If you’ve 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, here’s a summary of the different repayment plans to help you choose the right one.
What Is the Standard Repayment Plan?
With the standard repayment plan, you will pay off your student loans in 10 years by making “fixed” monthly payments. The government will determine your monthly payment by adding your student loans (and the projected interest that will accumulate on them), dividing that number by 10 [years], and splitting the amount into even monthly payments.
This is not the ideal plan for most residents. The average med student has around $200,000 in student loans so monthly payments required under this plan will be higher than you can afford on a resident salary. Unfortunately, you will be automatically enrolled into this repayment plan if you don’t select a different one.
What Is the Graduated Repayment Plan?
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 two years until you have fully paid off your student loans in 10 years. This is also not an ideal plan for graduating med students because payments will still be higher than you can afford on a resident salary.
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 payments over 20–25 years. It is not ideal for residents since we qualify for income driven repayment plans.
What Are Income-Driven Repayment Plans?
Income-driven repayment plans use your income to determine the amount of your monthly student loan payment. The four types are: 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 percent of your discretionary income. Your discretionary income is your income minus whatever the poverty line is for your family size.
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. Your required repayment is recalculated each year after you file your taxes. After 20–25 years, your student loans will be forgiven. If you qualify for public service loan forgiveness, they will be forgiven in only 10 years.
These plans are ideal for residents who have at least tens of thousands of dollars in student loans, trying to make ends meet on a $60K salary.
What Is the Difference Between PAYE and REPAYE?
Under REPAYE, the government will pay 50 percent of any unpaid interest that accrues on your unsubsidized loans. I realize this may sound confusing, so let me explain. Under all the income-driven repayment plans, the government will cover any unpaid interest on your subsidized loans (aka loans from undergrad) for the first three 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 percent 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) x 50 percent= $3,800.
PAYE 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.
My point? If you are single (or have a spouse who does not make much money), and do not think your monthly payments will fully cover the cost of interest that is accruing on your loans, then enrolling in REPAYE may be best. If you are married to a spouse who makes a decent amount of money, then enrolling in PAYE may be best.
What Is Income Based Repayment (IBR)?
Income based repayment (IBR) is a type of income-driven repayment plan. Under IBR, your monthly payments are capped at 10–15 percent 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 residents qualify for PAYE, so this plan isn’t applicable.
What Is Income Contingent Repayment (ICR)?
Income contingent repayment (ICR) is a type of income-driven repayment plan for people who are paying back student loans 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 for their children. If you aren’t paying back loans from your kids or loans from your parents, ICR is probably not the plan for you.
Can You Change From One Repayment Plan to Another?
Yes. 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 payment). 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.
Altelisha Taylor is a graduating medical student from the University of Florida College of Medicine who will begin family medicine residency training at Emory University July of 2019. She plans to pursue a career in primary care sports medicine and enjoys writing articles on personal finance and real estate on her blog CareerMoneyMoves.com.