Medicals schools do a great job of preparing us for the next step in our training. Unfortunately, they aren’t always good at preparing us for the first financial decision we have to make after medical school.
Upon graduating from residency, there will be a grace period before you will have to start making payments to your student loans. It is during this grace period that you will have to make a decision on which repayment plan to enter.
I remember seeing and being overwhelmed with the different options available to me. Depending on your current situation, there will be options that suit you better than others.
Here is the low down on the benefits and key points to each income-driven repayment plan available to residents with federal student loans.
Option 1: Revised Pay As You Earn (REPAYE)
REPAYE Offers Subsidized Interest Payments
REPAYE has a great subsidy on the interest you owe on your loans. Generally, the government will pay half the difference between what you owe in interest and your actual payments.
Here’s an example, most doctors may owe around $200,000 in unsubsidized loans. Let’s say that this loan has a 5% interest rate. You would accrue $833.33 of interest each month. If you qualified for $0 payments, the government would pay half of the $833.33 you owe. This would save you $416.67 each month!
Great If You Expect Your Income To Rise
Other income-driven plans are income-dependent in order to assess eligibility. If you are expecting a rise in income, your new income could disqualify you from other income-driven repayment plans. This is often the case with residents moving on to becoming attendings.
With REPAYE; your payments will always be capped at 10% of your discretionary income.
Word of caution, make sure to run the numbers and make sure that 10% of your new income doesn’t exceed what you would be paying using other repayment plans.
REPAYE Should Be Used If You Are Single
REPAYE with include your spouse’s income when calculating your payment amount. This can quickly increase your monthly payments if your spouse is a high-income earner.
Other income-driven repayment plans such as the PAYE repayment plan will let married borrowers make payments based on their own individual incomes. Although, this is only true when the married couple has decided to file their taxes separately.
Option 2: Pay As You Earn (PAYE)
PAYE Limits The Amount Of Capitalized Interest
The PAYE plan is great for its the ability to limit capitalized interest to 10% of your current balance. Capitalized interest is the interest added to your loan’s balance if it is unpaid. This addition increases your principal balance and in return increases what you will owe in the long term.
If we were to take the same example from above of a doctor who owes $200,000, over time this doctor accrues $25,000 worth of interest. If this doctor were to choose to switch to another repayment plan, only $20,000 would be added to the principal balance. This plan saved the doc $5,000 worth of interest.
Great If You Expect Your Income To Stay Low
The PAYE plan never increases your payments higher than what you would pay under a standard 10-year repayment plan. This holds true even if the amount you pay is less than 10% of your discretionary income.
The tricky part about the PAYE program is that you must no increase your income too much. Doing so may disqualify you from the program. If you are disqualified, you would end up owing the standard amount each month. In addition, any unpaid interest would be added to your balance.
Great for Married Couples
Unlike the REPAYE plan, for married couples who choose to file their taxes separately, the PAYE plan only counts your own salary in the calculation of your monthly payment.
If you believe that you will be getting married soon, it might be more beneficial to opt into a PAYE plan.
Option 3: Income-Based Repayment
If You Don’t Qualify For REPAYE or PAYE
For borrowers who took their loans before July 1, 2014, the new IBR applies a cap on your payments to 15% of your discretionary income and forgives your loans after 25 years of continuous payments.
Borrowers who took their loans after July 1, 2014, the new IBR applies a cap on your payments to 10% of your discretionary income and forgives your loans after 20 years of continuous payments.
IBR could be used if you do not qualify for a REPAYE or PAYE plan.
Option 4: Income-Contingent Repayment
If You Have A Parent Plus Loan
Income-Contingent Repayment is the only plan that includes those with parent PLUS loans or a consolidation loan that include parent PLUS loans.