The ins, outs, upsides, and downsides you need to know
By Rufus Sweeney
Looking forward to residency also means looking forward to repaying your student loans.
Sounds like fun… doesn’t it?
OK, perhaps not a lot of fun, but unavoidable. So, to reduce your stress and feel good about your financial progress, you need to make the best choice. And, making the best choice for how to repay your student loans takes a little thinking.
Before we look at the different types of repayment plans here are two important things to remember:
- It’s critical to start loan repayment while in residency rather than use deferment or forbearance. This will save you thousands.
- In many cases, you can switch repayment plans if your financial situation changes. This relieves some of the uncertainty you may feel when making your initial choice.
Now, the basic premise of income-driven repayment (IDR) plans is simple; you repay your federal student loans based on your ability to pay.
Here are your choices:
- Standard repayment plan
- Graduated repayment plan
- Extended repayment plan
- Income-driven repayment plans (Yes, there’s more than one!)
Phew! Seems complicated… and it is, but here are some basic definitions to help you figure out how you can best navigate the loan repayment landscape.
Standard repayment plan: You pay off your loans in 10 years. Your monthly payments are fixed based on adding the amount you owe to the projected interest and dividing by 120. WARNING: If you do not choose another type of repayment plan, you will be automatically enrolled in this repayment plan
As a resident, because your monthly payments will most likely be more than you can afford, this is not the way to go.
Graduated repayment plan: These also run for 10 years, but monthly payments start out low and increase every two years. But, as with standard plans, even the lower monthly payments are still likely higher than you can afford on a resident’s salary.
Extended repayment plan: Now we’re looking at the long term. With this type of plan, you’re facing 25 years of fixed or graduated payments. This type of plan is good if you don’t qualify for an income-driven repayment plan. And, sorry to do this to you, but even thinking about this type of plan is a waste of time because, as a resident, you qualify for income-driven repayment plans.
Income-driven repayment plans: These plans peg the size of your monthly payment to your income.
The four types are:
- Pay-As-You-Earn (PAYE)
- Revised-Pay-As-You-Earn (REPAYE),
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
Generally speaking, these plans cap monthly payments at 10% of your discretionary income. (Very simply, your discretionary income is your income minus whatever the poverty line is for your family.)
Low income = low payments. Your payment size is recalculated every year after you file taxes. The good (great?) news is that after 20 to 25 years, what remains of your student loans is forgiven. (Next blog we’ll look at public service loan forgiveness; which are forgiven in only 10 years.)
As you have probably realized, IDR plans work well for residents who are trying to get by on a $60,000 salary and owe a lot of money (roughly $50,000 or more).
PAYE and REPAYE
PAYE differs from REPAYE in two significant ways.
First, to qualify for PAYE you have to prove you can’t afford to make the payments a standard 10-year repayment plan requires. REPAYE doesn’t ask for this proof… no matter what your salary, your payments will never be more than 10% of discretionary income.
Secondly, PAYE is limited to the repayment of William D. Ford Direct Loans received after Oct. 1, 2007 and funds disbursed on or after Oct. 1, 2011. These loans include Direct Loans, subsidized and unsubsidized, Graduate PLUS loans and Direct Consolidation Loans made after Oct. 1, 2011, unless they include Direct or FFEL loans made after Oct. 1, 2007. Phew!
REPAYE is available to people who borrowed from the Direct Loan program, except for parents who took out PLUS loans. You qualify for REPAYE no matter when you took out your loan and as long as you borrowed from the list of qualified William D. Ford Federal Direct Loan programs.
A major benefit of REPAYE is you remain eligible for the Public Service Loan Forgiveness program.
Payments on the REPAYE program are adjusted every year based on income and family size. If you file your taxes separately, PAYE won’t take your spouse’s income into account when calculating your payments. With REPAYE, your spouse’s income is taken into account.
The best part of these programs is that after 20 years of on-time loan payments, your debt is forgiven.
Income-Based Repayment (IBR)
Income-based repayment (IBR) is another income-driven repayment plan that caps monthly payments at 10 to 15% of discretionary income. This type of plan is an option if you don’t qualify for PAYE and don’t want to include your spouse’s income into your discretionary income. (That said, almost every resident qualifies for PAYE.)
Income-Contingent Repayment (ICR)
This type of repayment plan work well if you are paying back student loans your parents took out on your behalf. They also work well for parents themselves who need an affordable way to pay back the loans they took for you. If you aren’t paying back loans from your kids or loans from your parents, ICR is probably not the plan for you.
A final word on flexibility
You can switch from on repayment plan to another. For example, if you graduated recently, you could choose REPAYE to take advantage of the government interest subsidy. Then, if you’re lucky enough to marry someone with a high income, you could switch to PAYE to avoid having your spouse’s income included in your monthly payment calculations. And, sometime down the road, you may quit your income-driven plan altogether because you want to make larger payments.
If you need help managing your debt, one of your best resources is your financial aid officer. And, I highly recommend visiting the White Coat Investor website. It’s a great source for guidance on how to acquire and manage the “good” forms of debt.