy as well?
3) is this true even if the status is changed to forbearance even during the grace period?
4) I read somewhere that its better to reduce the interest that will be capitalized than to forgo the grace period and get the repay subsidy.
2. Yes, if it can then get a subsidy, it’s worth it.
3. I think so.
4. I disagree.
2. I can get the subsidy, but then the issue becomes that its harder to target specific higher loan tokens since they all become one loan token together with the HPSL
Maybe you can consolidate it with just one other loan?
Is it okay if I send you or post some numbers on how much would get capitalized vs how much subsidy I would receive so we can see which would be more worth it?
Also – I just got off the phone with great lakes, and they said that when going from GRACE to Mandatory medical residency forbearance, interest does not capitalize since its considered continuation of education. Can anyone else confirm this?
Sounds to me like it would be worth your time and money to hire one of these guys to assist you:
https://www.whitecoatinvestor.com/student-loan-advice/
1. NOt really if things are on auto payment.
2. See # 1
3. Forbearance/deferment is almost always the wrong move. Not sure why you’d be an exception.
4. I would assume it’s usually less than the benefit of the interest subsidy.
3. I guess in the case of HPSL where the interest is subsidized it def makes sense only to defer as long as possible. But In the case where I would be pushing off the interest from being capitalized, so that I can pay that down before it gets capitalized, would it also make sense? (i.e. if I had an extra year, I can pay off all the interest that has accumulated before it gets capitalized). If it does not make sense, then should I forgo my grace period?
1. I would not consolidate. I agree you can target high loans first. Also if you do, they do round up to nearest 10th percent or something like that. Its not that big of a deal when you have set your payments on autopay
2. If it is separate, I would keep it separate. I am not sure if you consolidate different loan types together if all of the different loans will get the same subsidy….
3. While you are in residency the interest will still ACCRUE but it will Capitalize one you enter repayment. If you change payment programs, it will capitalize at the change
4. I dont think you can avoid interest capitalization
1 and 2. I agree with not consolidating. But in the case of HPSL, which is seperate, it may make sense to if it qualifies for the REPAYE subsidy once consolidated.
3 and 4. Im not sure, since great lakes says that mandatory residency forbearance does not capitalize the interest from the grace period and in school status. Not sure how accurate that is, but if thats true, it may make sense to do it so that I can pay off all the interest capitalization
You seem overly concerned about capitalizing interest to me.
https://www.whitecoatinvestor.com/quit-worrying-about-capitalizing-interest/
There isn’t a lot that I would be willing to do just to prevent the capitalization of interest, especially if I expected that interest to be forgiven or if I were going to pay it all off very quickly after residency.
Well I am not going the route of forgiven so thats out of the question
So after running through all the numbers here is what I came out with.
INTEREST ACCUMULATING YEARLY without capitalization: $14,259.07
INTEREST ACCUMULATING YEARLY with capitalization: $16,198.80.
Thats an additional $1,939.73 (at least for year 1). Based on my household AGI, my repayment would be around $500 a month on REPAYE which would mean that the difference between the two plans of my total loan amount balance for year 1 is that I would have a $3,159.67 less balance if i go the route of letting the interest capitalize and signing up for REPAYE.
The only issue is, its hard to tell what my AGI would be after year 1 (after residency) so I am not sure if that saving will be beneficial in the long run.
Hello!
I just started intern year. I’m still in the grace/forbearance period. I have 10 total Direct loans; my servicer is Fed Loans. I just applied for REPAYE but decided to have them delay repayment until grace period ended in Nov (6 months after grad). My thought was to pay as much to the unpaid interest accumulated during med school to have the least amount capitalized when I enter repayment period. Maybe that was a mistake as I am reading here. I have ~40k in unpaid interest at the moment. If I left it alone, my monthly interest is about ~1800/mo.after the 40k has capitalized. My future spouse combined actually have enough to pay ~2500/mo. . Which i think technically be able to pay down 700 from my principle. Anyways…
1. Should I just pay the 2500/mo and have them spread it out or should I target my loans?
2. I want to be able to keep my loans separate as stated above in other comments so I can easily target specific loans and possibly benefit from the subsidy on the other loans. By applying for REPAYE now, do they automatically consolidate the 10 loans I have or are they still separate?
3. I believe on Fed Loans site they state you are capable of making directed payments online. Has anyone been successful with that? Paying down one loan while getting subsidy for others? Seems servicer dependent so far from reading the comments.
Hi Alex, fellow Alex here.
1. Definitely do NOT spread it out. Otherwise you will lose all subsidy because FedLoan apparently applies the subsidy according to what you actually paid (vs what you were required to pay) on each loan considered individually.
2. Consolidation is a separate thing than REPAYE. Shouldn’t be auto enrolled.
3. Yes, FedLoan allows targeted payment. You just have to be sure you select this option on the payment screen because this in not the default option. Have been successful doing this process with my wife’s loans.
Best,
Alex
Hey fellow Alex lol
Thank you for the reply and answering my questions! Good to know that they don’t auto consolidate! Have you been successful in getting the subsidy while paying down one loan at a time? How have you been
doing the process? You don’t put payahead status correct? Seems from reading the comments no one had from Fed Loans
Hey Alex,
To my knowledge, the application process does take some time to get approved for the REPAYE program. Just because you apply now, does not mean you will enter repayment tomorrow. I would take advantage of the grace period to get your ducks in line. If you choose to pay down some of the interest, great. That will decrease the amount that will capitalize.
1. One you enter repayment in REPAYE, your minimum payment will be calculated. At the END of the month is when the subsidy is applied. I would schedule your payments for the 1st of the month. You can put more money towards the loans that have the highest interest.
2. The only way the loans will get consolidated is if you consolidate them. Does not have to do with REPAY
3. I have my loans with Great Lakes. I believe you can change to what ever company you would like to service you loans. You do not have to stay with Fed Loans. Once you set up automatic payments, you will be able to specify how much you want to go towards each group of loans. For me, each loan is called a token. The tokens are group together. Such as Grad Plus, Direct Subsidized, etc. I can specify the amount of money to go towards each group of loans.
Hope that helps!
Great info thank you for sharing! I wonder if it’s worth changing loan servicers because I heard from others Great Lakes is the best for whatever reason.
I called my borrower, Great Lakes, and asked about overpayments. They said if you overpay you can choose to attack the highest loan first. Of course, for that loan you first pay toward the interest and then any money left toward the principle of that loan.
Since I consolidated my loan to end the grace period early, it is all directed toward my one loan if I overpay. Again, first toward the interest and then any left over money would be directed at the principal amount. My current payment under repaye is $0.
What I was wondering was what if you saved up all the money you would be putting toward the loan each month into a high yield savings account and then at the end of the year (or whenever you had enough saved) made a large payment toward that loan. In this scenario, hypothetically, you would be taking advantage of the subsidy in all the other months but not in the one month where you make the large payment. So, if I had saved $10,000 and then made a payment in December, I would take advantage of January- November in the subsidy and then lose it for December. Has anyone tried/done this?
Hi Parisah, I had the same question. Did you end up trying it? Did a large payment yearly end up reducing your principle? Thank you so much.
So we have been maxing out our Roth IRAs and building our emergency fund! We haven’t saved enough of a big lump sum to test this out. I put $2,500 at the end of last year toward my loan just for the student interest subsidy, but other than that I haven’t been aggressive in paying down my student loan debt. Right now the interest rate is zero so you can overpay with no loss in the subsidy! But after interest on loans comes back, if you wanted to bring down the principle on a consolidated loan you would have to pay all the interest first and then anything remaining would take down the principle. For us, we are thinking of either making a lump sum at the end of next year or at the end of residency. We calculated it and even if we were aggressive and paid $7k down or some such amount on my loan this year it wouldn’t save that much overall compared to when we can aggressively pay it as attendings. One of our friends didn’t consolidate their loans and has been aggressively paying down their highest interest loan and brought it down a substantial amount. Everyone is different! Hope that helps 🙂
You’re right that doctor finances are far more about hitting the ground prepared as an attending than anything you do as a resident other than insurance and not screwing up PSLF if you’re going for that.
Have anyone with Great Lake done the ungrouping loans ?
So I recently entered repayment period with REPAYE on 11/25. I have FedLoans as my servicer. My current monthly payment is $0 so I should be looking to get the full 50% subsidy. Looking at my account, for simplicity I’ll just say for one of my loans, it says I have accrued $8 which is the daily rate for my 6% loan as of 11/26. My question is when do I see the subsidy? Does it accrue for 5 days (11/26-11/30) so it’ll say $40 has accrued and then on 12/1 it’ll magically say $20 has accrued? Again specifically looking for FedLoan servicer.
I’m planning on targeting my payments to specific loans (did not consolidate into one lump). So I am hoping as stated above I will get the subsidy on the loans I’m not actively paying down. Meanwhile, actively overpaying one loan to get down that principle.
Thanks!
Answering my own question: for Fedloans indeed the subsidy is applied the first of the month.
Anybody know about nelnet? Does the subsidy get posted?
Did you find out about this AAA? I also have nelnet and haven’t seen other comments about it. M4 here.
I have a pay as you earn loan for 69,000. My accrued interest is about 6,600. My question is… do I want to pay down that interest so I don’t get slammed at the end with taxes?
Slammed with taxes? What are you talking about? Why would you get taxes at the end? You mean interest?
https://www.whitecoatinvestor.com/quit-worrying-about-capitalizing-interest/
I wonder if Angie is referring to the taxable loan forgiveness at the end of 20-25 years of payments under PAYE/REPAYE?
If so, paying the interest is a bad idea since it would only reduce the tax bill by a percentage of what was paid to lower taxes.
Taxable forgiveness is unfortunately widely panned as a viable option by the “official” financial aid people at med/dental schools and AAMC.
You may be right. If so, then any extra payments are a bad idea.
I agree with the “official” financial aid people. Not a big fan of IDR forgiveness for the following reasons:
https://www.whitecoatinvestor.com/i-hate-income-driven-repayment-forgiveness/
But for someone in a desperate situation, it may be their best option.
I think you meant “disagree.” But yeah pretty clear divide between common advice and good advice.
No. I agree with your statement as made. Did you not say what you meant? I think IDR forgiveness is a poor option for all but those with terrible DTI ratios and no possible way to get a PSLF qualifying job.
yes, interest. but wont that be considered income and then get taxed on it???
Interest you pay is not income to you, no. Interest the government waives is not interest to you, no.
Hi,
I was reading the comments. So I decided to go with the REPAYE. I want to make extra payments, loan is by MOHELA & not consolidated. Plan was to make the payment to the highest interest first? Should I do this monthly on top of the regular payments or anyother way to approach to keep the subsidy?
Thank you
They’re all 0% through the end of September.