$420k debt! Should I switch from PAYE to REPAYE?

[loannightmares]

Hi, all. I have a pretty complicated/extreme loan situation... I'm considering speaking to a student loan payment plan expert, but I'm wondering whether anyone who has a good grasp on the system could help me out here in the meantime. Here goes:

My student loan debt is $420,000, all federal loans. Interest rate is 6.5%. I'm currently a resident making $56k per year. In 1.5 years I’ll graduate and hopefully earn about $260-300k per year, gross income. I'm married, filing jointly; spouse will likely make $30-50k/year for the foreseeable future, but right now their income is 0.

I’ve been on the PAYE plan since starting residency 2.5 years ago. Monthly payment is a little under $200 per month, somehow, which seems low to me... it’s about all I can afford right now though. Interest is accruing rapidly of course, and by the time I graduate residency in 1.5 years the loan total will be ~$462k.

My questions are...

1) Should I have gone for REPAYE from the beginning for the interest subsidy? The interest racking up is no joke.

2) I’ve read that once I start making an attending salary, the financial hardship disqualification will lead my interest to capitalize under PAYE, as I'll be moved out of PAYE and into another payment program. I've read that this means a specific amount will be added to the principle, and this will continue to accrue interest. How can I find out how much my loan amount will balloon to once that happens?

3) Can I save myself any money by switching to REPAYE *now* instead of in 1.5 years and taking the plan-switch capitalization hit now rather than later? Will the interest subsidy benefit offset the damage from the interest capitalization? I won't get switched out of the REPAYE plan when I start making an attending salary, correct?

My plan is to pay down loans extremely aggressively over about 5 years once I’m in practice (basically living off $50k per year (net) and putting a small amount toward retirement in order to make drastic monthly loan payments). I do know about PSLF but am worried it will be taken away... I’m only 2.5 years of payments in.

Thank you!

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[TMP-SMX]

REPAYE is good for hedging your bets on PSLF and benefitting from the interest subsidy. You are likely to meet partial financial hardship until you have re-certified with the tax year making a full attending salary (which will then capitalize your loan). When do you next re-certify your income? Just save yourself time and do your switch at that point.

 

[loannightmares]

Thanks for the response! I don't think I'll have to recertify my income until next September or so, but my income won't significantly change for about 21 more months; I think that's when I'll have my first attending job sorted out and actually be earning money, at least.

So right now I'm on PAYE... but I've learned now that REPAYE has a 50% interest subsidy on unsubsidized loans, for the life of the loan(?)... therefore my interest rate could effectively be cut in half from 6.5% to 3.25% overnight if I switched plans, which is a huge deal when my principal is so high. However, if I switch from PAYE to REPAYE, the interest will be capitalized now. I estimate that that would add about $40-50k to my loan principal (since I entered into PAYE when I owed about $440k (I've made some big payments since then which is why my total is currently lower at $417k -- I said $420k above for simplification, but now that I'm doing the math I'll be more precise)). My loan total consists of 99% unsubsidized loans.

If I'm doing the math right it seems like I need to switch to REPAYE immediately, but I'm not sure if I'm looking at this correctly. Here is my thought process:

If staying on PAYE -> $417k debt now, but total of $462k by the time I start earning an attending salary in about 21 months -> ~$45k capitalized interest is added once I'm an attending and financial hardship ends -> $507k is the new total, which continues on at 6.5% interest.

If switching to REPAYE today -> $417k debt now -> $45k capitalized interest is added now due to switching plans -> $462k new total over night -> but interest is effectively decreased to 3.25% for the next 21 months until I earn high salary -> ultimately graduate residency with $488k debt, and this continues at 3.25% interest for the life of the loan, which makes it easier to pay off.

From this, it looks like I should switch into REPAYE right away and should have been on this plan from the get-go. Does this seem correct?

 

[TMP-SMX]

REPAYE has the benefit of the 50% subsidy on interest on your unsub loans for the life of the loan. If you have subsidized loan both PAYE and REPAYE have a subsidy of that interest X3 years but not sure if anyone recently in med school would have subsidized loans since they aren't given out anymore. If you don't anticipate your income to rise significantly and especially that of your spouse then feel free to switch to REPAYE now. PAYE has the benefit of capping your capitalized interest to 10% of your loan balance when you entered repayment when you no longer meet partial financial hardship. This probably isn't a valid benefit compared to the REPAYE interest subsidy but a calculation that's needed as I'm not aware of the details (for example most people in your situation will be refinancing to a private loan in which case your new principal will be the entire balance including interest at that point and you may not make it to losing partial financial hardship and capitalization). PAYE also allows you to file separately and not include spousal income if that is something you need to worry about.

 

[SigmaFS]

Q1. Interest capitalizes when you switch repayment plans. How much accrued interest do you currently have?
Q2. To no longer demonstrate a Partial Financial Hardship(PFH), your Adjusted Gross Income would need to be approximately 1.4x your student debt or $420,000 x 1.4 = $588,000.
Q3. Again, we need to know your current accrued interest. My initial thought is, yes, you would be benefit from the REPAYE 50% interest subsidy despite the capitalization of accrued interest. Also keep in mind that your spouse's income will be consider while in REPAYE.

Regarding PSLF, I'm much more optimistic as I feel it will be grandfathered for current borrowers. If you have any thoughts of pursuing academic medicine, then consider submitting a PSLF Employment Certification Form (https://studentaid.gov/sites/default/files/public-service-employment-certification-form.pdf). Please be informed by submitting the form your loan servicer will be MyFedLoans.

Good luck!

 

[loannightmares]

I went ahead and switched to REPAYE, and no interest capitalized. It turns out that I didn’t have any accrued interest, which I assume is because I made a very large payment several months ago. So my overall loan total has remained the same. I wish I had switched to REPAYE a long time ago for the interest subsidy! Is there any way to receive confirmation monthly that the interest subsidy is being applied correctly, other than just doing the math myself?

I really go back and forth on whether to go for PSLF. The absolute soonest I could aggressively pay off my loans is 4 years after the end of residency, compared to going for PSLF which would take me about 6.5 years post residency. Two and a half years isn’t a big enough difference to justify not going for PSLF, considering how much I could save by going that route. It just makes me nervous to “depend” on that. I’d save up a PSLF side fund of course, but I’ve done the math and would likely have to empty out almost all my retirement savings up to that point if I had to use that side fund to pay off the loans. If PSLF works though, I get over 300k forgiven and have almost 500k in retirement savings to boot!

SigmaFS, I didn’t realize that’s how the financial hardship was determined. In that case I’ll never lose the financial hardship status, because my gross salary will never outstrip my loan total. Also, I’m glad you mentioned that submitting the ECF will cause my loans to be transferred to FedLoans, because I didn’t realize that. Just to be clear, instead of me using Navient as usual everything will go to FedLoans for the life of the loans?

 

[TMP-SMX]

Stop making large payments it defeats the purpose of getting your remaining loan balance forgiven and might put you in paid ahead status so that any payments after that don't count. Don't waffle it will reduce your potential benefit of forgiveness should you go that route. REPAYE determines the interest subsidy based on the calculated minimum loan payment not on the actual payment. If you file an employer recertification form you will be transferred to fedloans after an administrative forbearance of 1-2 months. Make sure you keep records of your current payments to keep track of how many you have made.

 

[SigmaFS]

SigmaFS, I didn’t realize that’s how the financial hardship was determined. In that case I’ll never lose the financial hardship status, because my gross salary will never outstrip my loan total. Also, I’m glad you mentioned that submitting the ECF will cause my loans to be transferred to FedLoans, because I didn’t realize that. Just to be clear, instead of me using Navient as usual everything will go to FedLoans for the life of the loans?

Yes, if you submit an ECF, your loan servicer will automatically switch to FedLoans. Should you pursue PSLF, your strategy is to minimize your payment to maximize your forgiveness. Make the minimum payment required, contribute to your retirement accounts and HSA if eligible. Also, if you live in a community property state, consider switching back to PAYE and filing taxes separately. This will allow you report a lower AGI.

 

[dpmd]

You have to keep in mind that some of the jobs qualifying for pslf will pay less than the non qualifying jobs, so you have to factor that in to your decision as well.