REPAYE

REPAYE (Revised Pay as You Earn) became the newest federal student loan repayment option at the end of 2015. Because of how REPAYE handles unpaid interest (negative amortization), it’s the ideal plan for many (but not all) residents, even those who would otherwise qualify for PAYE.

 

Let’s review: what is REPAYE?

REPAYE was created to give older borrowers from the (pre-PAYE) IBR regime a chance to benefit from some features of the newer PAYE plan (payments based on 10% of your discretionary income instead of 15% in IBR) while also closing some of its “loopholes.” As a general rule, the feds don’t change current programs; they create new ones and “grandfather” people in the old ones. Rather than extending PAYE to more people (those with loans prior to October 1, 2007, or without new loans since October 1, 2011), they made REPAYE.

Here are the main features of the REPAYE program (contrasted with PAYE and IBR as applicable and how they may affect switching):

 

Good: 10% AGI payments

Monthly payments are calculated at 10% of discretionary income (adjusted gross income minus the poverty line). If you’re currently in IBR, this effectively cuts your monthly payment by 33%, saving you a good chunk per month and potentially saving you a lot over the course of the 10-year PSLF mark. If you’re in PAYE, the monthly payment will be the same (with some exceptions outlined below).

 

Good: The 50% unpaid-interest subsidy

Subsidized loans for medical students are a thing of the past, but the new REPAYE program has actually added back a much more robust interest subsidy. In fact, the subsidy is the main feature that makes staying with federal loans during residency a reasonable alternative to private refinancing if you’re otherwise not considering PSLF.

The deal is this: half of the interest you don’t pay with the calculated 10% payment is waived and does not accrue. This is a huge perk of the program and should cause even residents currently in PAYE to run some numbers, as it effectively reduces your interest rate while in training (in many cases to an effective rate lower than what private companies are able to match). For example, a $0 monthly payment reduces your interest rate by half(!).

An example:

• Loan: $200,000 at 6%
• REPAYE payment as a single resident making $55,000: $308/month
• Annual interest accrued: $12,000
• Annual interest paid: $3,696
• Annual interest unpaid: $8,304
• Amount forgiven: $4,152
• Remaining unpaid interest: $4,152
• Total annual interest: $7,848 (the amount you paid + the unpaid amount not forgiven)
• Effective interest rate: 3.9%

The more you make, the higher your payment and thus the less interest unpaid and forgiven.

The more you owe, the greater the amount of interest remains unpaid and the more forgiven.

Effective Interest Rates Under REPAYE (Loan: $200,000 at 6%)
Salary	Interest Paid	Interest Unpaid	Interest Forgiven	Effective Annual Interest	Effective Rate
$0	$0	$12,000	$6,000	$6,000	3.00%
$25,000	$696	$11,304	$5,652	$6,348	3.18%
$50,000	$3,192	$8,808	$4,404	$7,596	3.80%
$75,000	$5,688	$6,312	$3,156	$8,844	4.42%
$100,000	$8,196	$3,804	$1,902	$10,098	5.05%
$125,000	$10,692	$1,308	$654	$11,346	5.67%
$138,100	$12,000	$0	$0	$12,000	6.00%

In this example, once your monthly payment hits $1,000, you’re breaking even with interest and nothing is forgiven (for a single physician, this corresponds to an annual income of around $138k, so sadly very much in the realm of some academic faculty jobs). Ultimately, this makes REPAYE the correct choice for even most non-PSLF-bound residents.

For attendings (or married residents) with a household income above the break-even point not considering PSLF, private refinancing will likely supply a better rate and more savings. Obviously, the more you owe, the more interest accrues, and the higher you have to earn before you break even on monthly interest. You really need to run your numbers! Private college + medical school and suddenly that subsidy could be good forever.

Of course, like IBR and PAYE, the unpaid interest you have on any subsidized loans (i.e. from college) is still completely covered for 3 years (and then 50% after that, like unsubsidized loans).

 

Bad: The Married-filing-separately “loophole” is Closed

REPAYE closes the married-filing-separately loophole. Under PAYE and IBR, if your spouse made big bucks, you could file taxes separately, thus calculating your loan payments for your debt based solely on your (lower) income. This was particularly helpful for doctors, especially low-earning residents, with high earning spouses who didn’t have big student loans themselves. If you rely on exploiting the income disparity between you and your spouse to make income-driven repayment work for you, then you don’t want to switch to REPAYE.

That said, if you and your spouse both have loans and similar income (i.e. both went to medical school around the same time and finished residency around the same time), then this isn’t an issue. If you file together despite higher loan payments due to other tax benefits, you aren’t using the loophole anyway. For example, you can only deduct student loan interest if you file jointly (but this deduction is unimpressively capped at $2,500 and only for households earning less than $165,000 in 2017). Run the payments both ways, and if it’s a big difference, then check the tax costs.

 

Bad: The Pay Cap is Gone

REPAYE did away with the monthly payment cap. IBR payments are calculated at 15% of your discretionary income and PAYE payments are 10%, but both are capped at the monthly amount calculated by the standard 10-year repayment when you first entered repayment. So even if your salary as an attending is huge, your monthly payments could only rise so much (often referred to as the “Doctor’s Loophole” due to the big salary jump at attendinghood with only a subdued concomitant rise in loan payments). There is no payment cap with REPAYE; your monthly payments keep scaling with income. For some, the IBR/PAYE cap is critical to potentially achieving PSLF, because if your income grows high enough fast enough you could “overpay” quickly and whittle down the forgiven amount. Practically, this change may be less important than it seems. It’s all about the ratio of your loan amount to your income. The bigger your loan and the smaller your income, the less relevant this becomes. You can plug different incomes into the feds’ calculator to run your numbers.

As a quick rule, you definitely need to make more per year than you owed at repayment for this to matter at all. So if you borrowed $200k and are making $150k doing primary care: probably irrelevant (depending on your spouse’s income). You’ll have to do your own numbers, but here’s an example:

Loan amount: $200,000
Loan rate: 6.8%
Payments with annual income: $50,000

• IBR: $404
• PAYE: $270
• REPAYE: $270
• Standard: $2302

Payments with annual income: $250,000

• IBR: Capped at standard, $2302
• PAYE: $1936
• REPAYE: $1936
• Standard: $2302

Payments with annual income: $300,000

• IBR: Capped at standard, $2302
• PAYE: Capped at standard, $2302
• REPAYE: $2352
• Standard: $2302

As you can see, in this example it takes an income of nearly $300,000 for the uncapped REPAYE to finally cost more per month. For the average single doc, the cap-removal is potentially not a huge deal, and even many married physicians needn’t worry, especially if you can “lower” your income or switch back (see below).

Loan payments are calculated based on your “adjusted” gross income, which takes some deductions into account. If your income jumps, you can “reduce” it by contributing to pretax accounts, such as your (non-Roth) 401(k)/403(b), 457(b), or HSA plans. Most academic jobs have both a 403(b) and 457(b), each with a $19,000 contribution limit. A few clicks and you can erase $38,000 in income from your taxes (and reduce next year’s payments by $3,800). We’ll talk about this in detail in the Maximizing PSLF chapter.

 

The switchback loophole

The choice to enter REPAYE is not binding. In trying to close several loopholes, the feds left one open: as long as you still have a partial financial hardship, you can still switch back from REPAYE to IBR or PAYE. So, if it looks like your uncapped 10% payment is finally going to be too big, you can go back down to your “lower” capped 15% IBR (or 10% PAYE payments) while you still qualify. Likewise, if your spouse is going back to work or destined for a huge raise, you could switch back and file separately to avoid having your income considered together.

In both cases, you have to anticipate these changes and make the switch before your salary/salaries is/are so high that you no longer qualify, but this would still allow you the training years of lower payments and subsidized interest.

The main downside of switching plans is the capitalization of accrued interest. When transferring out of IBR, you must also make either 1) a big “standard” repayment and have the month counts towards PSLF or 2) a reduced payment ($5), but the month won’t count, and you’ll be delaying filing for PSLF by a month.

There is sometimes a 1-month administrative hold when switching in and out of REPAYE and PAYE, particularly if you do so near the annual certification deadline (thus also potentially causing a 1-month delay in PSLF).

We’ll discuss this again in greater detail in a minute.

 

For whom this generally matters:

Other than new graduates making their first election, there are a few groups of people who should look into switching.

Group 1: People in IBR who want PSLF

All of this is most relevant for people trying to minimize monthly payments for eventual forgiveness under the Public Service Loan Forgiveness program. The goal for income-driven repayment and PSLF is to pay the absolute minimum possible per month for 120 payments (10 years) in order to maximize the currently unlimited (but mostly untested) tax-free loan forgiveness.

This plan starts in residency when income is low, continues throughout training (the longer the better), and ends up with as few years as possible at the higher-earning attending level to eat away at your potential forgiveness. Spousal income aside, 10% AGI payments under REPAYE will be lower than 15% payments in IBR. The downside to switching is interest capitalization, but not only is this usually mitigated by the interest subsidy, it’s actually irrelevant if your loans are forgiven (consider the subsidy in this case to be hedging your bets against PSLF). Residents in IBR should instead mostly be residents in REPAYE (the exceptions being if you were relying on the married-filing-separately loophole to exclude your spouse’s income or if you already make a cap-busting amount of money).

Group 2: People who can’t afford IBR payments

People forbearing because they can’t afford IBR payments and don’t qualify for PAYE could instead enter REPAYE in order to lower their monthly payments by a third and start making some payments. This is a big benefit versus forbearance because of the half unpaid interest subsidy, which really slows down interest accumulation. The caveat here is that if you couldn’t afford IBR, you still might not be able to afford REPAYE. If 10% is still not affordable, then you should see what kind of rate you get from private refinancing, as a couple companies have plans for residents that require between $75-$100/month during training and generally offer lower interest rates. Forbeared loans don’t have any of the IDR benefits, and they grow fast.

Group 3: People in PAYE who are currently accruing a lot of interest

While your monthly payments won’t change, the amount of unpaid interest accumulating will be cut in half. This is meaningless if you are going for PSLF since the total amount of your forgiven loan doesn’t matter to you (only the amount you spent to get there). Outside of PSLF, this could be a big deal, particularly if you have a fair amount of residency left. See take-home points below.

 

A word on non-PSLF long-term forgiveness

We have a whole chapter about IDR loan forgiveness in this book, but basically no one should really be going for the 20/25-year forgiveness unless you went to private college and med school, racked up an incredible amount of debt, but then went on to earn peanuts for a non-PSLF eligible job. But if that describes your plan, PAYE is 20 years. REPAYE is 25 years (just like IBR) if you have graduate loans (which you do). So, definitely worth switching from IBR to REPAYE. The choice if currently in PAYE is more complicated (see next chapter). Unlike PSLF, this forgiven amount is taxed as income for all income-driven repayment plans (the more you get forgiven, the more you owe the IRS as a big tax bomb).

Ick. If you’re not minimizing payments to get the most out of PSLF, you should instead be maximizing them to get rid of this high-interest debt.

 

Take-home points

REPAYE is a big deal with two big draws: Compared with IBR, it has lower monthly payments. Compared with both IBR and PAYE, there’s the new unpaid interest subsidy. Some “loopholes” are closed (no married filing separately loophole and no monthly payment cap), but these may not be relevant to your situation. Residents need to consider REPAYE seriously.

There is no true “average” medical student, because even people who carry an average amount of debt may have different circumstances. That said, for the average unmarried resident, REPAYE during residency is likely to be the best choice, followed by (staying in) PAYE.

For IBR:

• If you’re doing IBR, you owe it to yourself to run some numbers to see if REPAYE is for you. The main immediate downside will be interest capitalization and potentially losing one month of PSLF-qualifying payment during the switch. Is that loss a big deal? Well, how much is your standard monthly payment? That average $50k earning resident saves $130 bucks a month in REPAYE over IBR. That’s $1,560 a year. For example, the standard payment for a $200k loan is $2,302. In this case, it would take over a year to break even on the long-term costs PSLF-wise despite the immediate payment reduction.
• The main long-term downside could be if your future salary breaks through the cap. As above, this may not be a realistic problem for you, and even if it is, will likely take some time to undo the money you saved. You may also be able to preempt this by switching back to IBR while you still qualify.

For PAYE

• If you’re doing PAYE, you won’t save any money on your monthly payment, but if you have a high debt/income ratio (and many of you do), then you can potentially save a lot of money due to the new unpaid interest subsidy. If you’re married, this will depend on your spouse’s income and debt burden as well.
• If you’re already in PAYE and set on PSLF, there is no significant reason to switch, because you won’t benefit from the interest subsidy (it was all going to be forgiven anyway). If the government makes you uneasy, REPAYE can help you hedge your bets by lowering your effective interest rate while in training.
• If you’re definitely not going for PSLF, then there is no harm in applying to the resident-friendly private companies to see what the industry can offer you. If the rates they offer are lower than your effective REPAYE rate, then consider refinancing. Alternatively, if you need the even lower payments ($75 or $100/month) those banks offer in order to not enter forbearance, then refinance. If you’re scared about the future and want to lock in a relatively lower interest rate now instead of temporarily using REPAYE, then refinance (this would be a gut move, not a logical one).
• If you’re not sure about doing PSLF and are still experiencing negative amortization, then consider switching to REPAYE: this will keep your qualifying payments at the lowest possible amount while also limiting the growth of painfully accruing interest: a healthy middle ground.

 

Extra money and REPAYE

One big question that comes up frequently is if it’s possible to pay extra money on top of the calculated REPAYE monthly amount and still qualify for the interest subsidy. The answer is yes, but it might not be worth it.

Emphasis mine:

“Under the REPAYE Plan, if your calculated monthly payment doesn’t cover all of the interest that accrues, the government will pay

• all of the remaining interest that is due on your subsidized loans (including the subsidized portion of a consolidation loan) for up to three consecutive years from the date you begin repaying your loans under the REPAYE Plan, and half of the remaining interest on your subsidized loans following this three-year period; and
• half of the remaining interest that is due on your unsubsidized loans (including the unsubsidized portion of a consolidation loan), during all periods.”

So yes, if you’re doing REPAYE to get that sweet interest subsidy and wanted to pay down your loans faster, you can. Technically, the subsidy is based on what REPAYE says you need to be paying every month, not on what you actually choose to pay.

Many have also questioned if you need to “time” the interest subsidy (i.e. make the second payment immediately after the subsidy is applied before more unpaid interest accrues in order to not reduce the amount of unpaid interest and thus decrease the subsidy). Based on the language of the policy, this is not the case. Furthermore, not all servicers apply the subsidy in the same way and many do not make it clear exactly when or how this occurs. If you want to be extra cautious and time your payments, you’re probably going to need to make a phone call. And when you make a phone call, be prepared to receive incorrect information.

However, unless you can pay enough extra to dent the principal, there isn’t much point. Remember that interest in REPAYE doesn’t capitalize and that you can’t directly pay down the principal until all the accrued interest has been taken care of. Chipping away a few extra bucks of interest here and there isn’t going to change the rate of interesting accrual (just the total amount that’s sitting there). As a result, in this situation, it makes sense to put this money somewhere else, even just an interest-bearing savings account. The interest you earn on the saved up money would then help mitigate the interest on your loans. Make your money work for you.

 

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