Residency non-PSLF eligible: IBR vs. forbearance

[Mountaineer12]

Hi everyone, so I know there's been countless threads about loan repayment, but my situation is a little unique. My residency program does not qualify for PSLF so I'm trying to decide if it's worth it to squeeze out the extra $300+/month to do PAYE or REPAYE during residency or if I should just enter forbearance. Obviously keeping interest down is great, but if I do forbearance, I have a smaller private loan that I could completely pay off and I would also make small payments towards my government loans when I could. I'm just trying to justify spending so much of my salary on these loans while being stressed out about money during residency when I won't even have the benefit of 3 years towards PSLF that everyone else has. I'm also awful with financial things so any advice would be amazing! Thanks!

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[mvenus929]

Well, REPAYE would help keep your interest down, since they subsidize half the interest that you don't pay. But whether it is better for you to go into an income based repayment plan or to pay off a small private loan is hard to determine without numbers.

 

[Mountaineer12]

Well, REPAYE would help keep your interest down, since they subsidize half the interest that you don't pay. But whether it is better for you to go into an income based repayment plan or to pay off a small private loan is hard to determine without numbers.

I have about 180k in med school + undergrad loans that has become 200k from interest already. My private loan was a 5k residency relocation loan. Does that help? I'm awful with this stuff haha


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[mvenus929]

I have about 180k in med school + undergrad loans that has become 200k from interest already. My private loan was a 5k residency relocation loan. Does that help? I'm awful with this stuff haha


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What are your interest rates? What are the terms of your private loan repayment? Are you single or do you have a family to support? If the latter, is there a second income?

 

[Mountaineer12]

What are your interest rates? What are the terms of your private loan repayment? Are you single or do you have a family to support? If the latter, is there a second income?

I believe the government loans are around 6% and the private loan is 5.7%. I also have 20k in loans through my school that are around 5%, but won't start accuring interest until 6/2018. I will have to go into forbearance for them and pay what I can because the payments are too large. I don't have to make payments on the private loan until 2020, but it seems so silly for it to almost double in amount by then. I am single. I just don't need know what the best plan is. Thanks so much for the help!


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[NotAProgDirector]

Assuming your goal is to decrease your loan balance as much as possible, without doing almost any math, the REPAYE is almost certain to come out ahead because you get all this free money from the gov't that keeps your balance from rising. The difference in balances/rates between your private and gov't loans would need to be immense for any other plan to be superior. I'm going to ignore this small school loan, but it really doesn't matter.

Under REPAYE, let's assume your income is $45K, with 3% growth. Let's assume a 5 year timeframe -- the shorter the timeframe, the less it matters what you do. Using those numbers in a REPAYE calculator, using the national average for the poverty level, your payment would be $224 and the gov't would pay $1900+ each month. So your annual cost would be about $2700, but the govt would be paying most/all interest, so the loan balance would basically remain the same -- you'd still owe $200K on your govt loans. The private loan would grow, but not double. Assuming annual compounding, the growth of your loan would be 1.057^5 = 1.3 or so, so it would increase by about 30-35%. That assumes that you don't try to pay it off -- with only $224/mo on REPAYE, you might be able to pay down this private loan also. But, if you don't, at the end of 5 years you'd have paid $13500, and owe $200K on the govt loans, and $6600 on the private, for a total of $207K. (In reality your REPAYE would recalculate as your salary increases, so you'd actually pay a bit more than that -- but the difference is small).

Now, let's assume you pay down the private loan. If you plan to pay off the loan in 5 years, the payment is just under $100/month. You'd end up paying about $5800 total, and the loan would be paid off. But the $200K in loans would grow to $270K with interest. So you'd be much farther behind -- but you'd have smaller payments during residency. So it really depends on what's important -- minimizing loans, or minimizing payments.

I think the above is correct, although I haven't reviewed REPAYE in awhile. I'm also assuming that while in forebearance, your interest capitalizes. If not, then the two plans become closer together.

[GrumpyOldMan]
I hate to say this, but being this far in debt and not understanding how repayment works is frankly terrifying. How can you take out this much debt and not understand how this will be paid back?
[/GrumpyOldMan]

 

[Mountaineer12]

Assuming your goal is to decrease your loan balance as much as possible, without doing almost any math, the REPAYE is almost certain to come out ahead because you get all this free money from the gov't that keeps your balance from rising. The difference in balances/rates between your private and gov't loans would need to be immense for any other plan to be superior. I'm going to ignore this small school loan, but it really doesn't matter.

Under REPAYE, let's assume your income is $45K, with 3% growth. Let's assume a 5 year timeframe -- the shorter the timeframe, the less it matters what you do. Using those numbers in a REPAYE calculator, using the national average for the poverty level, your payment would be $224 and the gov't would pay $1900+ each month. So your annual cost would be about $2700, but the govt would be paying most/all interest, so the loan balance would basically remain the same -- you'd still owe $200K on your govt loans. The private loan would grow, but not double. Assuming annual compounding, the growth of your loan would be 1.057^5 = 1.3 or so, so it would increase by about 30-35%. That assumes that you don't try to pay it off -- with only $224/mo on REPAYE, you might be able to pay down this private loan also. But, if you don't, at the end of 5 years you'd have paid $13500, and owe $200K on the govt loans, and $6600 on the private, for a total of $207K. (In reality your REPAYE would recalculate as your salary increases, so you'd actually pay a bit more than that -- but the difference is small).

Now, let's assume you pay down the private loan. If you plan to pay off the loan in 5 years, the payment is just under $100/month. You'd end up paying about $5800 total, and the loan would be paid off. But the $200K in loans would grow to $270K with interest. So you'd be much farther behind -- but you'd have smaller payments during residency. So it really depends on what's important -- minimizing loans, or minimizing payments.

I think the above is correct, although I haven't reviewed REPAYE in awhile. I'm also assuming that while in forebearance, your interest capitalizes. If not, then the two plans become closer together.

[GrumpyOldMan]
I hate to say this, but being this far in debt and not understanding how repayment works is frankly terrifying. How can you take out this much debt and not understand how this will be paid back?
[/GrumpyOldMan]

Thank you, that helps a lot!! My residency is only 3 years so that's another reason I was questioning which option was best. We had some financial aid lectures in medical school, but they all assumed PSLF. We had one lecture in residency orientation about it and I had resigned myself to REPAYE, I just wanted to make sure this actually made financial sense before taking the plunge and starting payments. You're completely right that I should understand this stuff better. I'm woefully uneducated about financial things and often have to rely on the kindness of others. I appreciate everyone breaking it down for me!


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[mvenus929]

Thank you, that helps a lot!! My residency is only 3 years so that's another reason I was questioning which option was best. We had some financial aid lectures in medical school, but they all assumed PSLF. We had one lecture in residency orientation about it and I had resigned myself to REPAYE, I just wanted to make sure this actually made financial sense before taking the plunge and starting payments. You're completely right that I should understand this stuff better. I'm woefully uneducated about financial things and often have to rely on the kindness of others. I appreciate everyone breaking it down for me!

So, for comparison... I have a private loan of 40K which is subsidized and at 5%, so I had no interest accruing until after my grace period (I actually somehow managed to get a second grace period, which I'm certainly not complaining about, but I'm still not clear on how that happened). I have about $180K in government student loans. I started repayment prior to REPAYE being a thing, so I'm in PAYE (I didn't want my interest to capitalize when I switched plans, so I've stuck with PAYE). I had maxed out my credit card (with a measly limit of like $2K), and drained all my savings prior to residency starting, and didn't get my first paycheck until the end of July.

In the first 6 months after graduation, I managed to pay off my credit card, and get an emergency fund of about $3K (I increased this up to $7.5K by the time I got my tax return the following spring). Then I started repaying my government loan, and paid somewhere between $200 and $300 per month throughout residency, due to adjustments in salary. I wanted to pay down my private loan some, just because it didn't have all the benefits of federal loans. I was obligated to pay off my interest each month under the deferment plan I was given for being in residency, which amounted to about $150 per month. I decided to pay back $500 total towards all my student loans each month, with all the extra money going towards my private loan. Prior to my second grade period, I had paid off roughly $2.5K of the principal, plus had taken some nice trips with extra money I had each month, and had some unexpected large expenses come up during residency (at least $1000 in car repairs). My residency was 3 years, and I finished 2 months ago.

So even with paying the minimum on your federal loans, you should be able to pay off your $5K loan without much difficulty during residency, assuming your other spending habits are reasonable. Also, if you sign up for automatic payment on your federal loans, most servicers will decrease your interest rate by like 0.25%, which isn't much, but it's additional money you won't be paying down the line.

 

[Mountaineer12]

So, for comparison... I have a private loan of 40K which is subsidized and at 5%, so I had no interest accruing until after my grace period (I actually somehow managed to get a second grace period, which I'm certainly not complaining about, but I'm still not clear on how that happened). I have about $180K in government student loans. I started repayment prior to REPAYE being a thing, so I'm in PAYE (I didn't want my interest to capitalize when I switched plans, so I've stuck with PAYE). I had maxed out my credit card (with a measly limit of like $2K), and drained all my savings prior to residency starting, and didn't get my first paycheck until the end of July.

In the first 6 months after graduation, I managed to pay off my credit card, and get an emergency fund of about $3K (I increased this up to $7.5K by the time I got my tax return the following spring). Then I started repaying my government loan, and paid somewhere between $200 and $300 per month throughout residency, due to adjustments in salary. I wanted to pay down my private loan some, just because it didn't have all the benefits of federal loans. I was obligated to pay off my interest each month under the deferment plan I was given for being in residency, which amounted to about $150 per month. I decided to pay back $500 total towards all my student loans each month, with all the extra money going towards my private loan. Prior to my second grade period, I had paid off roughly $2.5K of the principle, plus had taken some nice trips with extra money I had each month, and had some unexpected large expenses come up during residency (at least $1000 in car repairs). My residency was 3 years, and I finished 2 months ago.

So even with paying the minimum on your federal loans, you should be able to pay off your $5K loan without much difficulty during residency, assuming your other spending habits are reasonable. Also, if you sign up for automatic payment on your federal loans, most servicers will decrease your interest rate by like 0.25%, which isn't much, but it's additional money you won't be paying down the line.

That's really impressive! I will certainly try to contribute to it when I can. I don't think I realized how fast a residency salary would go between rent, car payments, etc, etc. Hopefully I can make a dent at least. Thanks again for all your help and advice!


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