This post is pretty long, but this is an important development on the federal student loan front that’s worth the lengthy discussion. The bottom line is that the new REPAYE program has a lot to offer people currently not just in IBR but also PAYE. I highly recommend putting some numbers into this calculator to see how the repayment options look to you currently as well as how they might change with your career over the near future. Many residents should be doing REPAYE.

First, what is REPAYE?

REPAYE (or “revised pay as you earn”) is the newest federal government student loan payback plan, designed to give older borrowers from the (pre-PAYE) IBR regime a chance to benefit from some features of the newer PAYE plan (10% cap of your discretionary income instead of 15%) 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 1st, 2007 or without new loans since October 1st, 2011), they made REPAYE.

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

Like the ACA healthcare marketplace or Kayak, Credible isn’t actually lender itself. It’s a student loan marketplace of (currently) 9 vendors that allows you to apply to multiple companies simultaneously and compare rates (and terms, monthly payments, total payoffs, etc).

Pros:

• Polished interface
• Easy initial application process
• Ability to compare rates from multiple lenders simultaneously
• Saves time versus applying to all lenders separately

Cons:

• Several big players are missing (enumerated here), which means you’d still have to do some separate standalone applications if you want to ensure you’re getting the absolute best rate.
• Neither of the companies that have refinance programs tailored to residents are included, meaning that Credible isn’t a viable option for most residents yet.

Bottom line:

If you’re a busy attending who has been putting off refinancing because of the hassle, Credible is for you (yes you, I know you’re out there). Several of the big players are included and you can do the preliminary application in minutes and get a rate comparison within a day or two. Once you pick your lender, Credible sends over your application and documents and you’re turfed over to that lender to finalize the process as usual.

If you’re serious about getting the very lowest rate, Credible by itself may not be sufficient. While most lenders have similar rate ranges, you can’t predict who will provide the best, so you’d still have to apply to several of these guys not in the marketplace yourself for thorough comparison shopping. In this case, you could still use Credible to save some time by applying to several lenders together, but then giving up $100-300 referral bonuses in some cases may not be worth it to you.

If you’re still a resident or post-match MS4, Credible isn’t for you (yet). I’m told there are plans for some resident-friendly plans in the future, but the two current players in this arena aren’t part of the marketplace.

After you’ve switched employers, it’s time to think about what to do with the old retirement account(s) (401k/403b/457) you previously contributed to. But before you do anything, make sure any company match dollars you’ve earned have vested appropriately. Vesting schedules (i.e. when the money is yours free and clear) vary, and vesting may occur immediately, with some fixed percentage per year employed, completion of a specified residency program or contract period, etc.

As a personal anecdote, my transitional year internship had a 50% match up to 4% of salary with 100% vesting after the completion of a residency program (our TY qualified, as it was considered a complete 1-year program). I noticed that the vested portion of my employee contribution was still zero dollars after finishing two years ago, so I eventually got around to emailing them, they looked into it, realized the error, and contacted the plan: now I have my money. Now, my former employer was very responsive, and I doubt very much that this was done on purpose, but there is no denying that it would be in a company’s best interest to conveniently forget to vest their matching contributions and see who notices. Just saying.

Anyway, once you have all your hard earned money under your name, you have three real choices: cash out the plan, keep it where it is, or transfer/rollover to a new account.

Option 1: Spend it

No. Don’t cash out the plan. You’ll pay both federal and state taxes on it like it’s regular income PLUS an additional 10% early withdrawal penalty (because you’re probably not 59.5 years old). Your tax-sheltered retirement account distributions are limited on an annual basis (i.e. you can only contribute 18k in 2015/16), so why waste the benefits and tax-free growth?

Option 2: Leave it

Leave the money where it is. Nothing wrong with this, but your former employer’s plan may not have the best fund options or the lowest fees. Some employers also won’t let you do this if your balance is low, and others may hike up your fees without giving you a solid heads up once you’re no longer part of the team. Bottom line: if your old plan doesn’t have low management fees with access to low-cost index funds, then it’s not a great place for your money.

Option 3: Move it

For many people, moving it elsewhere is the best plan.

Your new employer
You can usually transfer funds into your new employer’s fund (assuming they accept rollovers), which is a good idea if your employer’s plan is better. But if the fees or fund options aren’t better, then the main advantage to a transfer in this setting is having fewer accounts to keep track of.

Roth IRA
If your income is within the Roth limits (which it almost certainly is as a resident or fellow), you can roll over a regular 401k/403b to a Roth IRA (you’ll pay taxes on the conversion, but then it’ll be tax-free on withdrawal). This may be the best option as a resident (if you have the money on hand to pay the taxes on it) and a good in general, particularly if your current income is lower than you expect during retirement. You can also always convert a Roth 401k/403b to Roth IRA with no penalty (Roth to Roth conversions are always Kosher), so if you have a Roth 401k/403b, just do this.

Individual (Solo) 401k
If you moonlight or have any self-employment 1099 income, then you could transfer your old money into a solo 401k that you set up for your side business’ income.2If you’re setting up an account for this purpose, make sure your chosen company accepts rollovers! Individual 401ks are pretty awesome. While you can still only contribute up 18k per year as an individual, your business can also offer up 20% of its (your) profits up to the 51k limit (which is a per business limit, not a per person limit).225% if you go to the trouble of filing as an S-corp instead of a sole proprietor Vanguard, one of the best solo 401k options, doesn’t allow for 401k rollovers, but low-cost competitor Fidelity does. An individual 401k of your choosing should have lower fees and good fund options compared with most employer plans.

Traditional IRA
Lastly, you could roll it over into a traditional IRA. But putting pre-tax money into a tIRA means that if you attempt the “backdoor Roth” in the future (which you should/will), you’ll eventually have pay tax on the conversion. So probably not the best unless you then roll over the IRA into an employer’s 401k (that takes rollovers) in the future. There’s no reason to do this really unless both your old and current employer’s options have high fees and you don’t have any 1099 income at the moment to set up your own 401k.

The internet has a gazillion pages dedicated to this question. Here is some good further discussion of the options and their relative merits.

If your employer offers matching contributions to a tax-advantaged retirement account, then yes. You should be contributing to the match limit. That’s free money. Obviously, if you’re training in a high cost of living area and surviving on ramen you steal from a roommate you found on Craigslist, then nevermind.

From there, if you have more money, what to do next depends on the status of your loans.Continue Reading

[Last revised December 2020)

There are a few good options for refinancing your federal student loans and their unreasonably high interest rates into something more manageable during residency (currently: Laurel Road, SoFi, and Splash, discussed at length here).

Once you’re an attending, even more options enter the fray (enumerated at length here). Ideally though, unless you didn’t know you weren’t planning on going for PSLF, you’d have refinanced earlier in residency to maximize your savings.

But medical students have up until now been relegated to getting loans, not refinancing them. Recently, Laurel Road squeezed the competition into medical school proper: post-match fourth years can now apply for their student loan refinancing.

While you sadly can’t get a better interest rate earlier in your education, it does mean that the minute you get that match letter to prove you have a job, you can start the process. When you apply in March, Laurel Road honors the usual six-month grace period, so nothing changes in that sense compared with your federal loans. They require $100/month payments during training (residency + fellowship) after the grace period (which is much lower than the usual PAYE payment and won’t ever increase in size until attendinghood). By applying in March instead of July, you’d save around four months of capitalized interest.

A numerical illustration:
200k at 6.8% accrues around $1133/month in interest. Refinancing that to 5% would knock the monthly interest down to $833/month, thus saving you $1200 over that brief four month span. Neat.3You can run your own numbers. The more you owe and the bigger the difference in interest rate, the more you save (and vice versa.)

Also of potential interest, Laurel Road also offers a referee bonus of $300 for readers of this site if you refinance via one of the links on this page.

I’ve written at length about refinancing your student loans, but the short of it is that payments during residency are thus low to nonexistent, and you can save a lot of money even with a mild interest rate reduction over the life of your loan in terms of interest accumulation. The potential downside is that you give up the option for loan forgiveness, both PSLF and the 20/25 year forgiveness made theoretically possible by IBR/PAYE. For low to average loan burdens or short residencies, that’s not a big loss. If you want to do pediatric endocrinology and borrowed $500k, obviously that’s a bigger consideration.2Note: If you can avoid borrowing $500k, you should. That’s a ton of money!

If you were planning on forbearing your loans because you won’t have the cashflow to make steady payments, then you should almost certainly refinance regardless. Going for loan forgiveness only make sense when you’ve been making years of low monthly payments during residency. For someone forbearing, refinancing saves thousands over the course of even a short residency.

It’s worth it to sit down for a few minutes with a loan calculator and some ideas about your residency, fellowship, and early attending pay to see how much you’d pay over 10 years of income-driven repayment, 20-25 years of IBR/PAYE, or with private refinancing. For many students, refinancing is the right choice financially as well as the most financially liberating during residency (and much much better than forbearance!). Doing so as early as possible is prudent, especially while interest rates remain low. Don’t forget, if the economy were to tank again and rates drop further, you could always refinance again (all of the student loan companies currently operating offer zero cost refinancing programs without origination fees or points required).

Update 2/2016: The DOE newest repayment plan, REPAYE is now available. For many if not most residents, REPAYE is probably a better choice than PAYE. I wrote about the pros and cons of REPAYE at length in this post. While the benefits and numbers are a bit different, the process of changing plans is the same.

For eligible borrowers, PAYE is just plain better than IBR.3By IBR, I mean the IBR that applies to nearly all borrowers that are not current MS1s. IBR for new borrowers (without any loans predating July 1, 2014) is very very similar to PAYE.

• The mandatory monthly payment is capped at 10% of discretionary income instead of 15%
• Loans are forgiven after 20 years instead of 25 (not relevant to most practicing physicians)
• Capitalized interest is limited to 10% of the original loan amount (that’s neat).
• Both are qualifying payments towards the 120 needed to qualify for PSLF
• Like IBR, the government pays interest on subsidized loans for 3 years (at this point only relevant for those with subsidized undergraduate loans, as grad subsidies are gone)
• Loans forgiven after the 20 years are taxed as income (just like IBR). Loans forgiven as part of PSLF are not considered taxable.

The financial requirement for PAYE is the same as IBR: you must demonstrate a “partial financial hardship” (i.e. the percentage/calculated monthly amount is less than the 10-year standard repayment for your loan balance), so the only difference is if your loans are eligible. You’re eligible for PAYE if you have no loans before October 1, 2007 and got at least one loan disbursement on or after October 1, 2011.

The oft-reported “downside” of income-driven repayment plans is that you will “pay more interest” over the longer term length. This is a bit of a red herring, as you are always free to send more money over to pay off your loan faster. IBR/PAYE plans allow you the flexibility to not need to make big payments; they don’t prevent you from taking prudent measures to pay down your debt. And if you’re planning on gunning for PSLF, then you won’t actually be making payments for that longer term length anyway!2It’s also not as though you could probably afford the standard repayment as a resident….

• If you are recent graduate, you should select PAYE as your payment plan and call it a day.
• If you have loans from October 2007 or older, you aren’t eligible for PAYE and need to stick with IBR.
• If you have no interest in PSLF (cynicism, short residency, smallish loans, private practice bound, etc), then you should probably refinance as soon as possible. The main substantial benefit of keeping federal loans is the possibility of loan forgiveness. Outside of that, private refinancing will save you money, and two companies now allow you to refinance as a resident.

If you’ve been out of school for a few years, you can potentially switch from IBR to PAYE. You apply to switch in the same process you use to update your loan servicer of your annual income. You go to studentloans.gov, pull in last year’s taxes, update family size, etc. Changing plans is just another choice instead of pick just “recalculating” your payments.

However, to switch from IBR to PAYE, this annoying thing happens:

If you leave this plan, you will be placed on the Standard Repayment Plan. If you want to change to a different repayment plan, you must first make at least one payment under the Standard Repayment Plan, or one payment under a reduced payment forbearance (you may request a reduced-payment forbearance if you can’t afford the Standard Repayment Plan payment).

This was presumably done to stop people from immediately jumping ship from IBR to PAYE. In practice, the “reduced-payment” requirement is $5. So you don’t need to shell over a few thousand to cover a month’s standard repayment. However, by switching out of IBR for the month, all of your accrued interest capitalizes. If you’ve been out for a few years making the typical negative amortizing IBR payments during residency, you may have a sizable chunk of accumulated interest sitting around.

A simple example:

• $200k loan @ 6.8% accrues $13.6k per year
• Assuming a $400/month IBR payment, the annual unpaid interest is $8800
• After 2 years of residency, that’s $17.6k accrued interest. After 3 years it’s $26.4k.
• Switching from IBR to PAYE after two or three years results in a new loan balance of $217.6k and $226.4k respectively. From that point on, the annual interest then increases to $14.7k and $15.4k.

So in this example, your monthly payment is reduced from $400 in IBR to around $266 under PAYE, which is great from a cashflow perspective. But now your loans are growing faster than ever (both from the capitalized interest on top of the fact you are paying down less of it).

By cutting those payments down from 15% to 10%, you’ll be taking an even bigger hit in terms of your loan growth. Keep in mind however that the interest that accrued while you were in school capitalized when you graduated, so you don’t have a ton to worry about if you’re fresh out of school or relatively close.

Which means: the reason to switch from IBR to PAYE is really best only to double down for PSLF. In order to maximize the gains of public service loan forgiveness, you want to spend the least amount possible during your 120 qualifying payments. The spiraling balance is then irrelevant because it’s going to be forgiven.

Over the long term, you lose some of that low-payment benefit for two reasons:

First, your “reduced” payment doesn’t count toward the 120 you need for PSLF. So you’ll have to make another as an attending, which could be as high as the 10-year standard repayment amount. In the example above, that’d be somewhere around $2-3k.3As a resident with the salary described above, that washes away over a year of the difference, but the more you earn, then the more you’ll save (until you cap at the standard repayment). Alternatively, you could pay the full standard repayment when you switch, but that’s guaranteed to be the 10-year amount as opposed to an income-driven amount, which may be significantly lower depending on your future salary.

Second, you’ll also lose a bit if your attending salary becomes high enough that you’re maxing out at the 10-year standard repayment and thus are paying more to handle a portion of that extra capitalized interest. In the example above, the extra $1000 will cost you around $13 a month; far less than you saved making the switch.

On the flip side, because PAYE prevents further interest capitalization due to its 10% cap, if you do lose your partial financial hardship due to your high income, at that point an IBR will capitalize a greater amount of accrued interest and then start costing more as well.

Well that’s boring. Technical details aside, the conclusion goes something like this:

• If you want to go for PSLF, do PAYE if you can, as soon as you can
• While your loan grows faster if you have to switch from IBR due to capitalized interest, it’s doesn’t matter if you’re doing PSLF. Even with an extra payment at the end, you’ll still just pay less money and get more forgiven.
• Switching from IBR to PAYE just to have lower payments will definitely result in your paying a lot more in interest over the course of your loan if it’s not forgiven and you stick it out for the complete term length (which you probably shouldn’t).
• If you don’t want to try to get your loans forgiven, then you should just refinance them at a lower rate (like yesterday).