Education Debt
Part 2: Loan Repayment Options
There are many options for repayment of federal student loans. Deciding which one to choose can be achieved by answering three questions:
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Am I going to pursue PSLF?
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How much can I regularly afford to spend on my monthly payments?
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If warranted, am I disciplined enough to make additional payments outside of required monthly payments?
Repayment in the Public Service Loan Forgiveness Program
If the answer to the first question is “yes” and you want to maximize the value of the PSLF program, you will need to choose the qualifying income-driven repayment plan that minimizes your loan payments—typically Pay As You Earn (PAYE) or Revised Pay As You Earn (RePAYE). In general, determining the repayment strategy which maximizes the benefit from the PSLF program is simple: Choose the option with the lowest required monthly payment and do not make any additional contributions. Currently, when certifying for income-driven repayment plans, the certification system will offer to automatically select the plan with the lowest monthly payment for you.
RePAYE tends to provide the lowest required monthly payments unless you're married and your spouse has a high income
RePAYE tends to provide the lowest required monthly payments—10% of discretionary income with a 50% subsidy for unpaid interest—unless you're married and your spouse has a high income, in which case using PAYE and filing your taxes separately typically provides the lowest required monthly payment (Note: this should not be the only factor in deciding how to file your taxes. Consider consulting a tax professional for assistance if you are in this situation). The reason for this is that RePAYE always counts spousal income in calculating your discretionary income, whereas PAYE only counts spousal income if you file taxes jointly. Like RePAYE, PAYE payments are also 10% of discretionary income. However, they do not include an interest subsidy.
Note on Grace Periods:
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Some loans will automatically go into a grace period after graduation from medical school. If you’re pursuing PSLF, you should waive this option and begin making qualifying payments!
In all likelihood your income will be lower at the beginning of residency than it will be ten years later. Since the value of PSLF increases as the size of your 120 qualifying payments decreases, making smaller qualifying payments early on will increase the value realized from the PSLF program. In addition, your loans will be forgiven earlier if you waive the grace period and begin payments at the very beginning of residency.
Note on Deferments:
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If you will be enrolled in school again during your PSLF repayment period (e.g., a masters or PhD program associated with fellowship) and wish to continue making qualifying payments during this time, be sure to waive automatic in-school deferment. Your loan servicer should be able to provide you with a form to do this.
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If you do not complete this form prior to enrollment, your loans will automatically be placed in deferment and qualifying payments will not be made. This form should be available from your loan servicer.
Repayment Without Public Service Loan Forgiveness
Since few residents will be able to afford the Standard Repayment Plan (which is the default option), the choice of repayment plan for residents who are not pursuing PSLF also tends to be limited to income-driven plans. Unlike repayment under PSLF, however, in this scenario, the total loan balance will need to be paid.
When paying off a loan, it is generally in one’s long-term interest to make the largest payments possible along the way (thus shortening the life of the loan, which minimizes interest accumulation and the total amount you end up paying). This long-term benefit, however, must be weighed against the short-term cost that comes with larger payments: a tighter budget that limits financial flexibility. Here are three approaches that illustrate each end of this spectrum, including a last-ditch option in case of financial catastrophe:
Approach #1: Maximize regular payments
For those interested in the simplest option, the main consideration is how much can regularly be contributed to loan payments while preserving a sufficient buffer for unexpected expenses (see Question #2 above). As there is no “correct” balance between these two interests, the decision of how much to pay each month will be a personal decision. The more aggressive income-driven repayment option tends to be Income-Contingent Repayment (ICR, typically 20% of discretionary income for residents), while IBR, PAYE, and RePAYE tend to be lower.
Note that most loan servicers will also allow you to schedule supplemental payments on top of your income-driven plan. For example, if you want to contribute $500 per month but your PAYE payment is only $250, you can typically arrange for your loan servicer to deduct an additional $250 from your payment account each month. This is a good option for residents who want to maximize their scheduled payments without the burden of remembering to budget for and make additional contributions themselves.
Approach #2: Maximize flexibility
Another approach is to minimize monthly payments in order to allow maximum financial flexibility. In this case, if a large unexpected expense occurs, you can use the money in your budget that was freed up by smaller monthly loan payments to establish and/or replenish your emergency fund.
In stable times where recovery from unexpected expenses is not necessary, if you are disciplined (see Question #3 above), these funds may be used to make additional payments toward loans. This setup maximizes both flexibility of income and contributions toward loan payments; however, this approach requires a significant amount of attention and discipline—including avoiding spending the additional income on something other than loans and emergency fund recovery. This flexibility may be worth the mental and clerical work to some. Again, the key here is to make sure the money freed up by lower loan payments is being put to good use.
Repayment plans that typically fit this approach include Pay As You Earn (PAYE), Revised Pay As You Earn (RePAYE), or Income-Based Repayment (IBR) plans (depending on the type(s) of loan(s) involved).
Approach #3: Dire financial circumstances
If you are in significant financial trouble, eligible loans can be placed into deferment or forbearance. In both of these situations, payments are halted. Deferment is preferable since the government will continue to pay the interest on your subsidized loans (if you have any); however, specific criteria must be met to qualify for deferment. In forbearance, interest continues to accumulate on all loans. Forbearance also has eligibility criteria, though less restrictive. All residents qualify for forbearance during residency training.