If you have ever tried to learn about student loan repayment plans you might have felt overwhelmed and confused. Instead of spending days researching information like I did, I’ve created a summary of the different repayment plans in a question-and-answer format with some key takeaways for graduating med students and current residents.
1. What is the Standard Repayment Plan and who should choose it?
With the standard repayment plan, you will pay off your student loans in 10 years by making “fixed” monthly payments. This means you will pay the same amount each month regardless of how much money you make. The government will determine your monthly payment by adding all of your student loans (and the projected interest that will accumulate on them), dividing that number by 10 [years], and splitting the amount into fixed monthly payments.
This is not the ideal plan for graduating med students and residents, especially those with around $200,000 in student loans. Unless you have very little money in student loans, the monthly payments required under this plan will be higher than you can afford on a resident salary. Unfortunately, you will be automatically enrolled into the standard repayment plan if you don’t select a different repayment plan.
2. What is the Graduated Repayment Plan and who should choose it?
With the graduated repayment plan you will also pay off your loans in 10 years, but your monthly payments are not fixed. Instead, they will start out low, and increase every 2 years, until you have fully paid off your student loans in 10 years.
This is also not an ideal plan for graduating med students and residents. The payments under this plan will still be higher than most residents can afford. Don’t get me wrong, paying off your loans in 10 years instead of dragging it out over 25 years will save you money in interest. However, if you can afford the high payments under this plan and want to pay off your loans in a few years, you could save even more money by simply refinancing your loans with an outside company since they can offer you can even lower interest rate.
3. What is the Extended Repayment Plan?
Through the extended repayment plan you will pay off your loans in 25 years by making fixed or graduated payments. This plan is for people who don’t qualify for an income driven plan and want to spread their loans out over 20-25 years. It is not ideal for medical students and residents since we qualify for income driven repayment plans during residency.
4. What are the income-driven repayment plans?
The Federal Department of Education understands that some people may have acquired a substantial amount of student loan debt that they may not be able to repay with their current salaries. Instead of handing you a monthly student loan bill that may be higher than your mortgage, these income-driven repayment plans base the size of your monthly student loan payments on your income.
Keep in mind that there are several different types of income-driven repayment plans. There is Pay-As-You-Earn (PAYE), Revised-Pay-As-You-Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
Most of these plans cap your student loan payment at 10-15% of your discretionary income. Your discretionary income is your income minus whatever the poverty line is for your family size. In other words, if your income is low, your student loan payment will be low. As your salary increases, the size of your student loan payment will increase. After 20-25 years (depending on the type of federal loans you have) your student loans will be forgiven. Keep in mind that many residents and attending physicians will qualify for public service loan forgiveness which forgives their student loans after only 10 years of payments.
5. Should you enroll in an income-driven repayment plan like Pay-As-You-Earn (PAYE) or Revised-Pay-As-You-Earn (REPAYE)?
As graduating med students or residents, you should consider enrolling in PAYE or REPAYE, especially if you have at least tens of thousands of dollars in student loans. Under these income-driven plans, your student loan payment is never more than 10% of your discretionary income, which is ideal for residents trying to make ends meet on a $60K salary. The amount of your income-driven repayment is recalculated each year after you file your taxes.
Of note, if you file your taxes as a graduating med student with zero income, then there is a high possibility your student loan repayment your first year residency will be zero dollars. Having a student repayment of zero dollars will actually count towards one of your 10 years of required payments under the public service loan forgiveness program. If you don’t file your taxes and instead opt for a grace period (the default option) then that time will not count toward public service loan forgiveness.
6. What is the difference between PAYE and REPAYE?
PAYE and REPAYE are similar income-driven repayment plans but have little nuances that can make a big difference. Both plans cap your student loan payment at 10% of your discretionary income and will forgive your loans after 20-25 years. The government will pay 100% of any unpaid interest that accrues on your subsidized loans during the first 3 years of repayment but will not do so for your unsubsidized loans. (As a rule of thumb, most people take out subsidized loans in undergrad and unsubsidized loans in med school). The differences between PAYE and REPAYE are:
-Under REPAYE, the government will pay 50% of any unpaid interest that accrues on your unsubsidized loans. I realize this may sound confusing, so let me explain. Under all of the income-driven repayment plans, the government will cover any unpaid interest on your subsidized loans (aka loans from undergrad) for the first 3 years. However, interest will still accumulate on your unsubsidized loans (loans from med school).
If you’re like me, with around $200,000 in student loans, it’s very likely that your income-driven payments in residency will not even cover the interest that is accruing on your loans. Under REPAYE, the government will pay 50% of the remaining interest to keep it from compounding so quickly. For example, if your income-driven repayment plan requires you to pay a monthly payment of $200 (which amounts to $2,400 a year) but the interest accruing on your loans is $10,000 a year, then the government will pay 50% of the interest that remains so ($10,000-$2,400)x50%= $3,800.
-PAYE will cap your payments at the standard repayment plan level even as your income rises and will not count your spouse’s income in calculating your income-based payment, if you file your taxes separately. However, if you are enrolled in REPAYE your spouse’s income will be used to determine your monthly payment, even if you file your taxes separately.
7. When should you consider Income Based Repayment (IBR) and how is that different from Income-driven repayment?
The term “income based repayment (IBR)” is a specific type of income-driven repayment plan. Under IBR your monthly payments are capped at 10-15% of your discretionary income. This plan is ideal for someone who doesn’t qualify for PAYE but still wants an income–driven repayment plan that won’t take their spouse’s income into account. Most med students and residents qualify for PAYE, so this plan isn’t applicable.
8. What the heck is Income Contingent Repayment (ICR) and who should enroll in that one?
Income contingent repayment (ICR) is a type of income-driven repayment plan for people who are paying back student loans that their parents might have taken out on their behalf or for parents themselves who want a more affordable way to pay back the loans they took out to finance their children’s educations. My point? If you aren’t paying back loans from your kids or loans from your parents then ICR is probably not the plan for you.
9. Can you change from one student loan repayment plan to another?
Yes. Oftentimes people may choose one of the income-driven repayment plans after they graduate, but then change to another type of plan as their salary increases or their life circumstances change. For example, a recent graduate might choose to enroll in REPAYE for a few years to enjoy the benefits of the government interest subsidy, then change into PAYE if they get married to someone who makes a high income (so that their spouse’s income isn’t used to determine their monthly payments). Then, after a few more years, they may opt out of the income-driven plans altogether or refinance their loans with an outside company to lower their interest rate.
I realize this was A LOT of information. I did a ton of research, read the information on student loan repayment plans multiple times, and even called the Department of Education to clarify a few things. Thus, if you’re slightly confused or unsure of what plan is right for you, you can always call your loan servicer to ask for help, put your information into the repayment estimator, or look up information on the Federal Website FAQ page. Nevertheless, here are some general takeaways:
1. Medical students and residents with at least tens of thousands of dollars in student loans should opt out of the standard repayment plan and enroll in an income-driven repayment plan. (this will make your payments affordable in residency).
2. There are 4 types of income driven repayment plans. They are Pay-As-You-Earn (PAYE), Revised-Pay-As-You-Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
3. PAYE caps your payment at 10% of your income and WILL NOT INCLUDE your spouse’s income when calculating your repayment (if you file your taxes separately).
4. REPAYE also caps your payment at 10% of your income AND will provide a 50% subsidy for any unpaid interest on your unsubsidized loans (aka loans med school) each year, but it WILL INCLUDE your spouse’s income when calculating your repayment (even if you file your taxes separately).
5. IBR is for people who don’t qualify for PAYE or REPAYE (not applicable for med students).
6. ICR is for people paying back loans that their parents took out on their behalf (hopefully not applicable for you).
7. If you are single (or married to a spouse who doesn’t make much money) and may consider public service loan forgiveness, REPAYE may be best. (Take advantage of that interest subsidy in residency)
8. If you are married to a spouse who makes a lot of money (i.e. near $100K) and may consider public service loan forgiveness, PAYE may be best. (This will prevent your spouse’s income from drastically increasing the amount of your student loan payment)
9. If you are married to a spouse who makes a decent amount of money (i.e. $40-80K), it depends, you may have to run the numbers yourself.
10. You can switch plans if you realize you are enrolled in the wrong one. This is very common as people’s life circumstances change (i.e. as they get married, switch jobs, or experience a change in income).