Quick question about PAYE vs. REPAYE

[FattySlug]

Advertisement - Members don't see this ad

Hello,

I am curently 390k at 6.6% interest in debt from medical school and thinking about signing up for REPAYE for the interest subsidy. However, I read that when you no longer qualify to make payment based on your income (salary jump as an attending right?) your interests will capitalize but in PAYE this will be capped at 10% of the principle. Does that mean that if I accumulate 150k of interests over the length of my residency and fellowship on a principle of 390k then only 39k will be capitalized?

PAYE: yearly interests is 25740. Lets say 6 years of residency and fellowship --> 154440 but will be capped at 10% principle so it will only be 39000 capitalized. New loan at this point becomes principle of 390k + 39k with frozen interest of 115440.

REPAYE yearly interest with the subsidy is 12870. 6 years of training like above --> 77220 will be added when I become an attending because there is no cap. New loan becomes principle of 390k + 77220 and start accumulate interest.

So it seems for me REPAYE is the best. Appreciate any inputs. Thank you very much.

 

[mvenus929]

Where are you reading this? The only thing I know related to 10% and PAYE is that your monthly payment is capped at 10% of your discretionary income. But I also don't remember reading anything specific about capitalization, and someone on here has claimed that your interest capitalizes as soon as you enter repayment regardless of your payment plan, but I don't see this happening with me.

That said, REPAYE, there is no cap on the amount you can pay every month, so if you are going to be a high earner and you have a lot of debt, it might be worthwhile to do PAYE over REPAYE. But in REPAYE, if your payment doesn't cover the interest accumulating every month (which it typically doesn't during residency), then the government will subsidize half of your interest each month.

 

[FattySlug]

Where are you reading this? The only thing I know related to 10% and PAYE is that your monthly payment is capped at 10% of your discretionary income. But I also don't remember reading anything specific about capitalization, and someone on here has claimed that your interest capitalizes as soon as you enter repayment regardless of your payment plan, but I don't see this happening with me.

That said, REPAYE, there is no cap on the amount you can pay every month, so if you are going to be a high earner and you have a lot of debt, it might be worthwhile to do PAYE over REPAYE. But in REPAYE, if your payment doesn't cover the interest accumulating every month (which it typically doesn't during residency), then the government will subsidize half of your interest each month.

I read it on the official source of studentaid.ed.gov https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment-q-and-a.pdf
Or you can google pay Q and A and it is the first link that comes up. It is in the description about interest capitalization.
I don't worry about the lack of monthly payment cap in REPAYE because I ran some numbers and my salary has to be higher than the principle (390k) quite a bit for the payment in REPAYE to exceed the standard monthly payment.
What do you think of my math above?

 

[mvenus929]

In that case, as long as you keep recertifying every year, your interest will not capitalize. Under either plan, you will continue to qualify for the payment plan because you were enrolled in it, and REPAYE there is no income requirement to enter into the plan--a dentist who starts making an attending salary as soon as he graduates from dental school can enter REPAYE, though there may be relatively little benefit for him to do so. It's just that under PAYE, your payment will cap at the 10 year standard repayment when you first entered the plan, while your payment will not cap in REPAYE. That's why they made that stipulation--because you keep qualifying for the plan even when your income does jump.

If, for some reason (refinancing, etc) you decide to leave the plan, then you are correct in that your interest capitalization will only be 10% if you are under PAYE, with no cap if you are under REPAYE.

 

[Robert.River]

Do you happen to know how to qualify for the REPAYE program???

 

[mvenus929]

I believe you qualify as long as you demonstrate financial hardship and have direct federal loans. You apply for REPAYE just like you apply for all of the other repayment plans.

 

[DrMidlife]

guessing is so pre-internet.

https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven#repaye

no hardship requirement.

 

[dpmd]

Hello,

I am curently 390k at 6.6% interest in debt from medical school and thinking about signing up for REPAYE for the interest subsidy. However, I read that when you no longer qualify to make payment based on your income (salary jump as an attending right?) your interests will capitalize but in PAYE this will be capped at 10% of the principle. Does that mean that if I accumulate 150k of interests over the length of my residency and fellowship on a principle of 390k then only 39k will be capitalized?

PAYE: yearly interests is 25740. Lets say 6 years of residency and fellowship --> 154440 but will be capped at 10% principle so it will only be 39000 capitalized. New loan at this point becomes principle of 390k + 39k with frozen interest of 115440.

REPAYE yearly interest with the subsidy is 12870. 6 years of training like above --> 77220 will be added when I become an attending because there is no cap. New loan becomes principle of 390k + 77220 and start accumulate interest.

So it seems for me REPAYE is the best. Appreciate any inputs. Thank you very much.

Looks like your math is wrong if you stay in REPAYE because the interest will not capitalize as long as you keep certifying your income (and why wouldn't you if you calculate that your income level as an attending will not put you above a standard payment, and if you can shelter money in retirement accounts maybe you can keep it below the standard repayment).