[Editor’s Note: Today’s guest post was submitted by Dr. Thomas Bomberger, a PGY2 Diagnostic Radiologist at Case Western Reserve University School of Medicine. As a 4th-year medical student, Dr. Bomberger took a deep dive into the question of REPAYE vs PAYE/MFS for residents married to a working, debt-free spouse. We have no financial relationship.]
For the majority of graduating medical students, the decision of which student loan repayment plan to enter will be simple: REPAYE. It’s the most generous because:
- it offers the 50% unpaid interest subsidy
- qualifies for PSLF
- and almost all loans are eligible.
However, the IDR payment calculation for REPAYE will include spousal income, which can cause higher payments for residents married to a working spouse without educational debt.
- you are making smaller payments, and
- you’re missing out on the REPAYE interest subsidy.
The end goal with the PAYE/MFS strategy is to minimize payments and get the loans forgiven eventually.
Below is an outline of my approach to the PAYE/MFS vs. REPAYE decision for residents with a working spouse, as well as my general thoughts on where the different inflection points may be. I’ve broken down my algorithm by the different variables you’ll need to consider.
For the purpose of simplifying things, we’ll assume all residents have an interest rate of 6% and resident AGI of $55k for all PGY years, however, in reality, most people will have much lower AGIs the first couple years and slightly higher ones in the later years.
Recommended Reading:
The Ultimate Guide to Student Loan Debt Management
I Switched to REPAYE and I Liked It
3 Variables to Consider
#1 Your Loan Balance
The first variable is the size of your loans at graduation/consolidation. The higher your loan balance, the more you benefit from the REPAYE unpaid interest subsidy (for now, we won’t consider PSLF). To quantify how valuable this is, let’s pretend you’re a single resident choosing between PAYE and REPAYE (a scenario in which you should generally choose REPAYE). The more debt you have, the more interest you aren’t paying, and the larger the subsidy.
For example, our ideal resident making $55k would have payments $300/mo. or $3600/year. If you have $200k in loans, then your loans are accruing $12k in interest each year. You’re paying $3600 into the loans, and the government covers 50% of the unpaid interest, which means your interest benefit is $4,200. If you have $400k in loans, they’re accruing $24k per year, and you qualify for the same payment, giving you an interest subsidy benefit of $10,200 per year for every year you’re in training. Keep in mind that you’ll have a bigger subsidy benefit the first couple years of training before you file taxes with your prior year salary in the spring of your PGY2 year, so the benefit is greater in those first 2 years.
*assuming 6% interest and ~$55k AGI
I hope I’ve convinced any single resident to choose REPAYE over PAYE by now! However, the take-home point for married residents with working spouses is that the higher your loan balance, the more valuable the REPAYE interest rate subsidy is, and the more strongly you should consider it.
#2 Length of Training
The second variable is the length of your training. The longer you’re in training, the more valuable the REPAYE interest subsidy. Here is the difference in interest accrual for PAYE vs. REPAYE with our ideal single resident.
*assuming interest rate 6% and AGI $55k
As you can see, if you have $400k in loans, you will accrue $30k of additional interest in PAYE vs. REPAYE by the end of PGY3, and $61k by the end of PGY6 based on the interest subsidy alone. If you have a particularly high loan burden and a long training period, you could end up accruing over $100k of additional interest just by missing out on the REPAYE subsidy. If you end up not being a candidate for PSLF, that $100k will have to be paid back, but will also be subject to capitalization when you refinance, and you’ll have to pay interest on your interest for the life of the loan.
Likewise, if you have a low student loan burden (congrats) and a short training period, the REPAYE benefit is not quite as profound (although the above tables likely understate it since your payments will be significantly less than $300 if you don’t have earnings). It is hard to make a big mistake with a low loan balance and short training period, so it may be reasonable to pursue PAYE/MFS without risk of it costing you a lot of money at the end of training. Just keep in mind that the larger the loan and the longer you’re in training, the more interest accrues.
#3 Spousal AGI
The first step is to calculate out the IDR payments for PAYE/MFS and REPAYE (PAYE/MFS is just your AGI, and REPAYE is your household AGI). Then, look at your monthly budget, and see whether the increased REPAYE payments will be affordable. For example, if you are in a higher COL area and have children, you may have less financial flexibility and the increased REPAYE payments may be more difficult to afford. If you can afford the increased monthly payments, consider REPAYE or PAYE/MFS depending on your spousal income levels, and how much they will affect your monthly IDR total.
If your spouse makes around $10k/year, you should go with REPAYE. Their additional salary will not drastically affect the IDR calculation ($300 for PAYE/MFS vs. $390 for REPAYE), and you get the benefit of the interest subsidy. This amounts to paying a $90 monthly premium for an interest benefit of 50% of all interest accruing above $390. A large benefit for REPAYE, even at lower loan balances.
If your spouse makes around the same order of magnitude of a resident (for example, spousal AGI $50k), then REPAYE or PAYE/MFS could be considered. Generally, REPAYE is preferential if (1) it fits into the budget, and (2) you have a high loan burden. IDR is again $300 for PAYE/MFS, but increases to $725 for REPAYE in this example. Essentially, you’re paying a $425 monthly premium in order to eliminate half of the interest accruing above $725 per month. Whether this premium is worth it will depend on the interest benefit you stand to gain.
If your spouse makes an order of magnitude above you ($150k for example), then it is usually more beneficial to opt for PAYE/MFS. IDR payments for this plan would be $300 for PAYE vs. $1,560 for REPAYE. Now, you’re paying a $1,260 monthly premium for a 50% subsidy on interest over $1,560. This amounts to a higher monthly premium for diminishing gain.
*assumes interest rate of 6% and resident AGI $55k
To take a more extreme example, once your spousal income hits $200k, you have to pay in almost $24,000 yearly for relatively small interest benefit, even at very high loan balances. At this point, with any possibility of PSLF (and maybe even without that possibility), I think you’re better off going with PAYE/MFS and using the money saved on payments to max out your tax-advantaged retirement plans (401(k)/403(b), backdoor Roth, and HSA for example). Of course, that requires that you actually invest the money saved on payments, but with a spouse earning that high of a salary, this isn’t unreasonable.
Dr. Thomas Bomberger
To be perfectly honest, before I wrote this post up I always imagined the inflection point for most residents where PAYE/MFS made sense over REPAYE would be those with very high-earning spouses somewhere in the $150k-$200k range. However, after running the numbers above I think it may be a decent bit less for a lot of borrowers, maybe even as low as the $50k range. Just note that the numbers above are yearly, so multiply the payments and interest benefit by the number of years in training to see the total premium paid and the total interest benefit during training.
If you’re like me, you went through the above iterations and realized you COULD choose either plan. Basically, the increased payments fit into your budget and you stand to benefit a reasonable amount from the additional payments via the REPAYE interest subsidy. The final variable will more directly address the question of which plan most residents SHOULD choose.
Public Service Loan Forgiveness (PSLF)
The reason PSLF is critical to the overall PAYE/MFS vs. REPAYE strategy is that the only way you end up significantly ahead by minimizing payments with PSLF/MFS is if you stick with the strategy all the way through to PSLF.
PSLF is a windfall benefit because it forgives the balance of your loan in a relatively short time (10 years of payments), and the forgiven amount is tax-free. If you have a very high loan balance, for example, $500k of tax-free loan forgiveness is roughly equivalent to a bit less than a $1M bonus. So, if there’s any possibility you end up working at a 501(c)(3), you should keep the PSLF door open, especially when there are very low costs associated with doing so.
With that said, I’m also not sure it makes sense to fully commit to PSLF by minimizing payments you could otherwise afford and foregoing the REPAYE interest subsidy, because (1) there is uncertainty around the program, and (2) there is individual career uncertainty.
First, with respect to the global uncertainty around the PSLF program, politicians of both parties have made efforts to cap forgiveness, and I can’t imagine it was ever really meant for doctors to have hundreds of thousands of dollars in loans forgiven. So, I anticipate that there will be changes to the program in the coming years, especially once the first physicians’ loans start coming up for forgiveness in 2021. With that said, if you’re in a qualifying repayment program right now, you have your signed MPNs, and are making payments, you’ll probably be grandfathered in. Either way, we don’t really have any control over this, so probably not worth losing sleep over. If you’re graduating this year, it may be prudent (and also a generally good financial decision) to enter a qualifying program right after graduation via federal direct consolidation as a hedge against potential changes that may come during your 6-month grace period.
The more relevant risk you should consider is individual career path uncertainty. No resident knows for sure exactly where or how they’re going to be practicing 5 or 10 years from now. Maybe your spouse has a strong preference for a geography with a predominance of private practice jobs. Maybe you get academic offers that are $100k less than private practice offers. Maybe $150k less. Maybe you start a family and want to prioritize the most vacation time. Maybe your research projects never take off and you can’t secure an appealing academic post.
This isn’t to say I don’t want an academic career, but rather it’s an acknowledgment that uncertainty exists, and that where there is uncertainty, we should aim to keep options open. This is especially true regarding PSLF, however, we should also be aware of the interest accrual just in case PSLF isn’t in the cards. For me, REPAY split the difference between these two goals nicely, but as I noted above, it isn’t without associated costs that may not be worth it for everyone.
Whichever route you decide on, you should try to stick with it through residency or at least until you have a life-changing event like having children and/or getting married/divorced/remarried rather than switching back and forth between the two options, although it is technically an option to switch.
Finally, astute readers will note that I only talked about PSLF here and not the inherent 20-year forgiveness in PAYE. If you’re wondering about that 20-year forgiveness option, then sure you could make an argument that some low-earning, part-time physicians with high loan burdens married to a high-earning spouse may gain some advantage from doing PAYE/MFS, stringing out payments as low as they can, investing the difference, sticking with it for 20(!!!!!) years, and then paying the ~50%(!!!!!) tax bomb at the end. However, this is a complex plan based on a lot of moving parts (including governmental support for the program), stringing out loans for longer periods means that you pay more interest to them, and the tax bomb can diminish the benefit significantly. I’ll admit, there is probably an inflection point at which this makes technical financial sense too, but I really don’t see this as a reasonable primary strategy for managing a physicians’ student loans, and especially not in residency.
Recommended Reading
Why You Should Not Give Up on Public Service Loan Forgiveness
Refinance and Payoff or Go For PSLF?
Why I Chose REPAYE
I have a high loan balance and long training period, my spouse works and makes around the same as most residents, we live in a low COL city with no kids, and there is uncertainty about whether I’ll qualify PSLF. So how did I decide on REPAYE?
It honestly wasn’t quite as complicated as what I just went through. Basically, I first calculated whether we would be able to afford the REPAYE IDR in our monthly budget.
After that, I totaled the amount extra I was paying in and the benefit I would get back. I will end up paying about $20k extra into the loans because of the higher IDR payments with REPAYE, but I end up getting about $80k of benefit in the form of non-accrued interest from the subsidy, so about 4:1 ROI, and that’s before capitalization is considered.
If I do end up qualifying for PSLF, I won’t get any benefit from the $20k premium I paid over the course of residency. However, if I end up not qualifying for PSLF, I will have $100k+ less to pay back. I am more comfortable with the risk of losing the $20k for the peace of mind I get by knowing I won’t under any circumstances have to pay that extra $100k+ back, and that’s why I ultimately decided on REPAYE.
Did you choose REPAYE or PAYE/MFS as a married resident? Comment below!
And, if you’re still sitting on loans that can be refinanced, what are you waiting for? Hurry up and get cashback by clicking on the links below.
This is very well written. I would just make 2 points. The first is to keep in mind that it may not be an option to switch to PAYE after residency if your life circumstances change because you may no longer meet the partial financial hardship requirement. So if you are going to switch to PAYE you likely need to do it before the end of residency. PAYE caps payments at the standard 10-year rate and RePAYE does not. So I doubt it would make sense for a radiologist with a high income going for PSLF to be in RePaye as an attending. Without that cap, payments could get so high that it would offset the benefit of PSLF.
My second point is that none of this accounts for the tax difference between MFS and MFJ, which can be substantial. It would be very difficult to run the numbers and account for taxes. But in my mind that’s really the main issue here. Would the loan payment benefit outweigh the tax costs of filing separately vs. Jointly?
Thomas, great article. As someone about to enter residency with a similar social situation, I too find myself trying to figure out the nuances. There’s are so many variables for married couples and this is a great summary.
I tend to favor your reasoning in terms of a loan repayment strategy. I’m going to go with RePAYE during residency in order to maximize the loan subsidy in case I end up not going for PSLF in the future. It seems like a nice hedge.
I believe there may be a small (but consequential) error in some of your math. It looks as though you forgot to account for family size when determining disposable income (AGI – 150% FPL). For example, take Section #3 when talking about spousal AGI. If the spouse’s AGI is 10k, then combined AGI is 10k + 55k = 65k. Disposable income should be 65k – 150% (Family size of 2) = 65,000 – 1.5 (16,910) = 39,635/year. At 10% RePAYE payment, that is 3,964/year or 330/month, rather than the 390/month. I believe this mistake was made for all the calculations in that section. The consequence of this being that the math behind RePAYE is even MORE beneficial!
Agreed about needing to maintain a partial financial hardship to enter PAYE. Although, many people may still qualify during attending hood, especially if academic.
Back of the envelope calculations for someone with 300k in loans. 10 year standard on 300k at 6% is 18k in interest for 10 years = 480k total loan payoff = 4k/month. If I’m doing my math correctly, an attending would have to make ~500k to be higher than the 10 year standard. 500k (AGI) – 20k (150% FPL) = 480k disposable income * 10% = 48k/year.
This of course simplifies everything and doesn’t include contributions to retirement accounts and many other variables, but point being that those with high debts (fortunately/unfortunately) won’t have the problem of a partial financial hardship. It also means that the PAYE cap on payments isn’t particularly beneficial for someone with high debt.
In terms of the tax difference between MFS and MFJ.
1) Losing space in lower tax brackets. If there is a big discrepancy in income, the higher income spouse will pay more in taxes in MFS than when filing MFJ as there is a loss of the lower income spouse’s tax brackets. If in one of the 9 community property states, this point is moot as the total spousal income is divided equally no matter of filing status and the federal tax brackets for MFS are exactly half of MFJ.
2) Tax credits. I don’t think this is as beneficial upon closer inspection. There is the lifetime learning credit, but you would presumable only take that in your first year of residency for your M4 year. However this phases out starting at MFJ AGI 116k. Saver’s credit for contributing to retirement accounts phases out at MFJ AGI 64k. Childcare credit is 600 for 1 kid or 1.2k for more. You can claim child tax credit (2k/kid) even if MFS, it’s just that only one person can claim each kid. Other credits (disable care, adoption, earned income, american opportunity) most likely don’t apply to many people.
3) Tax deductions. Deductions are much less beneficial and also have phase outs below typical attending salaries. Student loan interest deduction is a 2.5k that starts phasing out at 140-170k MFJ AGI. You do lose the ability to deduct contributions made to IRAs when MFS. But you retain capitals gain/loss deduction (1.5k per spouse if MFS).
Overall, I think the tax penalties for MFS are relatively low, especially once you reach attending salary (as you’re phased out). If you’re in a community property state and you’re an attending or combined income during training is >mid 100s, I believe (from what I’ve read so far) there is little to gain from MFJ.
One note about the deductions I mentioned above is that they’re above the line deductions that anyone can take without itemizing. Be aware that itemized deductions (mortgage, business expenses, etc) take a significant hit when MFS as both spouses must filing their deductions the same way (ie, both spouses take the standard deduction or both itemize). So if you’re planning to itemize but your spouse has few itemized deductions to make, you should be comparing the tax implications of itemizing to the standard deduction for two people (12.2k x 2 = 24.4k).
Nice run down.
Did I miss the tax implication part of this discussion though? That’s the real reason this is tricky – figuring out student loans in a vacuum is pretty straight forward vs. including the real life implications.
Nice and helpful explanation. One complicating factor I didn’t see you mention: community property states.
In a community property state (Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico), when MFS each souse claims half the total income. This can make IBR/MFS more appealing than REPAYE/MFJ for those planning on PSLF. With IBR/MFS, monthly payments are basically 15% x (half total income), while on REPAYE/MFJ payments are 10% x (total income).
Why not PAYE/MFS?
PAYE isn’t an option if you have loans dispersed before October 1, 2007.
True. And I feel terrible for anyone who still has loans disbursed 13+ years ago. But I guess there are still a few folks out there with them.
I agree community property states really complicate things. However, it definitely depends on spouse’s AGI.
You’d have to do the numbers, but the lower your spouse’s income and the higher your debt, the more beneficial it would be to file RePAYE during residency as you may still may get a significant interest subsidy. Then if going for PSLF, switch to PAYE.
Thomas, great article. As someone about to enter residency with a similar social situation, I too find myself trying to figure out the nuances. There are so many variables for married couples and this is a great summary.
I tend to favor your reasoning in terms of a loan repayment strategy. I’m going to go with RePAYE during residency in order to get the loan subsidy and interest accrual in case I end up not going for PSLF in the future. It seems like a nice hedge (insert radiologist joke).
I believe there may be a small (but consequential) error in some of your math. It looks as though you forgot to account for family size when determining disposable income (AGI – 150% FPL). For example, take Section #3 when talking about spousal AGI. If the spouse’s AGI is 10k, then combined AGI is 10k + 55k = 65k. Disposable income should be 65k – 150% (Family size of 2) = 65,000 – 1.5 (16,910) = 39,635/year. At 10% RePAYE payment, that is 3,964/year or 330/month, rather than the 390/month. I believe this mistake was made for all the RePAYE/MFJ calculations in that section. The consequence of this being that the math behind RePAYE is even MORE beneficial!
One mistake I made (particularly for rising M4s about to apply for residency): I applied for an advanced program and I’m pretty sure they all qualify as 501c3. However, I didn’t bother to check with my prelim/TY programs. If you applied to cush programs, a lot of them are private community hospitals that are not academic institutions (even if they have residents) and thus NOT 501c3. So my intern year, when my IDR payments will be lowest, will not qualify for PSLF. If I go for PSLF, this will cost 1 year of attending salary based loan repayment, which will likely be tens of thousands of dollars. There are other considerations (family, spouse’s job, location, advanced program, training) besides PSLF when choosing a prelim/TY year, but just some food for thought if you’re having trouble narrowing down your rank list.
Thanks so much for the comments above, I agree with a lot of what was said, and hope you all find this helpful. And I do agree, going with REPAYE is essentially a hedge against PSLF uncertainty.
Just to directly address a couple notable comments:
(1) Great point about the possibility of losing PAYE eligibility when you become an attending. If you’re in a situation where you were in REPAYE but want to switch to PAYE/MFS as an attending, you may need to do it before you leave residency. This article is more focused on during residency, but the point is well taken that you should keep an eye on what to do as an attending as well.
(2) It’s true that for REPAYE there is much ado about not having a cap on the payments as an attending. I actually had a section on the REPAYE payments as an attending that I deleted for length purposes, but long story short is I didn’t find much of a benefit to the PAYE cap with higher loan balances, even as an attending in higher paying specialties. At lower loan balances that you’re trying to get forgiven, there may be a benefit. But also keep in mind you’d have to be at a 501c3 for the overall PAYE/MFS plan to make sense as an attending (i.e., going for PSLF), and your spouse’s level of income comes into play as well.
(3) I also omitted any discussion of tax implications for MFS, for similar reasons as the commenters above noted, although I agree I probably should have at least mentioned it. Definitely do the calculations out yourselves for your personal situation, but after PGY1 (when you can claim savers and lifetime earners credits), I didn’t find a very large benefit to MFJ. Even at spousal incomes of $150k-$200k you’re talking about a couple thousand dollars in taxes saved (again, back-of-napkin calculations). Now, at those income levels doing PAYE/MFS if you could save $20k in yearly loan payments that you put it into tax-advantaged accounts, you just saved about ~$5,000 in taxes right there. So, yea maybe there is some advantage (I know MFJ makes my taxes easy to file), but it is a tradeoff.
(4) I actually didn’t think to mention community property states and I don’t have a great understanding of them, so I’m probably not the best person to write an article about those implications.
(5) I used the student loan calculators (I think from studentloanhero, but not 100% sure), and I have found that there can be some small discrepancies between actual payments and the calculated ones, so as with anything online you should take precise numbers as more of a ballpark figure.
We’ve seem to have found a great sweet spot in this but everyone should run the numbers that make sense for them. I initially started with an excel spreadsheet template I found in NYT or Washington Post I believe which compared MFJ/MFS and the varying IBR programs, though they did not take the subsidized interest rate into account.
My spouse is a resident with significant student loan burden and has lifelong pursuit for academic peds (including 3 yr fellowship) so PSLF made the most sense. In contrast I am an active duty physician without loans so probably $20k-$50k short of attending salary of the lower income specialties. For her, we did PAYE/MFS while also maxing her pre-tax contributions (both a 403b and 457b at her hospital) down to 150% of FPL which made her payments $0. We own a home and have some charitable contributions and preferentially itemizing towards myself has lowered the MFS tax penalty. It takes about 3-4 hrs of effort every year but I compare MFJ vs MFS for our tax bill and next years loan payment obligation. Thus far in the past 3 years it has been a substantial benefit in favor of filing separately (at least $10k-$13k in net loan payment/tax burden savings) and an early start for her retirement savings. We all know its not ideal to have a huge balance in pre-tax 401k but that’s the ideal first world problem. I don’t imagine our tax bill with a Roth conversion will come close to the forgiven loan balance. Just my two cents.
Great post!
I have a question regarding how the Standard Deduction for Married Filing Separately works. Is it 12400 per person or 12400 total? And if 12400 total, can it be split between the two or can only one person take it?
Per person.