Loan Consolidation/IBR

[HLxDrummer]

Hey guys,

Need some advice on what to do with my loans. I have FFEL, direct, grad plus, and a couple non-federal through my school.

Consolidating the federals together seems like it would make things a lot easier. What are the downsides to this?

Also, I am planning to do IBR, unless there is a downside to this (other than higher payments compared to PAYE/REPAYE which doesn't bother me). I just did exit counseling and selected that option. Did I mess up the order? As in, should I consolidate first then select IBR? I also saw a link that said apply for IBR, do I have to do that as well?

Lastly, if I consolidate or apply for IBR now, will I lose my grace period. I don't start residency/get an income until July so if I can keep my grace period that would be nice.

Thanks!

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[mvenus929]

Last I checked, you couldn't waive your grace period with federal loans. I know several people who wanted to in order to get an extra 6 months under PSLF and they weren't able to. And I'm pretty sure you have to put in a separate application beyond your exit counseling for any of the income based repayment options

 

[RangerBob]

You can't consolidate until you graduate and your loans are no longer in "in-school" status. It takes about 2-3 months to consolidate, after which you enter repayment--so yes, you would lose your grace period if you consolidate right away after graduating. Or you can wait until closer to October to apply for consolidation, and then you would likely start repayment around the same time you would have otherwise. But your income is currently $0 (I assume), so if you consolidate right away (after you graduate, before you start internship) then your income would still be $0 and you would qualify for $0 payments for that first year.

If you consolidate all your loans and plan to take advantage of PSLF, consolidating earlier is better because you can start making eligible payments sooner.

However, consolidating doesn't have that many benefits. The main one is making FFEL loans direct loans, and thus making them eligible for PSLF and REPAYE/PAYE. That's the only reason I consolidated, and I only consolidated my FFEL loans. Your interest gets rounded up the nearest eighth of a percent, so it costs you a little more to consolidate actually.

There are not many reasons to do IBR over REPAYE--you get a really nice interest subsidy with REPAYE that you don't get with IBR. The only downside is if filing jointly then your spouses income is included in your calculation, but if they have loans it doesn't usually change how much the two of you are paying in total anyway. Interest capitalizes whenever you change repayment plans (and when you start repayment--whether at consolidation or when your grace period ends), so make sure to chose the correct plan from the start.

 

[HLxDrummer]

You can't consolidate until you graduate and your loans are no longer in "in-school" status. It takes about 2-3 months to consolidate, after which you enter repayment--so yes, you would lose your grace period if you consolidate right away after graduating. Or you can wait until closer to October to apply for consolidation, and then you would likely start repayment around the same time you would have otherwise. But your income is currently $0 (I assume), so if you consolidate right away (after you graduate, before you start internship) then your income would still be $0 and you would qualify for $0 payments for that first year.

If you consolidate all your loans and plan to take advantage of PSLF, consolidating earlier is better because you can start making eligible payments sooner.

However, consolidating doesn't have that many benefits. The main one is making FFEL loans direct loans, and thus making them eligible for PSLF and REPAYE/PAYE. That's the only reason I consolidated, and I only consolidated my FFEL loans. Your interest gets rounded up the nearest eighth of a percent, so it costs you a little more to consolidate actually.

There are not many reasons to do IBR over REPAYE--you get a really nice interest subsidy with REPAYE that you don't get with IBR. The only downside is if filing jointly then your spouses income is included in your calculation, but if they have loans it doesn't usually change how much the two of you are paying in total anyway. Interest capitalizes whenever you change repayment plans (and when you start repayment--whether at consolidation or when your grace period ends), so make sure to chose the correct plan from the start.

Thanks for the info! So what are the advantages of PAYE or REPAYE over IBR? Actually just remembered my FFEL loans were already consolidated so I probably don't need to consolidate further.

 

[RangerBob]

Thanks for the info! So what are the advantages of PAYE or REPAYE over IBR? Actually just remembered my FFEL loans were already consolidated so I probably don't need to consolidate further.

PAYE is better in every way than IBR-- your payment is 10% AGI minus the poverty limit factor, vs 15% for IBR. Loan forgiveness (but still taxable!) after 20yrs instead of 25. I think PAYE also limits how much interest can capitalize.

For all three plans, the gov't pays your unpaid accruing subsidized interest (ie, if you monthly payment covers all the accruing interest on your subsidized loans, then there's no benefit, but if you're only making minimal payments then the gov't covers the rest)

REPAYE payments are also 10%, but you have to include your spouse's income even if you filed separately. If you spouse is making payments on their loans it probably doesn't change things much, but if your spouse has no loans then sometimes your monthly payment is higher than the IBR payment would be. Forgiveness is after 25 years, unless you only have undergrad loans, then it's 20. But the real benefit is that as long as you're in the program, the government will pay half of your unpaid accumulated interest. So if you owe $300k and are collecting $20k in interest/year, assuming a monthly payment of $400 means you pay roughly $5k per year--that means you have $15k in interest that has accrued, so Uncle Sam pays $7.5k of that. That saves you over $20k in a 3yr residency. That's a rough calculation with a few estimates, but that interest subsidy alone generally makes REPAYE the program to go with.

The other downside of REPAYE is your monthly payment isn't capped at the 10-year repayment amount, like it is for IBR/PAYE, so in theory your monthly payments could be higher than those programs, where you would just be shifted to the 10-year repayment plan. But if you're in that situation you're doing very well and I don't see why you wouldn't want to pay off those loans quicker! Regardless, you could always leave REPAYE and change to the 10-year plan, so it's really a moot point.

 

[azhrei]

For all three plans, the gov't pays your unpaid accruing subsidized interest (ie, if you monthly payment covers all the accruing interest on your subsidized loans, then there's no benefit, but if you're only making minimal payments then the gov't covers the rest)

I may be wrong, but I'm pretty sure that the government does not subsidize the interest in IBR and PAYE. In REPAYE, half of the interest left over after your payments is subsidized.

 

[RangerBob]

I may be wrong, but I'm pretty sure that the government does not subsidize the interest in IBR and PAYE. In REPAYE, half of the interest left over after your payments is subsidized.

For IBR, the government pays all unpaid interest on subsidized loans for the first three years. REPAYE does the same, but in additional\ the gov't pays 50% of unpaid interest on all loans, and then after those first three years, will cover half the unpaid interest on the subsidized loans (as well as continue subsidizing half of the unpaid interest on non-subsidized loans).

My understanding is subsidized loans aren't available anymore (at least for graduate studies), so it's a moot point for many.

 

[mvenus929]

Interest capitalizes whenever you change repayment plans (and when you start repayment--whether at consolidation or when your grace period ends), so make sure to chose the correct plan from the start.

I'm not sure that's strictly true. My interest did not capitalize when I entered PAYE.

 

[RangerBob]

I'm not sure that's strictly true. My interest did not capitalize when I entered PAYE.

If it didn't capitalize then you're quite lucky--it's supposed to capitalize at the end of your grace period.