Loan Scenarios and Advice

Advice for your situation

Want some specific advice about your student loan situation and what repayment plan to choose? Look below for said advice, but remember it is important for you to verify this info and make sure it fits your particular situation.

Also, keep in mind that we use language and descriptions here that assume you are at least passingly familiar with the information from the presentations on the Student Debt page. If something doesn’t make sense, ask us about it and review those presentations while you wait for us to respond.

 

How to use
this page

The advice is tailored to specific demographics. Find your matching scenario and check out the corresponding advice. We don’t have recommendations (yet) for all possible scenarios; if you can’t find what you are looking for, fill out the form at the bottom of the page to reach out to us about your specific question. Also, go to our loan repayment calculator and put in your loan balances and interest rate to play with your own numbers.

[This page currently has loan repayment suggestions for two particular situations (the most common for young MDs). Other scenarios/situations will be coming soon! Subscribe to our blog via email or RSS to receive updates.] 

 

Choose a Scenario

The Single Resident

Training Level: Resident (or graduating medical student)
Marital Status: Single (or spouse with no significant income)
Current Salary: Trainee level (no other substantial income)
Federal Loan Burden: Medium ($100,000-$150,000) or higher
Expect PSLF?: Yes (or probably/possibly)
Future specialty salary: Low (under $150,000) to Medium ($150,000 to $250,000)

jump to this scenario


The Married (or soon to be) Borrower

Training Level: Resident, Fellow, or Early-Stage Career
Marital Status: Married or contemplating marriage (spouse with no significant federal student loan debt)
Current Salary: Trainee level through Medium ($200,000 to $275,000)
Federal Loan Burden: Low ($50,000 to $100,000), or higher
Expect PSLF?: Yes (or probably/possibly)
Future specialty salary: Any

jump to this scenario

 

Your Demographics

The Single Resident

 The Single Resident

Training Level: Resident (or graduating medical student)

Marital Status: Single (or spouse with no significant income)

Current Salary: Trainee level (no other substantial income)

Federal Loan Burden: Medium ($100,000-$150,000) or higher

Expect PSLF?: Yes (or probably/possibly)

Future specialty salary: Low (under $150,000) or Medium ($150,000 to $250,000)

 

Suggested Loan Repayment Plan

 

Note: Want to learn more about REPAYE? Check out our Prezi that explains loan repayment plans.

Rationale

REPAYE provides the lowest possible monthly loan payment (10% of your discretionary income, which is tied with PAYE and recent IBR borrowers) for those with training-level salaries and no significant spousal income. This maximizes eventual loan forgiveness.

In addition, REPAYE provides immediate interest subsidies which do not depend on PSLF. Click HERE for a chart which describes the value of the REPAYE loan subsidies for a range of incomes and loan balances.

 

Spending, Budgeting,
Saving Implications

Anything which lowers your "Adjusted Gross Income" (AGI, line 26 on your Form 1040) will lower your income-driven loan payments under any plan (which will further increase your future loan forgiveness). Things which lower your AGI include: 401k or 403b contributions, health savings account contributions, employer dependent care or flexible health care contributions.

These items are subtracted from your salary prior to being reported as wages in Box 1 on your W2. Thus, consider making 401k/403b contributions with the extra cash-flow you get from an income-driven plan (e.g. rather than Roth IRA contributions, which would normally be a better choice for residents or fellows).

 

Potential Pitfalls

1) PSLF may be taken away by new legislation or policy change. If so, and if you intentionally pay less than you could on your loans, you will in the long run have paid more interest on your student loans than otherwise.

Despite this risk, choosing an income-driven repayment plan and making minimum payments carries relatively little risk, assuming you do not simply splurge the extra money provided by minimizing your payments. Save or invest that money instead!

2) If you get married, spousal income will “count against you,” meaning the combined income of you and your spouse is used to calculate your loan payments regardless of how you file your taxes after marriage. This is different than PAYE* or IBR, where you have the option to file separately to isolate your income.

Consider switching to PAYE just before you get married if you intend to file separately. But beware, filing separately can increase your taxes, sometimes only a little but sometimes dramatically, so please make careful calculations regarding the pros/cons of filing separately.

3) At higher salaries and lower debt levels, your payments can exceed the standard 10-year payments. But with IBR and PAYE, payments can never exceed the 10-year payments. Consider switching from REPAYE to PAYE before your salary jumps up after training and potentially pushes you above the 10-year payment level.

*While everyone qualifies for REPAYE, PAYE has eligibility requirements. Essentially, you have to have had your first direct loan no earlier than October 2007, AND at least one direct loan disbursed AFTER September 2011.

 

Rough Rule of Thumb

As long as your loan balance is higher than your AGI, REPAYE is likely to be your best choice (compared to PAYE).

 

Sample Scenario

Consider our non-married, soon to graduate medical student. He has $100,000 in un-subsidized qualifying loans at a rate of 6.8%. He intends to do 3 years of internal medicine followed by a 3 year fellowship in infectious disease.

He is very excited about getting on top of his loans and plans on making loan payments immediately upon graduation. He will consolidate his loans and choose an income-driven plan in order to eliminate the grace period and start the 10-year PSLF forgiveness clock. Read this excellent post by Ben White that explains the reasoning behind the last sentence.

Look at the income and payment chart below. In Academic Year 1 (e.g. July to June of the PGY-1/intern year) his payments will be ZERO on any Income-Driven Plan. This is because his income during the previous calendar year, i.e. the last full calendar year of medical school, was zero (no income = no payments!). And he was smart and filed a set of taxes to "prove" he had zero income. 

Now let's assume his intern salary is $65,000, but that he also made $3000 in 403b contributions evenly over the year and his health insurance premiums are $2000.

Remember, when re-certifying your income (but NOT necessarily for changing to or starting a new payment plan!) there is usually a delay of more than one year between any increases in your income and when that increase fully affects your payments. For example, if you are asked to re-certify your income in July of your PGY-2 year, you do so by providing a copy of your most recent 1040. This will show income from the first half of the previous year (e.g. the zero income from the last semester of medical school) plus only a half-year's income from your PGY-1 year. So your payments are essentially going to based on the average salary of the previous two academic years. This is most obvious in years in which you have a large increase in AGI (e.g. getting married, staring residency, or a jump in salary after residency/fellowship).

This results in a tax-reportable salary of only $60,000. However for the first calendar year of his internship he received only half of this due to only working a half year. Thus his new income-driven loan payments will not yet be based on a full salary, which results in an AGI of $30,000 for payments in year 2.

 

Payment Charts

The chart below provides one set of possible increases in AGI over 10 years. Note the increase in AGI after fellowship. I leave the question of whether that's a reasonable salary for an ID doc to you to answer!

The chart also compares the monthly payments for PAYE and REPAYE. Pay special attention to the annual interest rate subsidies with REPAYE (which you don't get with PAYE). As long as the payments do not cover the full interest, there will be a subsidy.

This has the net effect of lowering the effective interest rate as you can see in the last column. Note that MFS = "married filing single" and MFJ = "married filing jointly". With REPAYE, your AGI is the same regardless of how you file, but with with PAYE one can file separately to isolate income.

In this scenario, the resident is single (or has a spouse with no income), which is why the two "PAYE" loan payment columns are identical.

Assumption: $100,000 loan balance, unsubsidized, 6.8% interest rate.

 

Payment Graph

Now, let's see how those monthly payment options compare in graph view. 

Note that PAYE = REPAYE only until year 8. At that point, PAYE is fixed at the 10-year rate (blue line) and no longer depends on your income. But with REPAYE there is no payment cap. So just prior to year 8, our hypothetical borrower should consider switching to PAYE to keep payments lower and maximize PSLF.

graphsingleincome2.png

But what do loan balances and potential loan forgiveness look like when comparing PAYE to REPAYE in this very specific case? Keep reading.

 

Loan Balances and Forgiveness
After 10 years

If this "single resident" made PSLF qualifying payments under PAYE plan for 10 years the remaining loan principal + interest would be approximately $93,000, so loan forgiveness under PSLF would be $93,000. 

If he made PSLF qualifying payments for 10 years under REPAYE his remaining loan principal plus interest would approximately $68,000, so loan forgiveness would be $68,000.

So why did we suggest REPAYE instead of PAYE if loan forgiveness is higher with PAYE? It's because for most people who match the basic demographics of this scenario, REPAYE will win out clearly over all 10 years.

But we designed THIS PARTICULAR SAMPLE SCENARIO with a relatively low loan balance, and relatively high salary (depending on your point of view!) after fellowship to illustrate the borderline case where one would not just want to simply select the same payment plan for all 10 years.

Change the numbers in our "sample" case just a bit (e.g. larger loan and lower final salary) and REPAYE wins for all 10 years. But starting with REPAYE gives you a clear advantage at first, with the option to switch to PAYE later, which is why our sample borrower would want to start with REPAYE.

Remember, the goal is to minimize your total loan costs, and NOT to simply maximize loan forgiveness. In general, these go in tandem. But any REPAYE interest subsidies you earn will lower your overall loan+interest amounts, which makes REPAYE the better option over PAYE in case someday you end up not qualifying for PSLF and need to pay off the remaining loan yourself.

 

Conclusion

Hopefully our example helps you understand why choosing REPAYE is great if you meet the demographics above. If you still have questions, or don't fit into these demographics, click on the button at the very bottom of the page to contact us!

 

Your Demographics

The Married (or soon to be) Borrower

Training Level: Resident, Fellow, or Early-Stage Career

Marital Status: Married or contemplating marriage (spouse with no significant federal student loan debt)

Current Salary: Trainee level through Medium ($200,000 to $275,000)

Federal Loan Burden: Low ($50,000 to $100,000), or higher

Expect PSLF?: Yes (or probably)

Future specialty salary: Any

 

Suggested Loan Repayment Plan

REPAYE now, with potential switch to PAYE later

 

30-Second Rationale

REPAYE provides the lowest monthly payments together with interest subsidies if your AGI is low. But above a certain AGI, PAYE payments are capped (while REPAYE’s are not). And PAYE gives you the opportunity to isolate your income from your spouse’s, if you desire.

A REPAYE to PAYE strategy minimizes the total costs of your loans IF you one day qualify for PSLF. Remember, the goal is not necessarily to have the maximum forgiveness, it’s to minimize the total cost to you.

 

All the Details

REPAYE provides the lowest possible monthly loan payment for those with training-level salaries and no significant spousal income. The REPAYE payments are the same as PAYE and “recent” IBR borrowers.

However, for those with a high loan to AGI ratio, REPAYE provides immediate interest subsidies which do not depend on PSLF. Click here for a chart which describes the value of the REPAYE loan subsidies.

Upon marriage (or a large jump in salary for those who are single) REPAYE payments can exceed the standard 10-year payments. This is because REPAYE always takes spousal income into account. Including spousal income will reduce and can even eliminate loan forgiveness.

Switching to PAYE just prior to a jump in income (from either marriage or a jump in personal salary) accomplishes two (good) things:

1) Can eliminate spousal income from your income calculations if you file separately (although PAYE does not require filing separately). This is not possible with REPAYE.

2) Caps your payments at the 10-year rate regardless of you or your spouse’s income. REPAYE payments have no cap.

Switching to PAYE does have some potentially negative consequences:

1) Any plan which results in decreased payments has the potential to increase the total amount of money you will pay if you end up not qualifying for PSLF because those amounts will just be deferred and interest will accumulate.

2) Any previously uncapitalized interest which had accumulated under REPAYE gets added to your loan payments when switching to PAYE. This has the net effect of increasing your future interest accumulation. That is, you’ll start paying interest on the interest. If you end up with PSLF, however, this is of no consequence to you.

3) If you are married and file separately (MFS) to lower your income, you will likely pay more in taxes (but not always). This will be lost money if you don’t end up benefiting from PSLF

 

Spending, Budgeting,
Saving Implications

Anything which lowers your “Adjusted Gross Income” (AGI, line 26 on your Form 1040) will lower your income-driven loan payments with REPAYE, or with PAYE if you are under the 10-year payment threshold.

If you are above the PAYE 10-year threshold, reducing your AGI will not lower your payments (unless you reduce the AGI enough to get under the threshold, of course). But if you are near or over the threshold then you are likely in a high enough income range where it is prudent to minimize your AGI for tax purposes anyway, regardless of any effects on your loan payments.

Things which lower your AGI include: 401k or 403b contributions, health savings account contributions, employer dependent care or flexible health care contributions.

These items are subtracted from your salary prior to being reported as wages in Box 1 on your W2. Thus, consider making 401k/403b contributions (as opposed to Roth contributions)with the extra cash-flow you get from lowering your payments when using an income-driven plan.

 

Potential Pitfalls

1) PAYE allows you the option to file as “married filing separately” (MFS) to reduce your monthly payments in marriage. However, MFS will likely cost you extra in federal and (if applicable) state income tax. This extra amount may be trivial, but can also be large enough (particularly if you have children) to negate the advantage of switching to PAYE.

You must calculate the extra taxes you will pay if considering the MFS/PAYE route. The only reliable way to do this is to to prepare three sets of sample taxes in advance: yours alone, spouse alone, and married filing jointly. We have a page which can give you an idea of the ranges of extra tax you might be expected to pay when going from MFJ to MFS.

2) PSLF may be taken away or altered by new legislation or policy change. If so, and if you intentionally pay less on your loans, you will have paid more interest on your student loans than otherwise. Despite this risk, choosing the income-driven repayment plan which has the lowest payments carries relatively little risk, assuming you do not simply splurge the extra money you have by minimizing your payments. Save or invest that money instead!

 

Sample Scenario

Consider a non-married resident who is about to graduate from a pediatric residency and join a PSLF eligible hospital-based group with a salary of $200,000 (there is a ton of call in this job, hence the high salary for Peds). She finished medical school with $200,000 in unsubsidized federal loans at an average of rate of 6%. She thinks after another 4 years she will move back to her smallish hometown, where her salary is likely to be much higher ($300,000).

She was smart and had consolidated her federal loans just prior to graduating from medical school in order to eliminate the grace period and start the 10-year PSLF forgiveness clock immediately upon graduation. She chose the REPAYE plan. Good for her. Please read this scenario for an explanation why this was best in her case.

She has a boyfriend and is getting married this year (her PGY-3 year). He is finishing up law school (with private loans only) and will be starting a job mid-year making $150,000. Their goal is to minimize payments on her loans using an income-driven plan in order to 1) continue to qualify for PSLF and 2) use the extra cash flow to begin investing in their 401ks and to help with paying down his law school debt.

 

Monthly Payments

The Monthly Payments Chart shows the hypothetical progression of their income over 10 years. They are currently in Year 3, and thus their marriage won’t affect her loans until he re-certifies his income in Year 4.

Remember, when re-certifying your income (but NOT necessarily for changing to or starting a new payment plan!) there is usually a delay of more than one year between any increases in your income and when that increase fully affects your payments. For example, if you are asked to re-certify your income in July of your PGY-2 year, you do so by providing a copy of your most recent 1040. This will show income from the first half of the previous year (e.g. the zero income from the last semester of medical school) plus only a half-year's income from your PGY-1 year. So your payments are essentially going to based on the average salary of the previous two academic years. This is most obvious in years in which you have a large increase in AGI (e.g. getting married, staring residency, or a jump in salary after residency/fellowship).

Note that in order to make our calculations easier, we used a family size of “2” for all values, even when single or before married. In reality, the monthly payments prior to marriage are a little smaller

Notice the monthly payments under each plan, and how much they increase in the 4th year due to the increase in their incomes. If this borrower stays in REPAYE, her payments will jump even higher than the 10-year standard payment by Year 5. She also loses the REPAYE interest subsidies in Year 4.

With the PAYE plan (married filing jointly; “MFJ”) the payments are about $500 per month less than REPAYE in Year 5. They are a whopping $1250 per month less if they choose to file separately (MFS). You can better see how the payments compare by year by looking at the graph below.

image005.png
 

Running Total Loan Cost

Another way to view loan payments is to consider the running total loan costs to the borrower of each plan as the years go by, as in the following chart and graph.

image008.png
 

Loan Balances and Forgiveness
After 10 Years

Remember, if one is confident about qualifying for PSLF, then the goal of choosing an income-driven plan is to reduce the overall loan cost to you. You don’t really care about the amount of forgiveness.

However, the anticipated total federal loan balance plus accumulated interest after 120 qualifying payments, or anywhere along the way (see Running Total Costs above) is important in one very meaningful way: This is the amount you will have to pay if you fail to qualify for PSLF.

All things equal, if the loan cost to you is the same, choose the plan which minimizes the balance. For those with a high debt to AGI ratio, this is REPAYE.

Total Balance.PNG
image009.png
 

Conclusion

Hopefully our example helps you understand some of the consideration when choosing REPAYE or PAYE and when switching may be beneficial. If you have further questions, please let us know.