Can you do IBR or PAYE but pay off the loan early?

[Uncle Albert]

If I do IBR or PAYE, which is about 20 years long, can I just pay the 10% of my annual income while in residency/fellowship and then pay off the entirety of my remaining loans when I hit attending salary in like PGY7/PGY8? Or am I locked into paying 10% of my salary for the entire 20 years of IBR/PAYE without the option of paying my loans off earlier?


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[RangerBob]

Yes. The 10% is just the minimum required payment. You can (and should to avoid extra interest!) pay extra, and you can direct that extra payment to the highest interest loan(s) if you want. Just make sure it's directed as an extra payment--sometimes extra payments are credited towards future payments, and will only increase the amount of time until your next payment is due. This is common with mortgages too. If I recall, FedLoan specifically has that option on their website where you can make a one-time payment and specify which loan to apply it to. I'm sure the other loan services have this option as well.

 

[Uncle Albert]

Yes. The 10% is just the minimum required payment. You can (and should to avoid extra interest!) pay extra, and you can direct that extra payment to the highest interest loan(s) if you want. Just make sure it's directed as an extra payment--sometimes extra payments are credited towards future payments, and will only increase the amount of time until your next payment is due. This is common with mortgages too. If I recall, FedLoan specifically has that option on their website where you can make a one-time payment and specify which loan to apply it to. I'm sure the other loan services have this option as well.

Thanks for the advice! This seemed too good to be true at first. Idk why anyone would choose standard repayment plan given that you can pay loans off early with IBR.

Do you recommend IBR, REPAYE,or PAYE if I plan to pay a lot extra every month and pay off my loans ASAP? I’ll be 170k in debt when I graduate in May but plan on repaying right away when I start residency (not gonna wait for grace period). Monthly take home pay will be at least 2k after taxes since I will be living with parents so no rent.


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[RangerBob]

Thanks for the advice! This seemed too good to be true at first. Idk why anyone would choose standard repayment plan given that you can pay loans off early with IBR.

Do you recommend IBR, REPAYE,or PAYE if I plan to pay a lot extra every month and pay off my loans ASAP? I’ll be 170k in debt when I graduate in May but plan on repaying right away when I start residency (not gonna wait for grace period). Monthly take home pay will be at least 2k after taxes since I will be living with parents so no rent.


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I agree--I can think of almost no reason to chose the standard plan, given that you are not penalized for paying student loans off early and can easily apply pay the same amount per month towards your loans. The only reason I can think of to go with the standard plan is if you're not disciplined enough to pay that extra money towards the loans.

I am not sure there is any reason to ever choose IBR over PAYE, but not everyone qualifies for PAYE.

REPAYE has the downside of taking both your and your spouses (if you have one) income into account. For many that increases the monthly payment. But it also automatically takes your spouses loans into account (IBR and PAYE can take their loans into account as well, but I don't know if it's automatic), so if they have a proportionate loan balance relative to their income then you'd pretty much pay the same anyway.

I am married to a non-working spouse, and I actually changed from IBR to REPAYE. This unfortunately allowed my interest to capitalize (this will happen anytime you change payment plans, or if you fail to re-certify on-time), but REPAYE has an interest subsidy. Basically, Uncle Sam pays half my unpaid interest (which could effectively halve your aggregate interest rate if your payments are really, really low). The interest subsidy more than made up for the extra capitalized interest in my case.

My plan is to continue to pay the minimum REPAYE payment, and focus as much available funds as possible targeted to my highest interest loan (or the smallest loan balance--I've yet to fully decide) one at a time. Personally, that's what I would do in your shoes as well--use REPAYE to get the interest subsidy, pay the minimum monthly payment, and then selectively pay off one loan at a time. Studies show you're generally best off paying the smallest loans first because of the psychological snowball effect, but if you're super disciplined then paying off the loan with the highest rate makes more sense.

That's a great idea to start paying off the loans ASAP. You can't start REPAYE (or any payment plan) until your grace period expires, unless you consolidate (which might be worth looking into if your loans are all about the same rate). But you should certainly be able to make extra payments during that period.

 

[Postictal Raiden]

@RangerBob

I’m a 4th year student anticipating to start residency in few months. Have a nonworking wife and two kids. 500k loans including interests. My plan is to do RePaYE in residency and then refinance the loans at a hopefully much lower rate (I’m hearing of people refinancing at rates as low as 2.5%!). This would allow me to 1. Reduce my interests accumulation during residency by half and 2. Aggressively payoff the loans at much lower rate, saving myself from paying tons of interest.

I wonder, if one refinances federal loans that are under RePAYE, will the subsidized interests be added to the overall amount? (Like how your interests capitalized when switching from IBR to RePAYE)

 

[RangerBob]

@RangerBob

I’m a 4th year student anticipating to start residency in few months. Have a nonworking wife and two kids. 500k loans including interests. My plan is to do RePaYE in residency and then refinance the loans at a hopefully much lower rate (I’m hearing of people refinancing at rates as low as 2.5%!). This would allow me to 1. Reduce my interests accumulation during residency by half and 2. Aggressively payoff the loans at much lower rate, saving myself from paying tons of interest.

I wonder, if one refinances federal loans that are under RePAYE, will the subsidized interests be added to the overall amount? (Like how your interests capitalized when switching from IBR to RePAYE)

Tough situation, but depending on your lifestyle, where you live, and your salary, still quite doable. You just might not have the "high class" life for a while, but it's all relative.

A rate of 2.5% sounds great--though it's possible a rate that low is for a variable 5-year loan. Either way, see what you can get. My plan is to do the same, assuming I like the job I accepted (it's not PSLF eligible). But I will wait to consolidate until about a year into attendinghood, because up until then I still get the REPAYE interest subsidy, so my rates would effectively be about 4% or so. Still, 2.5% is quite nice. However, do be careful when consolidating--while I do not think PSLF will necessarily stick around in it's current form, there is still a good chance it will. Maybe it'll get taxed, or limited, or who knows, but maybe it won't (we've yet to see any limitations and the first cohort has applied for forgiveness).

I do not think the subsidized interest would be added to the overall amount. When I log in and view my loan balance, it shows my principle and accumulated interest. The accumulated interest goes up steadily each day, then drops after my payment is made--both from my monthly payment (which is hardly anything), as well as the interest subsidy. While you would certainly see your accumulated interest tacked on to any consolidation loan (since you have to pay off the entirety of whatever loans you want to consolidate), I do not believe the subsidized interest would be added on. I believe (and it's certainly possible I could be wrong), that it's best to view the interest subsidy as Uncle Sam gave you x dollars that month in cash, no strings attached.

 

[Postictal Raiden]

Tough situation, but depending on your lifestyle, where you live, and your salary, still quite doable. You just might not have the "high class" life for a while, but it's all relative.

A rate of 2.5% sounds great--though it's possible a rate that low is for a variable 5-year loan. Either way, see what you can get. My plan is to do the same, assuming I like the job I accepted (it's not PSLF eligible). But I will wait to consolidate until about a year into attendinghood, because up until then I still get the REPAYE interest subsidy, so my rates would effectively be about 4% or so. Still, 2.5% is quite nice. However, do be careful when consolidating--while I do not think PSLF will necessarily stick around in it's current form, there is still a good chance it will. Maybe it'll get taxed, or limited, or who knows, but maybe it won't (we've yet to see any limitations and the first cohort has applied for forgiveness).

I do not think the subsidized interest would be added to the overall amount. When I log in and view my loan balance, it shows my principle and accumulated interest. The accumulated interest goes up steadily each day, then drops after my payment is made--both from my monthly payment (which is hardly anything), as well as the interest subsidy. While you would certainly see your accumulated interest tacked on to any consolidation loan (since you have to pay off the entirety of whatever loans you want to consolidate), I do not believe the subsidized interest would be added on. I believe (and it's certainly possible I could be wrong), that it's best to view the interest subsidy as Uncle Sam gave you x dollars that month in cash, no strings attached.

Thank you for the response.

I wonder if there's a way to figure out the cutoff point at which refinancing the loans makes more financial sense than continuing with RePAYE and having half of the unpaid interest covered by Uncle Sam.

For example, if one makes 300k and the interests on his principle loans are 30k/year, would it be more reasonable to continue with RePAYE for the remaining of the 25-year term and potentially be hit with a tax bomb at the end, or refinance at, say, 4%? I could run the numbers; it's no rocket science, but things get more complex as you start factoring in potential increase of salary over the next 3 decades.

 

[RangerBob]

Thank you for the response.

I wonder if there's a way to figure out the cutoff point at which refinancing the loans makes more financial sense than continuing with RePAYE and having half of the unpaid interest covered by Uncle Sam.

For example, if one makes 300k and the interests on his principle loans are 30k/year, would it be more reasonable to continue with RePAYE for the remaining of the 25-year term and potentially be hit with a tax bomb at the end, or refinance at, say, 4%? I could run the numbers; it's no rocket science, but things get more complex as you start factoring in potential increase of salary over the next 3 decades.

Personally I plan to pay off my debt long before 25 years, and I am also a fellow high-borrower. I would not be comfortable counting on the 25 year forgiveness-it's just so far out. Many things could chance--like the top tax rates! But otherwise yes, it's probably not that complicated of math. Things like salary raises are difficult to predict--who knows if the economy will boom, or maybe it'll tank.

 

[The Physician Philosopher]

I just spent a bunch of time (hours and hours) creating my Student Loans Resource Page where I discuss some of these issues.

REPAYE has no cap on the 10% discretional spending cost... so its a terrible plan for an attending, but a great plan for residents with high debt burdens and a long training time. 10% of a residents discretionary income can even be zero dollars (intern year). They pay off 50% of whatever interest isn't paid via your payments. If you aren't planning to do PSLF (aren't going to work for a 501(c)3) then the private refinancing companies now offer programs specifically for residents. There are five companies, though two of them are really only worth considering if you have a contract in hand.

For the person above who has 500k in debt, I'd consider doing PSLF through REPAYE if your training time will be long enough. 500k is a bunch of money. Make sure you certify every year to make sure you qualify for PSLF, and that you line up a 501(c)3 job until your 120 payments have been made. Once you finish switch to PAYE because there is a cap on your monthly payment (unlike REPAYE).

 

[apr27]

I agree--I can think of almost no reason to chose the standard plan, given that you are not penalized for paying student loans off early and can easily apply pay the same amount per month towards your loans. The only reason I can think of to go with the standard plan is if you're not disciplined enough to pay that extra money towards the loans.

I am not sure there is any reason to ever choose IBR over PAYE, but not everyone qualifies for PAYE.

REPAYE has the downside of taking both your and your spouses (if you have one) income into account. For many that increases the monthly payment. But it also automatically takes your spouses loans into account (IBR and PAYE can take their loans into account as well, but I don't know if it's automatic), so if they have a proportionate loan balance relative to their income then you'd pretty much pay the same anyway.

I am married to a non-working spouse, and I actually changed from IBR to REPAYE. This unfortunately allowed my interest to capitalize (this will happen anytime you change payment plans, or if you fail to re-certify on-time), but REPAYE has an interest subsidy. Basically, Uncle Sam pays half my unpaid interest (which could effectively halve your aggregate interest rate if your payments are really, really low). The interest subsidy more than made up for the extra capitalized interest in my case.

My plan is to continue to pay the minimum REPAYE payment, and focus as much available funds as possible targeted to my highest interest loan (or the smallest loan balance--I've yet to fully decide) one at a time. Personally, that's what I would do in your shoes as well--use REPAYE to get the interest subsidy, pay the minimum monthly payment, and then selectively pay off one loan at a time. Studies show you're generally best off paying the smallest loans first because of the psychological snowball effect, but if you're super disciplined then paying off the loan with the highest rate makes more sense.

That's a great idea to start paying off the loans ASAP. You can't start REPAYE (or any payment plan) until your grace period expires, unless you consolidate (which might be worth looking into if your loans are all about the same rate). But you should certainly be able to make extra payments during that period.

Sorry to revive on old thread, but I've bene trying to educate myself on this stuff and I enjoy your posts. So, thank you. I anticipate on entering REPAYE as well. If one plans on entering pslf, is there any advantage to making extra payments? With that in mind (or regardless), why is it better to tackle loans first as opposed to saving? Are you speaking "after the fact" as in after you've done your initial savings for the month/year and you put additional funds towards your loans? I ask, because a friend of mine told me it was unwise to "save" and that I would be better off just putting all my money towards my loans. Mathematically, would one come out better this way as opposed to paying minimums and contributing to a 403b/Roth combo?

 

[RangerBob]

Sorry to revive on old thread, but I've bene trying to educate myself on this stuff and I enjoy your posts. So, thank you. I anticipate on entering REPAYE as well. If one plans on entering pslf, is there any advantage to making extra payments? With that in mind (or regardless), why is it better to tackle loans first as opposed to saving? Are you speaking "after the fact" as in after you've done your initial savings for the month/year and you put additional funds towards your loans? I ask, because a friend of mine told me it was unwise to "save" and that I would be better off just putting all my money towards my loans. Mathematically, would one come out better this way as opposed to paying minimums and contributing to a 403b/Roth combo?

If PSLF is not in the picture, you're typically better off paying off high interest loans first. The White Coat Investor has some helpful posts on this, and considers "high interest" to be above 7% or so. Federal loan rates are still quite high so you want to prioritize paying them off, but obviously first you want to take advantage of any kind of matched retirement plan, then you start debating loan payoff vs roth IRA, etc.

If you anticipate benefiting from PSLF, there is no reason to make extra payments (even if your rates are above 7%--the rates don't matter)--that's money that's being thrown away if PSLF pans out (because the balance just gets forgiven in the end, you have an incentive to pay as little as you can). If I had a job where I was expecting PSLF, then I would pay the absolute minimum REPAYE payment. I would recommend putting the difference between the 10-year payment and your REPAYE payment towards some sort of investment where you could still access the money, in the event PSLF disappears or gets limited one way or another.

To get the absolute minimum REPAYE payment, you could maximize non-Roth contributions, as that will lower your AGI. As a resident you may or may not be better off contributing to a Roth instead--you save money in retirement because you'd be withdrawing tax-free, but you'd lose the benefit of lowering your AGI, which not only lowers your REPAYE payment but also maximizes your REPAYE interest subsidy.

Of course, you can't withdraw that money (and in a Roth IRA, you can only withdraw your contributions, and it's unlikely you'll qualify for a Roth while you're an attending). So ideally you would be maximizing your retirement contributions and putting the difference between the 10-year payment and REPAYE payment in a taxable investment account or whatever seems to be a reasonable 10-year investment.

 

[TMP-SMX]

Sorry to revive on old thread, but I've bene trying to educate myself on this stuff and I enjoy your posts. So, thank you. I anticipate on entering REPAYE as well. If one plans on entering pslf, is there any advantage to making extra payments? With that in mind (or regardless), why is it better to tackle loans first as opposed to saving? Are you speaking "after the fact" as in after you've done your initial savings for the month/year and you put additional funds towards your loans? I ask, because a friend of mine told me it was unwise to "save" and that I would be better off just putting all my money towards my loans. Mathematically, would one come out better this way as opposed to paying minimums and contributing to a 403b/Roth combo?

Definitely get your free money from the match of your 403b if you have one. Make sure credit cards don't get you and live as cheap as possible. Beyond that, enjoy the subsidy on REPAYE, consolidate ASAP to all direct loans if you aren't on them yet, and have to a Roth IRA while you can benefit from the low tax rate you have.

 

[NITRAS]

Just an aside, you can do a ROTH if you have a high income. Just takes a couple of steps.

 

[TMP-SMX]

Just an aside, you can do a ROTH if you have a high income. Just takes a couple of steps.

That's true but only because traditional IRAs aren't useful either due to loss of tax deduction over the income limit. A backdoor Roth is a good investment vehicle for diversifying but the biggest benefit is through a standard Roth and not a backdoor. Most of us will have lower tax brackets in retirement (we assume as no-one has any idea what the future holds).