Help with Pay As You Earn repayment, please

[ImNotBritish]

I'll be graduating in May with a little under $150,000 in med school debt. I did my mandatory online exit counseling, and I'm still unclear on the best repayment choice. Someone please correct me if I'm wrong here: Couldn't I choose the PAYE repayment plan (which the online calculators show would give me a ~$200/month payment vs $1600/month for the standard plan), and apply an extra few hundred dollars per month to the principal of my loans throughout residency. Then, when residency is done in 3 years and I'm making an attending salary, switch over to the standard repayment plan?

I am not planning to try to use the loan forgiveness option, but it seems like this would buy me 3 years' worth of flexibility in payments and time to play down the principal a bit. The main drawback that I see is that the interest from those 3 years would be capitalized once I switch repayment plans, but if I'm doing a decent job of saving and paying down principal, I would hopefully be able to negate that drawback. Also, since I'm not holding out hope for balance forgiveness in the future or just paying the minimum interest, I don't think that I have to be concerned about my principal amount ballooning in those 3 years that I'm on PAYE. Am I missing something here? Thanks!

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[RangerBob]

You can definitely sign up for PAYE or IBR and make payments above the minimum--you'd likely want to pay off the highest interest loan first (though some people prefer to pay off the smallest loan first). You just make an additional payment and specify which loan you want it to apply to and that it's an extra (not early) payment. Many lenders will by default consider an extra payment an early payment, which just pushes your next due date further back.

Assuming you're not still eligible for PAYE when you become an attending (many of us will still be eligible depending on debt/salary) then when you leave PAYE/IBR your interest is capitalized, as you mention. But PAYE/IBR delay capitalization--if you were in forbearance your interest capitalizes regulatly (quarterly, I believe). So it saves you a lot of money to be in IBR/PAYE. Even if you can afford the 10-year payment, which would cover accruing interest, you might as well sign up for the income-based plans so you have some flexibility (in case you need to replace a car, etc.). If you have the money, then just pay the PAYE/IBR payment ($200 in your case) and then make up and apply the difference between the PAYE/IBR amount and the 10-year payment amount ($1400 in your case) to your highest-interest loan--that lets you pay down the principle faster on that one loan which will save you move than if you just pay the 10-year payment amount. In the latter case your payment gets applied proportionately to every loan, so it prevents you from selectively paying down the principle on one loan faster. Though, this makes no difference if your loans are all the same rate and unsubsidized. (If you have any subsidized loans, the government will pay any interest your PAYE/IBR payment doesn't cover for three years).

 

[mvenus929]

A further note on the above--whatever you pay above your PAYE/IBR payment will get applied to interest first before it gets applied to any principal. If your PAYE/IBR payment is not enough to cover interest, you will have interest accruing, it will just not capitalize while you are still under PAYE/IBR.

Also, our financial aid people told us to file a tax return this year, even if it's all 0's, so that you can hand over your tax return when your grace period ends in November. This will effectively make your PAYE/IBR payments $0 for the first year, and based on half your resident salary during your second year in repayment, giving you a little more flexibility and allowing the government to keep paying interest on your subsidized loans from first and second year (which saves something like $100/year). I'm not sure how this works logistically, since I haven't applied to enter repayment yet, but it'd be worth a shot.