Looking forward to residency also means looking forward to repaying student loans. There are several things to consider to make the best choice for how to repay student loans.
Here are two important things to remember before considering the different types of repayment plans:
- It’s critical to start loan repayment while in residency rather than use deferment or forbearance. This will save thousands of dollars.
- In many cases, it is possible to switch repayment plans if one’s financial situation changes.
The basic premise of income-driven repayment (IDR) plans is simple; repay federal student loans based on ability to pay.
Here are the choices:
- Standard repayment plan
- Graduated repayment plan
- Extended repayment plan
- Income-driven repayment plans (Yes, there’s more than one!)
Seems complicated… and it is, but here are some basic definitions to help figure out how to best navigate the loan repayment landscape.
Standard repayment plan: Pay off loans in 10 years. Monthly payments are fixed based on adding the amount owed to the projected interest and dividing by 120. WARNING: This is the standard repayment plan if another plan is not chosen!
Because most residents can’t afford these monthly payments, 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 most residents can manage.
Extended repayment plan: This is a long-term repayment plan. With this type of plan, fixed or graduated payments will be made over 25 years. This type of plan is good for those who don’t qualify for an income-driven repayment plan. But, most residents do qualify for income-driven repayment plans.
Income-driven repayment plans (IDR): These plans base the monthly payment on 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 one’s discretionary income. (Very simply, discretionary income is someone’s income minus whatever the poverty line is for their family.)
Low income = low payments. The payment size is recalculated every year based on filed taxes. The good (great?) news is that after 20 to 25 years, what remains of the student loans is forgiven. (Another topics is public service loan forgiveness; in which case loans are forgiven in only 10 years.)
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 applicants have to prove they can’t afford to make the payments a standard 10-year repayment plan requires. REPAYE, however, doesn’t ask for this proof… with REPAYE, payments will never be more than 10% of discretionary income regardless of salary.
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.
REPAYE is available to people who borrowed from the Direct Loan program, except for parents who took out PLUS loans. Borrowers qualify for REPAYE no matter when they took out their loan and as long as they borrowed from the list of qualified William D. Ford Federal Direct Loan programs.
A major benefit of REPAYE is borrowers 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 a couple files their taxes separately, PAYE won’t take a spouse’s income into account when calculating payments. With REPAYE, a spouse’s income is considered.
The best part of these programs is that after 20 years of on-time loan payments, the 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 for those who don’t qualify for PAYE and don’t want to include their spouse’s income into their discretionary income. (That said, almost every resident qualifies for PAYE.)
Income-Contingent Repayment (ICR)
This type of repayment plan work well for those paying back student loans their parents took out on their behalf. They also work well for parents themselves who need an affordable way to pay back the loans they took for their kids. ICR is really only for paying back loans from one’s kids or loans from one’s parents.
A final word on flexibility
Borrowers can switch from on repayment plan to another. For example, recent graduates could choose REPAYE to take advantage of the government interest subsidy. Then, if they’re lucky enough to marry someone with a high income, they could switch to PAYE to avoid having their spouse’s income included in their monthly payment calculations. And, sometime down the road, they may quit their income-driven plan altogether because they want to make larger payments.
For help managing your debt, one of the best resources is a financial aid officer. And, visit the White Coat Investor website for more information. It’s a great source for guidance on how to acquire and manage the “good” forms of debt.
Original post from September 9, 2020
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