The cap refers to a limit on capitalization that occurs as a result of losing your partial financial hardship. Does It Cost More to Train Residents or to Replace Them? But the fortunate few with small loans like you are exactly the kinds of folks with the most to gain from refinancing in residency. There are tax consequences to filing taxes separately such that many people who would lower their PAYE payments by utilizing the MFS loophole would still lose money in the long run, particularly if they are in a negative amortization situation where they would otherwise benefit from the unpaid interest subsidy in REPAYE. Under both PAYE and REPAYE, the government subsidizes 100% of unpaid interest that accrues on subsidized loans during the first three years of repayment. There are reasons PAYE can be a better choice for many borrowers, but the interest capitalization cap isn’t really one of them. Thanks. Ponzi Scheme Suspect Uses Underwater Scooter to Flee F.B.I. 20 years if you only have undergraduate loans. But making sense of PAYE and REPAYE’s nuanced differences can make your head spin: Must have received a federal loan on or after Oct. 1, 2007, and have had no outstanding federal loans at that time. To be eligible for PAYE, you must meet all of these requirements: Have received a federal loan on or after Oct. 1, 2007, and had no outstanding federal loans at that time. We can still file separately but the state, as far as I know and have done my research, says if we are filing married but separately, we have to add our incomes together and divide by two. The PAYE interest cap is essentially never better than the REPAYE interest subsidy. So, I’m greatly considering moving over to PAYE which my loan servicer did say I qualify for. As always, you’ll have to run some scenarios for yourself, but if you’re considering long-term long forgiveness, hopefully this gives you some food for thought. Income-driven repayment: Is it right for you? Our partners cannot pay us to guarantee favorable reviews of their products or services. The main difference is that you can still use REPAYE if your monthly payments would be higher than on the Standard 10-Year plan, but not with PAYE. You'll save on interest and become debt-free faster by sticking with the standard plan. If so, since I’m only 1.5 (2.5 as of next year when the government looks at my income again). Under this plan, the largest benefit is half of any interest accrued is subsidized. The only benefit of REPAYE over PAYE (the interest subsidy) is irrelevant when going for PSLF. Generally, PAYE is better for married borrowers in cases where both spouses have an income. Income-driven plans can calculate payments based on your spouse's income and debt, as well as how much you earn. In a year or so, that REPAYE subsidy will be gone due to her income, however my payment X now = X +(some interest) with PAYE. Really get to know your money and find cash you can put aside and grow. The way it looks, my 10% AGI will be just under my interest on my 70K. Ok thank you very much for this information, more help than I’ve gotten with multiple calls to loan servicer referring me back to an accountant that I don’t have. There is a good chance this is a good idea as IBR is based on 15% of your salary and RePAYE and PAYE … But as always, these calculators make assumptions that might not be true nor reflect your options. Generally, qualifying payments are limited to those made under one of the income-driven repayment plans, the standard repayment plan with a 10-year repayment period, or any other plan, if the payment amount is not less than the payment that would be required under the standard repayment plan with a 10- year repayment period. I neglected to include the option to use accruing interest for PAYE and instead treated the interest as capitalizing every year. My question is, if I switch from REPAYE to PAYE, do I still get the capitalization cap? Do you think that PSLF will be there in 10 years to forgive physicians that have large amounts of debt but are paid in the lower ranges (PCP, peds, etc.)? With RePAYE both spouses’ incomes are always included even if you file taxes separately. So PAYE will frequently “beat” REPAYE in two scenarios: You can run these scenarios easily in the official repayment estimator (just look at the first monthly payment). The other difference between them comes if you rely on filing taxes separately from your spouse in order to get low payments with PAYE, a trick/loophole closed by REPAYE. Hoping for PSLF, however, willing to refinance at the end of my training depending on my future practice situation. With 100k salary and about 289k in loans, would it be best to be in REPAYE and switch in the end to PAYE even with the capitalization or just do PAYE only for the next 20 years? You can switch from IBR to RePAYE or PAYE. I have close to 10K saved up. But I did the math, and taking into account another two years of residency/fellowship, the interest subsidy of REPAYE ended up more than making up for the capitalized interest in my case. Because REPAYE takes longer, you pay $158k more with REPAYE. To get the most accurate results, include all of the following information: Consequences of switching repayment plans: Once you choose a repayment plan, avoid switching. So that’s a total of $654k with PAYE and $812k REPAYE. If the goal is PSLF, it doesn’t even matter if you get a subsidy at all, that would be money wasted. As far as I understand, when you switch from one plan to another, you get fully capitalized. Any idea of how they allow us to pay this…. If you’re certainly going for PSLF, PAYE is your best bet. It’ll cap your monthly payments at 10%, never asking you to pay more than what you’d owe via a Standard Repayment Plan. » MORE: PAYE: How it works and whom it's best for. The government pays 100% of unpaid interest that accrues on subsidized loans in the first three years of repayment. If your balance is 4x your income, then you probably shouldn’t be in PAYE. Just to be clear: under PAYE, if 10% of my discretionary income exceeds the 10-year standard repayment calculated based on my original loan amount (likely during attendinghood), then PAYE caps at the 10-year standard repayment? Let's assume that a 1st year resident earns $55,000, and owes $200,000 at a weighted average 7% interest rate. Monthly payments will be 10% of discretionary income; ... REPAYE Interest Subsidy. Most residents should be in REPAYE. After three years, they will pay for half of the accruing interest. It was introduced as a plan for those types of loans that don’t meet all the requirements for the PAYE program, such as borrowers who received loans before October 1 st , 2007, for example. The monthly payment at a $150k salary is $1102 ($13,224/year), meaning your loan continues to grow big time forever. This subsidy is not dependent on the Public Loan Forgiveness Program, you don’t need to be in a qualifying job, and you get the benefits immediately. I’m just wondering your thoughts on this complicated situation keeping in mind that: – I’m a teacher, my wages will grow incredibly minimally – I qualify for Public Service Loan Forgiveness – Spouse has no loan debt – I make nearly double what my spouse makes – Texas’ community property / income – Moving to PAYE from REPAYE (unpaid interest capitalization). You have the option to file taxes separately and exclude your spouse's income from your PAYE calculation. I am planning on doing REPAYE and am in a 5 year residency with a likely 1 year fellowship. Please help us keep our site clean and safe by following our, Prevent identity theft, protect your credit, The difference between term and whole life insurance, How medical conditions affect your life insurance rate. We are both on income driven repayment plans. Your discretionary income calculator helps determine your monthly student loan payments on income-driven plans. Because REPAYE takes longer, you pay $158k more with REPAYE. My best estimate of monthly payments projected to 20 years I could end up with a 200k tax bill in 20 years. REPAYE sets student loan payments no more than 10% of the borrower's income just like PAYE but it offers an interest subsidy that it is not offered with PAYE. Interest subsidy. All of my loans are Stafford/GradPLUS federal loans. See this post about switching back. Compare the monthly payment amounts under each repayment plan and choose the one with the lowest monthly payment. I am trying to figure out if it makes more sense for us to aggressively pay her debt off, or pay the minimum payments and wait the 20 years under PAYE? On PAYE you would differ $400 of interest per month ($700 – $300). Which means that over the long term, the rate of interest accrual is capped (but not the amount, of course). to get a lower interest rate and save more. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. Your and your spouse's adjusted gross income. Note that switching to PAYE/IBR to avoid the spousal income issue requires that you file taxes separately and then submit your IDR income certification paperwork, so you can’t simply do this right before you start a new job without some planning. People with large amounts of debt and high income potential, such as dentists or physicians, may want to weigh factors such as PAYE's monthly payment cap and REPAYE’s superior interest subsidy. Ben, great post…thank you. If you have good credit, you can go a step further and. In this case, you’d get the best of both worlds: your months in REPAYE should still count toward the 240 needed for PAYE forgiveness, but you’re also decreasing the amount of interest accrued as much as possible. The tool also shows total interest costs and loan forgiveness potential on each plan. REPAYE became available to Direct Loan borrowers on December 17, 2015 and offers several benefits including: a potentially lower monthly payment, no disbursement date restrictions, loan forgiveness after 20 or 25 years, and interest subsidies to prevent ballooning loan balances. If you select REPAYE as your income-driven repayment plan, the government will actually pay at least half of any interest your payments do not cover. So talk it out, make sure they know what feds say, and get to the bottom of it. After 3 years, you’re responsible for the interest that accumulates. Her work has been featured by The Associated Press, USA Today and Reuters. Using REPAYE during training yields an effective interest … When you lose your partial financial hardship, which will likely happen at some point during attendinghood depending on how much you owe vs. how much you make. You can switch back to PAYE later if needed if you still qualify to hit forgiveness at 20 instead of 25 years. It ended up getting over 300,000 views on Business Insider. For many residents and fellows, this interest subsidy will lower your effective interest rate during training from 7%, to 4-5%. Which IDR plans get the student loan interest subsidy. If you have good credit, you can go a step further and refinance student loans to get a lower interest rate and save more. Otherwise, the repayment period on REPAYE is 20 years. You'll save on interest and become debt-free faster by sticking with the standard plan. REPAYE is typically better for single borrowers and people who don’t qualify for PAYE. She has no student loan debt (lucky her). A 500k loan at 6.8% accrues $34k in interest each year. Myself, on the other hand should get a larger-than-normal like an estimated $4400 refund or so (I guess it balances out) since I payed in for $54,000 but only had a $44,000 AGI. I’m SO glad I found this website – both the information you initially provided plus your interactions with others have provided me some much-needed insight and information. My monthly payments go from like the mid-to-upper $200’s to close to $600/mo with my Spouse’s income included. I think in 10 years, future borrowers will have access to a limited version, most likely with the $57,500 that has been floated around in the budget proposals for the past couple of years. If your debt is starting to dwarf your income and you’re seeking the lowest possible monthly payment, PAYE is likely your best option. I don’t think with my salary I can realistically pay this debt off. , meaning your payment on PAYE would be lower than it would be on the standard repayment plan. Both PAYE and REPAYE cap your payments at 10% of your monthly discretionary income. This can be when your loans are forgiven or if you … When you leave an income-driven repayment plan, the unpaid interest is capitalized, which increases the total interest you pay over time. If you're not pursuing PSLF and can afford to make payments on the standard repayment plan, you should. I am trying to decide between PAYE and REPAYE. Otherwise, the repayment period on REPAYE is 20 years. I’d love to chat if you wanted to reach out to me by email to set something up: travis AT studentloanplanner DOT com. For long-term forgiveness, it depends more and you can do the math, but a brief period of capitalized interest at the end won’t undo the long-term benefits of lower payments until the switch. I make around $54,000 after taxes (and no hope for any kind of wage growth since I’m a teacher) and she makes about $34,000 after taxes – so about $88,000 combined after taxes. If you really want the flexibility of lower monthly payments, there are several companies that have reduced payments for residents. At the same time, I am wondering what will happen with the outstanding interest the government has been subsidizing as my current payments do not even cover the interest – will it capitalize? Differences in repayment timelines: If you have any loans from graduate school, your repayment schedule is 25 years on REPAYE. if single REPAYE if single AND negative amortization exists--you will receive more interest subsidy (consider changing to PAYE once negative amortization no longer exists, and/or you get married AND your spouse To Build Resilience in Isolation, Master the Art of Time Travel. PAYE: How it works and whom it's best for, REPAYE: How it works and whom it's best for. Where PAYE allows for the government to cover unpaid interest on subsidized student loans for three years if the monthly installment didn’t cover all of the interest, REPAYE matches this and expands the subsidy to unsubsidized federal loans, as well as the unpaid interest on subsidized loans over the designated three years. Before you make a final decision on PAYE vs. REPAYE, make sure you know these details: Consequences of switching repayment plans: Once you choose a repayment plan, avoid switching. If you’re single or expect your income to grow, REPAYE is often the better choice. You compare the benefit of the interest subsidy of RePAYE versus the cap on payments of PAYE and of course marriage status, total student loan debt, etc. I would also like to start a Roth IRA and get as close to maxing it out as I can afford. But yes, if you’re in REPAYE, extra money toward loans means less unpaid interest accrued and thus less subsidy. It would just be a wasted effort toward reducing an amount that would be forgiven anyway. Unpaid interest will capitalize, but the capitalized amount is limited to 10% of your original loan balance when you entered PAYE. Hi Ben, I am so happy I found your website! REPAYE. The federal loan repayment calculator has my payment going down into the mid $100’s for PAYE using the $44,000 AGI. My wife has roughly 105k in student debt. Given the monthly payments you’re talking about vs the forgiveness amount, the tax consequences will be a far second fiddle to the amount at play for forgiveness. » MORE: Guide to filing taxes with student loans. I’m a public school teacher in Texas. You’ll need to do the math when debating PAYE vs. REPAYE to determine which plan nets out in your favor, but here are guidelines for making the decision. The full text is online and the table of contents is at the bottom of that page. If you no longer qualify for PAYE because your income becomes too high — or you fail to recertify your income annually — the amount of unpaid interest that can be capitalized is limited to 10% of your loan balance when you entered the plan. When evaluating offers, please review the financial institution’s Terms and Conditions. Say hello? REPAYE and PAYE will both ding you 10% of your "discretionary income." The servicers don’t give real advice because they’re customer service reps, not content experts, and even the advice they do give is often wrong. If switching like that sounds too good to be true, see #28 from the official FAQ: Similarly, if you were previously in repayment under one income driven repayment plan and later switched to a different income-driven repayment plan, payments you made under both plans will generally count toward the required years of qualifying monthly payments for the new plan. I had a lot of interest capitalize. However, things are (possibly) going to change after this year since I got married. We did file jointly last April and I am due to recertify in the next month. Other than that, the PAYE plan may actually be the better plan — especially for married borrowers. It should be noted that any extra payments in REPAYE will affect the subsidy on any loan that a borrower overpays; however, the benefit of paying extra means that the borrower could pay a specific loan off faster. My payments have been affordable in REPAYE. In future years, you may decide to opt for pretax retirement contributions instead of a Roth option: but are valid, but a pretax contribution will reduce AGI and thus reduce your REPAYE payments further, helping you save even more money while working toward PSLF. Your payment will only be higher with REPAYE than PAYE if you were to choose to file taxes separately from your future spouse, which is probably not worth it tax wise. PAYE payments are capped at the 10-year standard payment whereas RePAYE payments have no cap. I’m embarrassed to say I have just over $100,000 in loans from undergrad and grad school. If you and your spouse are pulling in $130k+, then you should be refinancing to a lower rate and trying to pay down your debt. Assuming you’re in a negative amortization situation, one should probably pick REPAYE, because then you get an interest subsidy that reduces your effective rate (a hedge against if the PSLF thing doesn’t work out). ©   BWMD LLC 2007-20   ||   CONTACT: BEN AT BENWHITE DOT COM, Additional thoughts on residency interviews, The Texas Medical Jurisprudence Exam: A Concise Review, The Essential List of My Writing Concerning Medical School, the NBMEs, USMLEs, and Residency, My Student Loan Refinancing Breakdown and Cashback Links, Some Practical Thoughts on the Virtual Interview Season, my post on saving for retirement during residency, several companies that have reduced payments for residents, Resident Refinance: Laurel Road vs LinkCapital vs SoFi vs Splash vs REPAYE | ben white, Highlighted advice for medical school, the boards, & residency, Unisex Disability Insurance Rates Are Basically Gone at the End of 2020, For-Profit Medical Schools, Once Banished, Are Sneaking Back. If you really want to move abroad, the foreign income exclusion would effectively reduce your payments to $0. For this first year where your income is super low, the Roth benefits are substantial (i.e. Also must have received a loan disbursement on or after Oct. 1, 2011, or consolidated on or after that date. If you are planning on or seriously considering PSLF, don’t put any more money toward your loans than you need to for your scheduled monthly payments. So, we made $88,000 this year – so we each made $44,000. I mentioned previously that I switched from IBR to REPAYE via this White Coat Investor guest post.Now that I've been on REPAYE for almost 9 months, let's take a closer look at my student loans under the new repayment terms. My guess is that the program will still be available to current students and residents who’ve already borrowed money and made plans that rely on it. Use Federal Student Aid’s Loan Simulator tool to compare monthly payments for PAYE vs. REPAYE, as well as all other federal student loan repayment plans. The Highlights of REPAYE vs PAYE vs IBR. And lastly, note that while 20 years is a leisurely payment schedule, you’d probably still spend less money just paying it down faster. In this situation, you don’t want to pay down your loans directly. The major difference between PAYE and REPAYE comes down to the interest subsidy I described above. PAYE vs. REPAYE: Which is right for you? Have received a loan disbursement on or after Oct. 1, 2011, or consolidated on or after that date. If you’re doing it to reduce payments in the context of a working spouse or increasing salaries but aren’t going for forgiveness, then you’re resigning yourself to substantially more wasted money on interest. If you're pursuing PSLF, you don't have to worry about this; loans forgiven through PSLF aren't taxed as income. Your tax filing status, family size and state of residence. REPAYE will cover some interest for you, yes. Just don’t quit that job. If your REPAYE payments are never able to cover interest while in REPAYE, you’d stay in REPAYE until you near the 240 needed for PAYE and then switch right before. #2 Taxes. I’m looking for advice for my situation: I am fortune to have only about 70k in unsubsidized loans, about to start repayment. With either one, you’ll need to save for years just to pay the taxes that will come due with the forgiveness (and even with your loans “forgiven,” you’re still spending a ton of money on them). Income-Driven Repayment: Is It Right for You? So my understanding is a little interest would be subsidized with REPAYE, or a little adding-up with PAYE? The repayment term on PAYE is 20 years, regardless of your loan type. When does interest capitalize within the PAYE program? The reason the above question is basically never is because REPAYE interest never capitalizes unless you leave the plan. With PAYE and REPAYE, your adjusted payments might be too small to cover the interest your loan accrues each month. All federal loan borrowers qualify for REPAYE, regardless of income or when they borrowed. To get the most accurate results, include all of the following information: Your and your spouse's student loan types, balances and interest rates. Subsidy of accrued interest during “negative amortization” REPAYE vs. PAYE vs. IBR What IDR plan should you choose? I’m a PT as well but my loans are 215k and only a few months into the PAYE plan. REPAYE stands for “Revised Pay As You Earn” program. When filing jointly, it depends on if your payments cover the accruing interest. It might be right for you. I’ve been on REPAYE for about 1.5 years or so. This may influence which products we write about and where and how the product appears on a page. Because there is no hardship requirement, your interest will continue to accrue at the same rate it always has. At a 28% marginal tax rate for a single filer, for example, that’s a tax bill of $203k for PAYE and $156k for REPAYE for the forgiven amount due in one big lump sum.

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