PAYE vs REPAYE

[agnes5]

So I'm currently looking at repayment plans and it seems like people generally pick repaye over paye. For some reason, my school's financial aid office recommends that people pick paye over repaye because they say that there is no ceiling on how much one can pay with repaye (and that you can pay more than the standard amount if your income shoots up exponentially). That being said, I have not found this info anywhere despite what my school's financial aid office says.

I'm graduating with about $110K in debt and probably won't be doing loan forgiveness (unless y'all think I should), so is there any benefit of repaye vs paye? (I am aware that under repaye interest can be partially subsidized through the government if my payment doesn't cover it).

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[TMP-SMX]

Don't do PAYE. It's a short term solution (only during residency). PAYE caps at 10% of "discretionary income" and you only qualify for it when you meet partial financial hardship (that's irrelevant the first year after residency because you'll have to switch repayment plans from PAYE likely to REPAYE since you won't qualify for PAYE anymore. The nice thing is that your interest during residency will only go up to 10% of the principal when you capitalize the interest under PAYE. Comparing with REPAYE, there's no cap on REPAYE payments (which is OK because most people want to pay their loans faster than 25 years at our income level before taxable forgiveness). With REPAYE there's a nice interest subsidy for repayment for the first 3 years of repayment where all of the unpaid interest is handled by the feds but then after that you are responsible for 50% of the accruing interest. Also, spousal income plays a role in the calculation of your payment. (This is different than IBR and PAYE though you'd have to file separately with your spouse to avoid higher payments). IBR and PAYE requires partial financial hardship but that's not true for REPAYE. If you don't plan on meeting criteria for PSLF and you have decent credit it might be a better idea (especially after residency) to refinance to a private lender. It really depends on your interest rate under REPAYE because PAYE won't be a long term solution for you.

There are some calculators around to estimate discretionary income. It's not the same as your AGI. A good solution if you qualify for PAYE is to increase your payments beyond the 10% minimum automatically to pay off the loan much quicker but mostly irrelevant as you won't qualify for PAYE after residency. It would be good to know your plans of specialty, academic vs private practice, current loan breakdown, direct vs non direct, and interest rates. It's not a great idea long term paying small amounts as you can probably afford higher amounts and most loans have a high interest rate.

 

[bwmd]

Your school's person is correct regarding the lack of a payment "cap" in PAYE but wrong about it probably being the best choice for most people. See this post which contrasts the pros and cons of REPAYE with regards to PAYE. Also note that should the payment cap or your marriage status become relevant to you (say in order to maximize PSLF forgiveness), you can switch plans with some planning.

 

[BiggiePow]

I am hoping to use the 10 year PSLF program. Once you become an attending, let's assume after 8 years of PAYE during neurosurgery residency and fellowship, what are your repayment options to for the remaining 2 years of the program as an attending? What is the cheapest option available at this point to a high earner?

 

[TMP-SMX]

Depends on your family size and spousal income. Keep in mind your first year of repayments after graduation from residency is based on a half year of income and your first 6 months is based on residency income. You can run a calculator to see what's best. If you make more than 250k AGI that's when your decision starts to matter.

 

[bwmd]

I am hoping to use the 10 year PSLF program. Once you become an attending, let's assume after 8 years of PAYE during neurosurgery residency and fellowship, what are your repayment options to for the remaining 2 years of the program as an attending? What is the cheapest option available at this point to a high earner?

PAYE or REPAYE, depending on a number of factors I mentioned above. The "cap" on PAYE means that your payments can never be higher than the ten-year standard even if you have a very high salary, which is definitely more likely to be relevant to a neurosurgeon than a pediatrician.

That said, you can switch plans, so for an 8-year training program, the question isn't really "what should I do nearly a decade from now" but is actually "what plan will give me the lowest monthly payments while in training." Minimizing the size of qualifying payments = maximizing PSLF benefit. You can cross the other bridge later.

 

[BiggiePow]

PAYE or REPAYE, depending on a number of factors I mentioned above. The "cap" on PAYE means that your payments can never be higher than the ten-year standard even if you have a very high salary, which is definitely more likely to be relevant to a neurosurgeon than a pediatrician.

That said, you can switch plans, so for an 8-year training program, the question isn't really "what should I do nearly a decade from now" but is actually "what plan will give me the lowest monthly payments while in training." Minimizing the size of qualifying payments = maximizing PSLF benefit. You can cross the other bridge later.

Thanks, so first just use PAYE for a long training program and decide later on what is best. Also, this means that if I end up practicing outside of a non-profit hospital I can simply refinance to lower my interest rate and pay my remaining loan balance as I wish without penalties?

 

[SigmaFS]

Thanks, so first just use PAYE for a long training program and decide later on what is best. Also, this means that if I end up practicing outside of a non-profit hospital I can simply refinance to lower my interest rate and pay my remaining loan balance as I wish without penalties?

If you're single, I recommend REPAYE during the course of your residency/fellowship. REPAYE to benefit from the 50% interest subsidy on any interest accrual (not offered by PAYE). You want to mitigate the interest accrual.

Also, to reach the 10% PAYE cap with $110k at 7%, your AGI would need to approach $180k. You probably won't reach that AGI while in residency/fellowship.

 

[bwmd]

Read the post I linked to above about REPAYE; most trainees will benefit from this program over PAYE unless you have a high-earning spouse.

Otherwise, yes, you can refinance whenever you want and pay down early without penalty regardless of which plan you choose.

 

[zbo]

Hey guys, there is finally a decent article on this topic, search "nerdwallet paye vs repaye"

It basically says to calculate your payments using a calculator they link to, and then pick the one with the lower monthly payment. If the monthly payments are equal, pick REPAYE.

It also mentions that if you aren't seeking forgiveness such as PSLF and don't have a financial hardship, you should consider just doing the standard plan or refinancing.

 

[bwmd]

That is unfortunately not necessarily good advice. For one, many residents are in a negative amortization situation during training and may have a lower effective interest rate with REPAYE even if payments are higher due to spousal income. Additionally, there are tax costs to filing taxes separately (which is required to get lower PAYE payments compared with REPAYE for married couples) such that many folks do not save money in the end. For anyone who is single and has a partial financial hardship (i.e. can actually sign up for PAYE), PAYE and REPAYE payments are identical. The payment cap or lack thereof may affect some folks in the future but will have no bearing at all on monthly payments for most people in training. Etc.

Few residents can do the standard plan. If you can afford standard, you should probably refinance instead.