RePAYE

[ND13MD]

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I have a question for anyone who is familiar or has paid off loans with RePAYE.


So lets say I have 150k in loans and my accumulated interest is 8k per year. I am making 50k as a first year resident. So under the RePAYE program I would be required to pay 10% of my gross salary towards my interest. I pay my 5k and I have 3k left over in accrued interest. My understanding is the government will subsidize up to half of the remaining interest on your loans after paying your 10%. So in reality my loans will only grow by 1.5k after the government subsidy.


Now if I decided I can afford to pay 6k towards my accumulated interest, I will have 2k left over and the government will subsidize half of that meaning my loans will grow by 1k.


So if I’m understanding this, I invested an extra 1k towards my interest but my overall loan growth only decreased by 500. So I lose money as I invest more into paying of my loans. Am I confused or does RePAYE incentivize you to pay the yearly minimum? (Assuming your 10% does not cover you annual interest). My financial aid advisor could not answer this question for me

 

[flightnurse2MD]

I have a question for anyone who is familiar or has paid off loans with RePAYE.


So lets say I have 150k in loans and my accumulated interest is 8k per year. I am making 50k as a first year resident. So under the RePAYE program I would be required to pay 10% of my gross salary towards my interest. I pay my 5k and I have 3k left over in accrued interest. My understanding is the government will subsidize up to half of the remaining interest on your loans after paying your 10%. So in reality my loans will only grow by 1.5k after the government subsidy.


Now if I decided I can afford to pay 6k towards my accumulated interest, I will have 2k left over and the government will subsidize half of that meaning my loans will grow by 1k.


So if I’m understanding this, I invested an extra 1k towards my interest but my overall loan growth only decreased by 500. So I lose money as I invest more into paying of my loans. Am I confused or does RePAYE incentivize you to pay the yearly minimum? (Assuming your 10% does not cover you annual interest). My financial aid advisor could not answer this question for me

Nothing's free, kid. Sucks don't it?

 

[CypherA]

Try giving this REPAYE article from White Coat Investor a read


REPAYE Case Studies

 

[sazerac]

I think @RangerBob is our local expert in all things REPAYE, and I'd like to hear his opinion.

 

[soccerkd]

I have a question for anyone who is familiar or has paid off loans with RePAYE.


So lets say I have 150k in loans and my accumulated interest is 8k per year. I am making 50k as a first year resident. So under the RePAYE program I would be required to pay 10% of my gross salary towards my interest. I pay my 5k and I have 3k left over in accrued interest. My understanding is the government will subsidize up to half of the remaining interest on your loans after paying your 10%. So in reality my loans will only grow by 1.5k after the government subsidy.


Now if I decided I can afford to pay 6k towards my accumulated interest, I will have 2k left over and the government will subsidize half of that meaning my loans will grow by 1k.


So if I’m understanding this, I invested an extra 1k towards my interest but my overall loan growth only decreased by 500. So I lose money as I invest more into paying of my loans. Am I confused or does RePAYE incentivize you to pay the yearly minimum? (Assuming your 10% does not cover you annual interest). My financial aid advisor could not answer this question for me

I'm doing this very thing right now. My monthly interest subsidy is calculated off of my minimum payment, not the actual payment I make. Great Lakes is my loans servicer, I assume all the other servicers do the same thing.

 

[fetorius]

I'm doing this very thing right now. My monthly interest subsidy is calculated off of my minimum payment, not the actual payment I make. Great Lakes is my loans servicer, I assume all the other servicers do the same thing.

Have you made any additional payments on top of the minimum? Does Great Lakes allow you to do that without any penalty towards the subsidy?

 

[001002154]

You aren't "losing" money by paying more. Your debt is growing a smaller amount by you investing more toward paying it off. How is that a bad thing?

 

[sazerac]

You aren't "losing" money by paying more. Your debt is growing a smaller amount by you investing more toward paying it off. How is that a bad thing?

Because let's say you have $3000 in the bank, an interest payment of $1000, and due to the income based repayment options you are allowed to make a minimum payment of $500 under REPAYE.

Scenario 1: you pay $500, the government pays $250 subsidy, and you keep the other $2500 in your bank account. Change in net worth: $750-$500=+$250.

Scenario 2: you pay $1000, the government pays $0, and you have $2000 in your bank account. Change in net worth: $1000-$1000=$0. Chump.

The one-half interest subsidy on underpaid REPAYE interest is FREE MONEY. Let me say that again: FREE MONEY!!! The more you underpay your loans under REPAYE, the more FREE MONEY the government will give you.

 

[B_52]

Because let's say you have $3000 in the bank, an interest payment of $1000, and due to the income based repayment options you are allowed to make a minimum payment of $500 under REPAYE.

Scenario 1: you pay $500, the government pays $250 subsidy, and you keep the other $2500 in your bank account. Change in net worth: $750-$500=+$250.

Scenario 2: you pay $1000, the government pays $0, and you have $2000 in your bank account. Change in net worth: $1000-$1000=$0. Chump.

The one-half interest subsidy on underpaid REPAYE interest is FREE MONEY. Let me say that again: FREE MONEY!!! The more you underpay your loans under REPAYE, the more FREE MONEY the government will give you.

Interest is a reduction in net worth, payment of interest is neutral and government money is positive so you also have to include the interest gained on the loan as a negative effector of net worth, which would be independant of however the minimum payment is calculated in this case and the payment of interest is not a negative because you're not changing your (equity-debt). Howevr unless your equity is gaining interest faster than your debt, any failure to use equity to pay off debt is losing money to interest on debt. So, I disagree with your calculation fundamentally and in fact it does seem that the government has incentivized people to let their interest on loans run longer in exchange for some "free money" that is actually worth less than what the accumulating debt on principal would ammount to by only paying minumums. I apologize that i can't come up with a more eloquent way to convey my thoughts btw lol

 

[ND13MD]

I'm doing this very thing right now. My monthly interest subsidy is calculated off of my minimum payment, not the actual payment I make. Great Lakes is my loans servicer, I assume all the other servicers do the same thing.

So in other words, any extra payments you make above the minimum applies to the principle and not the interest? That would make more sense to me

 

[RangerBob]

I think @RangerBob is our local expert in all things REPAYE, and I'd like to hear his opinion.

I'm not so sure I'm an expert! I am unfortunately not in the situation where I've been able to pay money on top of my monthly payments (I had private loans to pay off instead). But I recall reading a thread a while back where this topic came up and I believe others mentioned that the government pays half the unpaid interest based on your monthly payment, not your actual payment. Obviously if I were in the OP's shoes I'd want to confirm this. I doubt the typical customer service rep at any servicer would know the correct answer though.

If you take it to the extreme--that the OP pays the entire interest each month, then the big question is where would the government's money go? Does it stay the same and go to interest and the OP's extra funds (on top of the remaining interest) just get applied to the principle? Or does the OP's payment get applied to interest first, leaving nothing for Uncle Sam to apply a payment towards?

If the OP does pay off more than the minimum payment, I'd encourage them to just target their highest interest rate loan for the additional funds (and if they're all the same rate, just pick the smallest loan that you could eliminate the fastest). That way in case it turns out the government only pays half of your actual (and not calculated) accumulating interest, then you're applying those extra funds towards one particular loan's interest + principle, which would maybe preserve the subsidy for the interest on the other loans.

The surest way to figure this out is try paying more than the minimum payment and see how the interest subsidy gets applied. Every month I check my interest balance before and after my payment (and the subsidy) are applied. There are a few servicers that even document what your subsidy is each month. If one month I made a significantly higher payment, then I could see what happens to the subsidy.

In the event the subsidy drops if you pay more, it'd be interesting to see what happens if you wait to apply your additional payment until the subsidy was already applied...

 

[001002154]

Interest is a reduction in net worth, payment of interest is neutral and government money is positive so you also have to include the interest gained on the loan as a negative effector of net worth, which would be independant of however the minimum payment is calculated in this case and the payment of interest is not a negative because you're not changing your (equity-debt). Howevr unless your equity is gaining interest faster than your debt, any failure to use equity to pay off debt is losing money to interest on debt. So, I disagree with your calculation fundamentally and in fact it does seem that the government has incentivized people to let their interest on loans run longer in exchange for some "free money" that is actually worth less than what the accumulating debt on principal would ammount to by only paying minumums. I apologize that i can't come up with a more eloquent way to convey my thoughts btw lol

Exactly. Paying less per payment does not equate to paying less overall, your loan just grows more.

 

[soccerkd]

Have you made any additional payments on top of the minimum? Does Great Lakes allow you to do that without any penalty towards the subsidy?

So in other words, any extra payments you make above the minimum applies to the principle and not the interest? That would make more sense to me

So my minimum payment is ~150/month and I accrue ~450/month in interest, so my subsidy is about 150/month. I'm paying 600/month and still earning the full ~150 interest subsidy.

 

[B_52]

So in other words, any extra payments you make above the minimum applies to the principle and not the interest? That would make more sense to me

you wold have to calculate the interest first and how it compounds, then subtract that from your payment. Anything above that is taken off the principal which is what your really want to do. Paying down interest only is just tossing money down the drain. That's why any minimum payment which only serves to keep up with interest is a total scam. Always pay as much as you can spare. Unless the goverment assistance is so great that it beats the rate of interest on your loand and allows your payment to come off principal, then it's just not worth it. Best let that money go to some other program in higher education that can genuinely help somone

 

[B_52]

you wold have to calculate the interest first and how it compounds, then subtract that from your payment. Anything above that is taken off the principal which is what your really want to do. Paying down interest only is just tossing money down the drain. That's why any minimum payment which only serves to keep up with interest is a total scam. Always pay as much as you can spare. Unless the goverment assistance is so great that it beats the rate of interest on your loand and allows your payment to come off principal, then it's just not worth it. Best let that money go to some other program in higher education that can genuinely help somone

To that end I've heard there are programs where you can do certain kinds of work which give you credits to make payments on loans independent of any other calculations. That would be a better deal if the work is palitable.