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The REPAYE plan is the most straightforward (in my opinion) with respect to the treatment of interest. For any subsidized loans (perhaps from your undergraduate years), any interest which is not covered by any monthly payment during your first three years is waived. You never have to pay that interest. After three years, only 50% of the unpaid interest in each payment is waived. Unsubsidized loans on the other hand (likely all of your medical school loans) only ever have 50% of the interest forgiven. So let’s assume the resident with $200,000 in loans has a 50/50 mix of subsidized and unsubsidized loans. The payments during residency are only about $300 ($150 for each sub and unsub loan). But the interest each month is $1000 ($500 for each loan type). Thus $700 of the interest is unpaid. Normally, this would all get capitalized (added to the loan balance) in the future. However, during the first three years, $350/month of the unpaid interest is forgiven on the subsidized loans, and $175 forgiven in the unsubsidized loan, for a total of $525. This $525/month is a tangible benefit which is yours to keep, independent of PSLF. This is money you will not need to pay back later.
PAYE works a little differently. With PAYE, interest payments are not necessarily forgiven as you go. Instead, the overall interest that will be capitalized (and thus increase your loan balance) is capped at 10% of your loan balance. For a $200,000 loan, that cap is $20,000. So as in the previous example, $700 a month of interest is unpaid. It will take 28 months of payments to accumulate $20,000 of interest. After month 28, all future unpaid interest can be considered to be in a separate pool of sorts. If the loan is ever refinanced or upon any other trigger for capitalization, only $20,000 gets added to the loan balance, while all additional unpaid interest is “accrued” but not added to the loan balance. Thus, you are only paying “interest on interest” on a max of 10% of the original loan balance (the $20,000 in this case). The rest of the accrued interest “sits there”, owed by you, but for which you are not being charged interest as you repay it. This results in an effective interest rate less than 6%. How much less depends on the amount of accrued interest relative to the loan. But for those with large initial loan balances and long training programs, the effective interest rate can up in the ballpark of 2% LESS than the “official” interest rate. It is important to know your effective interest rate so that you can better evaluate your potential options (e.g. whether to refinance).
IBR works similarly to PAYE with one huge difference. There is no limit to the amount which can be capitalized. So you will one day pay all of the interest (assuming no PSLF), it will just be delayed and capitalized. Ultimately you will pay all the interest.
From a standpoint of interest subsidies, which plan is better? Well, both PAYE and REPAYE are always better than IBR. But deciding between PAYE and REPAY is tricky, because it depends on your length of training (i.e. how long will you have a low salary), your loan balance relative to your salary, and your family income if married and not filing separately under PAYE (total family income is taken into account under REPAYE regardless of family status).
I certainly cannot give any specific advice without knowing all of the details of your situation. But for many unmarried residents (or married residents who have a spouse with no substantial income), the REPAYE program is likely your best bet. Then switch to PAYE if your post residency salary is very large relative to your loans. Or if you want to take advantage of filing your taxes separately (which may lower your payments under PAYE, but will not do so with REPAYE).
Despite the difficulty of choosing the best plan, please just ensure you’ve chosen ANY plan and start making payments. In many cases you can change plans later, so you are not likely locked in if you change your mind. Do not let concerns about the future of PSLF deter you from taking advantage of the possibility of future forgiveness, and the immediate benefit of the interest subsidies.
Leave a question or comment below and I’ll do my best to respond. Also, check out www.doctoredmoney.org for our not-for-profit site with substantial additional information on student loans and other financial resources for physicians.