PAYE and IBR Interest Subsidy. Each month on the 1 st, 2 nd, or 3 rd business day, the government will forgive half of the interest that you deferred from the previous month. This *potentially* could help us in the long run if the government/fed loan people look at my income taxes next year and see that my adjusted gross income is $44,000 (instead of $56,000). The tool also shows total interest costs and loan forgiveness potential on each plan. The consistently most read post on FPMD has been PAYE vs. REPAYE for more than 1 year now. Which means when I file my taxes the state of Texas already considers our income joint. Under both PAYE and REPAYE, the government subsidizes 100% of unpaid interest that accrues on subsidized loans during the first three years of repayment. The features of REPAYE is very similar to that of PAYE except that it is made available not just for recent borrowers. If I switch to PAYE the payment goes down to basically the same rate as filing my taxes as single. So PAYE will frequently “beat” REPAYE in two scenarios: You can run these scenarios easily in the official repayment estimator (just look at the first monthly payment). When you lose your partial financial hardship, which will likely happen at some point during attendinghood depending on how much you owe vs. how much you make. And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free. I mean it’s crazy but I think I have fallen into a weird hole and I don’t see any way out of it with these predatory interest rates I have 7% avg. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly. With PAYE and REPAYE, your adjusted payments might be too small to cover the interest your loan accrues each month. you’re probably in the 15% tax bracket). All financial products, shopping products and services are presented without warranty. No limit to the amount that can be capitalized. It’s not hard to calculate the actual subsidy. There are two main reasons to choose PAYE or REPAYE for federal student loan repayment: You can't afford payments on the standard, 10-year repayment plan. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. The best plan is probably to file separately, you do PAYE with PSLF, and refinance her loans privately to a lower rate and pay them off as fast as possible. This is known as negative amortization. NerdWallet strives to keep its information accurate and up to date. REPAYE will cover some interest for you, yes. » MORE: PAYE: How it works and whom it's best for. I don’t think with my salary I can realistically pay this debt off. I switched from IBR to REPAYE when it first became available, after 2 or 3 years of payments in IBR. In that case, choosing the plan that gives you the lowest monthly payment would maximize the amount you get forgiven but increase your future tax burden. Anyone seriously considering a 20 or 25-year plan needs to double check their math or consider professional advice. If you and your spouse are pulling in $130k+, then you should be refinancing to a lower rate and trying to pay down your debt. The Highlights of REPAYE vs PAYE vs IBR. » MORE: Income-driven repayment: Is it right for you? My best estimate of monthly payments projected to 20 years I could end up with a 200k tax bill in 20 years. At a 28% marginal tax rate for a single filer, for example, that’s a tax bill of $203k for PAYE and $156k for REPAYE for the forgiven amount due in one big lump sum. Say hello? So how do we make money? If you don't fit PAYE's requirements, your decision is easy: Choose REPAYE. REPAYE became available to Direct Loan borrowers on December 17, 2015 and offers several benefits including: a potentially lower monthly payment, no disbursement date restrictions, loan forgiveness after 20 or 25 years, and interest subsidies to prevent ballooning loan balances. There are reasons PAYE can be a better choice for many borrowers, but the interest capitalization cap isn’t really one of them. Get it down to 4% and you’re looking closer to $607k. To Build Resilience in Isolation, Master the Art of Time Travel. Differences in repayment timelines: If you have any loans from graduate school, your repayment schedule is 25 years on REPAYE. » MORE: Guide to filing taxes with student loans. So, we made $88,000 this year – so we each made $44,000. — I got married this past year. As far as I understand, when you switch from one plan to another, you get fully capitalized. Generally speaking, PAYE is a better option for married borrowers in cases where both spouses have an income. If you really want to move abroad, the foreign income exclusion would effectively reduce your payments to $0. » MORE: 5 strategies for paying off medical school debt. Do I benefit from one more than the other? The other difference between them comes if you rely on filing taxes separately from your spouse in order to get low payments with PAYE, a trick/loophole closed by REPAYE. With REPAYE, the government picks up the tab on 50% of the unpaid interest. , which increases the total interest you pay over time. Here is a list of our partners. Forgiveness of only $37K on PAYE/$0 on REPAYE on $65K salary with $200K debt seems far off. My question is, if I switch from REPAYE to PAYE, do I still get the capitalization cap? Teddy Nykiel is a former personal finance and student loans writer for NerdWallet. Monthly payments will be 10% of discretionary income; ... REPAYE Interest Subsidy. Assuming you’re in a negative amortization situation, one should probably pick REPAYE, because then you get an interest subsidy that reduces your effective rate (a hedge against if the PSLF thing doesn’t work out). If you select REPAYE as your income-driven repayment plan, the government will actually pay at least half of any interest your payments do not cover. When you leave an income-driven repayment plan, the unpaid interest is capitalized, which increases the total interest you pay over time. 10% of discretionary income, but never more than you’d pay on the standard, 10-year plan. All of my loans are Stafford/GradPLUS federal loans. You can switch from IBR to RePAYE or PAYE. That’s because REPAYE payments are always based on a couple’s combined income, whereas PAYE will use only your income if you file taxes separately. In this case, you’d get the best of both worlds: your months in REPAYE should still count toward the 240 needed for PAYE forgiveness, but you’re also decreasing the amount of interest accrued as much as possible. When your income rises beyond the “cap.” For a $200k loan at 6.8% for example, that amount is around ~$295,000 a year for a single filer. If you have good credit, you can go a step further and refinance student loans to get a lower interest rate and save more. You are correct, you do not because the capitalization doesn’t happen “in” PAYE. We are both on income driven repayment plans. Please help us keep our site clean and safe by following our, Prevent identity theft, protect your credit, The difference between term and whole life insurance, How medical conditions affect your life insurance rate. Unpaid interest will capitalize, but the capitalized amount is limited to 10% of your original loan balance when you entered PAYE. I currently have 170k in student loan debt and am close to 3 years in at a qualifying employer for PSLF. Yours probably don’t, but you need to check with the payment calculator. , meaning your payment on PAYE would be lower than it would be on the standard repayment plan. Revised Pay As You Earn, or REPAYE, is an income-driven repayment plan that caps federal student loan payments at 10% of your discretionary income and … It might be right for you. But there are a few differences between REPAYE and PAYE/IBR. Under this plan, the largest benefit is half of any interest accrued is subsidized. In the above example, your salary is never big enough to pay more than the accrued interest, so you’d think REPAYE wins. If your REPAYE payments are never able to cover interest while in REPAYE, you’d stay in REPAYE until you near the 240 needed for PAYE and then switch right before. Most people who are switching from REPAYE to PAYE are doing it maximize PSLF benefits—in which case you don’t care. Really get to know your money and find cash you can put aside and grow. All of them are DIRECT UNSUB STAFFORD LOANS, with the exception of 1 that is direct student plus. See this post about REPAYE if you haven’t already. So that 10k before capitalization would save you $680/year if your interest rate was 6.8%, but that $680 would be forgiven by PSLF so who cares? Compare the monthly payment amounts under each repayment plan and choose the one with the lowest monthly payment. The only thing that matters with PSLF is how much you actually pay over the 120 payments, which as you know will be less if you MFS. Given the monthly payments you’re talking about vs the forgiveness amount, the tax consequences will be a far second fiddle to the amount at play for forgiveness. I’d love to chat if you wanted to reach out to me by email to set something up: travis AT studentloanplanner DOT com. For example, let’s say you are charged $1,000 per month in interest. tool to compare monthly payments for PAYE vs. REPAYE, as well as all other federal student loan repayment plans. So big money means bigger payments. REPAYE vs PAYE. It’ll cap your monthly payments at 10%, never asking you to pay more than what you’d owe via a Standard Repayment Plan. There are tax consequences to filing taxes separately such that many people who would lower their PAYE payments by utilizing the MFS loophole would still lose money in the long run, particularly if they are in a negative amortization situation where they would otherwise benefit from the unpaid interest subsidy in REPAYE. See this post about switching back. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly. Pre-qualified offers are not binding. Any dollar you spend toward your loans is another that won’t be forgiven for PSLF or at the least could get in the way of your REPAYE subsidy. Any idea of how they allow us to pay this…. We filed jointly this past year for first time and her minimum monthly payment went to 800 dollars recently.. would it make more sense for us in this scenario to file jointly or separately with regard to keeping my payments towards PSLF as low as possible? I think paying $500 less a month should make it worth the capitalization given my income. If you’re married and your spouse works, then you need to do the math with the calculator to see if your higher REPAYE payment (hopefully still with a subsidy) is better or worse than a lower PAYE without a subsidy coupled with any additional tax hits from filing separately. If you're pursuing PSLF, you don't have to worry about this; loans forgiven through PSLF aren't taxed as income. Otherwise, the repayment period on REPAYE is 20 years. My goal is to get the debt forgiven through PSLF since I am a teacher. This may influence which products we write about and where and how the product appears on a page. Following their married filing jointly REPAYE payment of $705 ($8,460 annually), they will still have 50% of any remaining interest paid for by the REPAYE subsidy. Given the amount of my loans, I would assume that my REPAYE interest subsidy would be considerable, and, thus, contributing towards my loans wouldn’t be as advantageous as putting money into my Roth IRA/403b? If you have to you have to, but this is not the ideal scenario. For this first year where your income is super low, the Roth benefits are substantial (i.e. If so, since I’m only 1.5 (2.5 as of next year when the government looks at my income again). The main reason is the 50% interest subsidy available under REPAYE that WAS NOT available under IBR and PAYE. Income-Driven Repayment: Is It Right for You? We believe everyone should be able to make financial decisions with confidence. Choosing Between PAYE and REPAYE. As always, you’ll have to run some scenarios for yourself, but if you’re considering long-term long forgiveness, hopefully this gives you some food for thought. In a year or so, that REPAYE subsidy will be gone due to her income, however my payment X now = X +(some interest) with PAYE. That is not affordable with our incomes. A spouse earns a significant income without holding significant student loans. My payments have been affordable in REPAYE. If you're pursuing PSLF, you don't have to worry about this; loans forgiven through PSLF aren't taxed as income. Let's assume that a 1st year resident earns $55,000, and owes $200,000 at a weighted average 7% interest rate. On PAYE you would differ $400 of interest per month ($700 – $300). Our partners compensate us. PAYE: How it works and whom it's best for, REPAYE: How it works and whom it's best for. So talk it out, make sure they know what feds say, and get to the bottom of it. I neglected to include the option to use accruing interest for PAYE and instead treated the interest as capitalizing every year. For many residents and fellows, this interest subsidy will lower your effective interest rate during training from 7%, to 4-5%. Have received a loan disbursement on or after Oct. 1, 2011, or consolidated on or after that date. But as always, these calculators make assumptions that might not be true nor reflect your options. Ok thank you very much for this information, more help than I’ve gotten with multiple calls to loan servicer referring me back to an accountant that I don’t have. I’ve been on REPAYE for about 1.5 years or so. But do that before you a make a decision that will haunt you two decades in the future. So, I’m greatly considering moving over to PAYE which my loan servicer did say I qualify for. This subsidy is not dependent on the Public Loan Forgiveness Program, you don’t need to be in a qualifying job, and you get the benefits immediately. Does It Cost More to Train Residents or to Replace Them? The government will pay for 100% of accruing interest on subsidized loans for the first three years. Your servicer may not agree, but servicers are often completely wrong. Your discretionary income calculator helps determine your monthly student loan payments on income-driven plans. ’s nuanced differences can make your head spin: If you no longer qualify for PAYE because your income becomes too high — or you fail to. Your tax filing status, family size and state of residence. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. This flexibility means PAYE is likely a better option if you’re married or anticipate getting married in the future. I am trying to figure out if it makes more sense for us to aggressively pay her debt off, or pay the minimum payments and wait the 20 years under PAYE? For long-term forgiveness, it depends more and you can do the math, but a brief period of capitalized interest at the end won’t undo the long-term benefits of lower payments until the switch. The reason the above question is basically never is because REPAYE interest never capitalizes unless you leave the plan. It would just be a wasted effort toward reducing an amount that would be forgiven anyway. If you’re doing it to reduce payments in the context of a working spouse or increasing salaries but aren’t going for forgiveness, then you’re resigning yourself to substantially more wasted money on interest. Another possibility I have considered is defaulting and just working until the IRS puts a lien on my professional license and then just disappearing off the face of the earth. Subsidy of accrued interest during “negative amortization” REPAYE vs. PAYE vs. IBR What IDR plan should you choose? Here’s my situation – I’d love to have your opinion. My guess is that the program will still be available to current students and residents who’ve already borrowed money and made plans that rely on it. So that’s the long-term scenario in which PAYE beats REPAYE for a single filer or non-working spouse: purely due to the 5 fewer years to qualify. I’m embarrassed to say I have just over $100,000 in loans from undergrad and grad school. I make around $54,000 after taxes (and no hope for any kind of wage growth since I’m a teacher) and she makes about $34,000 after taxes – so about $88,000 combined after taxes. Use Federal Student Aid’s Loan Simulator tool to compare monthly payments for PAYE vs. REPAYE, as well as all other federal student loan repayment plans. Before you make a final decision on PAYE vs. REPAYE, make sure you know these details: Consequences of switching repayment plans: Once you choose a repayment plan, avoid switching.
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