Switching from REPAYE TO PAYE

[iggles]

Lets assume I'm switching from REPAYE to PAYE after X amount of years. Is the total amount of all those interest subsidies I have been taking advantage of going to be tacked back onto my loan balance or does the non-subsidized interest rates just start accruing from the point that I switch?

Basically my question is what is stopping me from staying in REPAYE for 19.9 years and switching to PAYE right before the 20 year mark to get my graduate school loans forgiven 5 years early while still benefiting from a smaller "tax bomb" due to less negative amortization from REPAYE?

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[RangerBob]

I am not sure if payments made in REPAYE will actually count towards PAYE forgiveness. If a customer service agent tells you it does, that's no guarantee. There's nothing in the MPN on this. I believe when I switched from IBR to REPAYE I was told by one person my prior payments counted, and another said they didn't. It really didn't make a difference to me because they were all PSLF-eligible payments, and I had no plans go fo for the IBR/REPAYE forgiveness.

Personally, I think counting on PAYE/REPAYE forgiveness is a bad idea (I say this as a very high borrower) because of the negative amortization that occurs, the tax bomb, and the potential for things to change (what if marginal rates go up to 50%, etc.).

I don't think the government takes back the interest. But your interest would definitely capitalize if you change plans.

 

[iggles]

I am not sure if payments made in REPAYE will actually count towards PAYE forgiveness. If a customer service agent tells you it does, that's no guarantee. There's nothing in the MPN on this. I believe when I switched from IBR to REPAYE I was told by one person my prior payments counted, and another said they didn't. It really didn't make a difference to me because they were all PSLF-eligible payments, and I had no plans go fo for the IBR/REPAYE forgiveness.

Personally, I think counting on PAYE/REPAYE forgiveness is a bad idea (I say this as a very high borrower) because of the negative amortization that occurs, the tax bomb, and the potential for things to change (what if marginal rates go up to 50%, etc.).

I don't think the government takes back the interest. But your interest would definitely capitalize if you change plans.

Unfortunately I'm very high borrower not on a physician's income and do not qualify for PSLF so I'm hoping for the best here.

Per: 34 CFR 685.209 - Income-contingent repayment plans.
(iii) For a borrower who qualifies for the Pay As You Earn repayment plan, the beginning date for the 20-year period is -

(A) If the borrower made payments under the income-contingent repayment plan described in paragraph (b) of this section, the Revised Pay As You Earn repayment plan described in paragraph (c) of this section, or the income-based repayment plan described in § 685.221, the earliest date the borrower made a payment on the loan under one of those plans at any time after October 1, 2007


With the interest subsidies and no interest capitalization that REPAYE offers you get much less negative amortization than you'd think. My only question is if I leave REPAYE does that interest that would have been capitalized all those years suddenly get tacked back on my loan balance at the time of forgiveness? Which would mean it makes no difference switching from REPAYE to PAYE compared to just staying in PAYE the whole time.

 

[RangerBob]

Unfortunately I'm very high borrower not on a physician's income and do not qualify for PSLF so I'm hoping for the best here.

Per: 34 CFR 685.209 - Income-contingent repayment plans.
(iii) For a borrower who qualifies for the Pay As You Earn repayment plan, the beginning date for the 20-year period is -

(A) If the borrower made payments under the income-contingent repayment plan described in paragraph (b) of this section, the Revised Pay As You Earn repayment plan described in paragraph (c) of this section, or the income-based repayment plan described in § 685.221, the earliest date the borrower made a payment on the loan under one of those plans at any time after October 1, 2007


With the interest subsidies and no interest capitalization that REPAYE offers you get much less negative amortization than you'd think. My only question is if I leave REPAYE does that interest that would have been capitalized all those years suddenly get tacked back on my loan balance at the time of forgiveness? Which would mean it makes no difference switching from REPAYE to PAYE compared to just staying in PAYE the whole time.

Your interest capitalizes:
1) Upon starting repayment (end of grace period)
2) Anytime you switch repayment plans (REPAYE to PAYE, or REPAYE to standard, etc.)
3) Anytime you fail to re-certify on-time

To answer you question specifically, yes, your interest that has accrued over all those years would be capitalized, and added to your principle. In the event you're going for forgiveness AND payments made while in REPAYE count towards PAYE (I don't think they do), I do not believe it makes any difference. My understanding is you get the entire loan balance forgiven (principle + interest), and then pay tax on that total amount (probably at least 30% of your final loan balance, considering state and federal taxes). The benefit of REPAYE is the interest subsidy. The benefit of PAYE is the potential forgiveness after 20 years, at least for the original PAYE that was available around the early 2010's (I believe there's an updated PAYE). Originally, PAYE also limited how much interest could be capitalized as well, but I wasn't eligible since I had a loan in 2007 or whatever the arbitrary cutoff was, so I never looked that deeply into the program.

If you are a high borrower, you will accrue a lot of interest over 20-25 years, even at the subsidized rate. There are very few cases where I think it actually makes sense to carry a loan balance that long--you would have to owe an awful lot, and have a very small salary, for it to make sense. The only time I'd recommend aiming for the 20-25 year taxable forgiveness plans is when there is legitimately no hope of ever repaying off yours loans. In that case, you can think of it as you have a tax of 10% of your income for 20-25 years, followed by a whopper of a tax bill.

 

[iggles]

Your interest capitalizes:
1) Upon starting repayment (end of grace period)
2) Anytime you switch repayment plans (REPAYE to PAYE, or REPAYE to standard, etc.)
3) Anytime you fail to re-certify on-time

To answer you question specifically, yes, your interest that has accrued over all those years would be capitalized, and added to your principle. In the event you're going for forgiveness AND payments made while in REPAYE count towards PAYE (I don't think they do), I do not believe it makes any difference. My understanding is you get the entire loan balance forgiven (principle + interest), and then pay tax on that total amount (probably at least 30% of your final loan balance, considering state and federal taxes). The benefit of REPAYE is the interest subsidy. The benefit of PAYE is the potential forgiveness after 20 years, at least for the original PAYE that was available around the early 2010's (I believe there's an updated PAYE). Originally, PAYE also limited how much interest could be capitalized as well, but I wasn't eligible since I had a loan in 2007 or whatever the arbitrary cutoff was, so I never looked that deeply into the program.

If you are a high borrower, you will accrue a lot of interest over 20-25 years, even at the subsidized rate. There are very few cases where I think it actually makes sense to carry a loan balance that long--you would have to owe an awful lot, and have a very small salary, for it to make sense. The only time I'd recommend aiming for the 20-25 year taxable forgiveness plans is when there is legitimately no hope of ever repaying off yours loans. In that case, you can think of it as you have a tax of 10% of your income for 20-25 years, followed by a whopper of a tax bill.

Well if thats the case then it would be best for me to be on REPAYE for 20 years -> get my undergrad loans forgiven while the interest subsidies are in place -> Switch to PAYE to get my grad school loans forgiven since I'm past the 20 year mark correct?

 

[RangerBob]

Well if thats the case then it would be best for me to be on REPAYE for 20 years -> get my undergrad loans forgiven while the interest subsidies are in place -> Switch to PAYE to get my grad school loans forgiven since I'm past the 20 year mark correct?

I don't think it works that way. I believe if you have any graduate loans, REPAYE forgiveness is 25 years. And I do not think credit from one repayment plan counts towards credit for the other.

 

[DrMidlife]

Confidence in a federal loan repayment/forgiveness/refinance plan that goes 10 years out: medium to low.
Confidence in a federal loan repayment/forgiveness/refinance plan that goes more than 10 years out: zero.

The 10 year scenario for me:
- is not impossible in terms of what Congress can/will notice or change, specifically PSLF
- is aimed at untaxed forgiveness
- is front-loaded with residency years so I'll be nearly half done when I start making actual money
- is back-loaded with a small number of practice years during which it's reasonable to include consideration of loan repayment issues
- has multiple compelling private refi options as a backup plan, if the fed story falls apart

The 20-25 year scenario:
- is up against an unimaginable political climate (ie will China respect Dept of Ed promissory notes?)
- is aimed at taxable forgiveness
- is massively weighted to high income years during which I won't want loan repayment in my compensation package vs. other things
- gives up all the private refi backup-plan benes while I wait out the calendar

I'm not PAYE eligible, which matters in thinking through all of the above. A capped payment for 20-25 years would change my betting odds a little bit.