[Editor's Note: This is a guest post from blog advertiser and student loan expert Jan Miller, President of Student Loan Consultant. He offers fee-only advice about your student loans. I was happy to see this post as it was a subject I have been wanting to post about for quite a while and he did such a nice job, it'll save me a lot of work. It did, however, motivate me to get around to writing about something I've been meaning to write about the last few months. My post on a related subject will run later this week.]
The newest income driven plan, REPAYE, is here and it’s officially ready to join the ranks of the Pay As You Earn (PAYE), Income Based (IBR) and Income Contingent (ICR) repayment assistance programs.
Back in June of last year, Obama put through an executive order that would allow all those who qualified for the 15% IBR program to qualify for the lower 10% payment, starting as early as December 15th, 2015. So this change has been on its way for some time now, but the benefits, consequences and caveats were still lingering in the air, remaining a bit of a mystery.
Prior to this date, all borrowers who took out loans before October 1st, 2007, or had not taken out new debt after October 1st, 2011, did not qualify for the PAYE program (and its payment, which is based off of 10% of your discretionary income). This applies to most physicians in residency and beyond, since they have been in school longer than the program has existed, and before the important 2007 date.
Jan Miller, Student Loan Expert
Ideally, they would have simplified this whole issue and just extended the PAYE program to all borrowers who meet the income requirements. But they decided to add on this new program, which is a hybrid of IBR and PAYE – with a couple of its own unique twists and turns.
In my opinion, I suspect they did this so that they could implement the new regulations they have been itching to put in place to close certain loopholes (see The Doctor’s/Physician’s Loophole). In doing so, they have added a bunch of new variables to the equation. Let’s explore them.
The Apple Didn't Fall Far From The PAYE
At first glance, there are a lot of similarities between IBR, PAYE and REPAYE (let’s leave ICR out of this, as it is rarely relevant to anyone but Parent Plus Loan borrowers who, unfortunately, miss out on the deal and don’t get to switch to the REPAYE program).
All of these programs use a similar formula to determine the qualifying payment, with the only major difference being the 15% instead of the 10% between IBR and the other two. They all result in loan forgiveness after 20 or 25 years (if there’s anything left to forgive), income verification works the same way and, most importantly, all payments count towards the Public Service Loan Forgiveness program (while you are working for a qualifying employer).
Bad Apples
However, it’s the differences that stick out more than anything. There are several, but two of them are potentially the biggest deal-breakers when physicians consider the program.
The first is the removal of the payment cap. Basically, under REPAYE, your payment will continue to increase with your income, without limit. This is different from IBR, which caps payments out at the standard 10 year repayment term.
This is the payment amount that would, at the beginning of your repayment, pay off your loans within 10 years, based on the loan’s balance and interest, much like a typical bank loan. Then, once your IBR payment increased to the point that it matched this 10-year standard payment (also called “the hardship threshold”), then your interest would continue to capitalize, but your payment would not go up beyond this point, no matter how much money you made.
This rule actually created a nice “loophole” for physicians, who typically make a modest income during residency but then receive a dramatic income jump once they start their permanent positions. As a result of this type of income growth, a physician’s payment is relatively small against very large student loan balances during residency. At this point, the lower payment matches up nicely with the lower income. However, due to IBR’s income cap feature, the payment would never exceed the 10-year standard no matter how much money the borrower made.
For example, if a resident made $50,000 a year, owed $200,000 in federal student loan debt, and filed Single, the IBR payment would be a manageable $400 or so. However, once that individual’s income increased to $257,000/year, then their payment would not go past $2300 (depending on the interest rates) even though the same IBR calculation that yielded a $400 payment would now create a $3000/month payment).
So, in this example, the cap saves the borrower an extra $700/month in payments. And as the borrower’s income increased, the payment would stay at the cap, thus resulting in greater and greater savings until the loan was forgiven. This payment cap built into IBR is going to be responsible for tens of thousands of dollars in lifetime loan payments and forgiveness benefits for physicians in a majority of cases (especially those who qualify for the 10-year Public Service Loan Forgiveness program).
Legislators must have noticed this, which is one big reason the IBR payment cap feature is not included in the new REPAYE program. As a result, many physicians are leery to make the switch as a lower payment now might cost them in the long run.
However, the removal of this cap shouldn’t scare you away so quickly! Though you could potentially miss out on savings and forgiveness with the cap, the chances are less likely since the 10% formula makes such a huge dent in your monthly payment.
Looking at the same example above, the IBR payment runs into the cap at about $2300/month, which is equivalent to the physician’s income of $200,000 per year. So, anything above that income would push the payment beyond the 10-year standard if IBR did not have the cap feature. However, with the REPAYE program, you don’t miss that cap so much since it takes such a significantly higher income to reach the cap due to the reduction of your payment by about 1/3rd. So in the above example, under the REPAYE program, you won’t reach the cap till you make almost $300,000. As a result, by the time you reach the cap, you may be near the end of your 10-year forgiveness program anyway. You probably won’t care if your payment doesn’t pass the cap until your 8 years into repayment when your payment has been 33% less up until that point.
Every situation is different, and in my experience, many physicians don’t have the above cookie-cutter scenario. It changes everything when you throw a wider range of incomes and debt in the mix. Or even worse, private loans!
[Editor's Note: In case you didn't get that, if you're going for PSLF, and currently in PAYE, you don't want to switch to REPAYE because you'll end up with less forgiveness due to making bigger payments as an attending. If you are going for PSLF and currently in IBR there is a decent chance you do not want to switch to REPAYE, but you have to run the numbers or hire someone like Jan to do it for you.]
The Bitterest REPAYE Fruit
So, what could be worse than private loans? Your spouse! At least when it comes to the REPAYE program’s potential deal-breakers. Gone are the days when you could file your taxes married separately and exclude the spouse’s income when you entered the REPAYE zone. There’s no way out of it: you must include the income of both spouses regardless of your filing status.
This feature of the REPAYE program alone can cancel out any of its benefits. As with anything, of course, it depends on how all of the variables play out. If both spouses make equal pay, then the REPAYE is not a good option… unless both spouses have a similar total of federal student loans. Having a spouse with similar federal student loan debt cancels out the drawbacks of the REPAYE program’s spousal rules. These are just some of the potential scenarios that are possible.
So, What's the REPAYE Verdict?
Well, just like before, when you had a myriad of choices to consider as a doctor in student loan repayment (such as IBR, PSLF, scrapping IBR and paying extra and/or refinancing some or the whole lot), now you have even more math to do. And I didn’t even mention the other features of the program, such as the new 50% unpaid interest subsidy [the subject of my upcoming post-ed], or the variance that graduate loans add to the REPAYE term [if you have graduate loans you don't get any loans forgiven until 25 years, but if you only have undergraduate loans, you get forgiveness at 20.-ed] This can also only increase the chances that your loan servicer will make a mistake somewhere, and the customer service representatives will give you a different answer every time you call.
The Silver Lining
If you read between the lines, the REPAYE program is actually very good news for physicians and the like who are concerned that the PSLF program is not going to be around to forgive any of the debt they were promised. Right here, with the REPAYE program, you can see the standard grandfathering that the U.S. Department of Education always does at work. This is why they couldn’t just extend the PAYE program. It would go against the existing grandfathered rules of the program. Instead, they made a new program, which will also share its own grandfathering protection for borrowers who already qualify for it. And, if you look at things even more closely, the shape of this program is designed to accommodate the PSLF program. So, you have a brand new program that implements features like the removal of the payment cap and spousal filing loopholes, and it matches up nicely with the PSLF program and the direction they want that program to go in the future.
Additionally, two of the changes currently being discussed to close these so called doctor’s loopholes are already implemented here. In my mind, this reduces the potential that there will be a strict cap on how much can be forgiven in total under the PSLF program. It seems unnecessary and redundant to implement all of the considered methods when attempting to effect the desired change.
The very existence of the REPAYE program contradicts the likelihood that PSLF will be cancelled completely. So, I strongly feel that PSLF is here to stay for the long haul. And, at the very least, the current terms should be grandfathered with new changes only affecting new borrowers who take out their first loans after the new regulations. The form that the PSLF program takes over the next couple of decades will most likely be subject to constant change, but its core benefits should be around for years to come for those to whom it was promised.
What do you think of the new REPAYE program? Will you switch from PAYE to REPAYE or IBR to REPAYE? Why or why not? Comment below!
Excellent post. Very interesting with potentially huge implications for those of us struggling in the complex dilemma of deciding between the “Public Service Loan Forgiveness Program” versus “Refinance and pay back ASAP”. Thanks for your insight.
Since the 10 year standard repayment plan is a PSLF-eligible repayment plan, I don’t understand why REPAYE then switching to the 10 year plan when REPAYE no longer has a benefit isn’t the method of choice.
Also, with regard to having to consider all income as if filing jointly: When I did the math a year or two ago our household tax bill would have been $18k higher for the year, iirc. That far outweighs the potential benefit in reduced student loan payments for us.
Toshi,
The 10 year standard repayment is not “PSLF” eligible. You need to be in an income based repayment plan in order to qualify for PSLF. The 10 year standard repayment is simply the cap on payments in IBR/PAYE but not REPAYE.
Toshi, nevermind, you are right. I didn’t realize that the 10yr was PSLF eligible as it never would have worked as a beneficial repayment strategy under IBR or PAYE.
Do you know if it is possible to switch back to the old IBR program from REPAYE after a few years? I assume this would not be possible but I can see why people may want to do this to regain the benefit of a payment cap one out of residency and earning more money.
I don’t think you can switch back.
That seems kind of strange. As of now you can change your payment plan every year, from one to the other and back if you desire. So if you enroll in REPAYE then you’re stuck in REPAYE for the remainder of the life of your loan?
Unless you refinance into the private system, I think that’s the way it works. Perhaps you can go back to standard payments, I don’t know. But I don’t think you can go to IBR or PAYE from REPAYE. But you’d have to ask someone who knows more about it than I do to be sure.
I’ll find this out in August. I can’t imagine that one can’t switch back to at least the 10 year plan (which is what IBR would have capped at)–after all, that’s the default if you don’t cough up your income via tax return for the year.
Under the most recent proposal I could find (July 9), if you are using REPAYE and don’t submit income documentation, you are switched into an “alternative” payment plan that is basically a new 10 year standard plan starting then. The rub is that you have to switch back into REPAYE if you want to submit for PSLF, and if your new REPAYE payments are more than you were paying under the alternative payment plan, the difference will be added onto your REPAYE payments over the remainder of your payment period. So, it looks like you can’t game the system that way for PSLF.
Where did you see that you have to switch back to REPAYE to submit for PSLF? The 10 year standard payment plan is explicitly an acceptable plan under the PSLF rules, even if one would get no benefit from it if one made 120 payments under its terms.
It’s in the final regulations document dated July 9th of this year on the Dept of Ed website:
http://www.gpo.gov/fdsys/pkg/FR-2015-07-09/pdf/2015-16623.pdf
Page 39620 starting at the bottom of the center column.
Good catch. That indeed covers the case of the “10 year by default” option when not providing income documentation. The question then becomes “once REPAYE is selected, can one switch back outright to the 10 year standard repayment plan?”
I’ll find out in less than a year and report back, as I wrote above.
Toshi, what’s the verdict?
Does anyone know if REPAYE has implications for rumored payment caps? My wife and I use the PSLF/IBR and repaye would offer a discount. But our total projected forgiveness will be well north of the 50-70K rumored total payout caps. Is the grandfathering function based on year of loan or the specific payment plan or entry into the the payment plan?
Thanks
There’s no guarantee of grandfathering at all, much less how it would be done. It’s all speculation.
I was under the IBR plan until PAYE came out and I switched to them. I’m finishing up residency in 2016 and have 24 PSLF payments under my belt so far with payment amounts ranging from $0-$290 (having 2 kids helps!). I signed with a 501c3 organization and am planning to continue with the PAYE plan for the remainder of my 120 payments. I have $320+k in med school loans and always dreamed of being in family medicine so I’m really counting on this PSLF deal to continue, or at least to grandfather those of us in if we’ve already been accepted.
One thing I haven’t seen written about yet (though I may have missed it), is that every 12 months you can submit paperwork to get the previous 12 payments approved under the PSLF plan. FedLoans sends back a letter saying those payments were approved and will tell you how many payments are left until you reach 120. So I now have 2 documents (2 years worth) of approved payments. This does a couple things….one, it will serve as proof that I am in the program if/when they decide to grandfather people in, and two, it will expedite the process of getting my loan forgiven after I make the 120th payment, because I’ll already have gone through the process of getting the previous 9 years or 108 payments approved, so all 120 will not have to be done at once.
By the way…awesome website and great book! I just picked it up and it’s a great read.
You don’t have to get your payments approved every year, but having them done before you switch employers during that time would be beneficial. I plan on getting my paperwork submitted when I finish residency, then again when I finish fellowship.
Michael, did you switch to PAYE (the old system) or RE-PAYE?
I’m on PAYE, not REPAYE.
As I’m now doing my taxes and trying to decide how my wife and I should file (married jointly vs separately), I’ve come to the realization that under almost no circumstance does switching from IBR to REPAYE work in one’s favor if your spouse earns any meaningful amount of income (i.e. > $30k/yr). I am earning a resident salary and doing a bit of moonlighting on the side, with my wife working as well and earning about (AGI) $40k. I’m in IBR now and switching to REPAYE would increase my payment by about $200 per month. This is essentially a wash if you factor in the ~$2000 that I lose in tax refunds and extra tax filing fees by filing separately rather than jointly. But where it is not a wash is the whole concept of losing the payment cap. If my calculations are correct, at a starting attending salary of $250k, my REPAYE monthly payment would be nearly $1000 per month more than the capped payment based on the standard repayment plan. This is the difference of tens of thousands of dollars while finishing off my 10 years of PSLF payments. Plus I am in a long (~7 year) training program. It would be worse for those in shorter training programs.
Can anyone think of a way in which switching to REPAYE would be beneficial for dual earning couples?
If you’re not doing MFS anyway and can switch back to PAYE if you go for PSLF, I see little downside to switching. Going from IBR to RePAYE could lower your effective interest rate and should lower your payments.
But you’re right that everyone should run the numbers for themselves. Choosing between government programs is perhaps the most complex part of this whole thing, and then when you add in the possibility of refinancing during residency, it gets pretty tough.
Is it possible to refinance part of your loans and keep the other portion in REPAYE or PAYE?
I have federal loans that quaify under PSLF and private loans that do not. My loans are all consolidated.
Yes, you get to decide which ones are refinanced.
I’m wondering if I messed up? I intended to do PSLF, but seems I didn’t get credit for payments for all the months I was in residency (so already less than 36-months). I graduted in 2011 and was on IBR. However, I spoke to the Financial Aid folks at my medical school and switched to REPAYE in Fall 2016 when I was recertifying my income. That capitalized ~$31k of interest. My loans are at 6.55% interest on a total of ~$248k. I didn’t consolidate another $48k from my masters, as it’s at 1.6% interest. However, I’m only moonlighting now (almost part-time hours) – made $80k last year pre-taxes. Seems less likely I’ll go back for a fellowship at this time. Contemplating refinancing and trying to pay down the larger loan w/ worse interest rate. Should I be kicking myself right now?
No point in kicking yourself, right? Are you still going for PSLF? If so, then do all you can to get credit for those payments. If you’re not, then refinance. If you can’t get credit for ANY payments, there may be no point to PSLF.
I am trying to do the PSLF. I applied to switch to PAYE from IBR because of the 10% benefit, but was denied due to the date of my loans. So they switched me to REPAYE instead, which I know is bad because there is no payment cap. I am deciding if it is worth the hassle with dealing with Fedloan to switch back to IBR before I becoming an attending. I am confused with all the different information I get. When I talked to Fedloan trying to figure out the difference between the two payment programs, they said with REPAYE you remain eligible for the program no matter what income you make. Does that mean with IBR you won’t qualify if you make too much? If this is true, how can you take advantage of the payment cap with an attending salary? Is there an amount you make that makes it not worth being on IBR?
Also thank you for your site. I am clueless with finances and your site has helped me a lot with being armed with information to make better decisions!
Assuming your attending payments will be more under REPAYE than under the 10 year standard repayment plan, then yes, it’s worth switching back to IBR as soon as they go up. That could be as long as a year after becoming an attending.
Yes, IBR has a cap. I don’t think you have to have a particularly low income to get into it, but obviously it doesn’t lower your payments if you don’t. They’re just set equal to the standard 10 year repayment plan payments for most attendings.
How many small payments will you have made in training and how much do you owe in direct loans?