PAYE vs Refi - High Income Spouse

[james franco]

Hello. I would greatly appreciate posters' comments and perspectives on my loan situation. I have started to seriously read WCI and Ben White's student loan content to formalize a plan for paying back my loans, but unsurprisingly, I don't know what I don't know. I also have a situation that isn't as common and thus not discussed as frequently. I'll try to lay it out below but please feel free to ask additional questions if I omit something pertinent. I am well-versed in the other aspects of personal finance and feel comfortable there. Thanks for your time.

~$240k total obligation including interest at graduation coming this summer. No private loans.
Interest rates ~5-7% so obviously not great.
6 more years of training in well-paying specialty
Spouse currently makes ~$200k but will probably cut back. Will make $125-150k in that case but definitely not less and will not stop working.
Definitely not interested in academic career or PSLF jobs. Will go straight into PP.
Assumption of 0% interest by government until September ends but not longer. If this gets extended then I will reassess timeline of initiating plan.
Assumption that we will never qualify for any future student loan forgiveness from Biden or whatever. I'll just leave it at that.

From what I understand, this situation leaves me with: PAYE, REPAYE, and refinancing.

REPAYE:
I have previously read that REPAYE will not work in my situation because my spouse earns too much and that can't be thwarted by filing taxes separately. The benefit to REPAYE is that the unpaid loan balance at the end of the term is forgiven. This is likely irrelevant as the higher monthly payments made after residency will likely cover the rest of the loan before the 25-year term is up. If I'm understanding this correctly, I would never see the benefits of the interest subsidy. I also do not want to be paying my loans for that many years. This seems like an obvious method to eliminate.

PAYE:
So PAYE allows me to avoid the pitfall of REPAYE by filing my taxes separately. Payments are never more than the federal 10-year standard repayment plan amount but repayment is a twenty year plan. Interest is not capitalized until I leave the program, but even then, the amount capitalized is limited to 10% of the loan balance. Payments are capped even if income rises as an attending. There is no interest rate subsidy like REPAYE. Being a federal program it would qualify for any (unrealistic IMO) loan forgiveness and I would be eligible for any interest rate policies that may continue. Let me reiterate that I have no desire to use PSLF.

Refinance:
This is the option that I am leaning toward for my personal situation. Interest rates would greatly decrease and I can refinance as many times as I want over the years if desired. I believe the savings from a far better interest rate would far outweigh any possible savings from REPAYE or PAYE. Most companies like SOFI now have $100 minimum payments during training should I need flexibility one month for something but we can handle the relatively higher payments than PAYE with our cashflow during training. I can make payments to principle just like federal loans. In the event of my death, I already have a mechanism in place to pay the loan so my spouse isn't on the hook if she cosigned to get an even lower rate (and I believe places like Sofi don't even have that clause anymore anyways.) I do need to verify that the residency period can be changed to accommodate training longer than 3-4 years. A negative is that I shut the door on federal programs. Interest capitalizes when I refinance. I do not get any loan forgiveness if Biden delivers that, which I doubt anyway.

Sequence of events:
My plan is to not touch my loans until the 0% deal ends. Interest is not compounding and I would owe $0 payments. There will be plenty of notice on when that deal is ending IMO. Given our saving characteristics and discipline, the plan is to save that money through various mechanisms and continue to max out retirement accounts, roth etc. When it gets close to the end of the 0% deal, we will make a large payment to the loan and then refinance it close to the deadline.

Any critiques, pitfalls, or flaws in my plan would be welcomed. Like I said, I don't know what I don't know. It means a lot.

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[TMP-SMX]

Don't count out PSLF especially if your residency training is 6 years long. You may change your mind and another 4 years of making payments at a lower level might make sense. Interest subsidy for REPAYE is set based on your calculated monthly payment amount so effective rate is in the 4% range rather than 6.8%. If you are not going for PSLF trying to reduce your monthly payments there's no reason to file separately due to the potential tax implications. Even with income dependent repayment I doubt you'll make it to 20 or 25 years nor should you ever plan to do that. As soon as you qualify for refinancing do it or just stay on REPAYE and file joint. Your loans will capitalize when you no longer meet partial financial hardship or if changing repayment plans.

 

[SigmaFS]

As TMP stated, 6 years of training qualifies toward the 10 year PSLF period. Remain in the federal system while in training.

• REPAYE: At household income of $200k with 2 in family, your monthly payment (~$1450) will probably cover the interest due. No benefit from REPAYE 50% interest subsidy on interest accrual.
• PAYE: File separately to exclude spouse's income from PAYE calculation. If your annual income = $60,000, then PAYE ~$285/month. Invest some of the additional cash flow for the accruing interest.

 

[james franco]

Don't count out PSLF especially if your residency training is 6 years long. You may change your mind and another 4 years of making payments at a lower level might make sense. Interest subsidy for REPAYE is set based on your calculated monthly payment amount so effective rate is in the 4% range rather than 6.8%. If you are not going for PSLF trying to reduce your monthly payments there's no reason to file separately due to the potential tax implications. Even with income dependent repayment I doubt you'll make it to 20 or 25 years nor should you ever plan to do that. As soon as you qualify for refinancing do it or just stay on REPAYE and file joint. Your loans will capitalize when you no longer meet partial financial hardship or if changing repayment plans.

As TMP stated, 6 years of training qualifies toward the 10 year PSLF period. Remain in the federal system while in training.

• REPAYE: At household income of $200k with 2 in family, your monthly payment (~$1450) will probably cover the interest due. No benefit from REPAYE 50% interest subsidy on interest accrual.
• PAYE: File separately to exclude spouse's income from PAYE calculation. If your annual income = $60,000, then PAYE ~$285/month. Invest some of the additional cash flow for the accruing interest.

Thank you both for your comments. I'm glad I posted this because the responses have exposed even more of my ignorance. Please forgive my dense response to follow. Something isn't clicking. I apologize.

Setting PSLF to the side and speaking strictly about numbers, I am still confused as to what the benefit of REPAYE would be over refinancing solely based on total dollars paid at the end of this journey. If my effective interest rate is X on REPAYE/PAYE and Y via refinancing then isn't the question just whether the refinancing rate is low enough to outsave REPAYE's effective interest rate? What is the other element?

I guess I'm wondering what the point of REPAYE or PAYE is for me, specifically, if I don't see an interest subsidy and I'm just treading water on interest accrual? I have no desire to tread water during training. I want this debt gone. Initial impression is that it would be better to refinance to a lower rate since I can handle the higher payments, easily. I have great credit and no other debts. I own my cars, have an emergency fund, fully fund retirements etc. It seems like it would save me 10s of thousands of dollars versus a federal program that really could really only help with cashflow but actually cost me more in the long run.

 

[james franco]

@The White Coat Investor, do you believe the algorithm in this article still hold true?

Refinancing Medical Student Loans in Residency [Step-By-Step Guide] | White Coat Investor

WCI Scholarship sponsor, Laurel Road has a three-step process for physicians wanting to refinance their loans during residency.

www.whitecoatinvestor.com

 

[RangerBob]

If your spouse makes ~$200k (even if they cut back to $125k), and you make another $50-80k as a resident, you can easily pay that debt off during residency. Why not pay it down aggressively now? It's easier to live like a resident when you are a resident. And if you plan to have kids, it's nice to have that debt chain gone.

In your shoes that's what I'd do.

I am an attending. I applied for private refinance loan a couple weeks ago because I didn't expect the 0% federal rate to get pushed more than a couple months, and of course, Biden ended up pushing it out till Sept. I think it's unlikely to get extended further as the economy is likely to pick up in late summer/fall, but then, you never know. The fact it was pushed so far out seems to suggest it's staying there and he's giving people plenty of time to be aware of when repayments will start.

That interest freeze definitely saved us a lot of money, but we'll probably take the refinance loan we were approved for since it's at 2.5% and that's hard to beat. Rates could go up or down, or stay the same. They've been pretty stable for quite some time, but on the other hand, we're printing up a lot of money right now. Federal loan payments/interest freeze could be extended or stay the same. Who knows. But there's a guarantee they'll resume at some point, and when they do it'll be at ~6.8% again.

If you go the refinance route, I'd recommend waiting a few more months at least, unless you think interest rates are going to start going up. I wouldn't necessarily wait until Aug/Sept though, as there will be a rush of applications at that time and underwriting could get tougher or there could just simply be a big delay.

 

[SigmaFS]

@The White Coat Investor, do you believe the algorithm in this article still hold true?

Refinancing Medical Student Loans in Residency [Step-By-Step Guide] | White Coat Investor

WCI Scholarship sponsor, Laurel Road has a three-step process for physicians wanting to refinance their loans during residency.

www.whitecoatinvestor.com

I think it is clicking. With no REPAYE interest subsidy, your effective interest rate = promissory stated interest rate. And if you're certain that PSLF will not be a consideration, then refi might be the most cost effective option. But, Biden extended the 0% federal interest rate through Sept 2021 (and might be extended further) and there might be forgiveness also. No rush to refi, but watch rates as they have moved up. Finally, if you're spouse co-signs a refi, they might be obligated to the loan if something should happen to you.

 

[TMP-SMX]

$1360 of interest accrues per month at 6.8% of 240k less any payments. Do you have children? What's your estimated adjusted gross income during residency including spouse? I'd recommend maxing your 403b/457b if employed by a university during residency as that will lower your AGI/discretionary income. Filing separately and being on PAYE might make sense if going for PSLF. Depending on family size you may not qualify for switching to PAYE after your first year of full income in residency so you'd need to start in that repayment plan.

Remember your payments are based on the most recently filed taxes not on current income unless it is beneficial for you to use pay stubs. That may lower the payment below the interest accrual and lead to some small REPAYE benefit. However, since the payment is not capped if your spouse has no loans then your payments could be higher than what the PAYE cap would be if filing separately. I may have missed this but does spouse have federal student loans? If filing joint then both of your incomes and loan payments count towards the percentages for REPAYE. For PAYE if you file separately it is not joined together.

If there is zero chance you are going for PSLF and your credit is good then yes consider private student loan refinancing even during residency. However, if there is a chance of 3 years in academics you could make some adjustments to your savings rate for retirement for it to be beneficial to stay in the PSLF track. (Again it's based on most recently filed tax returns after you leave residency so could be 1.5-2 years before your payments go up depending on when you rectify income driven repayment compared to filing taxes).

 

[DogeDDS]

Listen to student loan planner on their advice for income-driven repayment options. They highly advocate for PSLF/PAYE/REPAYE if possible. Also, use this calculator to get an idea of what your costs will be (Student Debt Center - VIN).