Income based repayment plan for borrowing small amount of money and future feasibility?

[Magyarzorag]

I really like the income based repayment plan (particularly REPAYE), as it allows you to only pay 10% of your income over 25 years and have your loan ultimately forgiven, as well as half your interest forgiven (all of it forgiven first 3 years). I really don't mind paying 10% of my income to the government for the government's investment in my education, even if it was over my entire lifetime (less than alimony for most people, and that is until you retire).

However, while I can borrow $300K for medical school, I can also borrow as little as $60K given I have $150K in savings and can live frugally. I also plan on working maybe only 6-8 months a year to avoid high tax rates, keeping my AGI no more than $200k/year. Given this, and using the simple repay program over 10 years without interest forgiven.


If I borrow all $300K over time, my interest after 22 years (end of my repayment) will be about $600K

The first 4 years as a resident, making 50K a year, I only pay $3000 a year (since my disc. income will be about $30K after taxes and cost of living).
Next 16 years, if I'm married, about $15000 a year (AGI of 200k/year-$25K taxes-$25K poverty guideline)

Total repayment
$252000

"Tax Bomb": $348K (I will probably not work this year)

Tax price: $90K

In essence, I will only have paid $342K on a $300K loan over 22 years for the average loan amount, in essence, an excellent 1.3% annual interest rate

Other Pros of this:

If I decide medical school is not for me, fail my USMLE, can't get license, lose my license, or doctors start making a lot less than they do now.

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[RangerBob]

Quite a few things to consider:

Working less just to avoid high tax rates doesn’t make sense. For quality of life yes, but with marginal taxes your rate only goes up for income above the threshold for that limit.

I’m not going to check the math on your calculations. But there are very few people I believe should be considering income-based forgiveness plans as they currently are, and I say that as a physician who graduated with over $350k in debt and is not in a high paying specialty. With the tax bomb, it just doesn’t make sense. We have no idea what is going to happen to PSLF, let alone income based forgiveness. I would not bank my future on that, and if you do go forward with your plan, I recommend you put a substantial amount aside so that if things fall through in year 24, you can pay off the loan with the side investment.

Figuring out how to borrow the max and repay as little as possible is the wrong approach. Assume you need to pay every penny back. Borrow as little as possible. Be very cautious with any forgiveness plans.

 

[RangerBob]

Also, just to clarify:
Loan forgiveness for REPAYE is 25 year for graduate loans

Only the unpaid interest is subsidized. So once you make attending money, much of the subsidy is gone.

Your spouse’s income (and debt) count towards REPAYE calculations. This can hurt or help depending on whether or not they have loans

 

[TMP-SMX]

Do not do the 25 year repayment. I doubt you would make it to 25 years given the lack of cap on REPAYE you'd pay it off prior to that. This only makes some sense for people with low paying professions with extremely high debt load at least 3-4 times your annual income.

As for working for half a year this doesn't sound like a great idea. If you are employed obviously your employer won't allow this. If you are self employed then your health insurance expenses will be extremely high. If you want to do something like this just work for a nonprofit and plan for PSLF but work hard to advance your career.

 

[NITRAS]

You do know that the maximum marginal tax rates is 35% right now. I think taxes are outrageous, but It’s stupid to not make a dollar because you are going to be sending Uncle Sam realistically between a quarter and 30 cents (based on your effective tax rate, which will be much less than your marginal tax rate.

Borrowing $300k because you want to play games with the Feds is STUPID. 25 years is a long time. Lots of presidential elections, lots of news cycles, lots of congressional elections.