Income Driven Student Loan Programs #2
Last month, we went over various income-driven repayment options for student loans. These included IBR, PAYE, and REPAYE. In this article we will look at which strategies could make sense in certain lifestyles, career paths, and student loan amounts.
Generally speaking, physicians will receive the largest benefit from these income driven payment plans if:
- They are in a longer training program
- They intend on working at a qualified 501c(3) program
- They have an average or larger than average student loan burden
Since these income driven payments are based on a percentage of discretionary income, the more payments you can make while in training, the greater the potential forgiveness. In addition to this, while in PAYE or IBR, your payments are capped based on what a 10 year standard repayment plan would be regardless of in-practice income. For instance, let’s assume that someone wants to do Cardiology EP. They may go through 8 years of training before they even enter practice. During their time in training, their student loan balance may be increasing based on the fact that their monthly payments may not be covering all the interest accrual, however their payments would be counting toward the Public Service Loan Forgiveness Program (PSLF). They could then enter practice and continue making these payments for two years to reach their 120 qualifying payments. Since their income will be higher as an attending, their payment would increase, but this would only be for that 2 year period. In this example, it becomes quite apparent that there is the potential for significant loan forgiveness when entering these programs early!
When factoring in the benefits of this program, it will generally make sense to make payments in one of the income driven programs through training, if the physician expects to continue working for a non-for-profit organization. Confirming that payments are qualifying is also important. For payments to qualify, the loans must be considered Direct Loans. If a physician does not have Direct Loans, then they can make their loans Direct by consolidating them through the Direct Loans Program. Often times, the student loan lender will be able to confirm whether or not the student loans are Direct Loans.
The PAYE program has a lower payment calculation then IBR, so if someone can qualify for PAYE, this would be preferable versus IBR. This would also give someone in PAYE the opportunity to earn more forgiveness.
If someone does not qualify for PAYE, then it may be worth considering the new REPAYE program. Under this program, there is an interest rate subsidy while in negative amortization; however, there is NO CAP on the maximum payment. Also when switching from IBR to REPAYE, you must enter a 10-year repayment plan for one month and then make the switch. When the switch takes place, the interest will capitalize. Please consider this decision carefully as it could be costly. In REPAYE, one must also consider that the payment calculation takes into account spousal income. Therefore, if someone is in training, and their spouse is already in practice, their payments could be very high.
If someone is not considering working for a 501c(3) upon graduation, it would likely be best to look at either REPAYE for the interest rate subsidy or refinance the loans privately. Over the last few years, many banks are offering to buyout federal loans in exchange for a lower rate than offered federally. Keep in mind that these refinancing programs make the student loans private, so they lose all the eligibility for federal programs like PSLF. However, the potential interest rate reduction could help save a ton in interest!
As you can see, there are many options available for student loan repayment and it is important to consider your career plans, marital status, debt burden, liquidity needs, and income potential in developing your personal student loan repayment strategy. Please run the numbers before making any decisions or seek the help of a financial advisor to help you do so.
Resource: Federal Student Aid