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PSLF – Why REPAYE May NOT be the Best Plan.
[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 |
| $50,000.00 | $269.54 | $404.31 | $269.54 |
| $100,000.00 | $686.21 | $1,029.31 | $686.21 |
| $150,000.00 | $1,102.88 | $1,654.31 | $1,102.88 |
| $200,000.00 | $1,519.54 | $1,726.00 | $1,519.54 |
| $250,000.00 | $1,726.00 | $1,726.00 | $1,936.21 |
| $300,000.00 | $1,726.00 | $1,726.00 | $2,352.88 |
| $350,000.00 | $1,726.00 | $1,726.00 | $2,769.54 |
| $400,000.00 | $1,726.00 | $1,726.00 | $3,186.21 |
| *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.
Bottom Line:
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.
Additional Reading:
- 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
Author Profile:
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.
RePaye vs. Paye vs. IBR vs. Refinance
Dear MS4 around the world:
Congratulations for coming this far! This is your match day/ early medical school graduation present from DWM. This chart will serve you throughout your residency & fellowship.
I will continue to update this chart with legislative changes and new players in the student loan refinancing industry.
For Larger View/Printing: MS grad present DWM flow chart
You can calculate the minimum monthly payment required by each of the federal repayment options by using Repayment Estimator, U.S. Dept of Education. You will need your loan type, loan amount, loan interest, annual income, and household size.
But if you have any federal/ government student loan, you can just log in and it should automatically use your current numbers to calculate the estimated payments for you.
Refinance Your Student Loans to as Low as 1.95%
Recently, a friend of mine from Touro University- CA who’s now a practicing pharmacist refinanced her student loans with First Republic Bank (FRB) to a 15 year fixed 3.5% interest rate loan (she refinanced before the feds adjusted the prime rate up by 0.25%; the current 15 year fixed is 3.75%.)
She is happy that not only her FRB interest rate ½ of what she was paying before refinancing her federal student loans, but also the long 15 year term allows her to reserve more cash flow (than a shorter term loan) for retirement savings and down payment for buying a home in California.
I am happy to see that there’s finally a break for the medical professionals, especially those living in high cost of living areas such as many cities in California.
So I reached out to FRB, after several weeks, I heard back from Kerry Berchtold, Relationship Manager at First Republic Bank.
Here you will learn more about what FRB offers and what FRB is looking for. And of course, there’s a DWM reader deal for you. If you email me at [email protected] and I refer you personally, you will get a $200 towards in your FRB account (which you will open in order to refinance your loans) and DWM will get a referral bonus too.
First Republic Current Rates (March 2016):
- 5 Year Fixed: 1.95%
- 7 Year Fixed: 2.65%
- 10 Year Fixed: 2.95%
- 15 Year Fixed: 3.75%
First Republic is offering a 5 year fixed rate that is 1.55% lower* than its competitors lowest rates in their published interest rate ranges.
Just by paying 0.25% more with FRB, you get much better cash flow on a 15 year term rather vs. the 5 year term offered by most competitors.
*The lowest 5 year fixed rate with CommonBond, DRB, Creidble, or Sofi right now is 3.5%.
If you qualify to refinance your student loans with FRB, you get the ONE published rate and term, not an interest rate somewhere in the range of rates offered by all other refinancing banks. What you see is what you get.
For example, my friend with 800+ FICO score refinanced with DRB and got 5.65% interest rate (which initially surprised me as it was at the high end of the advertised range of interest rates for 10 year fixed loan). DRB explained that he didn’t get the low end of the range because his debt/income ratio was high, which is true of most typical PGY’s with 200k+ debt and 50-75k income.
While DRB was the best option for him as a PGY4 (he would not have qualified with FRB due to geographic requirement and debt-to-income ratio requirements by FRB), I definitely encourage him to refinance again, especially to check out First Republic when he becomes an attending.
To qualify:
#1: It all hinges on debt-to-income ratio, which differ by individual circumstances. In general, attending physicians can qualify; tougher for PGY’s to qualify but never hurts to find out.
#2: You have to live or work in locations FRB have banking branches, which include:
- California, specifically San Francisco, Palo Alto, Newport Beach, Palm Desert, Los Angeles, San Diego, and Santa Barbara
- New York, NY
- Boston, MA
- Portland, OR
- Palm Beach, FL
- Greenwich, CT
I asked Kerry, “What defines living in these areas?”
Kerry answered: “We don’t ask for proof of where they live, however they will need to show us paystubs, bank statements and a driver’s license; and if the address they gave us doesn’t match those documents, it would be a red flag.”
Other Caveats:
#3: You Forego Potential Forgiveness such as PSLF like refinancing with other private banks.
This loan is a personal, unsecured loan with all that entails. It doesn’t go away if you die (and will be assessed against your estate.) It goes away in bankruptcy. There are no provisions made for unemployment, underemployment, death, or disability. So be sure you have enough life and disability insurance to cover the amount borrowed.
#4: $60k-$300k Range: FRB won’t refinance loan amounts lower or higher than this range. If you have 300k+ in student loans, refinance 300k with them to get the lowest rate/best term, and then refinance the excess portion with another bank. If you have less than 60k in student loans, you are in pretty good shape. You can still refinance with other banks like DRB, common bond, Linkcapital, Earnest, etc.
#5: You must bank with FRB.
Specifically, you deposit your main source of income there and auto debiting the loan payments out of it. You get a personalized, dedicated banker and reimbursement of your ATM fees, but there are $25 monthly fees if you don’t keep $3,500 in the account. If you can save 5% on your 200k student loan for 5 years, that’s $50,000 in your pocket for switching to First Republic Bank. If this were available to me before I paid off my student loan, I’d do it in a heartbeat!
The DWM (Dr. Wise Money) deal:
Email me at [email protected]. I will personally refer you to First Republic Bank. When your loan closes, you will get a $200 bonus deposited into your First Republic checking account and DWM will get the same for referring you.
This promotional referral bonus may expire, and rates are subject to change, so act now.
“Luck is preparation meets opportunity.” I have presented the opportunity to you; do a little paper work and start saving 10’s of 1000’s over the life of your refinanced student loan.
You deserve to get a low-interest-rate funded education, the rest of the world has either free or cheap medical education.
Other options of refinancing student loan with DWM deals:
Lowest Interest Rate in the Student Loan Refinancing Market!
A few weeks ago, I learned of the best interest rates in the student loan refinancing market, from First Republic Bank (FRB). Reached out to them, here’s the scoop. More detailed post to come.
Instead of the 6.8% interest rate federal government charges on student loans (class of 2014, federal interest rates of other graduating classes may differ,) FRB charges as low as 1.95% for 5 year fixed interest rate to refinance your student loans. 7, 10, 15 year loan terms available too.
You can see the federal student loan interest rates by year here.
These student loan refinancing options by FRB are available only in California plus a few other cities where FRB has branches: New York City, Boston, Portland (OR), Greenwich, and Palm Beach.
Anyone who’s interested in applying to FRB: just email me at [email protected] or message me (or comment below) with your full name and contact information and I can refer you personally.
This way if your loan closes, you will get $200 towards your loan and DWM will get referral bonus too.