[This is a guest post by Bo Liu aka Future Proof M.D., who runs http://futureproofmd.com/ He is a colleague in the field of radiology and a comrade in the mission of promoting financial literacy and empowerment among physicians. We have no financial relationship.]
Given the recent addition of Revised Pay As Your Earn (REPAYE) to the list of Income Driven Repayment (IDR) plans, there has been renewed interest in the topic of what’s the best plan for medical residents who typically have a large student loan debt burden and a meager income, at least for 3-5 years. Especially if one is to pursue Public Service Loan Forgiveness (PSLF). Despite the new attractive offerings of REPAYE, I don’t recommend residents automatically jump over to this new plan. Read on for more details…
Important: PSLF and IDR plans are separate programs.
There has been some confusion surrounding this issue, so I want to clarify – Public Service Loan Forgiveness (PSLF) and Income Drive Repayment (IDR) are 2 separate but complementary programs. If you choose to go into public service and pursue PSLF, there are multiple repayment plans you can choose from – including ALL 4 IDR plans (IBR, PAYE, REPAYE, and ICR) as well as the 10-year Standard Repayment Plan. Now you would not want to choose the Standard Repayment Plan because you will end up paying off all your loans in 10 years, leaving nothing left to be forgiven! The question is – which of the IDR plans should you go with?
Basic Comparison of the 4 IDR plans.
What’s special about REPAYE?
As you can see above, REPAYE sounds like a sweet deal. It’s just like PAYE but with a sweeter interest subsidy. Why shouldn’t everyone jump over to REPAYE? There are 2 main reasons why REPAYE may not be as beneficial as it looks on the surface:
- Removal of the payment cap – under all of the other IDR plans, your payment will rise with your income, but never more than the amount you would have paid under the 10-yr standard repayment plan. So for a single resident making $50,000/yr with a student loan balance of $150,000, your payment can never be more than the standard repayment plan amount of $1,726/month. Under REPAYE, there is no cap on payments. So assuming everything stays the same except now you are making $350,000/yr as an attending radiologist. Your calculated payment under REPAYE would be $2,769.54/month – more than $1,000 more a month than if you had stayed on IBR or PAYE! See example below:
|Income*||Payment under PAYE||Payment under IBR||Payment under REPAYE|
|*Assumed single filing status and student debt of $150,000.|
- Spousal income now considered – NO MATTER WHAT! – under all of the other IDR plan, you can enjoy the benefits of filing taxes separately with your spouse, hence limiting the “income” portion of the Income Drive Repayment (IDR). Under REPAYE, your spouse’s income is now factored into calculating your payment – NO MATTER HOW you file your income tax returns! So unless you marry a deadbeat, the fact that you are married will increase the amount you have to pay under REPAYE.
What’s preventing me from doing REPAYE and jumping back to IBR when I’m about to leave residency?
The short answer is NOTHING. Currently you can switch between student loan repayment plans that you qualify for at will. So you can switch over to REPAYE while in residency to take advantage of the lowered payments and better interest subsidy and then switch back to IBR when you’re ready to take that first attending job. There are only a couple of drawbacks:
- Time and hassle – it takes about 10 weeks to switch over from IBR to REPAYE and you have to at least make 1 payment under the Standard Repayment Plan (or a reduced payment if you can’t afford the standard payment) before you can switch to REPAYE.
- Interest capitalization – any outstanding interest will be capitalized (added to your principal balance), resulting in a de-facto penalty for anyone trying to leave IBR for REPAYE.
Every situation is different. But in most situations, the original PAYE plan gives a borrower the best deal. If you don’t qualify for PAYE, chances are you are already on IBR. Which means you really should take a long hard look before deciding whether to jump over to REPAYE. Ask yourself questions like:
- What is my expected future income as an attending physician?
- Am I planning to get married?
- How realistic is it for me to find and stay in a job that qualifies for PSLF?
As usual, making a decision on hundreds of thousands of dollars should not be quick and easy. Make sure you do your research before you switch to REPAYE.
- Pay as You Earn (PAYE) vs. Revised Pay as You Earn (REPAYE)
- Income-Driven Repayment Plans for Federal Student Loans
- Income-Driven Repayment Plans: Frequently Asked Questions
- Federal Student Loans: Repaying Your Loans
- Public Service Loan Forgiveness Program Fact Sheet
- Public Service Loan Forgiveness Program Q&As
Dr. Bo Liu aka Future Proof M.D. is an aspiring radiologist-in-training and the founder and editor of the White Coat Money Blog (http://futureproofmd.com/). He has an interest in interventional radiology and helping his medical colleagues get ahead in this mad world of medicine and money. When he’s not crushing the list at the PACS station or typing up your next favorite blog post, you can usually find him at the local badminton club, movie theater or the most recently opened restaurant.