IBR vs standard repayment

[Bostonredsox]

Question, let me know if I'm offpoint here.

Based on my total federal debt, standard extended repayment for me is $3300/month for 20 years.

Married with my non working wife and 5 kids, on a starting hospitalist base salary of 200k yields am IBR payment of $1800. If I understand this right, even if IM not at nonprofit, my first two year contract is not at a nonprofit, whatever's left after 20 years of IBR is forgiven. With PSLF its 10 years.

So. Assuming my salary gets up to about 250k, my IBR go up to about $2500. Still much less than standard repayment. If we average my salary at 230k over those 20 years and assume I'm never a a nonprofit, which is unlikely as ill probably change to one in 3-4 years, my IBR is like $2200, yielding a forgiven amount of over $300k after 20 years as compared with standard repayment.

Is there any reason for me to not do IBR?

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[jplkl]

You will owe taxes on the $300k at your marginal tax rate in the year that the $300k is forgiven. You need to factor that into the analysis.

 

[RangerBob]

Jplkl is correct--as of right now anything forgiven (unless through PSLF) is taxable. Also, IBR forgiveness also occurs after 25 years, not 20. PAYE forgiveness is after 20.

I'd also like to add it's a gamble as to whether high-borrowers will be eligible for forgiveness--to me counting on IBR forgiveness is risky, as your principle isn't going to be going down much if you only pay the minimum IBR payment.

My personal opinion is the government will keep loan forgiveness for IBR and PAYE around, as currently they probably come out ahead with the "tax bomb" that hits you when your loans get forgiven (so the 20-year payment may actually be cheaper...) Think about all that interest you're paying over those 25 years of IBR and then the taxes on forgiveness--I'm pretty sure you'll end up paying more to the government than if you did the extended repayment plan.

Now, if the government gets rid of the "tax bomb" that's another matter...

 

[Igor4sugry]

Question, let me know if I'm offpoint here.

Based on my total federal debt, standard extended repayment for me is $3300/month for 20 years.

Married with my non working wife and 5 kids, on a starting hospitalist base salary of 200k yields am IBR payment of $1800. If I understand this right, even if IM not at nonprofit, my first two year contract is not at a nonprofit, whatever's left after 20 years of IBR is forgiven. With PSLF its 10 years.

So. Assuming my salary gets up to about 250k, my IBR go up to about $2500. Still much less than standard repayment. If we average my salary at 230k over those 20 years and assume I'm never a a nonprofit, which is unlikely as ill probably change to one in 3-4 years, my IBR is like $2200, yielding a forgiven amount of over $300k after 20 years as compared with standard repayment.

Is there any reason for me to not do IBR?

So looks like you own $435,000.00 Are you still in residency? If yes you are growing interest at $30k/yr as well. So take that into account.

1. At this point your best bet is to find a hospital that will offer you the most loan repayment and a high salary. Live well bellow your means and pay this off in under 10yrs.
With 5 kids taking this out for 20years will be crippling.
With this much debt, non-working spouse, and 5 kids you will be living a very middle class lifestyle for quite some time.
I wouldn't even think about doing 20yrs of payments and then paying 30-40% tax on remaining balance.

 

[Bostonredsox]

Thanks for the replies guys. Your right about 430k. Yes still in residency, 11 ,months to go. I have a base contract lined up for July for 200k hospitalist. Planning on an extra shift per pay period to get me to 240k.

Ran the numbers with the wife. I think the best plan for me is 10 year graduated payments. Reason graduated is I'm gonna have a lot of personal extra costs the first two years, which will disappear after year 2. If I do this plan, I'm supposed to pay monthly for years 1-2, 2900, 3-4, 3800, 5-6, 5000, 7-8, 6800, 9-10, 8600.

My plan will be 2900 years 1-2 when I have those personal expenses, then years 3-10 ill pay 5500 which will pay the entire balance in 10. Total payment will be 640k. If I did 25 year graduated I'd pay a total of 1.1 million. That extra 400k in interest will pay for all 5 of my kids college tuitions.

If I did IBR on 240k, I'd pay 680k....but if you add in the tax on the forgiven 250k you mentioned that's another 90k. Plus I'd be making payments for 25 years.

The ten year plan will have everything paid when I turn 39, 2 years before my eldest will start college.

Plus doing the math on 240k my take home will still be 14k monthly. We can pay the 5500 monthly for ten years and still get the 400k house we want for our kids.

 

[Postictal Raiden]

Thanks for the replies guys. Your right about 430k. Yes still in residency, 11 ,months to go. I have a base contract lined up for July for 200k hospitalist. Planning on an extra shift per pay period to get me to 240k.

Ran the numbers with the wife. I think the best plan for me is 10 year graduated payments. Reason graduated is I'm gonna have a lot of personal extra costs the first two years, which will disappear after year 2. If I do this plan, I'm supposed to pay monthly for years 1-2, 2900, 3-4, 3800, 5-6, 5000, 7-8, 6800, 9-10, 8600.

My plan will be 2900 years 1-2 when I have those personal expenses, then years 3-10 ill pay 5500 which will pay the entire balance in 10. Total payment will be 640k. If I did 25 year graduated I'd pay a total of 1.1 million. That extra 400k in interest will pay for all 5 of my kids college tuitions.

If I did IBR on 240k, I'd pay 680k....but if you add in the tax on the forgiven 250k you mentioned that's another 90k. Plus I'd be making payments for 25 years.

The ten year plan will have everything paid when I turn 39, 2 years before my eldest will start college.

Plus doing the math on 240k my take home will still be 14k monthly. We can pay the 5500 monthly for ten years and still get the 400k house we want for our kids.

As a pre-med, I understand that I still don't have much skin into the game, but being a head of a household I think I understand your situation.

If I were you, I would stick to the IBR/PAYE plan. I understand that you'll be paying ~130K more than what you would under the graduated 10-year plan. However, taking inflation in consideration, you may end up paying the same. In fact, 640K after ten years > 770K after 20 years (assuming 3% inflation/year).

In addition, by choosing IBR/PAYE, your monthly burden for the first ten years will be 3000 less than if you were to go with the standard 10-year repayment plan. With an additional 3K/month in hand, you could finish paying off your 400K mortgage in 10 years, instead of 20 or 30.

With a stay at home wife and 5 kids, my priority would be to secure my family first and let the student loans die slowly on its own. The debt dies with the death of the borrower.

 

[RangerBob]

One way to consider repaying is stick with IBR, and just making more than the minimum payment. This helps you in a couple ways:

1) If you end up possibly qualifying for PSLF (and the program isn't scrapped). If you plan to repay the loan in 10 years this doesn't help you, but if you get a job at a nonprofit in the next few years (note: you have to be paid by a non-profit. Many hospitalists work at non-profits but are employed by for-profit physicians foundations), then it might be worth lowering your monthly payments a bit and hedge your bets as far as maybe paying more than the minimum (if PSLF disappears) but less than the 10-year plan (so if PSLF sticks around you can benefit from it)

2) If unforeseen circumstances cause you to extend repayment then it's possible forgiveness (if still around!) under IBR after 25 years.

3) Most importantly: If you do IBR, you can still pay the same each month as the extended repayment plan. However, anything on top of the required IBR payment is considered an additional payment, so you can apply that to whatever loan you want (I assume with your level of debt you have GradPlus loans, which have a much higher interest rate than Stafford loans). So you'd end up paying less because you'd have less principle tied up in higher interest loans.

If you go that route, you do have to specify that any additional monthly payment is an additional payment and specify the loan you want it to apply to. Otherwise it just goes towards your repayment plan, and all that does is extend the time until your next payment is due. That doesn't do you any good--it's the same as just making the minimum IBR payment.

 

[Bostonredsox]

As a pre-med, I understand that I still don't have much skin into the game, but being a head of a household I think I understand your situation.

If I were you, I would stick to the IBR/PAYE plan. I understand that you'll be paying ~130K more than what you would under the graduated 10-year plan. However, taking inflation in consideration, you may end up paying the same. In fact, 640K after ten years > 770K after 20 years (assuming 3% inflation/year).

In addition, by choosing IBR/PAYE, your monthly burden for the first ten years will be 3000 less than if you were to go with the standard 10-year repayment plan. With an additional 3K/month in hand, you could finish paying off your 400K mortgage in 10 years, instead of 20 or 30. With a stay at home wife and 5 kids, my priority would be to secure my family first and let the student loans die slowly on its own. The debt dies with the death of the borrower.

But if I understand this right, id be using the extra 3k on my 4.2ish% morgate and not on my 6.8-8.5% student loans. this seems like the wrong way to hit the debt to me.

IMO, the PSLF will not be there. As soon as the government writes off a few million dollars in physician loan debt starting in 2017 they will ban us from being a part of it. or set a salary cap thats ridiculously low. Im not planning on that being an option. plus you guys are right, alot of the hospitalist gigs are private practice/group owned and for profit.

Now if I do IBR and just make extra payments towards the principal, isnt that essentially the same as doing 10 year standard? my understanding is the major benefit to IBR is the write off at the end. If I make extra payments and pay it off before the end I will have paid the same if not more than If I just did 10 year standard.

Every way I have looked at it, the LEAST amount I can pay back because of interest is 10 year standard. I chose graduated to give me a light payment those first two years. Unless I am missing something, mainly because of the write-off tax, IBR will cost me more money in interest by a lot. Plus, If my salary rises, which I am expecting it to, as around year-4 im planning on a CCM fellowship, hopefully one year possibly two. post fellowhip CCM pay where I wil be is much nearer to 325k. this will jack up my IBR pay to nearer to my standard repayment pay, but over a longer period.

 

[RangerBob]

Every way I have looked at it, the LEAST amount I can pay back because of interest is 10 year standard. I chose graduated to give me a light payment those first two years. Unless I am missing something, mainly because of the write-off tax, IBR will cost me more money in interest by a lot. Plus, If my salary rises, which I am expecting it to, as around year-4 im planning on a CCM fellowship, hopefully one year possibly two. post fellowhip CCM pay where I wil be is much nearer to 325k. this will jack up my IBR pay to nearer to my standard repayment pay, but over a longer period.

If you do IBR with extra payments applied towards the higher interest loans, it should be cheaper than the 10-year repayment, as long as you pay the same amount each month for IBR + extra payments when compared to the 10-year payment plan. The interest rate is the same regardless of which plan you choose, so if you do IBR + extra payments then you get rid of those high interest loans faster. Under standard repayment, if I'm not mistaken, your monthly payment gets divided among all your loans, high and low interest.

There's certainly more headache involved if you do IBR + extra payments. And you have to be really disciplined to stay on top of things, as well as not skip the extra payment part. But if you do it right, you'll have those loans paid off in 10 years and there's no tax bomb to worry about, because there's nothing being forgiven.

 

[Bostonredsox]

If you do IBR with extra payments applied towards the higher interest loans, it should be cheaper than the 10-year repayment, as long as you pay the same amount each month for IBR + extra payments when compared to the 10-year payment plan. The interest rate is the same regardless of which plan you choose, so if you do IBR + extra payments then you get rid of those high interest loans faster. Under standard repayment, if I'm not mistaken, your monthly payment gets divided among all your loans, high and low interest.

There's certainly more headache involved if you do IBR + extra payments. And you have to be really disciplined to stay on top of things, as well as not skip the extra payment part. But if you do it right, you'll have those loans paid off in 10 years and there's no tax bomb to worry about, because there's nothing being forgiven.

makes sense. What I need is to calculate what the extra payment amount is to have it paid off in ten years. What I like about your idea is that if I have a rough month, meaning work a few less shifts then normal and go on a vacation, I could just pay the normal IBR amount for that month and have an extra 3k to use.

 

[Igor4sugry]

Planning on an extra shift per pay period to get me to 240k.


Plus doing the math on 240k my take home will still be 14k monthly. We can pay the 5500 monthly for ten years and still get the 400k house we want for our kids.

Best advise is from whitecoatinvestor.com. Live like a resident for 5-7years post residency and pay off all your debt.

Doing extra shifts for 10 years may get you burned out. Also, I would avoid upgrading your lifestyle with a $400k house. You may have trouble securing a mortgage given your level of debt.

Repaying in 10years is the way to go, and tackling the highest interest rate loans is always the smart move.
There is another argument against doing 20yr IBR. How do you plan to send your 5 kids to college? Ten years form now you will need to start saving at high rate to pay for their tuition. That will be a big chunk of your paycheck, and if you still own med school loans you will be same situation as at end of residency.

 

[Bostonredsox]

Best advise is from whitecoatinvestor.com. Live like a resident for 5-7years post residency and pay off all your debt.

Doing extra shifts for 10 years may get you burned out. Also, I would avoid upgrading your lifestyle with a $400k house. You may have trouble securing a mortgage given your level of debt.

Repaying in 10years is the way to go, and tackling the highest interest rate loans is always the smart move.
There is another argument against doing 20yr IBR. How do you plan to send your 5 kids to college? Ten years form now you will need to start saving at high rate to pay for their tuition. That will be a big chunk of your paycheck, and if you still own med school loans you will be same situation as at end of residency.

I would agree with you, if my wife and I were willing to put our 5 kids in a small house for most of their childhood years, then sell it and buy a bigger house once the debts paid. This is something we fundamentaly would never do. The house we buy will be the one we die in and the one our kids and their kids come home to on the holidays. Dorky to some, important to us. for that reason I will buy our long term house up front. This makes free cash much less available, but its important to us. Didnt slave through undergrad, med school and residency to then live in a small house. Now, I drive a 14 year old dodge pickup with 140k miles on it. Wont be upgrading most things, they will stay the same as residency, but the house is important.

I do however agree with your assessment on loan repayment time. I think 10 years is the way to go too. Paying off the higher rate PLUS loans first. This is why I was thinking graduated 10 year payments. $2800 or so for two years to get on my feet with the house and such, then 8 years of like $5500. The difference between that and flat out standard 10 year is only 38k in interest over the 10 years. thats acceptable to me to let my family get into the house early.

The other option is IBR, but instead of making the minimum payment over 20 years, calculating out what I need to pay +in extra towards the principal balance monthly" to pay it off in 10 starting with the higher % PLUS loans first. From what I can see that is just alot more hassle and number crunching and in the end comes out to nearly the same total $ paid back as 10 year standard.

As for college, If I pay 5500 monthly for 10 years, thats about 60k annually in loans. So after the 10 year mark, when the loans are gone, 2 years before my eldest starts college, I will have an extra 60k in income which essentially pays for a a NY state school education for one kid onto itself. So when she starts, I will already have 120k just from extra salary I didnt have to put towards loans for the past two years.

 

[Igor4sugry]

As for college, If I pay 5500 monthly for 10 years, thats about 60k annually in loans. So after the 10 year mark, when the loans are gone, 2 years before my eldest starts college, I will have an extra 60k in income which essentially pays for a a NY state school education for one kid onto itself. So when she starts, I will already have 120k just from extra salary I didnt have to put towards loans for the past two years.

Where are your retirement savings in this plan?

I think it will be pay-check to paycheck for you with your plan. You want to live in a 400k home; you have 500k in high interest rate student loans; you have 5kids, single income home, and you are making relatively small salary of $200k. I think it is a bit unrealistic to meet all those expectations unless you live bellow your means.
Do you have your life-insurance purchased? Your disability insurance? Because you are carrying all this debt on your own for the next 10-20yrs.

 

[deleted498041]

If you do IBR with extra payments applied towards the higher interest loans, it should be cheaper than the 10-year repayment, as long as you pay the same amount each month for IBR + extra payments when compared to the 10-year payment plan. The interest rate is the same regardless of which plan you choose, so if you do IBR + extra payments then you get rid of those high interest loans faster. Under standard repayment, if I'm not mistaken, your monthly payment gets divided among all your loans, high and low interest.

There's certainly more headache involved if you do IBR + extra payments. And you have to be really disciplined to stay on top of things, as well as not skip the extra payment part. But if you do it right, you'll have those loans paid off in 10 years and there's no tax bomb to worry about, because there's nothing being forgiven.

Wouldn't it make more sense to pay the IBR minimum and set aside any extra money to deal with the so-called "tax bomb" that would be coming at the end of those 25 years? I did a lot of research before choosing to take on my own loans, but there's still a lot for me to learn, financially speaking.

 

[TeddyA]

Anyone on PAYE yet instead of IBR?

 

[MSmentor018]

any repayment changes or advice with all the upcoming tax law changes?

 

[Silent Cool]

Bump.

 

[deleted480308]

Where are your retirement savings in this plan?

I think it will be pay-check to paycheck for you with your plan. You want to live in a 400k home; you have 500k in high interest rate student loans; you have 5kids, single income home, and you are making relatively small salary of $200k. I think it is a bit unrealistic to meet all those expectations unless you live bellow your means.
Do you have your life-insurance purchased? Your disability insurance? Because you are carrying all this debt on your own for the next 10-20yrs.

It's a good question being asked here. As your income is really starting so much later in life than other people, you should consider maxing all retirement savings options. It's impossible to have it all right now. I know there is a philosophical decision to get the monster house but for everyone else's consideration, that is not a financially prudent plan.

Whitecoatinvestor really inspired me to plan our goals post residency (and I start med school this year). The wife and I have already discussed that she will continue to work at least parttime until our loan debts are paid, full time during residency. We'll likely do IBR during residency to stall that interest and give ourselves a "raise" to 60-70k for our budget after I hit attending salary. Much like the dave ramsey envelope system, everything else after a maxed retirement/disability insurance will be thrown at loans. If that means the four of us live in a two bedroom apt, so be it.

It's not stallingthe rewards of my hard work, being debt free is a BIG reward.