PSLF Payment Plan Advice for the Unmarried Borrower
The Single Resident
Training Level: Any
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 $350,000)
Suggested Loan Repayment Plan
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.
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).
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).
An Example Walkthrough
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.
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.
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.
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.
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.
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!