By Dr. Jim Dahle, WCI Founder
The most complicated time period for physician student loan management is during residency. While there can still be some complicated issues as an attending, it generally boils down to a simple “Go for PSLF vs refinance and pay off quickly” decision that is primarily based on whether or not you are working full-time for a 501(c)(3). However, in residency there are all kinds of student-loan related decisions to make like:
- Should you refinance or not?
- Which IDR should you enroll in?
- How should you file your taxes?
- What retirement accounts should you contribute to?
If you struggle with any of these decisions, we recommend you contact Andrew Paulson at StudentLoanAdvice.com for a one-time, flat-fee student loan consultation. Spending an hour and a few hundred bucks now could mean tens of thousands of dollars in savings over the course of your loans.
Today we're going to talk about the first of those questions, and specifically whether an intern or junior resident should enroll in REPAYE and take advantage of its subsidy, or whether that intern should refinance the loans.
Private Loans
If you have private loans, the decision is easy for them. You can't enroll those into an IDR, and they won't be eligible for forgiveness. So you can safely refinance them any time you can get a lower rate. If you go through the WCI Links on this page and elsewhere on the site, you will get all of these benefits:
- A lower interest rate
- Fewer loans to keep track of
- Better customer service
- Easier to understand terms (government programs can be complicated)
- $300-1500 Cash back (if you refinance through the WCI Student Loan Refinancing Links)
- Free enrollment in our Fire Your Financial Advisor online course (a $799 value) if you refinance $100K+ through our links
So refinance those private loans early and often. The lower your rate and the more cash you get, the faster you can get them paid off.
Federal Loans
Naturally, the decision to enroll in REPAYE versus refinance is more complicated when it comes to federal loans. Before we get into any calculations, we should first point out the obvious. Also, note that we're talking about REPAYE today because that is the usual default for graduating medical students these days due to the interest rate subsidy provided by REPAYE. There are some situations (primarily IDR forgiveness) where enrolling in PAYE can be the right move. If you think this might apply to you, we REALLY suggest that consultation with StudentLoanAdvice.com.
Going for PSLF?
If you are planning to be a full-time employee of a 501(c)(3) or a governmental employer, then you DEFINITELY DO NOT want to refinance your federal student loans. If you do so, those loans are no longer eligible for Public Service Loan Forgiveness (PSLF). Even if you're just not sure if you might go for PSLF, you should not refinance until you are positive you will not qualify for that benefit.
Going for IDR Forgiveness?
Some doctors, usually those with high debt to income ratios (usually > 2.5X but perhaps with a ratio as low as 1.5X), choose to go for Income-Driven Repayment (IDR) forgiveness through a program such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), or Revised Pay As You Earn (REPAYE). Now IDR forgiveness is much less attractive than PSLF, not only because, unlike PSLF, IDR forgiveness comes with a tax bomb (the amount forgiven is taxable as ordinary income in the year of forgiveness), but also because you have to make payments for 20 (PAYE) to 25 (IBR, REPAYE) years!
However, if you are one of those considering this strategy, you definitely don't want to refinance those federal student loans. You might want to be in PAYE instead of REPAYE too. Again, seek advice if you're not sure how to run the numbers yourself.
REPAYE vs. Refinance
Now, there are still a whole bunch of you out there who have federal loans and are not planning to have them forgiven. You know you will be paying them off yourself, so the only real question left is what you do with them during residency. The usual choices for you are REPAYE or refinance. There are two considerations. The first is effective interest rate and the second is cash flow.
#1 Interest Rate
It is important to understand how the REPAYE subsidy works. It forgives/waives half of the unpaid interest each month. So long as your payment is less than the accumulating interest, there is some interest rate subsidy going on. Let me give you four examples to demonstrate how to calculate your effective interest rate. In each of these examples, we'll assume you have a $200,000, 6% student loan. That's a conveniently chosen number because it generates precisely a nice, round $1,000 a month in interest. Let's also assume you have applied to each of the four lenders in the chart below who refinances student loans for residents without an attending contract in hand and the best interest rate you could find was 4.5%. The question to answer is whether you get a lower effective interest rate by remaining in REPAYE or refinancing to 4.5%.
Payments of $0
Imagine you're a brand new intern who filed taxes in the Spring of your intern year showing an income of $0 for the prior year. Your REPAYE payments are $0. So there is $1,000 of interest on the loan. 1/2 of that, $500, is waived because you are in REPAYE and the other $500 is added to the loan. Thus, your effective interest rate is 6% × $500/1000 = 3%. Since 3% < 4.5%, you should not refinance yet.
Payments of $200
Now, let's say your income is a little higher and you now have REPAYE payments of $200. $1,000 in interest – $200 = $800 in interest. REPAYE waives 1/2 of that interest, or $400, and $400 is added to the loan. In this case, your effective interest rate is 6% × $600/$1,000 = 3.6%. Since 3.6% < 4.5%, you should not refinance yet.
Payments of $800
Maybe your spouse is working too and your REPAYE payments are $800. $1,000 in interest – $800 = $200 in unpaid interest. REPAYE waives 1/2 of that interest, or $100, and $100 is added to the loan. In this case, your effective interest rate is 6% × $900/$1,000 = 5.4%. Since 5.4% > 4.5%, you should refinance.
Payments of $1,500
Let's say you're married to an attending and now your REPAYE payments are $1,500. ALL of your interest and some principal is covered by that payment, so there is no unpaid interest for REPAYE to waive. Your effective interest rate is simply 6%, and since 6% > 4.5%, you should refinance.
What about the student loan interest deduction?
One other consideration is that student loan interest deduction. For tax year 2020, if your Modified Adjusted Gross Income (MAGI) is less than $70,000 ($140,000 Married Filing Jointly) you can deduct up to $2,500 of student loan interest paid during the year from your income. That benefit phases out up to an income of $85,000 ($170,000 MFJ) above which there is no deduction. If you, like most residents, qualify for that deduction, you also need to adjust your effective tax rate for that. Luckily, this is a pretty minor effect. Consider the third example above where the doc has $12,000 in interest but only pays $400 × 12 = $4,800 of that interest. The doc can take the full $2,500 deduction for it. They're probably in the 22% bracket for federal and maybe 5% state, so $2,500 × 27% = a savings of $675. If you split that up by 12 months, it's $56 a month. So in reality, the effective tax rate is not truly 5.4%, it's 6% × $844/$1,000 = 5.1%. 4.5% is still better, of course.
However, don't forget that the refinanced loan is also eligible for that deduction; it isn't limited to federal student loans. If the doc refinances and pays $100 a month toward the loan, that would all go to interest, providing a $1,200 deduction worth $324. So the effective rate there isn't just 4.5%, it's really (4.5% × 200,000 – $324)/$200,000 = 4.3%. Still, 4.34% is better than 5.1%, so refinancing is still in order.
Note that the borrower COULD pay more of that interest if he or she wanted. By paying extra on the loan, the effective interest rate could be reduced from (4.5% to 4.5% × $200,000 – $675)/$200,000 = 4.16%
This effect is generally relatively minor compared to the effect of the REPAYE subsidy on the effective interest rate.
#2 Cash Flow
The second consideration in the REPAYE vs Refinance conundrum is cash flow. Most residents NEED to be enrolled in an IDR program simply because they cannot afford to make full payments on their student loans. They can afford $100 or even $400 a month, but they can't afford the full 10-year payment on a $200,000, 6% loan ($2,264 a month). So they would not refinance to get a lower interest rate just due to cash flow issues.
However, the student loan refinancing companies have (finally, after many years of me urging them to do it) recognized this reality and structured their loans such that the resident can make payments of just $100 a month! For many residents, their required payments are actually LOWER after refinancing than when they are in an IDR. Whether lower or not, a resident certainly cannot complain about a $100 a month payment. In fact, there may even be some residents out there who would refinance into a private loan with a slightly higher effective interest rate than what they would have in REPAYE just to improve their cash flow.
Refinancing During Residency
If you think this situation applies to you, I would encourage you to take the first step in making the comparison. Apply with the four companies below that will refinance resident student loans and see how low of an interest rate you can get. Then compare it to your effective tax rate under REPAYE. If you are not going for forgiveness, you can get a lower effective interest, and you can improve your cash flow, what are you waiting for? Refinance today!
† Bonus includes cash rebates and value of free course. Borrowers who refinance more than $60,000 in student loans using the WCI links will be enrolled in The White Coat Investor’s flagship course, Fire Your Financial Advisor: ATTENDING for free ($799 value). Borrowers will still receive the amazing cash rebates that WCI has negotiated with each lender. Offer valid for loan applications submitted from May 1, 2021 through April 30, 2026. Free course must be claimed within 90 days of loan disbursement. To claim free course enrollment, visit https://www.whitecoatinvestor.com/RefiBonus.
Student Loan Refinancing Disclosures
What do you think? Are you a resident planning to pay off your loans yourself? Are you in REPAYE or did you refinance and why? Comment below!
Hello. I’m PGY-3 with one more year to graduate residency and 250K in student loans. I have been on IBR, but recently my payment jumped to $600 a month due to my wife’s pay raise last year. I am not quite sure I will be going for PSLF, so I was thinking to start deferring payments until next year. Do you recommend switching to REPAYE instead? would this facilitate a lower monthly payment?
Have you considered filing your taxes with Married Filing Separately status? Worth looking into. You can’t do that with REPAYE. I’m not sure what your goal is. If your goal is minimum payments, then forebearance or refinancing is your best option.If your goal is to minimize interest paid, REPAYE may be the best option. If your goal is to maximize your forgiveness, then you want to make as many small payments now as possible and certainly don’t want to defer any payments. Remember that when you switch from IBR to REPAYE some interest capitalizes.
If Repaye monthly payments are $200 and Interest accrued each month is $1000, my understanding they would subsidize $400 of the unpaid interest? Assuming you can make larger payments ($1000 or more), how would you play the game they have created to start chipping away at the principal? Do I wait until the end of the year and make a lump sum payment to cover the $4800 of unpaid interest and the remainder would hit the principal or can I make the payments monthly? Basically, wondering if i send them $1000/month will they apply the entire thing to the interest even though the minimum payment is only $200? These are my wifes loans and it is unlikely she will do PSLF. Also used round numbers to try and understand how this works. Thanks!
My understanding is you’ll still get the subsidy if you send them a $1000 payment. So $600 to interest and $400 to Principal. But it might go toward last month’s unpaid, unsubsidized interest until you’re caught up. But leave it to the government to screw it up.
I would hope that it worked that way, but have spoken to loan counselors at nelnet and great lakes and have received different answers regarding how this situation will actually be handled each time I call. No one at either of these companies appears to know how the government (loan companies) handles this situation.
I called Nelnet a couple times to try to figure this out. The message I received was that if you pay over your payment required by RePAYE (as in the above example $1000 instead of the required $200 monthly payment) that extra interest paid is no longer subsidized (in above example all $1000 would go to accrued interest rather than any going to principal or previous unsubsidized interest.) Additionally, I was told that if you pay too much each month past your required payment, you would no longer be eligible for RePAYE. I’m not sure if the people I spoke with were incorrect, but this is the information I received.
That’s screwy. Typical government program. I’m also not sure that’s correct. If it is, I think that’s really too bad.
Hi,
I am in need of some advice, please.
I am graduating general surgery residency next month with just over $200,000 in loans (at 6.8% interest and IBR @$450/mo right now). I just got approved for a refi with SoFi making my monthly payments ~$2050 with a 3.35% interest rate. My salary is going to stay about the same through my 1 yr fellowship (tho my cost of living will decrease by ~500-800/month) and then I anticipate an attending position salary of ~300-350,000 starting Aug 2017.
I was holding out for PSLF, but I no longer think thats something worth waiting for as I’ll probably end up working for a private practice once I finish fellowship.
Is this the best option for me? Should I apply to any other lenders for a better rate? If so, who?
Is the 3.35% rate fixed or variable? What is the repayment term? If it is fixed it looks like a great deal to me.
It’s a variable rate, 10yr repayment
3.35%, fixed or variable, looks pretty good to me for a fellow. I hope you can afford the payments and that SoFi realized you weren’t moving on to attendinghood. That looks like an attending rate to me. I wouldn’t expect a dramatically better rate and there are probably a number of lenders who won’t lend to you as you are still considered to be in training.
It’s a variable rate and I believe 10 yr repayment
That is a good rate for 10 yrs. IMO rates can only go up during this timeline so be ready for that. I am doing a fixed rate 10-year plan with Earnest at 4.16%
I imagine rates will go up somewhat – from what I understand we are at a pretty low point right now. I think anything beats 6.7% with the gov and continuing to capitalize onto my principal every yr with no end in sight!
I think I’m willing to see where they go – from what I understand we’re at a pretty low point in terms of interest rates right now (lucky for us). Either way, nothing can be as bad as 6.7 to the gov with no end in sight!
Hi WCI,
I am going to be a resident this coming July. I just got a quote back from DRB for 5.77%-Variable and 7%-Fixed. I have $150K @ 5.5% and $55K @ 6.8%. I don’t think it’s worth it for me to refinance with the rate given by DRB. I am not going the PFLS route and my wife makes around 65K and my resident salary will be around 54K. Is REPAYE even worth it for us? I am not sure how the interest subsidy would apply to us because our 10% would probably be the same as the monthly interest incurred. We plan to pay aggressively (could probably afford $1000 -$2000 a month). What’s our best option here> It seems like with our scenario, all the options(IBR, PAYE, REPAYE, refinance) looks the same given the interest are almost identical.
I agree that refinancing doesn’t make any sense. I’d calculate your REPAYE payment and thus subsidy and see if that makes sense. I bet it does.
Hi Doc2016,
I am in a similar situation with my significant other having 217k @5.9%, me no loans, but both of us at a resident salary ~ 54k. We can afford to pay aggressively (~1000-2000) a month as well. Was wondering what you ended up going with?
Can anyone shed light on how the REPAYE interest subsidization actually works? Thank you!
I just ended another phone call with FedLoan. This was one of several phone calls in the past few months for multiple issues I will not go into. Every time I call, I receive conflicting responses to my questions. Before I started reading the WCI blog, I assumed that I was receiving accurate information from Fedloan representatives. When I first inquired about REPAYE, the Fedloan rep convinced me to switch from PAYE by explaining that 75% of my accrued interest “before payment” would be forgiven on all of my loans for three years, and then 50% after that. Today, a different representative told me that 100% of the accrued interest of my graduate subsidized loans remaining “after payment” would be forgiven for the first three years, and 50% after that. The new interest subsidization does not include unsubsidized loans, which make up 85% of my $200K debt. Even though the information was confirmed by the rep’s supervisor, I am not confident it is correct.
If you are talking about REPAYE, i think they are correct about the subsidized loans, but for unsubsidized, the website says 50% of unpaid accrued interest would be forgiven.
Thank you! I was able to confirm this by a financial services website… Edfinancial
I am applying for REPAYE now and it asked for my wife to create a FSA ID to co-sign the REPAYE. Does this mean my wife’s name will be on the loan? Or this is just because both income must be considered under REPAYE, thus, she would have to Co-sign, but won’t be responsible for the debt?
Good question. I don’t know the answer. Why not ask them and post the answer here?
But applying for REPAYE is not refinancing your loans, so I don’t know why it would add a co-signer. That wouldn’t make sense.
Yes, they replied saying your spouse is not co signing your loan, but they need that to confirm her income. They should probably not use the word co sign.
I’m still a little confused on why not to do REPAYE if you are doing PLSF. I just started residency, my spouse stays at home with our 2 kids. We have over $300,000 in debt all in qualifying unsubsidized loans. I’m going into anesthesiology with a fellowship most likely. So 5 years residency/5 years physician salary. Spouse doesn’t work. Why not do REPAYE to qualify for the interest benefits? I’m still in my grace period. I’d love some help!
Who’s telling you not to do REPAYE? You sound like a great candidate for REPAYE, at least during your training.
Hi WCI,
I am an MS4 entering Anesthesia residency in July 2017. I currently have ~$160K principal on loans ($8K is direct subsidized from undergrad at 3.4% interest, the rest is at 5.4-6.2% interest direct unsubsidized) and just married to a nurse with no student loan debt. I am weighing my options between PAYE/RePAYE/consolidation and have a very limited understanding of loan repayment. Do you have any recommendations for payment options? My wife will be quitting her job a month before we move for residency (wondering if I can take advantage of the fact that she won’t have any income when I go to apply for PAYE/RePAYE at least for that year), and I was debating PAYE for the ability to file individually to keep monthly payments down vs RePAYE to take advantage of the interest subsidy. Any advice would be greatly appreciated.
Due to your working spouse your situation is complicated. It would be worth paying some money to have someone help you run the numbers between RePAYE and PAYE with MFS if you’re going for PSLF. Unless your wife isn’t going back to work. Then RePAYE will obviously be best. Here’s my list:
https://www.whitecoatinvestor.com/student-loan-advice/
Thanks a lot for the advice and quick response! I’ll be sure to get in touch with an advisor.
My girlfriend and I will be starting residency this July (5 years for me and 4 for her), and were looking at refinancing vs. REPAYE for our loans. At graduation, I’ll have about $275k in debt and she will have about $220k. Looking at this initially, I thought the REPAYE would be a fantastic idea for us, but we are planning on getting married within the next couple of years and the whole filing jointly now makes this option much less attractive.
My main question is how is the monthly rate calculated for married couples under REPAYE where both people have significant debt? I had read somewhere that the rate is “prorated” but it did no give any specific numbers. Has anyone been in a circumstance like this before and what did you do/recommend?
REPAYE at least for the next six months is likely better than refinancing, but you’re in the situation where it pays to get advice.
https://www.whitecoatinvestor.com/student-loan-advice/