Federal Student Loan Repayment: Know Your Options (Part 1)

Starting on Dec. 15, the student loan repayment world became even more complex. In this first of a series on debt repayment, we outline current income-based repayment options.

Starting on Dec. 15, the student loan repayment world became even more complex! Both Jon and I receive many questions on this topic, so I would like to dedicate a few posts to help guide physicians on some considerations for developing their own debt repayment strategy. This first post will simply highlight the various programs. Future posts will include different profiles where we see each program apply.

Physicians now have the ability to elect a new income driven repayment plan for their student loans. REPAYE is now available to be considered with Income Based Repayment (IBR), Income Contingent repayment, and Pay As You Earn (PAYE) as you develop your federal student loan repayment strategy.

To help sort out some of the confusion, I’ve made brief outline of some of the key differences between programs below. I have also included a section to highlight their similarities. For brevity’s sake, I’ve left out details on ICR as it applications are quite limited.

What They Have in Common

  • All payments are based off of a percentage of your discretionary income.
  • Eligible for Public Service Loan Forgiveness after 120 qualifying payments. Forgiveness would be tax-free
  • If loan balance is not fully repaid by year 20 or 25 (program specific), remaining amount would be forgiven as a taxable benefit
  • Only applies to Federal Direct Student loans

Income Based Repayment (IBR)

  • Available to borrowers who have taken out federal loans prior to Oct. 1, 2007 or who had not taken out any new federal debt since Oct. 1, 2011.
  • Payments are based on 15% of discretionary income and you must show a financial need at the time of enrollment.
  • Payments can never be more than what a 10-year standard repayment schedule would be at the time you enroll in the program.
  • Spouses can file taxes separately to keep income (AGI) lower for payment purposes

Pay As You Earn (PAYE)

  • You must be a new borrower as of Oct. 1, 2007 and must have received a direct loan on or after Oct. 1, 2011.
  • Payments are based on 10% of discretionary income and you must show a financial need at the time of enrollment.
  • Payments can never be more than what a 10-year standard repayment schedule would be at the time you enroll in the program.
  • Spouses can file taxes separately to keep income (AGI) lower for payment purposes.

REPAYE

  • Available to all borrowers with Federal Direct loans.
  • Payments are based on 10% of discretionary income and there is no financial need requirement; however, both spouses’ incomes will be considered in determining the payment amount. There is NO cap on the maximum monthly payment.
  • There is an interest subsidy on loans during the period of negative amortization (period where your payments don’t cover the accruing the interest). This applies to both subsidized and unsubsidized loans.

Many young physicians (particularity those still in training or recently out) are likely familiar with IBR and PAYE as they have been the most popular choices for those seeking student loan forgiveness through Public Service Loan Forgiveness. In the next post, I’m going to address the following questions that we receive most often

1) Should I switch from IBR or PAYE into REPAYE?

2) Which program is best for loan forgiveness?

3) What are the options for those looking to leave public service and enter a private practice setting?

Developing a student loan strategy requires many complex considerations, it is advised that you consider your options with your financial advisor as the discussion above is only a general outline of available options.

More information can be found at: https://studentaid.ed.gov

Michael Paulus, CFP® is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated. 1500 Market Street | 12th Floor--East Tower | Philadelphia, PA 19102. 1411979/02-2016 Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. This is not a recommendation of any strategy or product in particular.