Repayment options?

[frosted2]

Hello everyone,
My SO and I will have about 500,000 in loans between the two of us once it is all said and done (all federal, interest rate between 4-7% on all). I put these numbers into the loan repayment calculator and the numbers are super confusing. For example, how in the world will doing PAYE allow us to pay back less than REPAYE? Both of them seem to imply that we will be paying back less than the 500,000 we will owe. What?

Thanks in advance, finances are not my strong point.

Combined income after taxes should be ~ 180K

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[mvenus929]

PAYE caps you at the 10 year standard repayment. REPAYE does not, but offers an interest subsidy. Both will forgive your loans after years of on-time payments (PAYE is 20 years, it looks like REPAYE is 25 years... I’m not in REPAYE, so I don’t know all the details). But, you will have to consider the amount ‘forgiven’ as earned income that year, and will thus have a hefty tax bill.

 

[frosted2]

@mvenus929 so we would pay a total of $334,462 and we would have $865,538 forgiven (i.e. "income") over a period of 20 years?

 

[SigmaFS]

REPAYE is greater because of the additional 5 year repayment period. In order to approach the PAYE 10-year payment cap, your AGI would need to approach $700k.

Another strategy is to select REPAYE for 19 years (to benefit from the 50% interest subsidy), then switch to PAYE (to benefit from the 20 year repayment period). But, the most conservative strategy is PAYE for 20 years assuming a relatively high student debt to income ratio, say 1.5:1 or greater.

 

[frosted2]

Awesome. Thanks for your help! Makes sense now

 

[mvenus929]

@mvenus929 so we would pay a total of $334,462 and we would have $865,538 forgiven (i.e. "income") over a period of 20 years?

Not 'over a period of 20 years'. At 20 years. So your income that year will be whatever loans were forgiven plus your regular salary (so on the order of $1 million). And you would owe income taxes on all that 'income', even though you only made, say, $200K in actual income that year.

The REPAYE interest subsidy would help you out during training when your loan payments aren't going to touch your interest. Once you're out of training, depending on how much you may, you may have payments that are enough to cover interest, with maybe a little bit of principal. Of course, you have to pay of all the outstanding interest that has accrued from med school and residency (+/- fellowship) before you start touching the principal balance, and since your base loans are so high, it will take a long time for that to happen. Which is why you're ending up with so much forgiven.

People will do one of two strategies in your situation. First, they refinance their loans to a lower interest rate as soon as they finish training. You lose out on income based repayment options at that point, but you're not accruing as much interest, so you have the chance to pay down the principal much faster. Second, they save up funds for that hefty tax bill at the time of forgiveness.

 

[TMP-SMX]

You can't switch to PAYE if you no longer have partial financial hardship. PAYE covers subsidized interest for 3 years (doesn't apply to grad students these days) and REPAYE covers interest fully for 3 years while 50% after that. There's no requirement for partial financial hardship for REPAYE. With 500k in loans I'd strongly suggest working for a nonprofit if you have any interest or refinance to get a better interest rate and work hard on paying down loans. There's also a difference with REPAYE as spousal income is included in the payment calculation.

 

[frosted2]

If neither of us are interested in working for a non-profit, would we be better off doing REPAYE?
Thanks!

 

[SigmaFS]

Do you mind sharing what your income might be? What degree are you and your SO pursuing?

 

[SigmaFS]

I just assumed AGI = $180k with a 3% annual increase.

 

[RangerBob]

REPAYE is greater because of the additional 5 year repayment period. In order to approach the PAYE 10-year payment cap, your AGI would need to approach $700k.

Another strategy is to select REPAYE for 19 years (to benefit from the 50% interest subsidy), then switch to PAYE (to benefit from the 20 year repayment period). But, the most conservative strategy is PAYE for 20 years assuming a relatively high student debt to income ratio, say 1.5:1 or greater.

While you can change plans and keep eligible PSLF payments, you might not be able to transfer eligible payments towards the IBR/PAYE/REPAYE forgiveness programs.

FedLoan (who are correct 30% of the time) told me my payments made while I was in IBR would not count towards REPAYE forgiveness. At the time I didn't care because I wasn't planing on that forgiveness (it'd be a whopper of a tax bill) and REPAYE was going to save me more money with the lower payment plus the subsidy.

 

[SigmaFS]

Precedent has been established. 4 borrowers switched from ICR to Repaye to reduce their repayment period - Tax penalty hits student loan borrowers in income-driven repayment plans for the first time | The Institute For College Access and Success.

While you can change plans and keep eligible PSLF payments, you might not be able to transfer eligible payments towards the IBR/PAYE/REPAYE forgiveness programs.

FedLoan (who are correct 30% of the time) told me my payments made while I was in IBR would not count towards REPAYE forgiveness. At the time I didn't care because I wasn't planing on that forgiveness (it'd be a whopper of a tax bill) and REPAYE was going to save me more money with the lower payment plus the subsidy.

 

[RangerBob]

Precedent has been established. 4 borrowers switched from ICR to Repaye to reduce their repayment period - Tax penalty hits student loan borrowers in income-driven repayment plans for the first time | The Institute For College Access and Success.

Good to know!