The consistently most read post on FPMD has been PAYE vs. REPAYE for more than 1 year now. Try typing "PAYE vs. REPAYE" into Google and you'll see why. I mentioned previously that I switched from IBR to REPAYE via this White Coat Investor guest post. Now that I've been on REPAYE for almost 9 months, let's take a closer look at my student loans under the new repayment terms.
Before the Switch - IBR
I have a relatively straightforward student loan situation. I only have Direct federal loans, both subsidized and unsubsidized. It didn't start out that way, but once I decided to enroll in Public Service Loan Forgiveness (PSLF), I took advantage of a Direct Consolidation Loan. Being an older borrower with student loan disbursements prior to 2007, I was not eligible for the more beneficial Pay As You Earn (PAYE) plan, so I enrolled in Income Based Repayment (IBR). If you are confused by the alphabet soup of loan repayment plans, be sure to check out this post. By the end of my intern year, this was what I was looking at:
- Loan Principal: $151,250.42
- $49,640.26 subsidized
- $101,610.16 unsubsidized
- Interest Rate: 6.25% (including a 0.25% discount for using Direct Debit)
- Interest accrual: $25.90/day or $776.97/month
- IBR Payment: $107.81/month (Thanks to only earning income for half of 2013)
- Negative amortization: $669.16/month (The amount my debt grows despite making payments). But wait! What about the interest subsidy?
- While on IBR, the government pays 100% of the negative amortization on my subsidized loans for the first 3 years in repayment, which meant $135.38 of the $669.16 was paid for by the Department of Education. The actual negative amortization on my loans amounted to $533.78/month.
The Switch - IBR to REPAYE
When the Department of Education first announced the new REPAYE plan in December of 2015, I got into the weeds and came out thinking it wasn't that great of a plan after all. However, after some back and forth, I decided it was worth the hassle to switch in the long run. You can see my reasoning for the switch here - I Switched to REPAYE and I Like It.
After the Switch - REPAYE
Now that I've been on REPAYE for almost 9 months, let's examine my current student loan situation.
- Loan Principal: $162,724.98 - thanks to $11,474.56 in capitalized interest during the switch, OUCH!
- $50,346.70 subsidized
- $112,378.28 unsubsidized
- Interest Rate: 6.25% (including a 0.25% discount for using Direct Debit).
- Interest accrual: $27.86/day or $835.92/month.
- REPAYE payment: $364.97 (Thanks to a solid resident salary).
- Negative amortization: $470.95/month
- Under REPAYE, the government pays 100% of the negative amortization on my subsidized loans for the first 3 years and then 50% of negative amortization for all loans for the life of the loan. The actual negative amortization on my loans amount to $166.74/month.
To sum it up, I switched from a loan of $151,250.42 that grows at $533.78/month to a loan of $162.724.98 that grows at $166.74/month. If nothing changed, here is how things will look.
As you can see, the total debt under IBR will catch up to REPAYE by the 32nd month in repayment, after which the debt will grow much faster under IBR than REPAYE. While the amount of debt doesn’t matter for someone taking advantage of PSLF, it’s still good to know that I made the correct financial decision in case PSLF doesn’t work out. Of course, the only constant is change. Check back with me at a future date for another student loan deep dive.
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