By Dr. James M. Dahle, WCI Founder
Student loan management is actually super easy for single docs and married docs with a non-earning spouse. You refinance your private loans as an intern and enroll your federal loans in the Revised Pay As You Earn (REPAYE) program. If you take a job with a 501(c)(3) (nonprofit) after residency/fellowship, you stay in an Income-Driven Repayment (IDR) program (might be worth switching from REPAYE to Pay As You Earn (PAYE) if you have a low debt-to-income ratio) and you go for Public Service Loan Forgiveness (PSLF). You then keep careful track of every payment and certification form and save up a PSLF side fund in case you change your mind or the program changes and you aren't grandfathered in. If you do not take a job with a nonprofit after residency, you refinance your loans as soon as you have your attending contract and you make huge payments toward them each month while living like a resident for 2-5 years after training.
Easy-peasy. I can put that on one PowerPoint slide.
Ridiculous Debt-to-Income Ratios
The only exception is people with ridiculous loan-to-income ratios, clearly something like 3-4X+ but perhaps also as low as 1.5-2.5X. Many of these folks are people who didn't do the math on the return on investment they would get for going to professional school. Honestly, if you borrowed 4X your expected annual income, you probably made a bad career decision, at least in a financial sense.
It reminds me of the classic Biblical admonition from Luke 14:28 (“For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?”) Those people probably ought to run the numbers on PAYE forgiveness. Yes, that forgiveness requires 20 years of payments, and, unlike PSLF, it is taxable at your ordinary income tax rates. But it might be easier to save up and invest for that tax bomb than to actually pay off the loans at those extreme debt-to-income ratios. It is a rare physician in this situation (although not so rare anymore to be in the 1.5-2.5X range where you might want to get advice and run the numbers), but it isn't that uncommon among dentists, veterinarians, attorneys, and other professionals who rack up similar debts but have lower incomes.
Let me demonstrate.
Let's say you make $100,000 a year and owe $400,000 in student loans at 7%. The interest alone on those loans is $28,000 per year—or 28% of your gross income. If you actually wanted to pay those loans off over 10 years, you would have to pay $57,000 per year—or 57% of your gross income.
But if you enroll in PAYE, your payments would be $683 per month. So, over the next 20 years, you would pay $683*12*20 = $163,920 toward those loans. After 20 years in PAYE, whatever is left is forgiven. Awesome! You borrowed $400,000 and only had to pay back $164,000. Winner, winner, chicken dinner!
Unfortunately, that forgiveness is taxable. How much will be forgiven if you let a $400,000 debt ride for 20 years while only paying $683/month? That would be $1.2 million. What is the tax bill on that going to be? Well, it's hard to say. The tax code could change, becoming more or less progressive between now and then. But most likely the brackets are going to continue to rise with inflation over those 20 years. I think it would be reasonable to assume that you're going to pay at least 30% on that forgiven debt, all due in the year it is forgiven. Thirty percent of $1.2 million is $400,000. Yes, that figure looks remarkably like that original debt, but when you consider the time value of money, it's probably less even when combined with the $164,000 you actually paid.
So, you have to start saving up to cover that tax bomb in addition to making your PAYE payments. If you can make 8% a year on that investment, after taxes and fees, how much do you need to save each year to have $400,000 in 20 years?
=PMT(8%,20,0,400000) = $8,741
Add that amount to the $683 per month ($8,196 per year) and you get a total of $16,937. If you actually wanted to pay those loans off over 20 years, you would need to make payments of
=PMT(7%,20,400000,0) = $37,757 per year, over twice as much.
As you can see, at extreme debt-to-income ratios, it makes a lot of sense to go for PAYE forgiveness. In this scenario, you probably don't want to use REPAYE. Although the subsidized interest rate would work toward reducing the amount forgiven and thus the associated tax bill (without increasing the amount you have to pay each month), you will be required to make 25 years of payments before you get forgiveness instead of just 20 under PAYE. Between the extra payments and the additional growth of the balance over those last five years, you will come out behind.
Roth vs. Tax-Deferred in Medical Residency
The only other interesting twist to talk about for single folks and married single earners is the Roth vs. tax-deferred savings issue during and possibly after residency. The general rule for residents is to use Roth accounts to save. But if you are going for PSLF or even IDR forgiveness, using a tax-deferred account lowers your income and, thus, your IDR payments. The lower your IDR payments, the better your cash flow in residency, but more importantly, the more that is left to be forgiven.
Is packing more money into a Roth account worth having less money forgiven? Or is it better to get more forgiven but then later end up with a negative tax rate arbitrage between contribution and withdrawal? Hard to say. You really have to run the numbers, and that's tough to do given that you don't even have all the numbers (such as your tax rate in retirement) to make an accurate calculation.
Personally, I like keeping it simple, and when in doubt, I'd still lean toward making Roth contributions even if it means getting a little less forgiveness. If you decide to put some money into tax-deferred accounts to increase the forgiveness amount, don't put too much in. Those payments don't go below zero. Once you get to that point, you should definitely put any additional savings into Roth accounts. What is that point? Well, it varies and you'll have to run the numbers for your situation. Let's do it really quickly for three scenarios:
- Single
- Married without kids
- Married with two kids
The goal is to get your adjusted gross income down to 150% of the poverty line but no further. That poverty line varies by family size but can be looked up here. These figures typically rise with inflation each year.
On a typical resident salary of $60,000, the numbers are as follows.
If you're single with an AGI of $60,000, you're going to need to put $60,000 – $20,385 = $39,615 into tax-deferred retirement accounts to get your REPAYE payments to $0. That's going to be pretty tough given that you can only put $19,000 into a 401(k) or 403(b) and $6,000 into a traditional IRA. Not to mention living in residency on $20,000. So, all the retirement savings you can manage should probably go into a tax-deferred account if you prefer to maximize forgiveness rather than to maximize your future Roth-to-tax-deferred ratio.
Dual dolphins in Cabo San Lucas
If you are married without children, it is a little easier to get to $0 payments, due to the higher poverty level. You're going to need to put $60,000 – $27,465 = $32,535 into a tax-deferred retirement account to get your REPAYE payments to $0. That's a pretty tough order, too.
If you are married with two children and a super saver, perhaps you can do it. That would be $60,000 – $41,625 = $18,250. You could get that into a 401(k) and an IRA. Obviously, any amount above and beyond that should go into a Roth IRA or Roth 401(k).
This technique can be used even if you don't plan to go for PSLF. Lowering your income also may increase the REPAYE subsidy you receive during residency. Is it worth it? Probably, especially if you just do a Roth conversion of all that tax-deferred money in the year you leave residency. Obviously, the value of this technique varies a lot, but it is a notable exception to the “Roth for Residents” rule of thumb that was a lot better rule before the government came up with REPAYE.
Student Loan Management for Dual Earners
The purpose of this post, however, is to discuss a far more complex issue—student loan management for those who are married to another earner. This gets a lot more interesting and a lot more complex. So much so that my standard advice for years has been to get professional student loan management advice if you find yourself in this situation.
I blame it on the government, really. If the government had not come up with all of these programs to help student loan borrowers, the management would still be really easy—refinance when you can and pay them back as fast as you can. But once you start adding in income-driven repayment programs, subsidized interest rates, and forgiveness programs, it becomes more complex than ventilator management in Acute Respiratory Distress Syndrome (ARDS).
The general principle behind the recommendations in this post is to maximize your benefits from those government programs. Usually, you are going to end up weighing one financial advantage against another, making the right course much less obvious.
Let's talk about five separate situations today:
- Two doctors, both going for PSLF
- Two doctors, one going for PSLF
- A doctor married to a debt-free engineer, going for PSLF
- A doctor married to a debt-free engineer, not going for PSLF
- A doctor married to a debt-free attending, not going for PSLF
2 Doctors Going for PSLF
In our first scenario, we have two doctors who love academics. Let's say they're both doing a total of six years of training, they both owe $300,000 in student loans, they both are making $60,000 a year during training, and they both expect to make $300,000 per year after finishing their training. They have no children and plan to stay in academia for at least four more years. Here is what they should do:
#1 Refinance private loans as interns
You never get interest rate subsidies or forgiveness for these.
#2 Both should enroll in REPAYE as soon as possible and start making payments
The more payments made during residency and fellowship, the better. That's because in-training payments are relatively low, usually less than the interest on the loan. The more of your 120 payments required for PSLF that are small in-training payments, the more that will be left to forgive. Why REPAYE over PAYE or IBR? Two reasons. The payments are lower and the interest rate is subsidized. IBR requires you to pay 15% of discretionary income (your adjusted gross income minus 150% of the poverty line) toward student loans. REPAYE and PAYE only require 10% of discretionary income be paid. Again, the less you pay, the more there's left to be forgiven. The advantage of REPAYE over PAYE is the interest rate subsidy. In REPAYE, half of the remaining monthly interest after your required payment is applied is forgiven. So if your $200,000, 6% loan accumulates $1,000 per month of interest and your payment is $200 per month, then $400 of interest is added on to the loan and $400 is forgiven.
So far so good. Unfortunately, it gets more complex from here.
#3 File your taxes Married Filing Jointly (MFJ)
Unfortunately, under REPAYE, you cannot separate out your incomes by filing MFS. There is no point to filing MFS as long as you qualify for a REPAYE subsidy. This couple does qualify since their combined REPAYE payments are $797 and the interest on $600,000 in loans at 6.8% is $3,400 per month.
Filing your taxes MFS instead of MFJ could mean you will pay more in taxes. Is that the case in this scenario? Let's run the numbers. Assuming the standard deduction and that there's nothing special about your taxes, you'll owe $12,749 in taxes if you file MFJ. If you file MFS, you will each owe $6,375; together, you will owe $12,750 due to rounding. No real penalty in this situation for MFS, so if you really want to, you could. But there is no point here.
#4 Contribute to tax-deferred retirement accounts
“What? I thought residents were supposed to use Roth accounts?”
Well, they usually are. But by putting at least some of your savings into tax-deferred accounts, you can lower your REPAYE payments and thus increase the amount of your student loans that will be forgiven. Of course, once those payments are reduced to zero, any additional savings should go into Roth accounts. In this scenario, each of the two docs is going to want to put as much as possible into tax-deferred accounts, assuming they prefer to maximize forgiveness and the REPAYE subsidy rather than maximize their future Roth-to-tax-deferred savings ratio. That's probably the right move here.
#5 Stay in REPAYE after residency
By the way, these docs should stay in REPAYE after residency. They will graduate each owing more than $300,000 with an income of $300,000. On that income, the student loans would have to be less than $204,000 before the REPAYE payments (which unlike PAYE are not capped) would exceed the payments under PAYE.
2 Doctors, 1 Going for PSLF
Did that seem crazy complex? That was nothing compared to what we're about to get into. The above scenario was relatively straightforward. Let's consider what should be done if only one of the docs wants to go for PSLF. For example, let's assume the doc going for PSLF owes $300,000 and the other doc owes nothing thanks to some scholarships, work, and wealthy parents. Again, both are residents making $60,000. What should they do?
#1 Refinance private loans
There is no reason not to refinance your student loans to a lower interest rate since you can qualify for $100 per month payments during residency.
#2 Enroll in PAYE
You want that interest rate subsidy available only in REPAYE. Unfortunately, filing MFS in REPAYE doesn't do you any good as REPAYE looks at your combined income. You have to give up that REPAYE subsidy to file MFS. Now, you have to weigh the value of the REPAYE subsidy against the value of having a lower PAYE payment due to a lower income. Let's do that in this scenario.
REPAYE payment: $797 ($9,564 per year)
PAYE payment: $349 ($4,188 per year)
REPAYE subsidy: ((6.8% * $300,000) – $9,574)/2 = $5,413
That is a very valuable subsidy this doc would giving up in order to lower payments. If plans changed from PSLF to payback, the right answer would be to go into REPAYE. But with PSLF, PAYE would allow for more to be forgiven and less paid toward the loans overall. PAYE is the correct program.
#3 File your taxes Married Filing Separately (MFS) as a resident
To get those lower PAYE payments, this couple would have to file MFS during residency. This will lower the required monthly payment under PAYE. For MFS, that payment would be $349. For MFJ, it would be $797. No brainer there. As demonstrated in the previous example, their tax bill will not increase by filing MFS.
What if one of them were an attending, though? Then what would be the additional tax cost to MFS? Let’s assume the resident going for PSLF is making $60,000 and the attending without loans is making $300,000. With MFS, the resident will owe $6,375, and the attending will owe $75,924 for a total of $82,299. If they filed MFJ, the tax bill would be $70,025, a difference of $12,274. Did they get more than that in additional PSLF forgiveness? No way: $349 per month = $4,188 per year. It seems kind of stupid to pay an extra $12,274 in taxes now to get $4,188 in additional forgiveness in a few years, right?
#4 Contribute to tax-deferred retirement accounts
The same principle applies as in the example above with the two residents going for PSLF, except only the one going for PSLF actually wants to use the tax-deferred retirement accounts. The other should probably use a Roth account, although they potentially could increase their REPAYE subsidy by using a tax-deferred retirement account. In this scenario, the couple really wants to defer as much into the PSLF-seeking doc's retirement accounts as possible (again, assuming they prioritize higher forgiveness over a higher Roth-to-tax-deferred ratio in retirement, which is not necessarily a no-brainer). They should live off the other doc's income to max out a 401(k)/403(b) for the PSLF-seeking doc. Also, remember that when filing MFS, if you make more than $10,000 and live with your spouse at any point during the year, you can neither deduct a traditional IRA contribution nor directly contribute to a Roth IRA. You will need to do any Roth IRA contributions through the backdoor.
#5 File taxes Married Filing Separately (MFS) as an attending
Since these two docs, once they become attendings, will each earn exactly the same amount, it is still OK for them to file MFS. That will lower the PAYE payments. For the same reason, the PSLF-seeking doctor should still be maxing out tax-deferred accounts (hopefully both will be doing so as they move into their peak earnings years). Of course, the ability to deduct an IRA contribution is going to go away, so they will both be doing Backdoor Roth IRAs. The doc will want to just stay in PAYE as an attending, mostly just to facilitate the lower payment from filing MFS since the cap will have no effect, given the size of the loan burden. But if it were a lower loan amount (say $150,000 instead of $300,000) then the payment cap available with PAYE but not REPAYE would also be beneficial.
Doctor Married to an Engineer, Going for PSLF
Let's add some more complexity. Let's assume the engineer spouse makes $60,000 and has no debt. The doc still owes $300,000, makes $60,000 during residency, and counts on making $300,000 after residency.
#1 Refinance private loans
Noticing a trend here? If you haven't refinanced your private loans, even if you're still in residency, scroll to the bottom of this post and click on the chart for the companies that will refinance loans for residents. Apply with both and take the one that gives you a lower interest rate.
#2 Enroll in PAYE
Same reasoning as above.
#3 File your taxes Married Filing Separately (MFS) as a resident
Same reasoning applies as in the above example. If you have to include that engineer's income, your REPAYE payments will be much higher. Since the tax burden will be the same with MFJ or MFS, you might as well do MFS. The more disparate the incomes, the more likely it is that the couple should file MFJ. When the incomes are similar, there isn't a penalty there.
#4 Contribute to tax-deferred retirement accounts
Same reasoning as in the above example. Again, if the couple can save more than the maximum into the resident's 401(k)/403(b), that should go into Roth accounts because they are not yet in their peak earnings years. Obviously, the debt-free engineer's retirement savings should go into Roth accounts.
#5 File taxes Married Filing Jointly (MFJ) as an attending
Here's the big difference between these two scenarios. The incomes are very disparate, so the tax advantage of filing MFJ is larger than the additional PSLF forgiveness. Now that they are filing jointly, it is even more advantageous for both to be maximizing any possible tax-deferred accounts available to either of them. Given an income of $360,000 and a debt of $300,000+, it still makes sense for them to just remain in REPAYE as they will not benefit from the PAYE cap on payments.
Doctor Married to an Engineer, Not Going for PSLF
OK, now for our fourth situation. In this case, the doc is not going for PSLF but still wants to take advantage of the interest rate subsidy available through REPAYE.
#1 Refinance private loans
If you can get a lower interest rate (and you almost surely can), get a lower interest rate.
#2 Enroll in REPAYE
The goal here is not to minimize payments but to minimize the total debt by maximizing the REPAYE subsidy. If you're not going to enroll in REPAYE, you might as well refinance your federal loans as an intern along with your private ones. It is worth actually running the numbers here. It's possible, but not very likely, that your effective tax rate under REPAYE is higher than what you can refinance to. Let's run those here for this couple.
REPAYE subsidy: $5,413 (see above for details)
Total interest: $5,413 + $9,564 = $14,977
Effective interest rate: $14,977/$300,000 = 4.99%
Now, this doc would have to apply with the companies in the chart below that will refinance resident loans to see what interest rate they could refinance to, but it is probably going to be in the 5%-5.5% range. Might as well go with REPAYE since the effective rate is lower.
#3 File your taxes Married Filing Jointly (MFJ) as a resident
Since you are using REPAYE instead of PAYE, there is no benefit to filing MFS.
#4 Contribute to tax-deferred retirement accounts
Same reasoning as above examples. However, the benefit is not nearly as high as the above examples since it doesn't increase forgiveness; it just increases the REPAYE subsidy (effectively lowering the interest rate).
#5 Refinance loans as an attending
As soon as your REPAYE payments become higher than the interest accumulating, there is no more REPAYE subsidy. At that point, you should refinance to a lower rate.
Doctor Married to an Attending, Not Going for PSLF
#1 Refinance private loans
Same reasoning as always. No reason not to do this. See the links at the end of this post and get it done.
#2 Refinance federal loans
“Say what?”
Yup. This is the right move in this situation. No sense in doing the MFS/PAYE thing since you're not going to get anything forgiven anyway. REPAYE isn't a good option due to the spouse's high income—there won't be a REPAYE subsidy. Just refinance them and get busy paying them off. You're married to a debt-free attending for crying out loud! You should have those loans paid off before you even finish residency.
#3 File your taxes Married Filing Jointly (MFJ) as a resident (and an attending)
Might as well. There is no advantage here to MFS.
#4 Contribute to Roth retirement accounts
The two of you are not yet at your peak earnings, so the right choice here is usually going to be using Roth 401(k)s and of course a Backdoor Roth IRA for each of you. If you have a tax-deferred account sitting around somewhere, you might even want to do a Roth conversion on it.
Some Conclusions
I know this post was long, but I hope you found it useful. As noted above, in most of these scenarios, there is a place for you to refinance your student loans. Here is our list of the best student loan refinancing deals on the internet. These are affiliate links, meaning I get paid if you refinance through them. But it's a win-win-win-win-win situation. The lender gets your business, you get cash back, we get paid, and the taxpayer gets their money back to lend to a new MS1. No losers when you click on those links.
Variable 4.54% - 11.72% APR
Fixed 3.95% - 9.19% APR
† 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 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 June 30, 2023. 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
If you are having trouble following this post or running the numbers or just want some reassurance that you're doing this right, I recommend you contact Andrew Paulson at StudentLoanAdvice.com, a White Coat Investor company. It will cost you a few hundred dollars, but as you can see, that investment could easily be worth tens of thousands in additional forgiveness, additional interest rate subsidy, or saved interest. There's no shame in asking for a little bit of professional help.
If you want to learn more about student loans, you might also consider reading Ben White's excellent Medical Student Loans: A Comprehensive Guide.
What do you think? Do you agree with my advice? Why or why not? What do you think about the government programs making these decisions so complex? What did you do with your loans? Comment below!
[This updated post was originally published in 2019.]
Really tough topic for a post!
In it, you said the following, “# 3 File your taxes Married Filing Separately (MFS) as a resident. This will lower the required monthly payment under REPAYE. MFS, that payment would be $349. MFJ? $797.”
Maybe I am missing something?
The government doesn’t care how you file your taxes if you are in REPAYE. They will consider your spouses income whether you file separately or jointly if in REPAYE.
Since the calculation for payment is 10% of Discretionary income = 10% (AGI – 150% poverty line)…. your AGI will be the same in REPAYE regardless of how you file. They do not give special consideration for those who file separately (unlike in IBR and PAYE where filing separately means your spouse’s income will not be included).
Unless your joint gross income (remember, they ignore separate versus filing jointly) is somehow lower when filing separately than it is when you file jointly, your filing status won’t matter in REPAYE if married.
I will admit that this is a super tough topic! Let me know if I misunderstood what you are saying. This is obviously really important.
TPP
Agree with other posts I believe they count both incomes if married regardless under repaye.
Yes, you cannot “isolate” individual incomes when married when filing MFS.
You are correct. My error. You would have to be in PAYE to do MFS. Apparently I had a brain-fart. I’ll get that corrected.
[Update: 7:45 am MST–the post has now been updated.]
So then according what you are saying, If two physician in PSLF are married then you would do MFJ and REPAYE since REPAYE takes both incomes anyways? (Could also file MJS if financially beneficial) Is there a time when you would switch to MFS and PAYE based on debt to income ratio?
If they have similar incomes and debts and are both going for PSLF, no sense in doing MFS or PAYE. Might as well just do REPAYE. I suppose it is possible that there is a scenario where it would make sense to switch to PAYE as attendings to get the cap on payments. You just have to see if the REPAYE payments are higher than the 10 year standard payment (which is the cap for PAYE).
Under the examples of “Two Doctors, one going for PSLF” and “Doctor going for PSLF with engineer spouse,” I have previously believed that one should sign up for PAYE rather that REPAYE. From my understanding, minimum REPAYE payment calculations include spousal income regardless of filing separately or jointly. As such, the interest subsidy (which is irrelevant if you are 100% confident in PSLF, since all of it will be forgiven) is outweighed by increased minimum payments.
I might be missing something here.
This post has convinced me even more that if there’s a chance in hell of living like a resident and paying off your loans in 2-5 (or even 2-7) years, then you should. Rare exception may be PSLF. But trying to earn 8% to out run 7% with 20 years of uncertainty about what the government may do…seems stressful.
We are two high earners with large student loan debt (originally we had right at $600,000 combined, though we didn’t meet until we had been working). Both of us at 2x salary to start. ($195,000ish And $425,000ish).
I have averaged 42% of take home salary to pay on loans, and in the past year or so that we have combined finances we have combined we average 46%. $360,000 to go ($35,000 for me, $325,000 for him – he was on a 25 year plan that averaged 7.65% when we met). Our respective salaries are currently around $150,000 & $235,000, with approximately $50,000-$100,000 in combined bonuses additionally (this is recent – as of this year – and hopefully will continue in the future). We live in a high tax area.
Improving his credit score to finally be able to refinance to 4% was the biggest win. Now we are seeing “traction.” 2.5-3 years to go. (We pay roughly $100,000 a year on loans, not including money from bonuses as that is highly variable, and live on $98-100,000k (I know, we live well. Moderation in all things)).
We max out 401(k)s and Backdoor Roth’s. This undoubtedly adds some time, but I do get a 5% match (and he gets a 3% match), and at age 32 and 35 I have zero desire to delay retirement savings.
Just some background on two high earners who met post-graduation and our approach. I refinanced initially 6 months out and he about 3 years out (so roughly 3 years of “lost” payments where his principal was growing because interest continued to capitalize). But we didn’t want to make payments for 17-22 more years (I honestly don’t recall if he was on the 20 or 25 plan, just that it was income based and would take decades).
We will be done approximately 7 years after he became an attending, despite the “lost” years (partly because I was aggressive and mine will finish in just a few months).
I guess my point is even for two high income earners who met a little later, sometimes behavior/emotion trumps math (particularly math that involves a lot of assumptions), at least for us.
To be fair, you don’t have to “outrun” the 7%, you just need to outrun the tax bill associated with that 7%, which is much easier. But you guys are at 2X, not 4X, so it makes a lot more sense to just pay your loans off. Imagine if you guys owed $1.2M.
The intro implies one can go from REPAYE back to PAYE. This isn’t possible. REPAYE also has no income cap and if one doesn’t certify income it is not a PSLF eligible plan.
I do not believe that is true. You CAN go back to PAYE from REPAYE, you just have to make one “full” payment in between. More details here:
http://www.benwhite.com/finance/yes-you-can-switch-back-from-repaye-to-ibr-or-paye/
REPAYE is a PSLF eligible payment program. Yes, you have to certify your income and full-time 501(c)3 status.
Agreed you can certainly switch from REPAYE to PAYE as long as you time it correctly. (My wife started in 10/21, we plan to switch from REPAYE to PAYE yet this year using our 2021 tax return before we have to supply our 2022 tax return which is 3x-4x higher AGI).
But I’m not familiar with the “one full payment” you reference. Is this aligned with the “one month Administrative forebearance” that is mentioned in that article?
I need to do more research ASAP, but in my situation I need to ensure I can recertify income using 2021 tax return without restarting payments before the $0 ends.
If you’re going to switch I’d do it before the 0%/zero payments thing ends because my understanding is that you’ll have to make one big payment based on the 10 year repayment plan in between being in REPAYE and going to PAYE.
Let me know if that’s not the case for you.
Great post on a very complex topic. Thank you WCI! If residents file MFS, the student loan interest deduction is not allowed. Attendings cannot use this deduction due to income phaseouts. Thank you again for your post.
I came to comment on the MFS/MFJ issue with REPAYE but it looks like I’m late to the party.
RE: 2 doctors, 1 going for PSLF
That’s a complicated scenario. In some cases, you actually lose money by refinancing the non-PSLF spouse’s loans. Because a double PAYE/REPAYE couple MFJ will have one total payment essentially divided across both loans, it depends on which spouse makes more money, which has bigger loans, the difference in the private refi rate vs federal, and if one will then need to MFS in order to utilize the loophole after the refi.
Yes, in my scenario the other doc didn’t have loans, but if they did, it gets even more complicated.
That was my world, until I ended up in a nonqualifying hybrid PP/academic job.
No wonder you had to learn enough to write the book.
I married a debt-free engineer, but our wedding was 3 weeks after the end of residency so I never even had to consider these decisions. Kinda makes my head spin!
I did not think I was confused until this article.
I am a physician making ~$300,000 with no student loans. My wife is a fellow making ~$60,000 with $250,000 at 6.8% in federal loans that we consolidated. We currently are doing IBR and MFS with a goal of PSLF in 2022. We redo the math each year, last year she was paying ~$600 a month via IBR MFS as opposed to ~$2,800 a month if IBR and MFJ (This is the 10 year payment amount which it is my understanding would be what we would pay if we are MFJ).
MFS cost us $16,000 in taxes (difference between MFJ and MFS) but if MFJ we would pay $26,400 more in IBR. [($2,800*12)-(600*12)]
As such I am under the assumption then that MFS saved us $10,400 last year.
My understanding is that PAYE and IBR both take into account how you file your taxes to determine you minimum payments.
Where am I wrong/ What am I missing?
She’s still in fellowship and expecting PSLF in only 3 more years? No wonder PSLF looks attractive to you.
Any particular reason you’re doing IBR instead of PAYE? Loans didn’t qualify for PAYE? She’d have more forgiven with PAYE.
Otherwise, your decision seems fine. Your scenario is not one of the five I discussed in the article in case that isn’t obvious. Maybe I should have added a sixth one. I’m sure there are a half dozen more possible scenarios out there.
I keep checking to make sure, but somehow she is still in fellowship…. (she loves her job though, so more power to her)
As far as IBR vs PAYE I think we may be making a mistake here. IBR is 15% discretionary income and PAYE is 10% and they both qualify for PSLF, correct? So based on that, it would seem that no one who thinks PSLF will exist should ever be in the IBR program, right?
I think the confusion came in with the following paragraph:
“What if one of them were an attending though? Then what would be the additional tax cost to MFS? Let’s assume the resident going for PSLF is making $60K and the attending without loans is making $300K. MFS, the resident will owe $6,375 and the attending will owe $75,924 for a total of $82,299. If they filed MFJ, the tax bill would be $70,025, a difference of $12,274. Did they get more than that from PSLF forgiveness? No way. $797-$349 = $348. $348 * 12 = $4,176. It seems kind of stupid to pay an extra $12,274 in taxes now in order to get $4,176 in additional forgiveness in a few years, right?”
Is this not my exact scenario? If so why is the monthly payment not adjusted for the addition of the spouses income with MFJ, and if no then how does my situation differ?
Thanks a ton for everything you do!!!
1. Yes. They both qualify.
2. Unless they don’t qualify for PAYE and want to do the MFS thing.
3. You’re right, I made an (another) error. This was part of the section I was fixing this morning between patients and obviously didn’t get it all quite fixed.
It should read:
As far as your question about adding in the spouse’s income to REPAYE, you wouldn’t want to do REPAYE. Look at the payment under REPAYE: $3,285 vs $349. If you make payments of $3,285 for 120 months there won’t be anything left to forgive and you certainly won’t get any REPAYE subsidy. Might as well refinance if you’re not going to file MFS and use PAYE or IBR (preferably PAYE if eligible.)
Does that help?
Thank you for your post! I wanted to clarify what to do in a specific scenario. Say you have two recently married residents, with only one having federal student loans . The latter has 2X the earning potential and is planning to go for PSLF. If she has been in REPAYE up until now, as PAYE is not an option, would it be more advantageous to stay with REPAYE knowing that MFS vs. MFJ will result in the same REPAYE payment calculation, or switch to IBR and file MFS? In the case of IBR, she would be giving up the REPAYE interest subsidy for lower IDR repayments, but switching would capitalize any unpaid interest.
This is the second scenario in the post. She should switch from REPAYE to PAYE and do MFS. Why are you looking at IBR instead of PAYE?
Why do you care about the capitalized interest if you’re planning on having it all forgiven anyway?
She doesn’t qualify for the PAYE plan because she received Direct Loans before 10/1/2007.
The capitalized interest is a concern in case the PSLF program changes and she isn’t grandfathered in.
That makes sense for IBR.
There’s a bigger concern if PSLF changes and no grandfathering- she’s sticking with the high federal interest rates instead of refinancing. You’re already coming out behind there if it doesn’t work out. There’s a bit of a gamble there–you can see why lots of people lately are just saying “Screw it, I’m just gonna refinance and pay these off. I can’t take the suspense.”
MFS drastically increases tax burden vs. MFJ for those in PAYE. This should also be part of the calculations on what to decide. The lower payments may not be worth the increased taxes/phase outs and certainly worth consideration. We ultimately decided that we would rather more money go towards paying off our loans than taxes
Agreed.
Thanks for this detailed post! We’re doing something similar to your Two Doctors / One PSLF scenario.
One correction, though: in that section under #4 (Contributing to Tax-Deferred Accounts) you correctly point out the advantage of the PSLF-aiming partner minimizing their AGI as much as possible to decrease loan payments, mainly by contributing to tax-deferred accounts like 403(b)s and doing MFS. However, you state that they should “max out a 401(k)/403(b) and traditional IRA for the PSLF-seeking doc”. It’s my understanding that the traditional IRA contribution will not be deductible since just about every resident/fellow is covered by a retirement plan at work and therefore can’t take an additional deduction for that $6000 (reference: https://www.irs.gov/retirement-plans/2019-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work). So, if they do have any extra money after maxing out a 403(b) with $19000, it makes more sense to do a Roth IRA through the backdoor.
Good catch. If you live with your spouse at any point during the year, then you can’t deduct your contribution on a resident salary. Thanks. Will fix.
We had another fun combo—a resident married to a debt free “engineer” who “retired” to take care of the kids halfway through residency. Honestly I’m not even sure what we should have done while I was working (frankly with the kids and two demanding jobs we were so in over our heads we didn’t even think to look past forbearance those years). After I left work, we entered REPAYE…but I had a 401k to rollover into a Roth. It’s been an interesting balance of trying to find the right amounts to convert each year so we aren’t busting our REPAYE cap, especially with somewhat variable moonlighting. So many things to consider!
Are you going for PSLF? I would think not if you were in deferment in residency and your payments are anywhere close to the REPAYE cap. And you’re not working full-time? So your payments don’t even count for PSLF. Why not refinance, live like a resident, and pay them off? If you can’t afford that because the debt to income ratio is too crazy, are you getting a REPAYE subsidy or working toward REPAYE forgiveness?
This is great stuff. Tons of good information in this. I feel like I am in one of these situations, although with a little different wrinkle. Mainly, my fiance is currently making $120,000 but also has $177,000 in loans from pharmacy school. From the beginning, I start a 5-year residency in a surgical subspecialty this year, and I am getting married as well in the Fall of 2019. My future spouse graduated from professional school in 2018 and makes $120,000/year. He works at a for-profit company so he is currently enrolled in the Standard Repayment plan (most likely will refinance with private sector in the very near future). His student loan balance is $177,000 with a 5.6% rate and $1,950 monthly payment.
I have a little more in loans. Current balance is $206,000 at 5.7%. My interest accrues at $900/month currently. My standard repayment is estimated at $2,258/month. I’ve yet to settle on a repayment plan because there are so many options at play here. I am tempted to just bite the bullet and get both of our loans paid off in 10 years with refinancing. However, I believe there may be a role for PSLF with my loans. I think REPAYE is the best initial plan (studentLoans.gov estimates my initial monthly payment at $550). At the end of residency, I would switch to PAYE for the next 5 years of attending-level salary (to cap my monthly payment at $2258) and then have the rest forgiven after the 120th payment. I have a few concerns about this plan though. I am assuming I am getting a favorable initial monthly rate with REPAYE because of my fiance’s loan status despite his large salary. One concern I have is if he refinances with a private bank if my REPAYE payment will go up with him leaving the public sector. Another concern is if I would have to pay income tax on the amount that is forgiven when I finish out the loan with PAYE plan.
REPAYE does sound right so long as you’re single, but if you’re really going for PSLF, it sounds like PAYE/MFS would be best after marriage but during residency. You’re likely going to have the run the numbers at least 3 different times before this is all over though.
I think your REPAYE amount would go up if he refinances (at least once you marry), so you’ll have to run the numbers there too. But if you’re doing PAYE/MFS, that shouldn’t matter.
Ho much do you owe that you would even consider PAYE forgiveness? If your interest is only $900 a month, you probably owe around $200K and shouldn’t do PAYE forgiveness. You’ll pay off the loans in less than 20 years.
Great post and thanks for opening my eyes to how complex this is! My wife and I have been both pursuing PSLF and are MFS paying with IBR. We are still on training salaries (She ~77k, me ~68k) and are finishing up 7 years of trainee-level payments. Her loans total in the 150k range and mine in the 250k range. We are both finishing training this year and are expecting to finally start making attending salaries (200-300k each) where we will just finish out paying our standard 10 year repayment rate. It is my understanding that the REPAYE can increase to above what your 10 year repayment payments are. Theoretically we would fit into your first scenario, but could potentially be paying more for the last 3 years, no?
That’s correct, the REPAYE payment could be more than the 10 year standard. I don’t think it will be in your case. You can calculate it. It would have been better for you guys to have been in PAYE or REPAYE the last 7 years instead of IBR, but I’m not sure it’s worth switching now. You’d have to run the numbers.
We are in a similar scenario. I’m a fellow finishing pgy7 years and now becoming an attending. Wife is aneshesiologist and already paid off loans. I did IBR and mfs until probably next year. Here are my questions.
1. If we do mfj, our combined income will be 500k. My understanding is that I stay in ibr and certify my income. If this was my income and I was trying to get into ibr, I do not think I would be eligible. However since I have been in ibr the entire time I would remain in ibr but my payment would now default to my standard 10 yr loan repayment from the original amount borrowed and I would still be in a qualifying payment plan under plsf. Then I would need to continue this for 3 more years. Is this correct?
2. I had read that after 10 yrs of repayment the balance is forgiven tax free. Is this true?
1. Yes.
2. Yes. After 120 monthly on-time qualifying payments in a qualifying program made while working full-time for a qualifying employer, the remainder is forgiven tax-free. Keep careful records and start a PSLF side fund.
1. Yes.
2. Yes. After 120 on-time payments made in a qualifying program while working full time for a qualifying employer, the rest is forgiven tax-free. Keep careful records and start a PSLF side fund.
Student loan forgiveness for working in certain occupations for a period of time is tax-free, per 26 USC 108(f)(1). This includes Public Service Loan Forgiveness, Teacher Loan Forgiveness and various loan forgiveness programs for nurses, doctors, veterinarians and attorneys.
Which federal loan forgiveness programs are you referring to? Got a link?
The numbers you gave regarding tax-deferred contributions to lower monthly loan payments should be revised, as standard deductions are not taken before AGI is calculated, i.e. it is a below the line deduction.
Also for those filing MFS, I have just noticed that you cannot contribute to Roth IRA accounts with this strategy! And like another poster mentioned you’re pretty unlikely to get a traditional IRA deduction either. I thought MFS would be a great way for me to minimize payments during residency (wife makes around 60k like me), but not being able to contribute 11-12k to a Roth (or traditional) IRA might be too big of a trade-off.
You may be right that I made an error. I’ll take a look when I get a chance. Standard/itemized deductions are certainly below the line-i.e. after calculation of AGI.
You can still contribute to a Roth IRA, but you must do it through the Backdoor. No big deal, lots of attendings doing that all the time.
Oh that’s a great point about the Roth IRA. Even though you can’t takea deduction with a traditional IRA if you are MFS, you can still contribute to a traditional IRA. Then you would just convert it to a backdoor Roth. I know you have instructions on how to do that on your site so I’ll check that out. I hope it is not too late to do it for 2018 (we already contributed directly to the Roth IRA, before realizing about the restriction for MFS).
Also, I forgot to thank you for your the very informative and helpful article, and your website altogether. I certainly appreciate it.
You’ll need to recharacterize the Roth IRA contribution to a traditional IRA contribution, wait the mandatory waiting period, then convert it. There’s still time to do it for 2018.
Okay, I’m looking at this more closely now. Which calculations do you think are wrong? Can you point out the section/paragraph?
In the “Roth vs Tax-deferred in Residency” paragraph: “If you’re single making $60K and have a $12,200 standard deduction, you’re going to need to put $60,000 – $12,200 – $18,735 = $29,065 into tax-deferred retirement accounts to get your REPAYE payments to $0.” I think it would be $60,000-$18,735 = $41,265 that would need to go into tax-deferred retirement accounts to get REPAYE payments to $0.
And then later in the paragraph the same would apply for the married couples scenarios as well.
Looks like it is my error. IDR payments are calculated based on AGI minus 150% of poverty line not taxable income minus 150% of poverty line. Will correct.
Great post, I found this extremely helpful. We have an interesting take on this situation where I am a working PA with $150,000 in loans and making $105,000 AGI. I have refinanced my loans to 3.5% interest with a monthly payment of $1,600. My fiancé is a 4th year medical student who has $250,000 in student loans and will be making $60,000 as a resident. I believe because of my AGI, there won’t be a REPAYE subsidy? But if we refinance, we will be have to make two monthly payments of $1,600 and $2,200, which stretches are finances, especially if we are trying to max out our Roth IRA during his residency. I am trying to decide if we fall more along the lines of “Doctor Married to an Engineer, Not Going for PSLF” or “Doctor Married to an Attending, not going for PSLF”
Hard to write a post that applies to every scenario. I guess the first question is whether either of you is going for PSLF. I would think that if you are not, the best thing is going to be just refinancing and getting started paying them back and using Roth IRAs. You have to do MFJ to do REPAYE and I’m skeptical there will be much of a subsidy given your combined incomes. Easy enough to run the numbers though. Let’s do it.
I think your REPAYE payment would be $1,172 and interest on $355K in loans at 7% is $2,071 a month. So the REPAYE subsidy would be ($2071-1172)/2=$450 a month. That effectively reduces your interest rate from 7% to 5.5%. I bet you can refinance to less than that.
Obviously if one of you is going for PSLF, a different calculation has to be made.
If you need more help running the numbers, hire one of my recommended student loan specialists.
MS4, incoming intern here. Thanks so much for this information, WCI!
My situation: Doctor married to engineer, going for PSLF.
My fed loans (principal): 280k
My fed loans (interest): 30k
My private loans (undergrad): 25k
Spouse fed loans: 6k
My question: #2 says to go PAYE so my payments during residency don’t include my spouse’s income in the calculations. But then #5 ends with “remain in REPAYE as they will not benefit from the PAYE cap on payments.” As an attending, should I switch to both MFJ and REPAYE?
Additional question: I goofed and submitted taxes MFJ. Should I amend MFS via TurboTax?
Thank you again!
I just tried to amend it via TurboTax and it looks like we’d owe 2.7k (unless I didn’t do it right). Since our 2018 AGI is 30.5k (spouse’s income), even with MFJ and PAYE, our payments will be $42 a month * 12 = $504 during my first year of training. I’d rather keep the MFJ status and 2.7k. Then for our 2019 taxes, I’ll file MFS since it would calculate my income from July-Dec. Does this sound right?
I suppose you could wait until next year to do MFJ if it doesn’t make a difference this year.
Talking to one of these guys is likely to be worth a couple hundred bucks to you: https://www.whitecoatinvestor.com/student-loan-advice/
Sorry for the repost, but this reply might be more appropriate as its own comment:
My wife and I are both doctors in fellowship enrolled in PSLF under PAYE. We were told to file taxes under MFS so that our monthly loan repayments would not skyrocket (a friend of ours switched to MFJ and went from monthly payments of ~$200-300 to ~$800; both doctors, wife had no loans, unlike us).
From reading this, it sounds like we should be in REPAYE so that we can MFJ, but I’m worried that the REPAYE/PSLF program would look at our AGI and say, “Hey, you’re making twice as much now — here’s your new appropriately higher monthly payment.” Is that not the case because we both have loans?
If that is not the case, we might consider switching. While we are doing the tax-deferred retirement contributions for the reasons you outlined above, we are under the understanding that we cannot contribute to Roth IRAs because we are MFS (MAGI above $10,000) and I want to have that option after fellowship when we are able to maximize our tax-deferred contributions.
Thank you for any input you can provide regarding the overall question of monthly payments when MFJ.
That’s right. Twice the loans should equal it out. But check your payments both ways. It’s not like you can’t get the figure before changing.
Hi!
I will be marrying a dental student (who has one more year left-graduates 2021) in June and I will be a FM intern in July…
I am in the process of figuring out the best way to pay back student loans and plan on consulting with SLP… but was wondering if I should be considering my finacé student loan debt also at this time??
My federal student loan debt: principal $150K ; interest $15K
My fiancé is projecting he will have about 300-350K in dental school student debt
Neither of us have private loan debt
Thank you in advance for your guidance!
Yes, I would take it into consideration in my making my plan given a wedding date that is 60-90 days away.
Recently married couple both new attendings not going for PSLF(our jobs don’t qualify). We both have significant debt, wife has almost double mine. Wife has been working as an attending for 2 years, and has refinanced her loans. I finished fellowship in July, and I plan to refinance in September as there is no current compounding interest. What would you recommendation be on attacking this situation?
Live like a resident until both are paid off. Refinance any time you can get a lower rate.
Hi Jim,
I am incredibly impressed by your process, guidance, and dedication to unraveling the mess of medical student loans. As the non-physician numbers guy, I have been geeking out and pouring through your articles and forums to help my wife pivot from her med school’s overly simple/inefficient advice.
Could I extend this article into other scenarios:
Doctor Going for PSLF Married to Moderate-Earning Statistician
https://www.whitecoatinvestor.com/student-loan-management-when-both-spouses-work/
Married with 2 kids.
Assume the Moderate-Earning Statistician spouse makes $200K and has no debt.
The doctor makes $55K and will finish residency mid-2022 and owes $500K. After residency, doctor will make $200K.
Doctor is currently on REPAYE, but on residency forbearance.
Fortunately, the non-payments during COVID forbearance count toward PSLF until I can pivot her loan plan.
PSLF Version
Doctor Going for PSLF Married to Moderate-Earning Statistician
If I interpret your guidance correctly, is the below sequence most advantageous?
# 1 Refinance private loans
# 2 Enroll in PAYE while doctor is a resident
# 3 File your taxes Married Filing Separately (MFS) as a resident
# 4 Contribute to doctor’s Roth retirement accounts as a resident
# 5 File taxes Married Filing Jointly (MFJ) as an attending
# 6 Contribute to tax-deferred retirement accounts as an attending
NOT PSLF Version. How is this?
Again, but Doctor NOT Going for PSLF Married to Moderate-Earning Statistician.
# 1 Refinance private loans
# 2 Enroll in PAYE while doctor is a resident
# 3 File your taxes Married Filing Separately (MFS) as a resident
# 4 Contribute to doctor’s Roth retirement accounts as a resident
# 5 File taxes Married Filing Jointly (MFJ) as an attending
# 6 Contribute to tax-deferred retirement accounts as an attending
# 7 Refinance loans as an attending
Thank you very much for your review and guidance!
Sincerely,
the Statistician
Your proposed strategies may be the right ones, one would have to run the numbers to be sure. If the “moderate-earning” statistician earning $200K needs assistance doing that, we have a new resource available:
https://studentloanadvice.com
In particular the Roth contribution for the PSLF scenario may be wrong.
again Jim have to echo above comments regarding your talent in personal finance. really comes through with this post!
U da man!
Thanks for your kind words.
This article is fantastically detailed and timely. A good reminder to sort this out prior to $0 payments ending and before filing 2022 tax returns.
In my situation (wife physician finishing 1st yr attending, I am not a physician) we are considering using 2021 AGI to switch from REPAYE to PAYE as she persues PSLF. However I originally was thinking of making this switch to take advantage of the cap but in reality if we switch to PAYE then I need to go a step further to evaluate MFJ vs MFS (I originally planned to make 1/4 of her salary but now make 1/2).