RePAYE Question

[DragonDO]

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Hello,

Is anyone being on RePAYE at the moment for federal loan student repayment option and willing to share their experience with payments, getting subsidy, etc?

With my current understanding and knowledge on 50% interest subsidy is that it is calculated by taking 50% of difference between monthly accrued interest amount and minimum monthly required payment. Based on your previous tax return income, your minimum amount monthly is calculated and fixed per month for a year. Of course, you have to re-certify application each year with new income and family size which will either increase or decrease the minimum required monthly amount.

Now, if you pay a little bit of extra monthly on top of minimum of RePAYE monthly amount, does this extra amount monthly will be used to reduce any outstanding unpaid interests?

I am curious if anyone has paid an extra monthly on top of minimum RePAYE requires and maybe tell/share with us how those extra monthly payment has been taken care of.

Thanks!

 

[heybrother]

The actual rules should be available here: http://www2.ed.gov/policy/highered/reg/hearulemaking/2015/index.html

I've attempted to bold some parts that seem relevant to myself (and probably most of us below). I've obviously cherrypicked the text I quoted.

If the borrower's monthly payment amount is not sufficient to pay the accrued interest on the borrower's loan--

(A) Except as provided in paragraph (c)(2)(iii)(B) of this section, for a Direct Subsidized Loan or the subsidized portion of a Direct Consolidation Loan, the Secretary does not charge the borrower the remaining accrued interest for a period not to exceed three consecutive years from the established repayment period start date on that loan under the REPAYE plan. Following this three-year period, the Secretary charges the borrower 50 percent of the remaining accrued interest on the Direct Subsidized Loan or the subsidized portion of a Direct Consolidation Loan.

(B) For a Direct Unsubsidized Loan, a Direct PLUS Loan made to a graduate or professional student, the unsubsidized portion of a Direct Consolidation Loan, or for a Direct Subsidized Loan or the subsidized portion of a Direct Consolidation Loan for which the borrower has become responsible for accruing interest in accordance with §685.200(f)(3), the Secretary charges the borrower 50 percent of the remaining accrued interest.

(C) The three-year period described in paragraph (c)(2)(iii)(A) of this section--

(1) Does not include any period during which the borrower receives an economic hardship deferment;

(2) Includes any prior period of repayment under the income-based repayment plan or the Pay As You Earn repayment plan; and

(3) For a Direct Consolidation Loan, includes any period in which the underlying loans were repaid under the income-based repayment plan or the Pay As You Earn repayment plan.

(iv) Any unpaid accrued interest is capitalized at the time a borrower leaves the REPAYE plan.

(v) If the borrower's monthly payment amount is not sufficient to pay any of the principal due, the payment of that principal is postponed until the borrower leaves the REPAYE plan or the Secretary determines the borrower does not have a partial financial hardship.

(vi) A borrower who no longer wishes to repay under the REPAYE plan may change to a different repayment plan in accordance with §685.210(b). A borrower who changes to a different repayment plan in accordance with this paragraph or paragraph (c)(4)(vi)(C) of this section may return to the REPAYE plan pursuant to the requirements in paragraphs (c)(4)(vi)(D) and (E) of this section.

(3) Payment application and prepayment. (i) The Secretary applies any payment made under the REPAYE plan in the following order:

(A) Accrued interest.

(B) Collection costs.

(C) Late charges.

(D) Loan principal.

(ii) The borrower may prepay all or part of a loan at any time without penalty, as provided under §685.211(a)(2).

 

[Debt Free Doctor]

Thank you very much for the references...
But I am still a bit confused on how exactly is RePAYE subsidy calculated, is it month by month depending on the payment amount or is it by year depending on the AGI of the prior year?

A friend wrote this,

"I called the Fedloan servicing representative. He said that 50% subsidy will be fixed for a year based on your minimum REPAYE required monthly payment, not actual amount you pay monthly. So, as of right now, if someone wants to or can afford to pay few hundreds bucks more on top of minimum payment monthly, that extra amount will be going toward the principle.

But he advised me to double check where those extra will be applied to make sure.

So, I am more confused now. I talked to Dr. Dahl on White Coat Inventer and one other folk who is in finance. Both also told me subsidy is based on the minimum required payment. So, extra should go toward the principle."

However I got the impression that
RePAYE subsidy is 50% of monthly accrued interest- monthly Actual payment
-> so RePAYE subsidy decreases, and effective interest rate increases with every additional penny you pay above the RePAYE estimated required payment.

If you know how RePAYE subsidy is calculated exactly, please enlighten us all.

 

[DragonDO]

If you know how RePAYE subsidy is calculated exactly, please enlighten us all.[/QUOTE]

I reached out to Sergio Estavillo who is an enrolled agent and licensed by the US Department of the Treasury as a tax practitioner.

He said, "The interest subsidy is the determined on the REPAYE repayment amount required, not what you actually paid."

Also, according to https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment-q-and-a.pdf

A minimum required monthly payment for RePAYE is determined by the AGI that is filed on your previous tax income return AND family size. So, it is reasonable to say your minimum required payment monthly is based on your previous income tax return amount and the family size and those minimum monthly amount will be fixed for a year until you re-certify with new AGI and family size.

This is my current knowledge on 50% interest subsidy.

I realized that not many people are on RePAYE since this program started this year of January. And when people heard about the subsidy benefit, many people plan to switch from previous plans (IBR/PAYE). But, remember, if you switch plan, your unpaid interest will be capitalized.

 

[DragonDO]

Also, beware that if you switch from IBR/PAYE to RePAYE, consider your spouse income if you are married. However you filed your spouse income tax, the government will take your spouse's income into account so your AGI will be higher which means you won't get much subsidy benefit.

 

[mvenus929]

So, I am more confused now. I talked to Dr. Dahl on White Coat Inventer and one other folk who is in finance. Both also told me subsidy is based on the minimum required payment. So, extra should go toward the principle."

That's not fully accurate regardless of your payment plan. Anything you pay in excess of your minimum payment FIRST goes to outstanding accrued interest--such as all that interest you accrued during medical school. I can't tell you how this would affect the subsidy, though it probably wouldn't--you'd still get the same amount for your subsidy, you would just be paying off a different interest.

Now, if you were fortunate enough to pay off all the interest you had accrued on the loan, then yeah, any remaining payments you make would be towards the principle. But I imagine that is not going to happen for most people in residency or the first few months of making an attending salary.

 

[rotarman]

Doesn't section A of heybrother's post address this? Secretary charges the borrower 50 percent of the remaining accrued interest on the Direct Subsidized Loan. As in remaining accrued interest after the monthly payment. Ie you get 50 cents on the dollar for everything over the minimum. Maybe WCI knows something we don't since he disagrees and is usually pretty knowledgeable.

 

[DragonDO]

Doesn't section A of heybrother's post address this? Secretary charges the borrower 50 percent of the remaining accrued interest on the Direct Subsidized Loan. As in remaining accrued interest after the monthly payment. Ie you get 50 cents on the dollar for everything over the minimum. Maybe WCI knows something we don't since he disagrees and is usually pretty knowledgeable.

So, you are interpreting as 50% subsidy of difference between the interest amount accrued monthly and the actual amount of monthly payment (minimum monthly required + any extra payments)? I discussed with WCI on his website as well and he told me that it is 50% subsidy of difference between the interest amount accrued monthly and the monthly required payment. So, any extra fund you pay will likely go toward outstanding unpaid interests or you can choose where those extra fund go to your loans (if you have multiple loans = not consolidated). This RePAYE is relatively new that started this January and no one really knows for sure how subsidy will be affected for someone who is paying extra fund monthly...

 

[rotarman]

So, you are interpreting as 50% subsidy of difference between the interest amount accrued monthly and the actual amount of monthly payment (minimum monthly required + any extra payments)? I discussed with WCI on his website as well and he told me that it is 50% subsidy of difference between the interest amount accrued monthly and the monthly required payment. So, any extra fund you pay will likely go toward outstanding unpaid interests or you can choose where those extra fund go to your loans (if you have multiple loans = not consolidated). This RePAYE is relatively new that started this January and no one really knows for sure how subsidy will be affected for someone who is paying extra fund monthly...

It will be interesting to see how it goes down. If you get a chance, can you report back and let us know how it ends up working? I'll have the same general plan as you during residency, but I thought I'd have to save on the side to avoid eating into my interest subsidy.

 

[Psai]

My understanding is that the federal government covers 50% of the interest for 3 years. I'm thinking that I will do fellowship so it will be 5 years before I start making a dent in my loans. So would it be advantageous to apply for repaye right away and start paying the interest or can you wait until the grace period is over and then start. Because I'm thinking that the later it gets, my salary will increase and the principal will be higher so I would have more interest forgiven

 

[DragonDO]

My understanding is that the federal government covers 50% of the interest for 3 years. I'm thinking that I will do fellowship so it will be 5 years before I start making a dent in my loans. So would it be advantageous to apply for repaye right away and start paying the interest or can you wait until the grace period is over and then start. Because I'm thinking that the later it gets, my salary will increase and the principal will be higher so I would have more interest forgiven

For unsubsidized loans including Grad Plus will be covered for 50% interest subsidy during all times you will be on. For subsidized loans, it covers 100% subsidy for the first 3 years and then 50% thereafter.

Under REPAYE, you will get the most interest subsidy benefit if your Adjust Income Gross (AGI) is low-moderate which it is during our training period. So, as early you will be on REPAYE, you will get the most benefit out of subsidy under this plan. As your interest gets higher (including moonlight salary during your later residency times), your interest subsidy amount of benefit will reduce. Because subsidy is calculated for 50% of difference between the amount of monthly interest accrued and the monthly payment. Your monthly payment is determined by your AGI and family size. So, if your income increases, monthly payment will go up which will reduce the 50% difference, meaning less subsidy benefit. Also, consider marriage into a factor if you will be on REPAYE since partner's income will be considered no matter how you file the tax.

I have 4 unsub, 2 grad plus and 2 perkins. Unfortunately, 2 perkins has to be consolidated to be eligible to enter into REPAYE plan. So, I have to use one of unsub loans with 2 perkins to consolidate. Remember that once you consolidate loans, your grace period can be waived or nullified. So, you can start repay without waiting till the grace period ends. My lender is Fedloan servicing and consolidation counselor told me I can waive the grace period meaning I can enter into REPAYE earlier (don't have to wait for grace period). Check your lender and see if they can waive the grace period so you can start the plan earlier. It is no brainer that it will be more advantageous to enter into this plan early so you can get the subsidy benefit. During the 6 months grace period, the interest will keep accruing at your original interest rate.

http://drwisemoney.com/2016/04/22/revised-pay-as-you-earn-repaye-or-refinance/

This link is very helpful if you are thinking of REPAYE vs refinance options. It has a in-depth discussion that can be relevant to most incoming residents to think about.